Registration No.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------
FIRST ESSEX BANCORP, INC.
(Exact name of registrant as specified in its charter)
-----------------------------
DELAWARE 6035 04-2943217
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Identification No.)
organization) Classification Code)
71 Main Street, Andover, Massachusetts 01810
(508) 475-4313
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
-----------------------------
Leonard A. Wilson
FIRST ESSEX BANCORP, INC.
71 Main Street
Andover, Massachusetts 01810
(508) 475-4313
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-----------------------------
Copies to:
Stephen J. Coukos, Esq. V. Duncan Johnson, Esq.
SULLIVAN & WORCESTER LLP EDWARDS & ANGELL
One Post Office Square 2700 Hospital Trust Tower
Boston, Massachusetts 02109 Providence, Rhode Island 02903
(617) 338-2800 (401) 276-6477
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective and all
other conditions to the merger of Finest Financial Corp. with and into First
Essex Bancorp, Inc. pursuant to the Agreement and Plan of Reorganization
described in the accompanying Joint Proxy Statement--Prospectus have been
satisfied or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
==================================================================================================================================
Title of Each Class of Securities Amount to be Proposed Maximum Proposed Maximum Amount of
to be Registered Registered Offering Price Per Share Aggregate Offering Price Registration Fee
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, (1) (1) $18,565,706(2) $6,402(2)
Par Value $.10 per share
==================================================================================================================================
<FN>
(1) The Securities to be offered hereby will be offered on the basis of a maximum aggregate offering price. Accordingly,
pursuant to Rule 457(o), the number of shares offered and, as a consequence, the maximum offering price per
share and are omitted from this table.
(2) Pursuant to Rule 457(f), the maximum aggregate offering price has been determined as the value of the shares of Finest
Financial Corp. to be acquired by First Essex Bancorp, Inc. in the merger, less the minimum portion of the purchase
price to be paid in cash.
</FN>
</TABLE>
--------------------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant will file a
further amendment which specifically states that this Registration Statement
will thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, or until this Registration Statement will become
effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
<PAGE>
First Essex Bancorp, Inc.
71 Main Street
Andover, Massachusetts 01810
(508) 475-4313
October __, 1996
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders
(the "First Essex Special Meeting") of First Essex Bancorp, Inc. ("First Essex")
to be held on December 19, 1996 at 10:00 a.m., local time, at the Andover
Country Club, 60 Canterbury Street, Andover, Massachusetts.
At the First Essex Special Meeting, stockholders will be asked to
approve and adopt an Agreement and Plan of Reorganization (the "Merger
Agreement") dated August 5, 1996, as amended as of September __, 1996, by and
among First Essex, Finest Financial Corp. ("Finest") and Pelham Bank and Trust
Company ("Pelham Bank"), whereby Finest will merge with and into First Essex
(the "Merger") and Pelham Bank will merge with and into First Essex Bank, FSB. A
copy of the Merger Agreement is attached as Appendix A to the accompanying Joint
Proxy Statement-Prospectus.
Subject to certain limitations, in accordance with the terms of the
Merger Agreement, each share of outstanding Finest common stock, par value $.10
("Finest Common Stock") will be converted into and become exchangeable for (i)
that number of shares of First Essex common stock, par value $.10 ("First Essex
Common Stock") equal to the number (the "Exchange Ratio") obtained by dividing
$20.25 (the "Acquisition Price") by the average of the closing bid prices of the
shares of First Essex Common Stock as reported on the NASDAQ National Market
System for the twenty consecutive trading days ending on the fifth business day
prior to the closing date of the Merger (the "Average Closing Price") or (ii) an
amount in cash equal to the Acquisition Price. If the Average Closing Price is
greater than $11.50 per share, the Exchange Ratio will equal 1.761 and if the
Average Closing Price is less than $9.50 per share, the Exchange Ratio will
equal 2.132. Notwithstanding the foregoing, if the Average Closing Price is less
than $8.75, Finest will have the right to terminate the Merger Agreement, unless
First Essex elects to increase the number of shares issuable in the Merger by
utilizing an adjusted Exchange Ratio determined by dividing $18.65 by the
Average Closing Price. The Merger Agreement provides that Finest's stockholders
may elect to receive all cash, all stock or any combination thereof, subject to
an overall limitation that 50% of the total number of outstanding shares of
Finest Common Stock shall be converted into shares of First Essex Common Stock,
with the remaining outstanding shares of Finest Common Stock to be converted
into cash. The exchange provisions of the Merger Agreement allow the exchange
agent a means by which it can equitably meet the respective elections of the
Finest stockholders without violating the overall stock to cash ratio. The
portion of the aggregate acquisition price paid in shares may be increased up to
a maximum of 62%, to the extent necessary to preserve the tax-free nature of the
Merger.
You should refer to the Joint Proxy Statement-Prospectus for a more
detailed description of the Merger.
Enclosed are a Notice of Special Meeting of Stockholders and a Joint
Proxy Statement-Prospectus, which includes descriptions of the Merger, the
background of the transaction, the business of Finest and the factors that the
Board of Directors of First Essex considered in approving the Merger. I urge you
to read the enclosed materials carefully.
The Merger is subject to various conditions, described in this Joint
Proxy Statement-Prospectus. It is expected that the Merger will be completed in
December 1996.
Your Board of Directors has carefully considered the terms of the
proposed Merger and believes that the Merger and related transactions are
advisable and in the best interests of First Essex and its stockholders. See
"The Merger-Background of the Merger,"and "-Recommendation of the First Essex
Board and Reasons for the Merger" in the enclosed Joint Proxy
Statement-Prospectus for a discussion of the reasons for the Board's
recommendation. THE BOARD HAS UNANIMOUSLY APPROVED THE MERGER AND THE RELATED
TRANSACTIONS AND RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE PROPOSAL TO APPROVE
AND ADOPT THE MERGER AGREEMENT AND EACH OF THE TRANSACTIONS CONTEMPLTAED
THEREBY.
<PAGE>
We hope you will be able to attend the meeting. However, even if you
anticipate attending in person, we urge you to complete, sign, date and return
the enclosed proxy card promptly to ensure that your shares will be represented
at the First Essex Special Meeting. If you do attend, you will, of course, be
entitled to vote in person.
Thank you and I look forward to seeing you at the meeting.
Sincerely,
Leonard A. Wilson
President and Chief Executive Officer
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<PAGE>
FIRST ESSEX BANCORP, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held On December 19, 1996
TO THE STOCKHOLDERS OF FIRST ESSEX BANCORP, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the
"First Essex Special Meeting") of First Essex Bancorp, Inc. ("First Essex") will
be held on December 19, 1996 at 10:00 a.m., local time, at the Andover Country
Club, 60 Canterbury Street, Andover, Massachusetts, for the purpose of
considering and voting upon the following matters:
o A proposal to approve and adopt the Agreement and Plan of
Reorganization, dated August 5, 1996, as amended as of September __,
1996 (the "Merger Agreement"), by and among First Essex, Finest
Financial Corp. ("Finest"), and Pelham Bank and Trust Company, and each
of the transactions contemplated thereby, including the merger (the
"Merger") of Finest with and into First Essex, upon the terms and
subject to the conditions set forth in the Merger Agreement, as more
fully described in the accompanying Joint Proxy Statement-Prospectus. A
copy of the Merger Agreement is attached as Appendix A to the
accompanying Joint Proxy Statement-Prospectus and certain related
documents are attached as exhibits thereto;
o Such other business as may properly come before the First Essex Special
Meeting or any adjournments or postponements thereof.
The First Essex Board of Directors has fixed the close of business on
October 31, 1996 as the record date for the determination of stockholders
entitled to notice of and to vote at the First Essex Special Meeting and any
adjournments or postponements thereof. Only stockholders of record at the close
of business on such date are entitled to notice of and to vote at such meeting.
A list of First Essex stockholders entitled to vote at the First Essex Special
Meeting or any adjournments or postponements thereof will be available for
examination for any purpose germane to the First Essex Special Meeting, for 10
days prior to the First Essex Special Meeting during ordinary business hours, at
the principal executive offices of First Essex located at 71 Main Street,
Andover, Massachusetts.
Shares of First Essex common stock, par value $.10 per share ("First
Essex Common Stock"), are the only securities of First Essex whose holders are
entitled to vote at the First Essex Special Meeting.
Your vote is important regardless of the number of shares you own.
Approval of the Merger requires the affirmative vote of the holders of not less
than a majority of the issued and outstanding shares of First Essex Common
Stock. Each stockholder, even though he or she now plans to attend the First
Essex Special Meeting, is requested to sign, date and return the enclosed Proxy
without delay in the enclosed postage-paid return envelope. You may revoke your
Proxy at any time prior to its exercise. Any stockholder present at the First
Essex Special Meeting or at any adjournments or postponements thereof may revoke
his or her Proxy and vote personally on each matter brought before the First
Essex Special Meeting.
By Order of the Board of Directors,
William F. Burke, Secretary
October ____, 1996
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO
APPROVE AND ADOPT THE MERGER AGREEMENT AND EACH OF THE TRANSACTIONS
CONTEMPLATED THEREBY.
PLEASE DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
ENCLOSED POSTAGE-PAID RETURN ENVELOPE.
<PAGE>
FINEST FINANCIAL CORP.
Route 38, Bridge Street
Pelham Plaza
Pelham, New Hampshire 03076
(603) 635-3545
October ____, 1996
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders
("Finest Meeting") of Finest Financial Corp. ("Finest") to be held on December
____, 1996, at ______ a.m. at the Windham Branch office of Pelham Bank and Trust
Company ("Pelham Bank"), Route 111, Windham, New Hampshire.
At the Finest Meeting, you are being asked to consider and vote upon a
proposal to approve and adopt an Agreement and Plan of Reorganization dated
August 5, 1996, as amended as of September __, 1996 (the "Merger Agreement"), by
and among First Essex Bancorp, Inc. ("First Essex"), Finest and Pelham Bank,
pursuant to which Finest will be merged with and into First Essex (the "Merger")
and Pelham Bank will be merged with and into First Essex Bank, FSB, a
wholly-owned subsidiary of First Essex. A copy of the Merger Agreement is
attached as Appendix A to the accompanying Joint Proxy Statement-Prospectus.
Subject to certain limitations, at the effective time of the Merger,
each outstanding share of Finest common stock, par value $.10 per share ("Finest
Common Stock"), will be converted into and become exchangeable for (i) that
number of shares of First Essex common stock, par value $.10 per share ("First
Essex Common Stock"), equal to the number (the "Exchange Ratio") obtained by
dividing $20.25 (the "Acquisition Price") by the average of the closing bid
prices of the shares of First Essex Common Stock as reported on the NASDAQ
National Market System for the twenty consecutive trading days ending on the
fifth business day prior to the closing date of the Merger (the "Average Closing
Price") or (ii) an amount in cash equal to the Acquisition Price. If the Average
Closing Price is greater than $11.50 per share, the Exchange Ratio will equal
1.761 and if the Average Closing Price is less than $9.50 per share, the
Exchange Ratio will equal 2.132. Notwithstanding the foregoing, if the Average
Closing Price is less than $8.75, Finest will have the right to terminate the
Merger Agreement, unless First Essex elects to increase the number of shares
issuable in the Merger by utilizing an adjusted Exchange Ratio determined by
dividing $18.65 by the Average Closing Price. The Merger Agreement provides that
Finest's stockholders may elect to receive all cash, all stock or any
combination thereof, subject to an overall limitation that 50% of the total
number of outstanding shares of Finest Common Stock shall be converted into
shares of First Essex Common Stock, with the remaining outstanding shares of
Finest Common Stock to be converted into cash. The exchange provisions of the
Merger Agreement allow the exchange agent a means by which it can equitably meet
the respective elections of the Finest stockholders without violating the
overall stock to cash ratio. The portion of the aggregate acquisition price paid
in shares may be increased up to a maximum of 62%, to the extent necessary to
preserve the tax-free nature of the Merger.
You should refer to the Joint Proxy Statement-Prospectus for a more
detailed description of the Merger.
Enclosed are a Notice of Special Meeting of Stockholders and a Joint
Proxy Statement-Prospectus, which includes descriptions of the Merger, the
background of the transaction, information with respect to First Essex and the
First Essex Common Stock and the factors the Board of Directors of Finest
considered in approving the Merger. I urge you to read the enclosed materials
carefully.
The Board of Directors has unanimously approved the Merger Agreement
and recommends that stockholders vote in favor of approving the Merger. See "The
Merger-Background of the Merger," and "-Recommendation of the Finest Board and
Reasons for the Merger" in the enclosed Joint Proxy Statement-Prospectus for a
discussion of the reasons for the Board's recommendation. Keefe, Bruyette &
Woods, Inc. ("Keefe Bruyette"), Finest's financial advisor, has advised the
Board of Directors of Finest that, in its opinion, the consideration to be
received in the Merger is fair, from a financial point of view, to the
stockholders of Finest. The full text of the Keefe Bruvette opinion, which
<PAGE>
describes the procedures followed, assumptions made, limitations on the review
undertaken and other matters in connection with rendering such opinion, is set
forth in Appendix B to the accompanying Joint Proxy Statement-Prospectus, and I
urge you to read the opinion carefully.
Holders of shares of Finest Common Stock are entitled to dissenters'
rights under New Hampshire law in connection with the Merger, as more fully
described in the Joint Proxy Statement-Prospectus.
A form of proxy solicited by the Board of Directors is enclosed for
your convenience. You are requested to complete, date, sign and return the
enclosed proxy card in the enclosed envelope. If you attend the Finest Meeting,
you may vote in person if you wish, even if you have previously returned your
proxy card.
Promptly after the Merger, a letter of transmittal and election
materials will be mailed to all holders of record of shares of Finest Common
Stock to use in connection with surrendering their stock certificates and
electing to receive stock or cash or a combination thereof in exchange for their
shares of Finest Common Stock. Please do not send your stock certificates with
the enclosed proxy card or to the Exchange Agent until you receive the letter of
transmittal and related materials, which will include instructions as to the
procedure to be used in exchanging your stock certificates.
Very truly yours,
Leo Kahn
Chairman of the Board of Directors
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE FINEST MEETING.
WHETHER OR NOT YOU PLAN TO ATTEND THE FINEST MEETING, YOU ARE REQUESTED TO
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED ENVELOPE
WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE
FINEST MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF YOU HAVE PREVIOUSLY
RETURNED YOUR PROXY CARD.
FINEST STOCK CERTIFICATES SHOULD NOT BE FORWARDED TO THE COMPANY OR THE
EXCHANGE AGENT UNTIL YOU HAVE RECEIVED A TRANSMITTAL FORM AND SHOULD NOT BE
RETURNED WITH THE ENCLOSED PROXY CARD.
ii
<PAGE>
FINEST FINANCIAL CORP.
Route 38, Bridge Street
Pelham Plaza
Pelham, New Hampshire 03076
(603) 635-3545
------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held On December __, 1996
A Special Meeting of Stockholders of Finest Financial Corp., a New
Hampshire corporation ("Finest"), will be held on December ____, 1996, at _____
a.m. at the Windham Branch office of Pelham Bank and Trust Company ("Pelham
Bank"), Route 111, Windham, New Hampshire (together with all adjournments and
postponements thereof, the "Finest Meeting") for the following purposes:
o To consider and vote upon a proposal to approve and adopt an Agreement
and Plan of Reorganization dated August 5, 1996, as amended as of
September __, 1996 (the "Merger Agreement"), by and among Finest,
Pelham Bank and First Essex Bancorp, Inc. ("First Essex"), and each of
the transactions contemplated thereby, pursuant to which Finest will be
merged with and into First Essex (the "Merger") and Pelham Bank will be
merged with and into First Essex Bank, FSB, a wholly-owned subsidiary
of First Essex. A copy of the Merger Agreement is attached as Appendix
A to the accompanying Joint Proxy Statement-Prospectus.
The Board of Directors has fixed the close of business on October 31,
1996 as the record date (the "Finest Record Date") for determination of
stockholders entitled to notice of and to vote at the Finest Meeting. A list of
such stockholders will be available at the main office of Finest, the address of
which is set forth above, beginning two business days after the date of this
Notice and continuing through the date of the Finest Meeting. Only holders of
record at the close of business on the Finest Record Date of shares of common
stock, par value $.10 per share, of Finest ("Finest Common Stock") will be
entitled to notice of and to vote at the Finest Meeting.
In the event there are not sufficient votes to approve the foregoing
proposals at the time of the Finest Meeting, the Finest Meeting may be adjourned
or postponed in order to permit further solicitation of proxies by Finest;
provided, however, that a proxy voted against the Merger Agreement will not be
voted in favor of any such adjournment or postponement of the Finest Meeting.
A majority of the outstanding shares of Finest Common Stock entitled to
vote must be represented at the Finest Meeting, in person or by proxy, to
constitute a quorum for the transaction of business.
Holders of shares of Finest Common Stock are entitled to dissenters'
rights in connection with the Merger, pursuant to the procedures set forth in
New Hampshire Revised Statutes Annotated sections 293-A:13.01 to 13.31,
inclusive, a copy of which is attached as Appendix D to the accompanying Joint
Proxy Statement-Prospectus.
By Order of the Board of Directors,
Ralph S. Boutwell
Secretary
Pelham, New Hampshire
October ____, 1996
<PAGE>
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE FINEST MEETING.
WHETHER OR NOT YOU PLAN TO ATTEND THE FINEST MEETING IN PERSON, YOU ARE
REQUESTED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE
ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF
YOU ATTEND THE FINEST MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF YOU
HAVE PREVIOUSLY RETURNED YOUR PROXY CARD.
ii
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 26, 1996
JOINT PROXY STATEMENT-PROSPECTUS
------------------
FINEST FINANCIAL CORP. FIRST ESSEX BANCORP, INC.
PROXY STATEMENT PROXY STATEMENT
For Special Meeting of Stockholders For Special Meeting of Stockholders
to be held on December ___, 1996 to be held on December 19, 1996
------------------
PROSPECTUS
First Essex Bancorp, Inc. Common Stock, $.10 par value
------------------
This Joint Proxy Statement and Prospectus (the "Proxy
Statement-Prospectus") relates to the proposed acquisition of Finest Financial
Corp., a New Hampshire corporation ("Finest"), by First Essex Bancorp, Inc., a
Delaware corporation ("First Essex"), pursuant to the terms of an Agreement and
Plan of Reorganization dated August 5, 1996, as amended as of September __, 1996
(the "Merger Agreement"), by and among First Essex, Finest and Pelham Bank and
Trust Company ("Pelham Bank"). It is being furnished to the stockholders of
First Essex and Finest in connection with the solicitation of proxies by the
respective Boards of Directors of such corporations for use, in the case of
First Essex, at its Special Meeting of Stockholders (the "First Essex Meeting")
to be held on December 19, 1996, and in the case of Finest, at its Special
Meeting of Stockholders (the "Finest Meeting") to be held on December __, 1996
(together, including any adjournments or postponements of such meetings, the
"Meetings"), both at the times and places specified in the respective
accompanying Notices of Meetings.
The terms of the Merger Agreement provide that upon the satisfaction or
waiver of the conditions to closing set forth therein, Finest will be merged
with and into First Essex (the "Merger") and each then outstanding share of
common stock of Finest, par value $.10 per share ("Finest Common Stock"), will,
subject to certain limitations, be converted into and become exchangeable for
the right to receive (i) a number of shares of the common stock of First Essex,
par value $.10 per share ("First Essex Common Stock"), equal to the number (the
"Exchange Ratio") obtained by dividing $20.25 (the "Acquisition Price") by the
average of the closing bid prices of the shares of First Essex Common Stock as
reported on the NASDAQ National Market System for the twenty consecutive trading
days ending on the fifth business day prior to the closing date of the Merger
(the "Average Closing Price") or (ii) an amount in cash equal to the Acquisition
Price. If the Average Closing Price is greater than $11.50 per share, the
Exchange Ratio will equal 1.761 and if the average Closing Price is less than
$9.50 per share, the Exchange Ratio will equal 2.132. If the Average Closing
Price is less than $8.75, Finest will have the right to terminate the Merger
Agreement, unless First Essex elects to increase the number of shares issuable
in the Merger with respect to those Finest shares to be converted into First
Essex shares by utilizing an adjusted Exchange Ratio determined by dividing
$18.65 by the Average Closing Price.
The Merger Agreement provides that Finest's stockholders may elect to
receive all cash, all stock or any combination thereof, subject to an overall
limitation that 50% of the total number of outstanding shares of Finest Common
Stock shall be converted into shares of First Essex Common Stock, with the
remaining outstanding shares of Finest Common Stock to be converted into cash.
The exchange provisions of the Merger Agreement allow the exchange agent a means
by which it can equitably meet the respective elections of the Finest
stockholders without violating the overall stock to cash ratio. The portion of
the aggregate acquisition price paid in shares may be increased up to a maximum
of 62%, to the extent necessary to preserve the tax-free nature of the Merger.
See "The Merger--Election Procedures".
<PAGE>
This Proxy Statement-Prospectus also constitutes a prospectus of First
Essex filed as part of a Registration Statement on Form S-4 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with the Securities and Exchange Commission (the "Commission" or "SEC") covering
the shares of First Essex Common Stock to be issued in connection with the
Merger.
At the effective time of the Merger, the shares of First Essex Common
Stock issued in connection with the Merger will be listed for trading on the
NASDAQ National Market System.
This Proxy Statement-Prospectus does not cover any resales of First
Essex Common Stock received by stockholders of Finest upon consummation of the
Merger, and no person is authorized to make use of this Proxy
Statement--Prospectus in connection with any such resale.
All information contained in this Proxy Statement-Prospectus with
respect to First Essex and First Essex Bank, FSB ("First Essex Bank") has been
supplied by First Essex and all information with respect to Finest and Pelham
Bank has been supplied by Finest. This Proxy Statement-Prospectus and the
accompanying form of proxy are first being mailed to stockholders of First Essex
and Finest on or about November ___, 1996.
-----------
THESE SECURITIES INVOLVE A DEGREE OF RISK. SEE "RISK FACTORS" ON PAGE 13.
-----------
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROXY
STATEMENT--PROSPECTUS. THE PROPOSED MERGER IS A COMPLEX TRANSACTION.
STOCKHOLDERS ARE STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS PROXY
STATEMENT--PROSPECTUS IN ITS ENTIRETY.
------------
THE SHARES OF FIRST ESSEX COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS
ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK OR NON-BANK SUBSIDIARY OF
FIRST ESSEX AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE BANK INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY.
------------
THE SHARES OF FIRST ESSEX COMMON STOCK OFFERED HEREBY HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT--PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------
The date of this Proxy Statement-Prospectus is November ____, 1996.
ii
<PAGE>
TABLE OF CONTENTS
AVAILABLE INFORMATION.......................................................vi
INFORMATION INCORPORATED BY REFERENCE.......................................vi
SUMMARY ....................................................................1
SELECTED CONSOLIDATED FINANCIAL DATA OF FIRST ESSEX AND SUBSIDIARIES.........9
SELECTED CONSOLIDATED FINANCIAL DATA OF FINEST AND SUBSIDIARY...............10
FIRST ESSEX PRO FORMA FINANCIAL DATA........................................11
RISK FACTORS................................................................12
Special Note Regarding Forward Looking Statements........................12
General ................................................................12
COMPARATIVE PER SHARE FINANCIAL INFORMATION.................................15
THE MEETINGS................................................................18
Matters To Be Discussed at the Meetings..................................18
Record Dates; Stock Entitled to Vote; Quorum.............................18
Solicitation of Proxies .................................................19
Required Votes ..........................................................20
Solicitation Expenses....................................................20
Ownership of Finest Securities...........................................20
Appraisal Rights and Dissenting Stockholders.............................21
THE MERGER..................................................................23
General ................................................................23
Background of the Merger.................................................23
Recommendation of the Finest Board and Reasons for the Merger............25
Recommendation of the First Essex Board and Reasons for the Merger.......26
Opinion of Financial Advisors............................................27
Effective Time of the Merger; Closing Date...............................34
Conversion of Shares of Finest Common Stock Pursuant to the Merger.......34
Election Procedures......................................................35
Certificate Exchange Procedures..........................................36
Treatment of Finest Stock Options........................................37
Conduct of Business Pending the Merger...................................37
Conditions to Consummation of the Merger.................................40
Termination..............................................................41
Amendment, Extensions and Waiver.........................................42
Requisite Regulatory Approvals...........................................42
Expenses ................................................................43
Stockholders Agreement...................................................43
No Solicitation..........................................................43
Interests of Certain Persons in the Merger...............................43
Employment Obligations...................................................44
Resale of First Essex Common Stock.......................................45
Material Federal Income Tax Consequences.................................46
Accounting Treatment.....................................................48
BUSINESS OF FIRST ESSEX.....................................................49
General ................................................................49
Market Area..............................................................49
Current Market Conditions................................................49
Regulation...............................................................49
Lending Activities.......................................................51
iii
<PAGE>
Non-Performing Assets....................................................53
Investment Activities....................................................54
Deposits ................................................................54
Competition..............................................................55
Employees................................................................55
MARKET FOR FIRST ESSEX COMMON STOCK.........................................55
SELECTED CONSOLIDATED FINANCIAL DATA OF FIRST ESSEX AND SUBSIDIARIES........57
FIRST ESSEX MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................58
SELECTED CONSOLIDATED FINANCIAL DATA
OF FINEST AND SUBSIDIARY.................................................75
FINEST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ...............................................76
DESCRIPTION OF FIRST ESSEX CAPITAL STOCK....................................96
First Essex Common Stock.................................................96
Series A Preferred Stock.................................................96
COMPARISON OF RIGHTS OF HOLDERS OF
FINEST COMMON STOCK AND FIRST ESSEX COMMON STOCK.........................97
Special Meetings of Stockholders.........................................97
Inspection Rights........................................................98
Action by Consent of Stockholders........................................98
Cumulative Voting........................................................99
Preemptive Rights........................................................99
Dividends and Repurchases of Stock.......................................99
Classification of the Board of Directors.................................99
Removal of Directors....................................................100
Vacancies on the Board of Directors.....................................100
Exculpation of Directors and Officers...................................100
Indemnification of Directors, Officers and Others.......................101
Interested Director Transactions........................................101
Mergers, Share Exchanges or Asset Sales.................................102
Delaware Business Combination Statute...................................103
Amendments to Charter...................................................103
Amendments to By-laws...................................................104
Dissenters'/Appraisal Rights............................................104
RECENT LEGISLATION AND RELATED MATTERS.....................................105
LEGAL MATTERS..............................................................108
EXPERTS ..................................................................108
INDEX TO FINANCIAL STATEMENTS..............................................F-1
iv
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APPENDICES
A. Agreement and Plan of Merger A-1
B. Opinion of Keefe, Bruyette & Woods, Inc. B-1
C. Opinion of Oppenheimer & Co., Inc. C-1
D. New Hampshire Revised Statutes Annotated
ss.293-A:13.01 through ss.293-A:13.31 D-1
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NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION WITH RESPECT TO THE MATTERS DESCRIBED IN THIS PROXY
STATEMENT-PROSPECTUS OTHER THAN THOSE CONTAINED HEREIN, IN CONNECTION WITH THE
SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY FIRST ESSEX. THIS PROXY STATEMENT-PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT-PROSPECTUS NOR ANY
DISTRIBUTION OF SECURITIES MADE HEREUNDER WILL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF FIRST ESSEX
SINCE THE DATE OF THIS PROXY STATEMENT-PROSPECTUS OR THAT INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-------------
AVAILABLE INFORMATION
First Essex is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information with
the SEC. Proxy statements, reports and other information concerning First Essex
can be inspected and copied at the SEC's office at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and the SEC's Regional Offices in
New York (7 World Trade Center, Suite 1300, New York, New York 10048) and
Chicago (CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661), and copies of such material can be obtained from the Public Reference
Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The SEC maintains a World Wide Web site (located at
http://www.sec.gov) which contains reports, proxy and information statements and
other information regarding First Essex and other registrants that file
electronically with the SEC. First Essex Common Stock is listed on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") National Market
System. Consequently, reports, proxy statements and other information concerning
First Essex may also be inspected at the offices of the National Association of
Securities Dealers, Inc. ("NASD") at 1735 K Street, N.W., Washington, D.C.
20006. This Proxy Statement-Prospectus does not contain all the information set
forth in the Registration Statement and exhibits thereto which First Essex has
filed with the SEC under the Securities Act, which Registration Statement and
exhibits thereto may be obtained from the Public Reference Section of the SEC at
its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549 upon
payment of the prescribed fees, and to which reference is hereby made.
THIS PROXY STATEMENT-PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE RELATING TO
FIRST ESSEX WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF ANY
SUCH DOCUMENTS, OTHER THAN EXHIBITS THERETO, ARE AVAILABLE WITHOUT CHARGE TO ANY
PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT-PROSPECTUS
IS DELIVERED UPON WRITTEN OR ORAL REQUEST TO WILLIAM F. BURKE, SECRETARY, FIRST
ESSEX BANCORP, INC., 71 MAIN STREET, ANDOVER, MASSACHUSETTS 01810, (508)
475-4313. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST
SHOULD BE MADE BY DECEMBER___, 1996.
INFORMATION INCORPORATED BY REFERENCE
The following First Essex documents are incorporated by reference
herein:
(1) First Essex's Annual Report on Form 10-K for the year ended December
31, 1995 and the portions of First Essex's definitive Proxy Statement
dated April 1, 1996 incorporated by reference in Part III of such Form
10-K;
(2) First Essex's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1996 and June 30, 1996;
(3) First Essex's Current Report on Form 8-K, dated August 5, 1996.
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SUMMARY
The following is a brief summary, which is necessarily incomplete, of certain
information contained elsewhere in this Proxy Statement-Prospectus. Reference is
made to, and this summary is qualified in its entirety by, the more detailed
information contained herein, the annexes hereto and the documents incorporated
by reference herein. Stockholders of First Essex and Finest are urged to read
this Proxy Statement-Prospectus with care in its entirety.
The Companies
First Essex. First Essex is a Delaware corporation whose primary
activity is to act as the parent holding company for First Essex Bank. Until
December 1, 1993, the business of First Essex was conducted through two banking
subsidiaries, First Essex Savings Bank, a Massachusetts-chartered savings bank
and First Essex Savings Bank of New Hampshire, a New Hampshire-chartered
guaranty savings bank. The New Hampshire bank was owned through a second tier
holding company, First Essex Bancorp of New Hampshire, Inc., which was merged
into First Essex on December 1, 1993. First Essex's principal executive office
is located at 71 Main Street, Andover, Massachusetts 01810 and its telephone
number is (508) 475-4313.
First Essex Bank was originally founded under a Massachusetts
legislative charter issued in 1847. On December 1, 1993, First Essex Savings
Bank converted to a federal savings bank with a charter issued by the Office of
Thrift Supervision (the "OTS") under the name of First Essex Bank, FSB. On the
same day First Essex Savings Bank of New Hampshire was merged into First Essex
Bank, FSB.
As of June 30, 1996, First Essex Bank had total assets of $842.9
million, total deposits of $508.1 million, net loans of $522.4 million, and
stockholders' equity of $62.3 million. First Essex Bank is principally engaged
in the business of attracting deposits from the general public and investing in
residential mortgage, construction, commercial real estate, commercial and
consumer loans. First Essex Bank also makes investments in various investment
securities to provide a source of interest and dividend income. First Essex Bank
currently maintains [ten] full service banking offices at various locations
throughout its market area. First Essex Bank's deposits are insured by the Bank
Insurance Fund (the "BIF") of the Federal Deposit Insurance Corporation (the
"FDIC") up to $100,000 per separately insured account.
Finest and Pelham Bank. Finest is a New Hampshire business corporation
organized in 1986 for the purposes of becoming the holding company of Pelham
Bank, which is a wholly-owned subsidiary of Finest. Finest's principal executive
office is located at Route 38, Bridge Street, Pelham Plaza, Pelham, New
Hampshire 03076 and its telephone number is (603) 635-3545.
Pelham Bank is a New Hampshire-chartered trust company which conducts a
general banking business primarily in southern New Hampshire. Deposits at Pelham
Bank are insured by the BIF of the FDIC up to $100,000 per separately insured
account.
Pelham Bank was incorporated in 1968 and operates from three banking
offices located in Pelham, Salem and Windham, New Hampshire. Pelham Bank offers
a wide range of deposit and lending services to its customers. It has a loan
portfolio of residential, consumer and small business loans and emphasizes both
retail and commercial banking. As of June 30, 1996, Pelham Bank reported total
assets of $179.1 million, total deposits of $158.3 million, net loans of $95.6
million, and stockholders' equity of $18.5 million.
The Merger
Pursuant to the terms of the Merger Agreement by and among First Essex,
Finest and Pelham Bank, Finest shall merge with and into First Essex (the
"Merger"). Pursuant to a separate merger agreement and as a condition to the
consummation of the Merger, immediately preceding the Merger Pelham Bank will be
merged with and into First Essex Bank (the "Bank Merger") and Pelham Bank's
three New Hampshire branches will be operated as branch offices of First Essex
Bank. It is anticipated that the transaction will close in December 1996.
Upon the Effective Time of the Merger (as defined in the Merger
Agreement), each then outstanding share of Finest Common Stock will, subject to
certain limitations, be converted into and become exchangeable for (i) a number
of shares of First Essex Common Stock equal to the Exchange Ratio (obtained by
dividing the Acquisition Price by the Average Closing Price) or (ii) an amount
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in cash equal to the Acquisition Price (the aggregate of such shares and cash
collectively, the "Merger Consideration"). If the Average Closing Price is
greater than $11.50 per share, the Exchange Ratio will equal 1.761 and if the
Average Closing Price is less than $9.50 per share, the Exchange Ratio will
equal 2.132. If the Average Closing Price is less than $8.75, Finest will have
the right to terminate the Merger Agreement, unless First Essex elects to
increase the number of shares issuable in the Merger with respect to those
Finest shares to be converted into First Essex shares by utilizing an adjusted
Exchange Ratio determined by dividing $18.65 by the Average Closing Price (the
"Adjusted Exchange Ratio").
The Merger Agreement provides that Finest's stockholders may elect to
receive all cash, all stock or any combination thereof, subject to an overall
limitation that 50% of the total number of outstanding shares of Finest Common
Stock shall be converted into shares of First Essex Common Stock, with the
remaining outstanding shares of Finest Common Stock to be converted into cash.
The exchange provisions of the Merger Agreement allow the exchange agent a means
by which it can equitably meet the respective elections of the Finest
stockholders without violating the overall stock to cash ratio. The portion of
the Merger Consideration paid in shares may be increased up to a maximum of 62%,
to the extent necessary to preserve the tax-free nature of the Merger. See "The
Merger--Election Procedures".
The Meetings
First Essex. The First Essex Meeting will be held on December 19, 1996
at 10:00 a.m. at the Andover Country Club, 60 Canterbury Street, Andover,
Massachusetts. At the First Essex Meeting, First Essex stockholders will
consider and vote upon a proposal to approve and adopt the Merger Agreement and
the transactions contemplated thereby.
Finest. The Finest Meeting will be held on December ____, 1996 at
__________ at the Windham Branch office of Pelham Bank, Route 111, Windham, New
Hampshire. At the Finest Meeting, Finest stockholders will consider and vote
upon a proposal to approve and adopt the Merger Agreement and the transactions
contemplated thereby.
Record Date and Vote Required
First Essex. The Board of Directors of First Essex (the "First Essex
Board") has fixed the close of business on October 31, 1996 as the record date
(the "First Essex Record Date") for determination of stockholders entitled to
notice of and to vote at the First Essex Meeting and any adjournments or
postponements thereof. The Merger Agreement and the transactions contemplated
thereby must be approved by the affirmative vote of the holders of at least a
majority of the issued and outstanding shares of First Essex Common Stock.
Stockholders of First Essex are entitled to one vote at the First Essex Meeting
for each share of First Essex Common Stock held of record at the close of
business on the First Essex Record Date. At the close of business on the First
Essex Record Date, [6,058,935] shares of First Essex Common Stock were
outstanding and entitled to vote, of which approximately [370,140] shares, or
[6.11]%, were held by directors and executive officers of First Essex and their
respective affiliates. See "The Meetings--Record Dates; Stock Entitled to Vote;
Quorum".
Finest. The Board of Directors of Finest (the "Finest Board") has fixed
the close of business on October 31, 1996 as the record date (the "Finest Record
Date") for determination of stockholders entitled to notice of and to vote at
the Finest Meeting and any adjournments or postponements thereof. The
affirmative vote of the holders of at least a majority of the outstanding shares
of Finest Common Stock entitled to vote is required to approve and adopt the
Merger Agreement and the transactions contemplated thereby. Stockholders of
Finest are entitled to one vote at the Finest Meeting for each share of Finest
Common Stock held of record at the close of business on the Finest Record Date.
At the close of business on the Finest Record Date, 1,478,750 shares of Finest
Common Stock were outstanding and entitled to vote, of which approximately
210,030 shares, or approximately 14.2%, were held by directors and executive
officers of Finest and their respective affiliates. See "The Meetings--Record
Dates; Stock Entitled to Vote; Quorum" and "--Ownership of Finest Securities".
All of the Finest and Pelham Bank directors and executive officers and
their respective affiliates, and a certain principal stockholder of Finest, who
own in the aggregate 410,890 shares on the Finest Record Date, representing
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approximately 27.8% of the shares of Finest Common Stock issued and outstanding
on the Finest Record Date, have entered into a letter agreement dated as of
August 5, 1996 (the "Stockholders Agreement"), pursuant to which they have
agreed to vote their shares of Finest Common Stock in favor of the Merger
Agreement. See "The Meetings--Ownership of Finest Securities" and "The
Merger--Stockholders Agreement".
Management and Operations after the Merger
The Merger will become effective at the Effective Time as set forth in
the Articles of Merger to be filed with the Secretary of State of the State of
New Hampshire and a Certificate of Merger to be filed with the Secretary of
State of the State of Delaware. On the Closing Date and immediately prior to the
Effective Time, and as a condition to the Merger, the Bank Merger will be
consummated. The directors and officers of First Essex and First Essex Bank will
remain unchanged after the Effective Time, except that Brian W. Thompson, the
current President of Finest and Pelham Bank, will be elected an Executive Vice
President of both First Essex and First Essex Bank.
Recommendation of the Boards of Directors and Reasons for the Merger
THE BOARD OF DIRECTORS OF EACH OF FIRST ESSEX AND FINEST UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND EACH UNANIMOUSLY RECOMMENDS APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS
CONTEMPLATED THEREBY.
Finest. The Finest Board believes that the terms of the Merger
Agreement and the transactions contemplated thereby are in the best interests of
the stockholders and recommends that the stockholders vote FOR the approval and
adoption of the Merger Agreement and the transactions contemplated thereby.
From October 1992 to August 1996, Pelham Bank had been operating under
various regulatory orders. During the period October 1992 through August 1995,
Pelham Bank operated under a Cease and Desist Order (the "the Order"), issued by
the FDIC and concurred to by the New Hampshire State Banking Department, which
Order was modified by action dated November 23, 1993. The Order was terminated
by the FDIC in a letter from the FDIC dated September 13, 1995 and was replaced
by a Memorandum of Understanding (the "MOU"), issued by the FDIC and concurred
to by the New Hampshire State Banking Department. The MOU was terminated in a
letter from the FDIC dated August 12, 1996. During the past two years, Finest
has, among other things, explored the strategic alternatives of merging with or
being acquired by a larger banking organization, as compared to the alternative
of remaining as an independent financial institution. After evaluating the
available alternatives, including proposals from various potential acquirers, in
July 1996 the Finest Board determined that being acquired by First Essex in a
strategic merger represents the most likely opportunity for long-term
enhancement of stockholder value and is in the best interest of Finest other
constituencies including its employees and the communities served by Pelham
Bank.
In the course of reaching its decision to enter into the Merger
Agreement with First Essex, the Finest Board consulted with its advisors and
considered a number of factors, including without limitation, the following: (i)
the amount and form of the consideration offered by First Essex in relation to
the estimated value of Finest Common Stock, in comparison with other proposals
under consideration at the time; (ii) First Essex's business, results of
operations, prospects, financial condition and potential future value of the
First Essex Common Stock; (iii) the advice of Finest's financial advisor as to
the fairness of the consideration to be paid to Finest stockholders from a
financial point of view; (iv) Finest's financial condition, prospects and the
competitive environment for small banking institutions generally and for Finest
in particular, and the risks and costs of Finest continuing as an independent
business; (v) the financial strength the Merger would provide to the combined
Finest/First Essex organization; and (vi) the impact of the transaction upon
customers served by Pelham Bank and the expanded range of financial services to
be offered by the combined organization. The Finest Board concluded, in light of
the above factors and such other factors as it considered appropriate, that the
terms of the Merger Agreement are fair to, and in the best interests of, Finest
and Finest's stockholders and that such terms provide a greater value to
stockholders than the strategic alternatives of remaining as an independent
financial institution or entering into an acquisition transaction with any other
potential acquiror. See "The Merger-Background of the Merger," and
"-Recommendation of the Finest Board and Reasons for the Merger" for a more
detailed discussion of the reasons for the Board of Directors' recommendation to
approve the Merger Agreement and the transactions contemplated thereby.
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First Essex. The First Essex Board believes that the terms of the
Merger Agreement and the transactions contemplated thereby are in the best
interests of the stockholders and recommends that the stockholders vote FOR the
approval and adoption of the Merger Agreement and the transactions contemplated
thereby.
In reaching its determination, the First Essex Board considered the
following factors: (i) First Essex's business, operations, financial condition,
earnings and prospects; (ii) the business, operations, financial condition,
earnings and prospects of Finest; (iii) the enhanced prospects and opportunities
for growth that the Merger makes possible; (iv) the anticipated cost savings
resulting from the Merger; and (v) the advice of First Essex's financial advisor
as to the fairness from a financial point of view of the consideration to be
paid by First Essex in the Merger.
Risk Factors
Risks Associated with Commercial Real Estate, Commercial and
Construction Loans. Commercial real estate and commercial lending involve
significant additional risks compared with one-to-four family residential
mortgage lending, and therefore typically account for a disproportionate share
of delinquent loans and real estate owned through foreclosure. Such lending
generally involves larger loan balances to single borrowers or groups of related
borrowers than does residential lending, and repayment of the loan depends in
part on the underlying business and financial condition of the borrower and is
more susceptible to adverse future developments.
Construction loans are, in general, subject to the same risks as
commercial real estate loans, but involve additional risks as well. Such
additional risks are due to uncertainties inherent in estimating construction
costs, delays arising from labor problems, shortages of material, uncertain
marketability of a completed project and other unpredictable contingencies that
make it relatively difficult to determine accurately the total loan funds
required to complete a project or the value of the completed project.
Construction loan funds are advanced on the security of the project under
construction, which is of uncertain value prior to the completion of
construction. In a declining market, there is no assurance that the lender will
be able to recover outstanding loan amounts and interest due.
Economic Conditions and Real Estate Risk. First Essex's lending
operations are concentrated primarily in Massachusetts and southern New
Hampshire and Finest's lending operations are concentrated in southern New
Hampshire and bordering counties of Massachusetts. As a result, the financial
condition and results of operations of the combined company will be subject to
the effects of changes in the business cycle and downturns in the local,
regional and national economies, as well as other general economic conditions,
particularly the conditions in the single-family or multi-family residential
real estate markets prevailing in those states.
Interest Rate Risk. Each of First Essex and Finest realizes its income
principally from the differential between the interest earned on loans,
investments and other interest-earning assets, and the interest paid on
deposits, borrowings and other interest-bearing liabilities. Periods of
increasing interest rates may adversely affect the combined company's actual
interest rate spread, and thus net income.
Operational Issues. The ability of the combined company to operate
efficiently, at least in the short term, will be enhanced by the ability to
retain existing management personnel. If First Essex is not able to retain
certain key management personnel of Finest, the consolidation of the two
companies may be more time-consuming, difficult and expensive, and may
negatively affect the anticipated cost savings.
Competition. First Essex and Finest both face significant competition
in their respective markets. Increasing consolidation within the banking and
financial services industry, as well as increased competition from larger
regional and out-of-state banking organizations and nonbank providers of various
financial services, may adversely affect the combined company's ability to meet
its financial goals.
Laws and Regulations. The business of First Essex and Finest are
subject to substantial federal and state regulation. Changes in laws and
regulations, including federal and state banking laws and regulations, with
which the combined company will be required to comply, and the associated costs
of compliance with such laws and regulations, could cause actual results of the
combined company to vary significantly from the results presently anticipated by
management for the combined company.
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Opinions of Financial Advisors
Finest. Keefe, Bruyette & Woods ("Keefe Bruyette") has advised the
Finest Board that, in its opinion, the consideration to be received in the
Merger is fair, from a financial point of view, to the stockholders of Finest.
The full text of Keefe Bruyette's opinion, which describes the procedures
followed, assumptions made, limitations on the review undertaken and other
matters in connection with rendering such opinion, is set forth in Appendix B
attached hereto. Stockholders of Finest are urged to read this opinion in its
entirety. Keefe Bruyette's opinion is directed only to the consideration to be
received in the Merger and does not constitute a recommendation to Finest
stockholders as to how they should vote at the Finest Meeting.
First Essex. Oppenheimer & Co., Inc. ("Oppenheimer") has delivered to
the First Essex Board its written opinions, dated July 30, 1996 and the date of
this Proxy Statement-Prospectus, that the consideration to be paid in the Merger
is fair, from a financial point of view, to First Essex. The full text of
Oppenheimer's opinion as of the date of this Proxy Statement--Prospectus, which
sets forth assumptions made, matters considered and limits on the review
undertaken by it, is attached hereto as Appendix C. Stockholders of First Essex
are urged to read this opinion in its entirety. Oppenheimer's opinions are
directed only to the consideration to be paid in the Merger and do not
constitute a recommendation to First Essex stockholders as to how they should
vote at the First Essex Meeting.
See "The Merger-Background of the Merger", "-Opinions of Financial
Advisors" and Appendix B and Appendix C to this Proxy Statement-Prospectus.
No Solicitation
Finest has agreed in the Merger Agreement that neither it nor Pelham
Bank will encourage, solicit, initiate or, subject to the fiduciary obligations
of the Finest Board (as advised in writing by outside counsel), participate in
any discussions or negotiations with, or provide information to, any other party
concerning any merger, tender offer, sale of substantial assets, sale of shares
of capital stock or debt securities or similar transaction involving Finest or
any of its subsidiaries (any of the foregoing being referred to as an
"Acquisition Transaction"), except that Finest may communicate or disclose
certain information to its stockholders pursuant to applicable securities or
other law. Finest has also agreed that it will immediately communicate to First
Essex the terms of any proposal, discussion, negotiation or inquiry relating to
an Acquisition Transaction and the identity of the party making such proposal or
inquiry which it may receive in respect of any such transaction or its receipt
of any request for information from any governmental agency or authority with
respect to a proposed Acquisition Transaction. See "The Merger--No
Solicitation".
Interests of Certain Persons in the Merger
Pursuant to the Merger Agreement, First Essex has, subject to certain
limitations, agreed to indemnify, defend and hold harmless each present and past
director, officer and employee of Finest against certain claims and the expenses
and liabilities resulting therefrom. First Essex has also agreed to maintain for
three years the directors' and officers' liability insurance maintained by
Finest prior to the Effective Time (or provide an appropriate substitute
therefor), except that First Essex is not required to expend more than 125% of
what is currently being paid by Finest for such insurance coverage.
On the Closing Date, First Essex and First Essex Bank will enter into
certain employment and severance arrangements with Brian W. Thompson and Irving
J. Goss, which will take the place of and supersede the employment and severance
arrangements presently in effect for Messrs. Thompson and Goss with Finest and
Pelham Bank. Mr. Thompson will be elected an Executive Vice President of First
Essex and First Essex Bank, with responsibilities as head of Corporate Banking.
He will receive an annual salary of $150,000 and may be paid an annual
performance bonus of up to 30% of his annual salary. On the Closing Date, Mr.
Thompson will enter into an employment agreement with First Essex and First
Essex Bank, which will have an initial term of two years, and a special
termination agreement with First Essex and First Essex Bank, which will contain
change of control provisions providing for a termination payment of three years'
salary and bonus upon the occurrence of a Terminating Event (as defined therein)
within three years of a Change in Control (as defined therein) of First Essex.
Mr. Thompson will also be entitled to voluntarily terminate his employment with
First Essex Bank for any reason during the first year following the Effective
Time and receive a lump sum severance payment of $225,000, which is equal to the
change of control payment that Mr. Thompson could receive under his existing
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employment agreement. Mr. Goss will receive an annual salary, as an employee of
First Essex Bank, of $100,000 and will be entitled to all benefits accorded to
similarly situated executives of First Essex Bank. Mr. Goss may voluntarily
terminate his employment with First Essex Bank for any reason during the first
year following the Effective Time and will receive a lump sum severance payment
equal to (x) the amount, if any, of the remaining balance of his full year
salary for such initial year of employment plus (y) $125,000, which is
equivalent to the change of control payment that Mr. Goss could receive under
his existing employment agreement.
At the Effective Time, certain options granted to Messrs. Thompson and
Goss to purchase 50,000 and 15,000 shares of Finest Common Stock, respectively,
will become immediately exercisable in full pursuant to the accelerated vesting
provisions contained in the agreements under which such options were granted. If
Messrs. Thompson and Goss were to exercise all of their options immediately upon
such acceleration, the value to them (based upon the difference between the
options' exercise prices and the Acquisition Price) would be $337,500 and
$101,250, respectively.
See "The Merger--Interests of Certain Persons in the Merger".
Employment Matters
Following the Effective Time, First Essex will, or will cause First
Essex Bank to, honor in accordance with their terms all employment, severance
and other compensation contracts disclosed to First Essex under the Merger
Agreement between Finest or Pelham Bank and any director, officer or employee
thereof (other than the employment agreements with Messrs. Thompson and Goss
which will be superseded at the Effective Time by the arrangements described
above), and all provisions for benefits or other amounts earned or accrued
through the Effective Time under Finest pension plans or benefit plans. First
Essex will cause each plan, program or arrangement included among the benefits
of First Essex to be provided to such employees after the Effective Time, except
for First Essex's defined benefit pension plan provided through the Savings
Banks Employees Retirement Association ("SBERA"), to treat the prior service of
each such employee with Finest or Pelham Bank, to the extent such prior service
is recognized under the comparable plan, program or arrangement of Finest, as
service rendered to First Essex or its affiliate, as the case may be, for
purposes of eligibility to participate, vesting, and eligibility for special
benefits under each such plan, program or arrangement of First Essex, but not in
any case for benefit accrual attributable to any period before the Effective
Time. In addition, any employee of Finest or Pelham Bank who becomes an employee
of First Essex or First Essex Bank immediately following the Effective Time and
whose employment is involuntarily terminated at any time during the twelve-month
period from and after the Closing Date will be entitled to salary continuation
and benefits in accordance with the terms and conditions of the salary
continuation policy and bonus plan of Pelham Bank (the "Salary Continuation
Policy and Bonus Plan"). See "The Merger--Employment Obligations".
Conditions to Consummation of the Merger; Termination
Consummation of the Merger is subject to various conditions, including,
among other things, the effectiveness of the Registration Statement of which
this Proxy Statement-Prospectus forms a part; the approval of Finest's and First
Essex's stockholders solicited hereby; approval of the Bank Merger by the OTS;
receipt by each of First Essex and Finest of an opinion of its respective
counsel as to the tax-free nature of the Merger for federal income tax purposes,
except for the cash received as part of the Merger Consideration, cash in lieu
of fractional shares and cash received by dissenting stockholders; the lack of
any materially adverse changes concerning Finest or First Essex or their
respective subsidiaries; the authorization for listing on the NASDAQ-NMS of the
First Essex shares to be issued in the Merger; and other customary closing
conditions. The Merger Agreement may be terminated prior to the Effective Time
by either First Essex or Finest under certain circumstances (including if the
Effective Time has not occurred by July 31, 1997). See "Merger-Conditions to
Consummation of the Merger" and "-Termination".
Amendment and Waiver of the Merger Agreement; Extensions
At any time prior to the consummation of the Merger or termination of
the Merger Agreement, the parties may amend the Merger Agreement, extend the
time for performance of any obligations or waive any inaccuracies in
representations and warranties or compliance with any conditions; provided, that
stockholders' approval shall be necessary to amend the Merger Agreement to
change the amount or form of the Merger Consideration. See "The
Merger--Amendment, Extension and Waiver".
6
<PAGE>
Regulatory Approvals
The Bank Merger is subject to approval by the OTS. First Essex Bank and
Pelham Bank have filed an application with the OTS with respect to the Bank
Merger. Furthermore, assuming OTS approval, the United States Department of
Justice ("Department of Justice") may challenge the Bank Merger on antitrust
grounds for up to 30 days after that approval. There can be no assurance that
the Bank Merger will be approved by the OTS. If such approval is received, there
can be no assurance as to the date of such approval, the absence of a Department
of Justice challenge of such approval, or the absence of any litigation
challenging such approval. The Merger will not occur until all regulatory
approvals required to consummate both the Merger and the Bank Merger have been
obtained, such approvals are in full force and effect and all statutory waiting
periods in respect thereof have expired. See "The Merger--Requisite Regulatory
Approvals".
Certain Federal Income Tax and Accounting Consequences
Neither First Essex nor Finest has requested or will receive an advance
ruling from the Internal Revenue Service as to the tax consequences of the
Merger. Each of First Essex's and Finest's respective obligations to effect the
Merger is conditioned upon its receipt from its respective legal counsel of an
opinion dated as of the Closing Date, in form and substance reasonably
satisfactory to it, substantially to the effect that for federal income tax
purposes the Merger (and, in the case of First Essex, the Bank Merger)
constitutes a reorganization within the meaning of section 368 of the Internal
Revenue Code of 1986, as amended (the "Code") (noting, however, that the
nontaxability to the stockholders of Finest resulting from such reorganization
does not extend to cash received as part of the Merger Consideration, cash in
lieu of a fractional share interest in First Essex Common Stock or cash received
by dissenting stockholders, if any).
It is intended that both the Merger and the Bank Merger will constitute
tax-free reorganizations and that no gain or loss will be recognized by First
Essex, First Essex Bank, Finest or Pelham Bank and that no gain or loss will be
recognized by Finest stockholders with respect to their receipt of First Essex
Common Stock in exchange for their shares of Finest Common Stock. The receipt of
cash by Finest stockholders in exchange for shares of Finest Common Stock, in
lieu of fractional shares of First Essex Common Stock or as a dissenting
stockholder will be taxable to the extent of any taxable gain realized upon such
receipt of cash.
Stockholders of Finest should consult their own tax advisors as to the
tax consequences of the Merger under federal, state, local or any other
applicable law. See "The Merger--Material Federal Income Tax Consequences".
It is intended that the Merger will be subject to purchase accounting
treatment. See "The Merger--Accounting Treatment".
Appraisal Rights and Dissenting Stockholders
Holders of Finest Common Stock who do not vote to approve and adopt the
Merger Agreement and who comply with the requirements of the New Hampshire
Revised Statutes Annotated ("NHRSA") sections 293-A:13.01 through 293-A:13.31
will be entitled to dissenters' rights under New Hampshire law. A copy of NHRSA
sections 293-A:13.01 through 293-A:13.31 is attached to this Proxy
Statement-Prospectus as Appendix D. See "The Meetings-Appraisal Rights and
Dissenting Stockholders" and "Comparison of Rights of Holders of Finest Common
Stock and First Essex Common Stock-Dissenters'/Appraisal Rights".
Certain Differences in the Rights of Stockholders
The rights of stockholders of Finest are currently governed by the New
Hampshire Business Corporation Act ("NHBCA"), Finest's Articles of
Incorporation, as amended (the "Finest Articles"), and Finest's by-laws, as
amended (the "Finest By-laws"). Upon consummation of the Merger, Finest's
stockholders will automatically become stockholders of First Essex, and their
rights will be governed by the Delaware General Corporation Law ("DGCL"), First
Essex's Restated Certificate of Incorporation (the "First Essex Certificate")
7
<PAGE>
and First Essex's by-laws (the "First Essex By-laws"). See "Comparison of Rights
of Holders of Finest Common Stock and First Essex Common Stock".
Market Prices and Dividend Data
First Essex. The following table sets forth for the periods indicated
the high and low closing prices of First Essex's Common Stock on NASDAQ-NMS, as
derived from published sources.
Price per Share Dividends
------------------- Declared
High Low per Share
---- --- ---------
1994
First Quarter $9 1/4 $6 5/8 $.06
Second Quarter 9 7/8 6 3/4 .06
Third Quarter 10 1/2 9 .08
Fourth Quarter 9 6 7/8 .08
1995
First Quarter $8 3/4 $7 5/8 $.08
Second Quarter 8 3/4 8 .08
Third Quarter 11 8 1/8 .12
Fourth Quarter 12 10 3/8 .12
1996
First Quarter 11 3/4 10 5/8 $.12
Second Quarter 11 10 3/8 .12
Third Quarter .12
Fourth Quarter (through October ___, 1996)
On August 2, 1996, the last business day immediately preceding the
first public announcement of the proposed Merger, the closing sales price for
First Essex Common Stock as reported on NASDAQ-NMS was $107/8 per share. See
"Market for First Essex Common Stock".
Finest. The shares of Finest Common Stock are not quoted on any
national or regional exchange or on NASDAQ-NMS and are traded sporadically on a
private basis, with 71,040 shares traded in 1994, 440,410 shares traded in 1995
and [202,940] shares traded through October_____, 1996. Finest does not have
available to it reliable information regarding the prices at which such shares
were traded, but such prices were reported to have been most recently in excess
of $14.00 per share.
Finest declared and paid a $.10 per share dividend in September 1995
after receiving approval from the Federal Reserve Bank of Boston. Prior to that
payment, Finest had not paid dividends on the Finest Common Stock since May
1992. The terms of the Order, in effect for the period of October 1992 through
August 1995, prohibited the payment of dividends by Pelham Bank to Finest
without prior approval of the FDIC and the State of New Hampshire's Banking
Commissioner.
All information in this Proxy Statement-Prospectus regarding shares of
Finest Common Stock has been adjusted to reflect a 10-for-1 split of the Finest
Common Stock in February 1996.
8
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF FIRST ESSEX AND SUBSIDIARIES
The following table sets forth certain historical and pro forma
consolidated financial data of First Essex. The selected data for the years
ended December 31, 1991 through 1995 is based on consolidated financial
statements, including the respective notes thereto, included in the Annual
Reports on Form 10-K prepared and filed with the SEC by First Essex. The
selected data for the six months ended June 30, 1996 and 1995 is based on
unaudited financial statements.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Years Ended December 31,
----------------- ------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $ 842,903 $ 841,500 $ 808,792 $ 806,872 $ 645,873 $ 506,913 $ 510,709
Loans receivable 522,362 479,768 493,499 422,574 282,760 284,875 353,760
Investment securities (1) 278,948 312,300 275,900 346,943 329,823 186,232 116,944
Foreclosed property 1,513 1,995 1,756 3,038 6,360 12,125 15,847
Deposits 508,080 484,107 491,469 456,878 398,233 412,218 449,032
Borrowed funds 256,695 276,264 245,569 279,948 185,001 40,000 9,417
Stockholders' equity 62,347 57,954 60,172 54,757 50,749 44,619 43,103
RESULTS OF OPERATIONS:
Interest and dividend income $ 30,563 $ 29,922 $ 60,914 $ 45,057 $ 36,183 $ 37,831 $ 45,347
Interest expense 17,975 18,045 37,081 22,707 16,654 19,240 30,675
--------- --------- --------- --------- --------- --------- ---------
Net interest income 12,588 11,877 23,833 22,350 19,529 18,591 14,672
Provision for loan losses 815 329 770 -- -- -- 10,952
Net gain (loss) on sale of securities -- -- (13) -- -- 613 247
Gain on sale of mortgage loans and
mortgage servicing rights 930 295 1,431 260 730 234 316
Other income 1,217 1,153 2,290 2,301 2,465 2,252 1,897
Non-interest expense 10,017 9,744 19,244 19,190 18,395 20,579 23,420
Income tax provision (benefit) 19 20 75 (805) (2,621) 13 --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) before extraordinary
item 3,884 3,232 7,452 6,526 6,950 1,098 (17,240)
Extraordinary item(2) -- -- -- -- -- -- 800
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ 3,884 $ 3,232 $ 7,452 $ 6,526 $ 6,950 $ 1,098 $ (16,440)
========= ========= ========= ========= ========= ========= =========
COMMON SHARE DATA:
Net income (loss) per share $ .63 $ .53 $ 1.22 $ 1.08 $ 1.15 $ .18 $ (2.73)
Dividends declared .24 .16 .40 .28 .11 .00 .00
Book value at end of period 10.31 9.63 9.99 9.10 8.44 7.42 7.17
AVERAGE BALANCES:
Total assets $ 814,896 $ 812,863 $ 84,747 $ 695,110 $ 561,973 $ 491,737 $ 534,494
Total borrowed funds 244,561 273,791 274,956 218,553 108,616 9,095 18,983
Total stockholders' equity 61,781 56,361 58,247 52,549 46,863 43,959 52,818
SELECTED FINANCIAL RATIOS:
Return on average assets 0.95% 0.80% 0.91% 0.94% 1.24% 0.22% (3.08)%
Return on average equity 12.57% 11.47% 12.79% 12.42% 14.83% 2.50% (31.13)%
Average equity as a percentage of average
assets 7.40% 6.89% 7.09% 7.56% 8.34% 8.94% 9.88%
Weighted average interest rate spread 2.69% 2.60% 2.56% 3.02% 3.29% 3.57% 2.48%
Net yield on average earning assets 3.19% 3.01% 2.99% 3.33% 3.60% 3.96% 2.90%
- ----------------
<FN>
(1) Investment securities include short term investments, U.S. government and agency obligations, mortgage backed securities,
other bonds and obligations, stock in the Federal Home Loan Bank of Boston and stock in the Savings Bank Life
Insurance Company.
(2) On December 31, 1991, First Essex recorded the estimated value of its shares in the Savings Bank Life Insurance Company.
</FN>
</TABLE>
9
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF FINEST AND SUBSIDIARY
The following table sets forth certain historical consolidated
financial data of Finest. The selected data for each of the five years ended
December 31, 1991 through 1995 is based on consolidated financial statements,
including the respective notes thereto, which have been audited by Shatswell,
MacLeod & Company, P.C., independent certified public accountants, for 1995 and
1994 and by Grant Thornton LLP, independent certified public accountants, for
1993, 1992 and 1991. The selected data for the six months ended June 30, 1996
and 1995 is based on unaudited financial statements.
<TABLE>
<CAPTION>
At or for the
Six Months Ended
June 30, At or for the Years ended December 31,
------------------- ---------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $ 179,328 $ 177,027 $ 181,103 $ 178,012 $ 180,403 $ 177,841 $ 194,144
Total loans 100,137 111,974 107,238 108,263 110,319 120,225 141,060
Allowance for loan losses 4,057 2,828 4,136 3,746 3,660 4,335 3,031
Investments (1) 71,793 54,213 67,737 56,940 51,002 26,992 15,303
Other real estate owned 891 2,876 1,501 7,936 15,896 26,392 28,655
Deposits 158,187 158,272 161,669 161,364 164,022 162,433 175,036
Borrowed funds -- -- -- -- -- -- --
Stockholders' equity $ 18,650 $ 16,850 $ 17,267 $ 15,281 $ 14,811 $ 14,378 $ 16,344
RESULTS OF OPERATIONS:
Interest and dividend income $ 6,845 $ 6,413 $ 13,596 $ 11,556 $ 11,541 $ 12,684 $ 16,158
Interest expense 2,812 2,593 5,624 4,554 4,846 6,107 10,199
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest and dividend income 4,033 3,820 7,972 7,002 6,695 6,577 5,959
Provision for loan losses 169 300 1,600 600 2,125 3,200 5,338
Net gains (losses) from sales of
assets held for sale and
investments (1) -- -- (2) 1 11 91 --
Losses on real estate operations 109 133 360 393 834 1,083 2,172
Fees and service charges 294 236 489 495 506 867 530
Other income 125 356 366 378 473 519 570
Merger related expenses 413 286 371 128 -- -- --
Non-interest expense 2,137 2,469 5,316 6,198 5,255 5,142 3,823
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income tax
expense (benefit) 1,624 1,224 1,178 557 (529) (1,371) (4,274)
Income tax expense (benefit) (2) 124 (172) (453) (723) 515 (1,112)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ 1,626 $ 1,100 $ 1,350 $ 1,010 $ 194 $ (1,886) $ (3,162)
=========== =========== =========== =========== =========== =========== ===========
PER SHARE DATA: (2)
Net income (loss) $ 1.10 $ 0.75 $ 0.93 $ 0.69 $ 0.13 $ (1.29) $ (2.15)
Dividends declared -- -- $ 0.10 -- -- -- $ 0.20
Book value at end of period $ 12.61 $ 11.55 $ 11.68 $ 10.48 $ 10.16 $ 9.86 $ 11.12
Average shares outstanding 1,478,736 1,474,520 1,458,750 1,458,530 1,458,050 1,463,180 1,470,685
AVERAGE BALANCES:
Total assets $ 175,467 $ 173,275 $ 176,454 $ 178,426 $ 176,946 $ 186,311 $ 197,958
Total borrowed funds 130 -- -- -- -- -- --
Total stockholders' equity 17,997 15,900 16,590 15,195 14,594 15,356 18,045
SELECTED FINANCIAL
RATIOS:
Return (loss) on average assets 1.85% 1.27% 0.77% 0.57% 0.11% (1.01)% (1.60)%
Return (loss) on average equity 18.07% 13.84% 8.14% 6.65% 1.33% (12.28)% (17.52)%
Average of equity as a percentage
of average assets 10.26% 9.18% 9.40% 8.52% 8.25% 8.24% 9.12%
Dividend payment ratio N/A N/A 10.81% N/A N/A N/A (9.30)%
- ---------------
<FN>
N/A Not applicable.
(1) Includes investment securities, available-for-sale securities, held-to-maturity securities, federal funds sold,
and Federal Home Loan Bank stock where applicable.
(2) Per share data reflects 10-for-1 stock split in February 1996.
</FN>
</TABLE>
10
<PAGE>
FIRST ESSEX PRO FORMA FINANCIAL DATA
The unaudited pro forma condensed consolidated balance sheets contained
herein have been prepared to reflect the Merger using the purchase method of
accounting, assuming the Merger had occurred on January 1, 1995. Under the
purchase method of accounting, the purchase price will be allocated to assets
acquired and liabilities assumed based on their estimated fair values at the
Effective Time. Income of the newly-consolidated company will not include income
(or loss) of Finest prior to the Effective Time. The unaudited pro forma
condensed statements of operations contained herein present the results of
operations of First Essex and Finest for the six months ended June 30, 1996 and
for the year ended December 31, 1995, assuming the Merger had been effective on
January 1, 1995. See "The Merger--Accounting Treatment". The pro forma financial
statements contained herein reflect the exchange of 56% of the shares of Finest
Common Stock for First Essex Common Stock in connection with the Merger at the
rate of 1.901 shares of First Essex Common Stock for each share of Finest Common
Stock and the payment of $13.18 million in cash for the balance of the shares of
Finest Common Stock. This unaudited pro forma financial data should be read in
conjunction with the consolidated historical financial statements of Finest and
First Essex, including the respective notes thereto, which are included in this
Proxy Statement-Prospectus.
The pro forma financial data contained herein is for information
purposes only and is not necessarily indicative of the results of future
operations of the consolidated entity or the actual results that would have been
achieved had the Merger been consummated prior to the period indicated.
Moreover, the pro forma condensed financial statements contained herein reflect
preliminary pro forma adjustments made to combine Finest with First Essex
utilizing the purchase method of accounting. The actual adjustments will be made
as of the Effective Time and may differ from those reflected in the pro forma
financial statements contained herein.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1996 December 31, 1995
----------------- ----------------
(Dollars in thousands, except per share data)
<S> <C> <C>
BALANCE SHEET DATA:
Total assets $1,022,888 --
Loans receivable 617,478 --
Investment securities -- --
Foreclosed property 2,404 --
Deposits 666,267 --
Borrowed funds 256,695 --
Stockholders' equity 79,554 --
RESULTS OF OPERATIONS:
Interest and dividend income 37,503 $74,698
Interest expense 20,787 42,705
------- -------
Net interest income 16,716 31,994
Provision for loan losses 984 2,370
Non-interest income 2,566 4,561
Non-interest expense 13,146 26,230
Income tax provision (benefit) 49 (33)
-------- --------
Net earnings (loss) before extraordinary item 5,103 7,988
Extraordinary item -- --
Net income (loss) $ 5,103 $ 7,988
======= =======
COMMON SHARE DATA:
Net income (loss) per share $.66 $1.03
</TABLE>
11
<PAGE>
RISK FACTORS
Special Note Regarding Forward Looking Statements
This Proxy Statement-Prospectus contains certain statements concerning
plans, objectives, future events or performance, assumptions and other
statements which are other than statements of historical fact ("Forward-Looking
Statements"). The following important factors, among others, may have affected
First Essex and Finest and could in the future affect the actual results of the
combined company, and could cause the actual results for subsequent periods to
differ materially from those expressed in any Forward-Looking Statement made
herein: (i) the effect of changes in laws and regulations, including federal and
state banking laws and regulations, with which the combined company must comply,
including the effect of the cost of such compliance; (ii) the effect of changes
in accounting policies and practices, as may be adopted by the regulatory
agencies as well as by the Financial Accounting Standards Board, or of changes
in the combined company's organization, compensation and benefit plans; (iii)
the effect on the competitive position of First Essex or Finest within its
market area resulting from increased consolidation within the banking industry
and increased competition from larger regional and out-of-state banking
organizations, as well as from nonbank providers of various financial services;
(iv) the effect of unforeseen changes in interest rates; (v) the effect of
changes in the business cycle and downturns in the New England and national
economies; and (vi) other factors discussed herein under the captions, "Risk
Factors", "First Essex Management's Discussion and Analysis of Financial
Conditions and Result of Operations", and "Finest Management's Discussion and
Analysis of Financial Condition and Results of Operations".
General
Risks Associated with Commercial Real Estate, Commercial and Construction Loans
Commercial real estate and commercial lending involve significant
additional risks compared with one-to-four family residential mortgage lending,
and therefore typically account for a disproportionate share of delinquent loans
and real estate owned through foreclosure. Such lending generally involves
larger loan balances to single borrowers or groups of related borrowers than
does residential lending, and repayment of the loan depends in part on the
underlying business and financial condition of the borrower and is more
susceptible to adverse future developments. If the cash flow from
income-producing property is reduced (for example, because leases are not
obtained or renewed), the borrower's ability to repay the loan may be materially
impaired. These risks can be significantly affected by considerations of supply
and demand in the market for office, manufacturing and retail space and by
general economic conditions. As a result, commercial real estate and commercial
loans are likely to be subject, to a greater extent than residential property
loans, to adverse conditions in the economy generally.
Construction loans are, in general, subject to the same risks as
commercial real estate loans, but involve additional risks as well. Such
additional risks are due to uncertainties inherent in estimating construction
costs, delays arising from labor problems, shortages of material, uncertain
marketability of a completed project and other unpredictable contingencies that
make it relatively difficult to determine accurately the total loan funds
required to complete a project or the value of the completed project.
Construction loan funds are advanced on the security of the project under
construction, which is of uncertain value prior to the completion of
construction. When a construction project encounters cost overruns, marketing or
other problems, it may become necessary, in order to sustain the project and to
preserve collateral values, for the lender to advance additional funds and to
extend the maturity of its loan. In a declining market, there is no assurance
that this strategy will successfully enable the lender to recover outstanding
loan amounts and interest due. Moreover, foreclosing on such properties results
in administrative expense and substantial delays in recovery of outstanding loan
amounts and provides no assurance that the lender will recover all monies due to
it, either by developing the property, subject to regulatory limitations and to
the attendant risks of development, or by selling the property to another
developer.
Economic Conditions and Real Estate Risk
First Essex's lending operations are concentrated primarily in
Massachusetts and southern New Hampshire and Finest's lending operations are
concentrated in southern New Hampshire and bordering counties of Massachusetts.
12
<PAGE>
As a result, the financial condition and results of operations of the combined
company will be subject to the effects of changes in the business cycle and
downturns in the local, regional and national economies, as well as other
general economic conditions, particularly the conditions in the single-family or
multi-family residential real estate markets prevailing in those states. In an
economic downturn, there tends to be a run-off in deposits. If economic
conditions in those states worsen or if the market for residential real estate
in particular declines, the combined company may not be able to originate the
volume of high quality single-family or multi-family residential mortgage loans
or achieve the level of deposits on which the Forward-Looking Statements are
based.
The New Hampshire economy and its real estate market showed signs of
recovery in 1994 and 1995 from the recessionary levels of the early 1990s, and
consequently Finest's delinquencies, non-performing assets and loss provisions
improved from earlier periods. The Forward-Looking Statements regarding Finest's
results of operations assume that the New Hampshire economy and real estate
market will continue the trend of improvement. A worsening of current economic
conditions or a significant decline in real estate values in New Hampshire could
cause actual results to vary materially from the Forward-Looking Statements.
Similarly, the Massachusetts economy and its real estate market showed
signs of recovery in 1994 and 1995 from earlier recessionary levels, and
consequently First Essex's delinquencies, non-performing assets and loss
provisions improved from earlier periods. The Forward-Looking Statements
regarding First Essex's results of operations assume that the Massachusetts
economy and real estate market will continue the trend of improvement. A
worsening of current economic conditions or a significant decline in real estate
values in Massachusetts could cause actual results to vary materially from the
Forward-Looking Statements.
Interest Rate Risk
Each of First Essex and Finest realizes its income principally from
the differential between the interest earned on loans, investments and other
interest-earning assets and the interest paid on deposits, borrowings and other
interest-bearing liabilities. Net interest spreads are affected by the
difference between the repricing characteristics of interest-earning assets and
deposits and other liabilities. Loan volumes and yields, as well as those of
investments, deposits and borrowings, are affected by market interest rates.
Generally, based on current asset liability structure, First Essex will
experience increased interest rate spreads during sustained periods of downward
interest rate movement and decreased interest rate spreads during sustained
periods of upward interest rate movement. In contrast, Finest will experience
increased interest rate spreads during sustained periods of upward interest rate
movement and decreased interest rate spreads during sustained periods of
downward interest rate movement. To the extent that interest rates generally are
increasing during the period to which the Forward-Looking Statements apply, the
combined company's actual interest rate spread, and thus net income, may be
materially less than set forth in the Forward-Looking Statements.
Operational Issues
The Forward-Looking Statements utilize Finest's internal estimates of
growth and results of operations and generally make no provisions for any
possible negative effects of the Merger. In addition, the Forward-Looking
Statements estimate certain cost savings from the consolidation of operations
which may not materialize or which may be delayed as a result of difficulties in
consolidating operations. To the extent that events differ from the assumptions,
actual results of operations may vary materially from the Forward-Looking
Statements.
The ability of the combined company to operate efficiently, at least in
the short term, will be enhanced by the ability to retain existing management
personnel. If First Essex is not able to retain certain key management personnel
of Finest, the consolidation of the two companies may be more time-consuming,
difficult and expensive, and may negatively affect the anticipated cost savings.
The Forward-Looking Statements assume that the deposit base of both
First Essex and Finest will remain substantially intact pending the Merger and
will grow at historical rates following the Merger. To the extent that the
change in ownership of Finest or other factors result in either a temporary or
long-term loss of deposits, actual results of operations may vary materially
from the results anticipated by the Forward-Looking Statements.
13
<PAGE>
Competition
First Essex and Finest both face significant competition in their
respective markets. Increasing consolidation within the banking and financial
services industry, as well as increased competition from larger regional and
out-of-state banking organizations and nonbank providers of various financial
services, may adversely affect the combined company's ability to meet its
financial goals. Many of these large competitors have significantly more
financial resources, larger market share and greater name recognition in the
market area to be served by the combined company. The existence of such
competitors may make it difficult for the combined company to achieve the
financial goals reflected in the Forward-Looking Statements.
Laws and Regulations
The business of First Essex and Finest are subject to federal and state
regulation. Changes in laws and regulations, including federal and state banking
laws and regulations, with which First Essex and its subsidiaries must comply,
and the associated costs of compliance with such laws and regulations, could
cause actual results to vary from the Forward-Looking Statements. Changes in
accounting policies and practices, as may be adopted by applicable regulatory
agencies as well as by the Financial Accounting Standards Board, or in First
Essex's organization, compensation and benefit plans also could cause actual
results to vary from the Forward-Looking Statements.
14
<PAGE>
COMPARATIVE PER SHARE FINANCIAL INFORMATION
The following summary sets forth certain unaudited per share financial
information on a historical and pro forma basis for First Essex and Finest both
assuming consummation of the Merger as of the beginning of the period presented
for earnings per share and dividends declared and as of the end of the period
presented for book value per share. The pro forma data should be compared to the
historical data. This information should be read in conjunction with the
consolidated historical financial statements of First Essex and Finest,
including the respective notes thereto, which are contained in this Proxy
Statement-Prospectus. The pro forma data is presented for comparative purposes
only and is not necessarily indicative of the parties' combined financial
position or results of operations, either in the future or if the Merger had
been consummated during the period or as of the date for which the pro forma
data is presented.
<TABLE>
<CAPTION>
First Essex December 31, 1995
-----------------------------------------------------------------------------------------------------
First Essex Average Exchange Dividends
Closing Price Ratio EPS(1) Declared(2) Book Value(3)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Historical $1.22 $.40 $9.99
Pro Forma $12.00 1.761 1.05 .32 9.99
11.50 1.761 1.05 .32 9.99
11.00 1.841 1.04 .31 9.91
10.50 1.929 1.03 .31 9.81
10.00 2.025 1.02 .31 9.71
9.50 2.132 1.01 .30 9.61
9.00 2.132 1.01 .30 9.61
<CAPTION>
PRO FORMA PER SHARE AMOUNTS GIVING EFFECT TO CASH RECEIVED IN MERGER
Finest December 31, 1995
-----------------------------------------------------------------------------------------------------
First Essex Average Exchange Dividends
Closing Price Ratio EPS(4) Declared(4) Book Value(4)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Historical $0.93 $.10 $12.61
Pro Forma $12.00 1.761 .90 .10 11.52
11.50 1.761 .90 .10 11.52
11.00 1.841 .86 .09 11.03
10.50 1.929 .82 .09 10.54
10.00 2.025 .79 .08 10.05
9.50 2.132 .75 .08 9.56
9.00 2.132 .75 .08 9.56
<CAPTION>
PRO FORMA PER SHARE AMOUNTS WITHOUT GIVING EFFECT TO CASH RECEIVED IN MERGER
Finest December 31, 1995
-----------------------------------------------------------------------------------------------------
First Essex Average Exchange Dividends
Closing Price Ratio EPS(5) Declared(5) Book Value(5)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Historical $0.93 $.10 $12.61
Pro Forma $12.00 1.761 .52 .06 6.62
11.50 1.761 .52 .06 6.62
11.00 1.841 .49 .05 6.33
10.50 1.929 .47 .05 6.05
10.00 2.025 .45 .05 5.76
9.50 2.132 .43 .05 5.48
9.00 2.132 .43 .05 5.48
15
<PAGE>
<CAPTION>
First Essex June 30, 1996
-----------------------------------------------------------------------------------------------------
First Essex Average Exchange Dividends
Closing Price Ratio EPS(1) Declared(2) Book Value(3)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Historical $.63 $.24 $10.31
Pro Forma $12.00 1.761 .67 .19 10.39
11.50 1.761 .67 .19 10.39
11.00 1.841 .66 .19 10.30
10.50 1.929 .65 .19 10.20
10.00 2.025 .65 .18 10.10
9.50 2.132 .64 .18 9.99
9.00 2.132 .64 .18 9.99
<CAPTION>
PRO FORMA PER SHARE AMOUNTS GIVING EFFECT TO CASH RECEIVED IN MERGER
Finest June 30, 1996
-----------------------------------------------------------------------------------------------------
First Essex Average Exchange Dividends
Closing Price Ratio EPS(4) Declared(4) Book Value(4)
--------------------------- --------------- ---------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C>
Historical $1.10 $.00 $12.61
Pro Forma $12.00 1.761 1.08 .00 12.44
11.50 1.761 1.08 .00 12.44
11.00 1.841 1.04 .00 11.91
10.50 1.929 .99 .00 11.38
10.00 2.025 .95 .00 10.85
9.50 2.132 .90 .00 10.32
9.00 2.132 .90 .00 10.32
<CAPTION>
PRO FORMA PER SHARE AMOUNTS WITHOUT GIVING EFFECT TO CASH RECEIVED IN MERGER
Finest June 30, 1996
-----------------------------------------------------------------------------------------------------
First Essex Average Exchange Dividends
Closing Price Ratio EPS(5) Declared(5) Book Value(5)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Historical $1.10 $.00 $12.61
Pro Forma $12.00 1.761 .61 .00 7.05
11.50 1.761 .61 .00 7.05
11.00 1.841 .59 .00 6.75
10.50 1.929 .56 .00 6.45
10.00 2.025 .54 .00 6.14
9.50 2.132 .51 .00 5.84
9.00 2.132 .51 .00 5.84
<FN>
(1) Earnings per share on a pro forma basis for First Essex,
assuming the consummation of the Merger at the beginning of
the above disclosed period, takes into account: the combined
net income of First Essex and Finest; amortization of
discounts on loans and investments ranging from five to eight
years; and the expenses related to the amortization of
goodwill over fifteen (15) years; as if such event had
occurred at January 1, 1995.
(2) Cash dividends declared on a pro forma basis for First Essex
assuming consummation of the Merger were assumed to be
unchanged in the aggregate.
(3) Book value per share on a pro forma combined basis for First
Essex, assuming consummation of the Merger at the end of the
above disclosed period, takes into account: the issuance of
shares of First Essex Common Stock as a result of the Merger
16
<PAGE>
based upon the Exchange Ratio applied to the 1,478,750 shares
of outstanding Finest Common Stock; the payment of $13,175,800
in cash to the former stockholders of Finest; recognition of
expenses associated with the Merger amounting to approximately
$2.1 million; amortization of discounts on loans and
investments ranging from five to eight years; and the
recognition of goodwill, which will be amortized over a
fifteen year period.
(4) The equivalent Finest pro forma per share amounts, for
illustrative purposes only, were determined by adjusting the
Finest Common Stock equivalents by an exchange ratio that
reflects the Finest per share consideration received in First
Essex Common Stock excluding any cash received in the Merger,
divided by the per share value of First Essex Common Stock
received.
(5) The equivalent Finest pro forma per share amounts, for
illustrative purposes only, were determined by adjusting the
Finest Common Stock equivalents by the exchange ratio that
reflects the total Finest per share consideration divided by
the per share value of First Essex Common Stock received and
assumes that the cash to be received for each share of Finest
Common Stock is converted to shares of First Essex Common
Stock at the assumed Average Closing Price.
</FN>
</TABLE>
17
<PAGE>
THE MEETINGS
Matters To Be Discussed at the Meetings
General. This Proxy Statement-Prospectus is being furnished by First
Essex to holders of shares of First Essex Common Stock and by Finest to holders
of shares of Finest Common Stock in connection with the solicitation of proxies
from such stockholders for use at the First Essex Meeting and the Finest
Meeting, respectively.
First Essex. At the First Essex Meeting or any adjournments or
postponements thereof, holders of shares of First Essex Common Stock will be
asked to approve and adopt the Merger Agreement and the consummation of the
transactions contemplated thereby, including the Merger, and such other matters
as may properly be brought before the meeting.
THE BOARD OF DIRECTORS OF FIRST ESSEX HAS UNANIMOUSLY APPROVED THE
MERGER AGREEMENT AND RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY,
INCLUDING THE MERGER.
Finest. At the Finest Meeting or any adjournments or postponements
thereof, holders of shares of Finest Common Stock will be asked to approve and
adopt the Merger Agreement and the consummation of the transactions contemplated
thereby, including the Merger.
THE BOARD OF DIRECTORS OF FINEST HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY,
INCLUDING THE MERGER.
Record Dates; Stock Entitled to Vote; Quorum
First Essex. The First Essex Record Date for the determination of
shares of those holders of First Essex Common Stock entitled to notice of, and
to vote at, the First Essex Meeting is October 31, 1996. Only holders of record
of shares of First Essex Common Stock at the close of business on the First
Essex Record Date will be entitled to notice of and to vote at the First Essex
Meeting or any adjournments or postponements thereof. As of the First Essex
Record Date, there were [6,058,935] shares of First Essex Common Stock
outstanding and entitled to vote.
The presence in person or by proxy of shares representing a majority of
votes ([3,029,468] votes) entitled to be cast by holders of First Essex Common
Stock issued and outstanding and entitled to vote as of the First Essex Record
Date is required to constitute a quorum for the transaction of business at any
meeting of stockholders. Abstentions and broker non-votes are included in the
determination of the number of shares of First Essex Common Stock present and
voting. "Broker non-votes" are proxies with respect to shares held in record
name by brokers or nominees, as to which (i) instructions have not been received
from the beneficial owners or persons entitled to vote, (ii) the broker or
nominee does not have discretionary voting power under applicable national
securities exchange rules or the instrument under which it serves in such
capacity, and (iii) the record holder has indicated on the proxy card or
otherwise notified First Essex that it does not have authority to vote such
shares on that matter.
Finest. The Board of Directors of Finest has fixed the close of
business on October 31, 1996 as the Finest Record Date. Only the holders of
record of shares of Finest Common Stock at the close of business on the Finest
Record Date will be entitled to notice of and to vote at the Finest Meeting and
any adjournments or postponements thereof. At the Finest Record Date,
[1,478,750] shares of Finest Common Stock were outstanding and entitled to vote.
The presence in person or by proxy of the holders of a majority of the issued
and outstanding shares of Finest Common Stock entitled to vote is required to
constitute a quorum at the Finest Meeting. Shares of Finest Common Stock for
which proxies or ballots have been received but with respect to which holders of
shares have abstained with respect to the approval and adoption of the Merger
Agreement (whether as a broker non-vote or otherwise) will be counted as present
for purposes of determining the presence or absence of a quorum for the
transaction of business.
18
<PAGE>
Solicitation of Proxies
First Essex. Stockholders of record on the First Essex Record Date are
entitled to cast their votes, in person or by properly executed proxy, at the
First Essex Meeting. All shares represented at the First Essex Meeting by
properly executed proxies received prior to or at the First Essex Meeting and
not properly revoked will be voted at the First Essex Meeting in accordance with
the instructions indicated in such proxies. IF NO INSTRUCTIONS ARE INDICATED,
SUCH PROXIES WILL BE VOTED FOR APPROVAL OF THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY.
If a quorum is not present at the time the First Essex Meeting is
convened, or if for any other reason First Essex believes that additional time
should be allowed for the solicitation of proxies or for the satisfaction of
conditions to the Merger or the transactions contemplated thereby, First Essex
may adjourn the First Essex Meeting with a vote of the holders of a majority of
the voting power represented by the First Essex Common Stock present at such
meeting. If First Essex proposes to adjourn the First Essex Meeting, the persons
named in the enclosed proxy card will vote all shares for which they have voting
authority in favor of such adjournment.
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before it is voted. Proxies may be revoked by (i)
filing with the Secretary of First Essex, at or before the First Essex Meeting,
a written notice of revocation bearing a date later than the date of the proxy,
(ii) duly executing a subsequent proxy relating to the same shares and
delivering it to the Secretary of First Essex at or before the First Essex
Meeting or (iii) attending the First Essex Meeting and voting in person
(although attendance at the First Essex Meeting will not in and of itself
constitute revocation of a proxy). Any written notice revoking a proxy should be
sent to William F. Burke, Secretary of First Essex, 71 Main Street, Andover,
Massachusetts 01810.
Proxies are being solicited by and on behalf of the First Essex Board.
In addition to solicitation by use of the mails, First Essex has retained D.F.
King to solicit proxies at an anticipated cost of $3,500, plus $3.00 per
telephone call and reimbursement for out-of-pocket expenses. D.F. King may
solicit proxies in person, by telephone, telegram or other means of
communications. Further, proxies may be solicited by directors, officers and
employees of First Essex in person or by telephone, telegram or other means of
communication. Such directors, officers and employees will not be additionally
compensated, but may be reimbursed for out-of-pocket expenses in connection with
such solicitation. Arrangements will be made with custodians, nominees and
fiduciaries for forwarding of proxy solicitation materials to beneficial owners
of First Essex Common Stock held of record by such persons, and First Essex may
reimburse such custodians, nominees and fiduciaries for reasonable expenses
incurred in connection therewith.
Finest. Proxies in the form enclosed are being solicited by the Finest
Board. Stockholders are requested to complete, date, sign and promptly return
the accompanying proxy card in the enclosed envelope. Shares represented by a
properly executed proxy received prior to the vote at the Finest Meeting and not
revoked will be voted at the Finest Meeting as directed in the proxy. IF A PROXY
IS SUBMITTED AND NO DIRECTIONS ARE GIVEN, THE PROXY WILL BE VOTED FOR THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY.
The persons named as proxies by a Finest stockholder may propose and
vote for one or more adjournments or postponements of the Finest Meeting to
permit further solicitation of proxies in favor of the proposals to be
considered at the Finest Meeting; provided, that a proxy voted against the
Merger Agreement will not be voted in favor of any adjournment or postponement
of the Finest Meeting.
A holder of record of Finest Common Stock may revoke a proxy by filing
an instrument of revocation with Ralph S. Boutwell, Secretary of Finest, Route
38, Bridge Street, Pelham Plaza, Pelham, New Hampshire 03076. Such stockholder
may also revoke a proxy by filing a duly executed proxy bearing a later date, or
by appearing at the Finest Meeting in person and notifying the Secretary at the
Finest Meeting. Any stockholder of record attending the Finest Meeting may vote
in person whether or not a proxy has been previously given, but the mere
presence (without notifying the Secretary) of a stockholder at the Finest
Meeting will not constitute revocation of a previously given proxy.
19
<PAGE>
Required Votes
First Essex. The affirmative vote of a majority of the votes
([3,029,468] votes) of holders of the outstanding shares of First Essex Common
Stock is required for approval of the Merger Agreement and the transactions
contemplated thereby. Abstentions and broker non-votes will have the same effect
as votes against the Merger Agreement. Stockholders of First Essex are entitled
to one vote at the First Essex Meeting for each share of First Essex Common
Stock held of record at the close of business on the First Essex Record Date. At
the close of business on the First Essex Record Date, [6,058,935] shares of
First Essex Common Stock were outstanding and entitled to vote, of which
approximately [370,140] shares, or approximately [6.11]%, were held by directors
and executive officers of First Essex.
Finest. Under applicable New Hampshire law, the vote of the holders of
at least a majority of the outstanding shares of Finest Common Stock entitled to
vote, or 739,376 shares, is required to approve and adopt the Merger Agreement
and the transactions contemplated thereby. Stockholders of Finest are entitled
to one vote at the Finest Meeting for each share of Finest Common Stock held of
record at the close of business on the Finest Record Date. Given that New
Hampshire law requires the vote of the holders of a majority of the outstanding
shares of Finest Common Stock entitled to vote in order to approve and adopt the
Merger Agreement, abstentions and broker non-votes will have the same effect as
a negative vote.
At the close of business on the Finest Record Date, 1,478,750 shares of
Finest Common Stock were outstanding and entitled to vote. The Finest and Pelham
Bank directors and executive officers and their respective affiliates, and a
certain principal stockholder of Finest, who own a total of 410,890 shares of
Finest Common Stock, representing approximately 27.8% of the shares of Finest
Common Stock issued and outstanding on the Finest Record Date, have entered into
the Stockholders Agreement, pursuant to which such stockholders have agreed to
certain restrictions on their respective shares of Finest Common Stock.
Specifically, such stockholders have agreed, with respect to all presently owned
or after-acquired stock, (a) to vote such stock in favor of the Merger and
against any other acquisition transaction with a party other than First Essex or
its affiliates, and (b) generally not to sell, assign, transfer, encumber or
otherwise dispose of such stock. The Stockholders Agreement shall remain in
effect until the earlier of the consummation of the Merger or the termination of
the Merger Agreement in accordance with its terms. Assuming that all of the
shares subject to the Stockholders Agreement are in fact voted in favor of the
Merger Agreement, the vote of holders of approximately 328,486 additional shares
of Finest Common Stock, representing approximately 22.2% of the shares of Finest
Common Stock issued and outstanding on the Finest Record Date, will be required
to approve and adopt the Merger Agreement and the transactions contemplated
thereby.
Solicitation Expenses
First Essex and Finest shall pay their respective expenses in
connection with the solicitation of proxies.
Ownership of Finest Securities
The following table sets forth certain information regarding beneficial
ownership of Finest Common Stock as of September 1, 1996, and as adjusted to
reflect the amount of First Essex Common Stock to be beneficially owned after
the Merger, by (i) each person known by Finest to own beneficially more than 5%
of Finest Common Stock, (ii) each director and executive officer of Finest, and
(iii) all directors and executive officers of Finest as a group. The number of
shares beneficially owned by such persons is determined according to rules of
the Commission, and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rules, beneficial ownership includes
any shares as to which the individual or entity has sole or shared voting power
or investment power. As a consequence, several persons may be deemed to be the
"beneficial owners" of the same shares. Except as noted below, each holder has
sole voting and investment power with respect to shares of Finest Common Stock
listed as owned by such person or entity.
20
<PAGE>
<TABLE>
<CAPTION>
Number of
Shares of First Percentage of
Number of Percentage of Essex Common Shares of First
Shares of Outstanding Stock Beneficially Essex
Finest Finest Owned (Adjusted Common
Common Common to Reflect the Stock As
Name Stock Stock Merger)(1) Adjusted (1)
- ---- ------- ------- ---------- ------------
<S> <C> <C> <C> <C>
Gerauld Hopkins 194,000 13.1% 206,524 2.7%
David Maltz 50,280 3.4 53,526 *
Leo Kahn 40,350 2.7 42,954 *
George W. Harris 33,700 2.3 35,875 *
Willis S. Low 27,700 1.9 29,488 *
Brian W. Thompson (2) 20,000 1.3 105,695 1.4
Robert Bendetson (3) 18,850 1.3 20,066 *
Ralph S. Boutwell 18,800 1.3 20,013 *
Irving J. Goss (4) 10,000 * 39,160 *
Thomas J. King 250 * 266 *
Marilyn R. Campbell 100 * 106 *
All Directors and Executive 220,030 14.8% 347,149 4.5%
Officers as a group (10
persons) (2)(3)(4)
- ---------
<FN>
*Less than 1%
(1) Assumes the pro rata issuance of 1,574,556 shares of First Essex Common Stock in the Merger, based upon a 56% stock
conversion number and an Average Closing Price of $10.65.
(2) Includes 10,000 shares of Finest Common Stock issuable pursuant to options held by Mr. Thompson which may be exercised
within 60 days of September 1, 1996. Under the terms of Mr. Thompson's option agreement, the remaining 40,000 shares of
Finest Common Stock under the option will become fully exercisable upon the Effective Time. For purposes of this table, it
is assumed that these options will not be exercised prior to the Effective Time.
(3) Includes 18,750 shares of Finest Common Stock held by Mr. Bendetson as Trustee for Boston Furniture Company Profit
Sharing Plan. Mr. Bendetson has sole voting and investment power with respect to such shares.
(4) Under the terms of Mr. Goss's option agreement, 15,000 shares of Finest Common Stock under option will become fully
exercisable upon the Effective Time. For purposes of this table, it is assumed that these options will not be exercised
prior to the Effective Time.
</FN>
</TABLE>
Appraisal Rights and Dissenting Stockholders
Stockholders of Finest who do not vote to approve and adopt the Merger
Agreement and who comply with the requirements of NHRSA ss.293-A:13.01 through
ss.293-A:13.31, a copy of which is attached to this Proxy Statement-Prospectus
as Appendix D (the "Dissenters' Rights Statute"), will be entitled to
dissenters' rights.
If the Merger is consummated, a stockholder of Finest who does not vote
in favor of the approval and adoption of the Merger Agreement, and who follows
the statutory provisions of the Dissenters' Rights Statute summarized herein may
require First Essex to pay the fair value of his or her shares of Finest Common
Stock, determined as provided in the Dissenters' Rights Statute.
A stockholder of Finest who desires to pursue his or her dissenters'
rights must deliver to Finest, before the taking of the vote on the Merger
Agreement, a written notice of intent to demand payment for his or her shares if
the proposed action is effectuated. Notice of an intention to demand payment
should be addressed to Ralph S. Boutwell, Secretary, Finest Financial Corp.,
Route 38, Bridge Street, Pelham Plaza, Pelham, New Hampshire 03076. The
stockholder must then not vote in favor of the approval and adoption of the
Merger Agreement. A vote against the approval and adoption of the Merger
Agreement, whether by proxy or in person at the Finest Meeting, is not required
to perfect a stockholder's dissenters rights, nor will a negative vote be
considered a demand for payment in and of itself without the prior delivery of
the demand.
21
<PAGE>
If the Merger Agreement is approved and adopted by the required vote at
the Finest Meeting, and all conditions to consummation of the Merger are
satisfied or waived, First Essex will, within 10 days after the Effective Time,
deliver a written dissenters' notice to all stockholders who complied with the
statutory requirements, which notice shall (i) state where the payment demand
shall be sent and where or when certificates for certificated shares (if any)
shall be deposited; (ii) inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment demand is received;
(iii) supply a form for demanding payment that includes the date of the first
announcement to news media or to stockholders of the terms of the Merger
Agreement and requires that the person asserting dissenters' rights certify
whether or not beneficial ownership of such shares was acquired before that
date; (iv) set a date by which First Essex must receive the payment demand,
which date shall not be fewer than 30 nor more than 60 days after the date the
notice is delivered; and (v) be accompanied by a copy of the appropriate
statutory provision.
Within the time period set forth in First Essex's written dissenters'
notice, the dissenting stockholder must demand payment, certify whether
beneficial ownership of the shares was acquired before the date set forth
pursuant to clause (iii) above, and deposit his or her certificates in
accordance with the terms of the notice. With respect to the shares acquired by
the stockholder prior to the clause (iii) date, First Essex shall then pay each
dissenter who has complied with the provisions set forth above the amount First
Essex estimates to be the fair value of the shares plus accrued interest. This
payment shall be accompanied by certain required financial information relating
to Finest, a statement of its estimate of the fair value of the shares, an
explanation of how the interest was calculated, a statement of the dissenter's
right to demand payment in a different amount if the stockholder is dissatisfied
with the payment tendered by First Essex and a copy of the relevant statutory
provision. With respect to shares acquired on or after the clause (iii) date,
First Essex may withhold payment and merely send to the dissenter its offer of
payment, together with a statement of its estimate of fair value, an explanation
of how the interest was calculated and a statement of the dissenter's right to
demand payment in a different amount.
If the stockholder is dissatisfied with the payment or offer tendered
by First Essex, he or she may notify First Essex in writing of his or her own
estimate of the fair value of the shares, and the amount of interest due, and
demand payment in that amount less any payment received through the procedure
set forth above. This notice must be delivered within 30 days after First Essex
makes or offers payment for the stockholder's shares as provided above.
If the parties have not agreed to a payment which is acceptable to both
of them, First Essex will commence a proceeding within 60 days after receiving
the dissatisfied stockholder's payment demand, by a petition in Superior Court
in New Hampshire to determine the fair value of the shares and accrued interest,
making all dissenters whose demands remain unsettled at the time parties to the
proceeding, whereupon the court will determine the appropriate amount of
payment. The cost and expenses of any court proceeding to determine the fair
value of the shares of Finest Common Stock will be determined by the court and
will be assessed against First Essex or the stockholders as deemed appropriate.
22
<PAGE>
THE MERGER
General
This section of the Proxy Statement-Prospectus describes the material
terms and provisions of the proposed Merger, including the principal provisions
of the Merger Agreement, and related transactions. A copy of the Merger
Agreement is attached to this Proxy Statement-Prospectus as Appendix A. All
stockholders are urged to read the Merger Agreement in its entirety.
The Merger Agreement provides that, subject to the satisfaction or
waiver (where permissible) of certain conditions, which are described more fully
herein and therein, Finest will be merged with and into First Essex. In
connection with the Merger, each outstanding share of Finest Common Stock will
be converted into and become exchangeable for (i) a number of shares of First
Essex Common Stock equal to the Exchange Ratio, or (ii) $20.25 in cash.
Background of the Merger
During the period 1991 through the latter half of 1994, the attention
of the Finest Board and Finest's management had been principally directed
towards the resolution of Finest's problem assets which had increased during the
downturn in the New Hampshire real estate market, as well as towards addressing
various supervisory and managerial concerns as required pursuant to the Order.
During 1994, the Finest Board recognized that progress had been made in reducing
problem assets and increasing profitability, but it still had concerns relative
to Pelham Bank's competitive position and the fact that Pelham Bank was still
operating under the Order. In view of these concerns, Finest entered into a
merger agreement with Andover Bancorp Inc. ("Andover") of Andover,
Massachusetts, which provided for the acquisition of Finest by Andover for a
price of approximately $14.40 per share of Finest Common Stock. In June 1995,
the shareholders of Finest rejected the merger agreement with Andover. In
September 1995, with the election of directors, including several new directors,
the Finest Board decided to hire a new chief executive officer and a new chief
financial officer. The new management team was hired during the fourth quarter
of 1995 and was given four major directives from the Finest Board: (i) to have
the MOU terminated at the next examination date through compliance with the
MOU's requirements; (ii) to improve asset quality to a point where it was
comparable to peer banks; (iii) to restore the core earnings of Pelham Bank and
(iv) to formulate a plan that would allow the Finest Board to consider its
long-term strategic options of remaining independent or being acquired by a
larger institution.
During a period commencing in early 1996, Finest began to receive
unsolicited inquiries relative to the potential sale of Finest. The Finest Board
formed a merger and acquisition committee, which in turn hired Keefe Bruyette to
serve as an advisor to review and analyze these inquiries. In addition, Keefe
Bruyette was asked to contact any parties that might have an interest in
acquiring or merging with Finest. Towards the end of the first quarter of 1996,
the Finest Board began to more actively consider the possibility of a merger due
to several factors: (i) significant progress had been made on both asset quality
and earnings such that Finest was in a position where exploring alternatives was
appropriate; (ii) a regulatory examination was expected in the second quarter,
and while the results would not be known for several months, management felt
that significant improvement had been made towards the objective of terminating
the MOU; and (iii) the preliminary draft of the strategic plan had indicated
that, while the alternative of staying independent was viable, such option would
require significant investment spending over the next two years which could
negatively impact earnings in the near term. In addition, increased competition
with respect to both loans and deposits could hamper management's ability to
achieve an acceptable rate of return on Pelham Bank's investments.
Keefe Bruyette, on behalf of Finest, contacted several institutions,
including First Essex, at this time to ascertain, on a preliminary basis, the
extent to which any of these institutions would be interested in acquiring or
merging with Finest.
As part of First Essex's ongoing review and consideration of strategic
alternatives, the Board of Directors regularly reviews the operational and
structural options available to First Essex to expand and strengthen its
community banking franchise and enhance long-term stockholder value. In this
regard, the Board of Directors considers from time to time possible acquisitions
of, and/or mergers with, other banking and thrift institutions.
In response to the preliminary inquiry from Keefe Bruyette referred to
above, the First Essex Board authorized management to submit an indication of
interest to Finest, in which First Essex outlined the general terms and
23
<PAGE>
conditions on which it would be willing to discuss further the prospects for
acquiring Finest. Following the First Essex submission of this indication of
interest on March 13, 1996, First Essex, along with one other institution among
those who had also submitted indications of interest to Finest by March 15,
1996, was invited by Finest to undertake a due diligence review of Finest and
Pelham Bank.
On April 4, 1996, after considering a report from management and a
presentation on the financial aspects of the proposed acquisition of Finest by
First Essex's financial adviser, Oppenheimer, the First Essex Board authorized
and directed management to submit a revised indication of interest to Finest,
which was intended to take into account various matters raised in the course of
First Essex's due diligence examination of Finest and Pelham Bank. Following the
First Essex submission of a revised indication of interest to Finest on April 5,
1996, the parties were unable to reach an agreement on the general terms and
conditions on which an acquisition of Finest could be completed, and further
negotiations were suspended at that time. During the period in which merger
discussions were suspended, Finest and Andover Bancorp came to agreement on the
final termination of their proposed merger in 1995. In June 1996, the Finest
Board asked Keefe Bruyette to inform those parties that had previously expressed
an interest in acquiring Finest as well as other parties who may have had an
interest, that the Board would consider renewed indications of interest at this
time. Three potential acquirers, including First Essex, expressed preliminary
interest in acquiring Finest and met with Finest's management before submitting
formal indications of interest on July 16, 1996. The other institutions which
had previously contacted Finest or had been contacted on Finest's behalf
indicated either that they no longer wished to consider a transaction with
Finest or that they were unable to do so in the near term due to other
commitments.
On July 18, 1996, the merger and acquisition committee of the Finest
Board met with its counsel and Keefe Bruyette to review the expressions of
interest submitted by the three prospective acquirers, including First Essex.
The First Essex proposal provided that the consideration to be paid by First
Essex to Finest's stockholders would be in the form of 50% cash and 50% shares
of First Essex Common Stock. The other proposals provided for payment solely in
stock. Keefe Bruyette reviewed each of the expressions of interest in detail
with the committee, including the advantages, disadvantages and risks of each
proposal. Keefe Bruyette's detailed financial analysis of the three potential
bidders included a review of their financial performance and market performance,
potential earnings per share and book value per share, dilution involved in the
proposals and other recent comparable transactions. In reviewing all of the
relevant factors associated with each of the alternative proposals, including
structure, risk to stockholders and probable consequences to the communities
served by Pelham Bank and its employees, the committee unanimously voted to
recommend the First Essex proposal to the full Finest Board.
On July 19, 1996, the Finest Board met with Keefe Bruyette and counsel
to review the recommendation of the merger and acquisition committee. Keefe
Bruyette presented the Finest Board with detailed financial and evaluation
analysis of the First Essex proposal, as well as the other proposals received.
Keefe Bruyette also presented its detailed analysis of Finest remaining
independent compared to the proposals received, the financial performance and
market performance of each of the potential acquirers and the potential earnings
per share, book value per share and dilution involved in each proposal. Keefe
Bruyette also looked at recent comparable transactions and the financial history
and prospects of First Essex. Edwards & Angell, legal counsel to Finest,
reviewed the terms contained in a proposed form of definitive agreement with
First Essex, which had been prepared by First Essex's counsel, including a
termination fee required as a condition for First Essex entering into such a
definitive agreement with Finest. At this time, the Finest Board authorized
management, with the assistance of Edwards & Angell and Keefe Bruyette, to
negotiate a definitive agreement with First Essex.
Following negotiations between the parties and their counsel, the First
Essex Board met on July 29, 1996 to consider the proposed acquisition of Finest
in accordance with the terms of the proposed Merger Agreement as it had been
then negotiated to date. At this meeting, management and counsel described the
intended tax treatment of the transaction (i.e., that it should constitute a
tax-free reorganization to First Essex), as well as certain factors that could
affect such tax treatment. The First Essex Board directed management to continue
its negotiation of the proposed merger with Finest and to provide in the Merger
Agreement that the number of shares of First Essex Common Stock that would be
issued in the Merger could be adjusted, within an appropriate range, if
necessary to preserve the tax-free nature of the transaction for First Essex. In
addition, the First Essex Board directed that if the Merger Agreement were to be
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<PAGE>
signed by the parties, it must be conditioned upon all of the directors,
executive officers and a certain principal stockholder of Finest agreeing to
vote their shares in favor of the Merger at the meeting of Finest's
stockholders.
At a meeting on July 30, 1996, the Finest Board reviewed the negotiated
terms of the proposed Merger Agreement. Management and Edwards & Angell reviewed
with the Finest Board the course of the negotiations with First Essex and its
counsel. The Finest Board discussed the stockholder and regulatory approvals
that would be required to consummate the Merger. At this meeting, Keefe Bruyette
reviewed for the Finest Board its financial and valuation analysis of the First
Essex proposal. In addition, Keefe Bruyette delivered to the Board of Directors
its oral opinion to the effect that, as of such date, the Merger Consideration,
as provided for in the proposed Merger Agreement, would be fair, from a
financial point of view, to Finest's stockholders. Management of Finest,
representatives of Edwards & Angell and Keefe Bruyette reviewed various
provisions of the proposed Merger Agreement, including the requirement that all
of the directors, executive officers and a certain principal stockholder of
Finest agree to vote their shares in favor of the Merger, and responded to
questions from directors. At the conclusion of this meeting, the Finest Board
unanimously approved entering into the Merger Agreement with First Essex on the
condition that a favorable resolution be reached with respect to the tax
treatment of the transaction. On July 31, 1996, the Finest Board met by
telephone. Management and Edwards & Angell updated the Finest Board with respect
to the tax issue and the Board instructed management to execute the Merger
Agreement.
Following further discussions among the parties and their advisors, the
First Essex Board reconvened after the close of business on Friday, August 2, at
which time management and counsel confirmed that provision had been made in the
Merger Agreement that First Essex would pay up to 62% of the consideration to be
paid to Finest's stockholders in shares of First Essex Common Stock, if such
increase would be necessary to preserve the tax-free treatment of the Merger for
First Essex. In addition, management confirmed that all of the directors,
executive officers and a certain principal stockholder of Finest had agreed to
vote their shares in favor of the Merger at the meeting of Finest's
stockholders. The First Essex Board also received a written opinion from
Oppenheimer that the consideration to be paid by First Essex to Finest's
stockholders was fair, from a financial point of view, to First Essex. The First
Essex Board voted at this time to authorize and direct management to enter into
the Merger Agreement with Finest and Pelham Bank and the related Stockholders
Agreement with the directors, executive officers and certain principal
stockholder of Finest. In addition, acting in its capacity as the Board of
Directors of First Essex Bank, the First Essex Board approved the form of merger
agreement to be entered into between First Essex Bank and Pelham Bank (the "Bank
Merger Agreement") and directed management to execute and deliver the Bank
Merger Agreement. Prior to the commencement of business on Monday, August 5,
1996, the parties formally executed and delivered the Merger Agreement,
Stockholders Agreement and Bank Merger Agreement.
Recommendation of the Finest Board and Reasons for the Merger
The Board of Directors of Finest believes that the Merger is fair to
and in the best interests of Finest and its stockholders. The Board of Directors
of Finest recommends that the Finest stockholders vote for the approval and
adoption of the Merger Agreement and the transactions contemplated thereby.
In reaching its determination that the Merger is in the best interests
of the Finest stockholders, and recommending that the Finest stockholders
approve the Merger, the Finest Board consulted with Finest management, as well
as its financial and legal advisors, and considered a number of factors. Without
assigning any relative or specific weights thereto, the following is a
discussion of the material factors considered by the Board in reaching its
determination:
(a) the amount and form of the consideration offered by First
Essex in relation to the estimated value of Finest Common
Stock, the Finest Board's belief that of the alternatives
available, the Merger offered the greatest immediate benefit
and opportunity for long-term value to the Finest
stockholders, and the expectation that the Merger will be a
tax-free transaction to Finest and its stockholders to the
extent they receive First Essex Common Stock in exchange for
their shares;
25
<PAGE>
(b) the absence of available alternative transactions that
appeared likely to offer the Finest stockholders immediate or
long-term economic benefits comparable or superior to the
Merger, on the basis of Finest's extensive efforts to explore
and develop such alternative transactions;
(c) Finest's business, results of operations, prospects and
financial condition, and the prospects, risks and costs of
Finest continuing as an independent business given the
extremely competitive environment in the financial services
industry, the increasing pressure for consolidation in the
banking industry, and the continuing complexity of the
regulatory environment within which it operates;
(d) First Essex's business, results of operations, prospects and
financial condition and the historical and potential future
value of the First Essex Common Stock and dividends paid
thereon;
(e) the potential cost savings, operating efficiencies and
financial strength the Merger would provide to the combined
Finest-First Essex organization, its customers and the
communities it serves, and the immediate and long-term effect
that it would have on such organization's ability to compete
for new business;
(f) the possible impact of the Merger on Pelham Bank's customers
and that, following the Merger, the combined organization
would be well situated to offer Pelham Banks's former
customers an expanded range of financial services;
(g) the conditions to the Merger and the risks to Finest if the
Merger was not consummated, including that the termination of
the Merger Agreement might result in a decline in the market
place of Finest Common Stock and might have other adverse
operational consequences for Finest and Pelham Bank;
(h) the fact that approval of the Merger Agreement requires the
affirmative vote of a majority of the shares of Finest Common
Stock outstanding and entitled to vote and that the Finest
Board's decision to approve the Merger Agreement would empower
the stockholders as a group to decide whether or not to accept
First Essex's proposal to acquire Finest; and
(i) Keefe Bruyette's opinion that, subject to certain assumptions,
the consideration to be paid to the Finest stockholders in
connection with the Merger is fair, from a financial point of
view, to Finest stockholders, and that Keefe Bruyette expected
to be able to reconfirm in writing its opinion to such effect
to accompany the Proxy Statement-Prospectus.
Recommendation of the First Essex Board and Reasons for the Merger
The Board of Directors of First Essex believes that the Merger is fair
to and in the best interests of First Essex and its stockholders. The Board of
Directors of First Essex recommends that the First Essex stockholders vote for
the approval and adoption of the Merger Agreement and the transactions
contemplated thereby.
In reaching its determination that the Merger is in the best interests
of the First Essex stockholders, and recommending that the First Essex
stockholders approve the Merger, the First Essex Board considered a number of
factors. The following is a discussion of the material factors considered by the
Board in reaching its determination:
(a) The Merger will enable First Essex to expand and strengthen
its franchise by generating new business and increasing its
26
<PAGE>
visibility in New Hampshire, and after the Merger, the
combined company will be well positioned to provide a broader
range of banking services to New Hampshire customers;
(b) Given First Essex's existing presence in southern New
Hampshire and the ability to integrate Pelham Bank into First
Essex Bank, the acquisition of Finest offers significant
opportunity for cost savings;
(c) Finest's customer base provides First Essex with significant
cross selling opportunities; and
(d) Oppenheimer's opinion that, subject to certain assumptions,
the consideration to be paid by First Essex to Finest's
stockholders was fair to First Essex, from a financial point
of view.
Opinion of Financial Advisors
Opinion of Keefe, Bruyette & Wood
Keefe Bruyette has delivered to the Finest Board its oral opinion on
July 30, 1996 and its written opinion dated the date of this Proxy
Statement--Prospectus to the effect that as of such dates the Merger
Consideration is fair, from a financial point of view, to the holders of Finest
Common Stock. Keefe Bruyette's opinion is addressed to the Finest Board and does
not constitute a recommendation as to how any stockholder of Finest should vote
with respect to the Merger Agreement.
The full text of the opinion of Keefe Bruyette, which sets forth a
description of the procedures followed, assumptions made, matters considered and
limits on the review undertaken, is attached to this Proxy Statement--Prospectus
as Appendix B and is incorporated herein by reference. Stockholders are urged to
read the opinion in its entirety. The following summary of the opinion is
qualified in its entirety by reference to the full text of the opinion.
In rendering its opinion, Keefe Bruyette (i) reviewed the Merger
Agreement, Annual Reports to Stockholders and Annual Reports on Form 10-K of
First Essex for the four years ended December 31, 1995, certain interim reports
to stockholders and Quarterly Reports on Form 10-Q of First Essex and certain
internal and regulatory financial reports, analyses and forecasts prepared by
Finest management; (ii) held discussions with members of senior management of
Finest and First Essex regarding the past and current business operations,
regulatory relationships, financial condition and future prospects of the
respective companies; (iii) compared certain financial and stock market
information for Finest and First Essex with similar information for certain
other companies the securities of which are publicly traded; (iv) reviewed the
financial terms of certain recent business combinations in the banking industry;
and (v) performed such other studies and analyses as it considered appropriate.
In conducting its review and arriving at its opinion, Keefe Bruyette
relied upon and assumed the accuracy and completeness of all of the financial
and other information provided to it or publicly available, and did not assume
any responsibility for independently verifying any of such information. Keefe
Bruyette relied upon the management of Finest and First Essex as to the
reasonableness and achievability of the financial and operating forecasts and
projections (and the assumptions and bases therefor) provided to it, and assumed
that such forecasts and projections reflect the best currently available
estimates and judgments of Finest and First Essex and that such forecasts and
projections will be realized in the amounts and in the time periods currently
estimated by Finest and First Essex management. Keefe Bruyette also assumed that
the aggregate allowances for loan losses for Finest and First Essex are adequate
to cover such losses. In rendering its opinion, Keefe Bruyette did not make or
obtain any evaluation or appraisals of the property of Finest or First Essex,
nor did it examine any individual credit files.
The following is a summary of the material financial analyses employed
by Keefe Bruyette in connection with providing its oral opinion of July 30,
1996, and does not purport to be a complete description of all analyses employed
by Keefe Bruyette.
Summary of the First Essex Transaction. Keefe Bruyette calculated the
multiple which the $20.25 per share Acquisition Price represents when compared
to Finest's June 30, 1996 stated book value per share of $12.61, its June 30,
27
<PAGE>
1996 stated tangible book value per share of $12.61, its trailing 12 months
(June 30, 1995 to June 30, 1996) earnings per share of $1.27, its estimated 1996
normalized earnings per share as estimated by management of $1.78 and its
estimated 1997 earnings per share as estimated by management of $1.92. The price
to book multiple was 161%, the price to tangible book value was 161%, the price
to trailing 12 months earnings per share was 15.94 times, the price to 1996
estimated earnings per share was 11.38 times and the price to 1997 estimated
earnings per share was 10.55 times. Keefe Bruyette also calculated a deposit
premium of 8% by dividing the premium paid over tangible equity by the total
deposits of Finest at June 30, 1996.
Keefe Bruyette also described the Exchange Ratio, whereby each share of
Finest Common Stock would be exchanged for (i) that number of shares of First
Essex Common Stock equal to the number obtained by dividing the Acquisition
Price of $20.25 per share by the Average Closing Price of the shares of First
Essex Common Stock or (ii) an amount in cash equal to the Acquisition Price.
Keefe Bruyette explained that if the Average Closing Price is greater than
$11.50 per share, the Exchange Ratio will equal 1.761 and if the Average Closing
Price is less than $9.50 per share, the Exchange Ratio will equal 2.132. Keefe
Bruyette also noted that, notwithstanding the foregoing, if the Average Closing
Price is less than $8.75, Finest will have the right to terminate the Merger
Agreement, unless First Essex elects to increase the number of shares issuable
in the Merger by utilizing an adjusted Exchange Ratio by dividing $18.65 by the
Average Closing Price.
Selected Transaction Analysis. Keefe Bruyette analyzed certain
comparable merger and acquisition transactions of financial institutions based
upon the acquisition price relative to stated book value, stated tangible book
value and latest twelve months earnings. The information analyzed was compiled
from both internal sources and a data firm that monitors and publishes
transaction summaries and descriptions of mergers and acquisitions in the
financial services industry. The analysis included a review and comparison of
the average book value multiples and median earnings multiples represented by a
sample of recently completed or announced transactions, as segmented into: (a)
all transactions announced between January 1994 and December 1995 in which the
selling institution was a bank located in New England; (b) all transactions
announced between January 1994 and December 1995 in which the selling
institution was a thrift located in New England; (c) all transactions announced
between January 1996 and June 30, 1996 in which the selling institution was a
bank in New England; (d) all transactions announced between January 1996 and
June 30, 1996 in which the selling institution was a thrift in New England.
The following bank transactions comprised group (a): New England
Community Bancorp/Manchester State Bank; Citizens Financial Group/Bank of
Ireland; Bank of Boston Corporation/BayBanks, Inc.; Peoples Heritage Financial
Group, Inc./Bank of New Hampshire Corp; Center Financial Corp./Heritage Bank;
Chittenden Corporation/Flagship Bank & Trust; Community Bankshares,
Inc./Centerpoint Bank; Norwich Financial. Corp./Seconn Holding; Camden National
Corp./United Corp.; Bank of New York/Putnam Trust Company; BayBanks,
Inc./Cornerstone Financial; New England Community Bancorp/Equity Bank; Peoples
Heritage Financial Group, Inc./Bankcore, Inc.; Fleet Financial Group,
Inc./Shawmut National Corporation; Peterborough Savings Bank/Horizon Banks;
Atlantic Bank & Trust/Chestnut Hill Bank & Trust; Chittenden Corporation/Bank of
Western Massachusetts; Webster Financial Corporation/Shoreline Bank & Trust
Company; Norwich Financial Corporation/Bank of Mystic; KeyCorp/Casco & Bank
Vermont; Central Co-Operative Bank/Metro Bank; Banknorth Group, Inc./North
American Bank Corp.; Family Bancorp/Profile Financial Corp.; Atlantic
Bancorp/Citibank (Maine), NA; Eastern Bank Corp./Saugus Bank & Trust Company;
Compass Bank For Savings/Martha's Vineyard NB; Village Bancorp, Inc./Liberty
National Bank; and Co-Op Bank Concord/Depositors Trust Co.
The following transactions comprised group (b): Bank of Boston
Corporation/The Boston Bancorp; Center Financial Corp./Great Country Bank;
ALBANK Financial Corporation/Marble Financial Corp.; Webster Financial
Corporation/Shelton Bancorp; Co-Op Bank Concord/Bank of Braintree; Main Street
Community/Lexington Savings Bank; BayBanks, Inc./NFS Financial Corp.; Bank of
Ireland/Great Bay Bankshares; CFX Corporation/Orange Savings Bank; Citizens
Financial Group/Quincy Savings Bank; Shawmut National Corporation/Northeast
Federal Corp.; Fleet Financial Group, Inc./NBB Bancorp, Inc.; Shawmut National
Corporation/West Newton Savings Bank; Bank of Boston/Pioneer Financial Co- Op
Bank; and Shawmut National Corporation/Cohasset Savings Bank.
The following bank transactions comprised group (c): Hubco,
Inc./Westport Bancorp; Hubco, Inc./Hometown Bancorp; Weetamoe Bancorp/Fairbanks,
Inc.; Hubco, Inc./Lafayette American; and CFX Corporation/Safety Fund Corp.
28
<PAGE>
The following thrift transactions comprised group (d): First Union
Corp./Center Financial Corp.; Citizens Financial Group/Farmers & Mechanics;
Peoples Heritage/Family Bancorp; and CFX Corporation/Milford Co-Op Bank.
Based upon the First Essex stock price of $10.50 per share, the value
of First Essex Common Stock to be issued was $20.25 per share of Common Stock.
The relative multiples and implied transaction values for each of the comparable
transaction groups are provided in the following table:
<TABLE>
<CAPTION>
Average Average
Price/Book Price/Tangible Median Price/Last
Value Book Value Four Quarters
---------- -------------- -----------------
<S> <C> <C> <C>
Finest 1.6 1.6 15.9
(a) New England Bank Acquisitions 1.7 1.7 14.6
1994-1995
(c) New England Thrift Acquisitions 1.6 1.6 13.6
1994-1995
(c) New England Bank Acquisitions 2.2 2.2 17.3
1996
(d) New England Thrift Acquisitions 1.7 1.7 11.0
1996
</TABLE>
Financial Impact Analysis. Keefe Bruyette analyzed the estimated
financial impact of the Merger on First Essex based on various projections and
assumptions reviewed with the management of Finest. This analysis indicated that
the transaction is expected to increase First Essex's 1997 earnings per share
and decrease book value. The actual results achieved by the combined company
will vary from the projected results, and the variations may be material.
Present Value Analysis. Keefe Bruyette compared the present value of
future cash flows that would accrue to a holder of a share of Finest Common
Stock assuming Finest were to remain independent to the $20.25 value offered by
First Essex. The present value of future cash flows was determined by adding (i)
the present value of the estimated future dividend stream that Finest could
generate over the five year period beginning January 1997 and (ii) the present
value of the "terminal value" of Finest Common Stock at the end of that period.
Keefe Bruyette presented a table showing this analysis, which was based on
several assumptions including a range of annual earnings per share growth rates
ranging from 3.0% to 13.0%, with price to earnings multiples ranging from 8.0 to
14.0. Over a five-year period, the present value of cash flows ranged from
$10.14 to $23.33 and over a ten-year period the present value of cash flows
ranged from $7.62 to $22.62. The present value analysis of cash flows for Finest
was based on the following assumptions: (i) estimated 1997 fully diluted
earnings per share of $1.92, (ii) a 1997 dividend per share of $0.40, (iii) an
annual dividend growth rate of 8.0%, and (iv) a discount rate of 15.0%. Keefe
Bruyette stated that the discounted cash flow analysis is a widely-used
valuation methodology but noted that it relies on numerous assumptions,
including assets and earnings growth rates, dividend payout rates, terminal
values and discount rates. The analysis did not purport to be indicative of the
actual values or expected values of Finest Common Stock.
Other Analyses. Keefe Bruyette also reviewed the relative financial and
market performance of First Essex to a variety of relevant industry peer groups
and indices and selected investment research reports, earnings estimates,
historical performance and other financial data for First Essex.
In connection with its written opinion dated as of the date of this
Proxy Statement- Prospectus, Keefe Bruyette confirmed the appropriateness of its
reliance on the analyses used to render its July 30, 1996 oral opinion by
performing procedures to update certain of such analyses and by reviewing the
assumptions on which such analyses were based and the factors considered in
connection therewith.
The preparation of a fairness opinion is a complex process and is not
necessarily amenable to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analysis as a whole, could create an incomplete view of the processes
underlying Keefe Bruyette's opinion. In arriving at its fairness determination,
Keefe Bruyette considered the results of all such analyses. None of the banking
institutions selected for use in developing comparisons is identical to Finest
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<PAGE>
and none of the New England Acquisitions is identical to the Merger.
Accordingly, Keefe Bruyette indicated to the Finest Board that analyses of the
results described above are not purely mathematical, but rather involve complex
considerations and judgments concerning differences in operating and financial
characteristics, including, among other things, differences in revenue
composition and earnings performance among Finest, First Essex and the selected
companies and acquisitions reviewed. The analyses were prepared by Keefe
Bruyette solely for the purpose of preparing its opinion of July 30, 1996, to
the Finest Board as to the fairness of the consideration to be received by
stockholders of Finest in the Merger, and do not purport to be appraisals or
necessarily reflect the prices at which Finest or its securities may actually be
sold. Analyses based upon forecasts of future results are not necessarily
indicative of actual future results, which may be significantly more or less
favorable than suggested by such analyses.
Pursuant to an engagement letter dated February 13, 1996 (the "Keefe
Bruyette Engagement Letter"), Finest agreed to pay Keefe Bruyette a fee equal to
0.75% of the market value of the aggregate consideration offered by the party
acquiring Finest at $17.50 per share, increasing by .01% for each additional
$.10 per share; provided, however, that if the aggregate consideration offered
were less than $17.50 per share, the cash fee would be equal to 0.50%. It was
also agreed that if the Finest Board rejected an offer in excess of $17.50 per
share, but below $18.50 per share, Keefe Bruyette would receive a fee of
$10,000. If the Finest Board rejected an offer of $18.50 or more, Keefe Bruyette
would receive a fee of $25,000. If the Finest Board rejected an offer of $17.50
or less, Keefe Bruyette would not receive a fee.
Such fee has been or will be paid in three parts: (i) 25% at the
signing of the Merger Agreement, (ii) 25% payable promptly after the mailing of
this Proxy Statement--Prospectus to stockholders, and (iii) 50% payable at the
Closing Date. As of the date hereof, $77,857 has been paid to Keefe Bruyette.
Pursuant to the Keefe Bruyette Engagement Letter, Finest also agreed to
reimburse Keefe Bruyette for certain expenses related to its retention and to
indemnify Keefe Bruyette against certain liabilities, including such liabilities
arising under the federal securities laws.
Keefe Bruyette is a nationally recognized investment banking firm that
regularly engages in the valuation of businesses and their securities in
connection with mergers and acquisitions. The Finest Board selected Keefe
Bruyette to act as its financial advisor on the basis of its expertise and its
reputation in investment banking and mergers and acquisitions.
Keefe Bruyette has advised Finest that, in the ordinary course of its
business as a full-service securities firm, Keefe Bruyette may, subject to
certain restrictions, actively trade the equity and/or debt securities of First
Essex for its own account or for the accounts of its customers, and accordingly,
may at any time hold a long or short position in such securities.
Opinion of Oppenheimer
Pursuant to an engagement letter dated April 3, 1996, First Essex
retained Oppenheimer as its financial advisor in connection with the Merger.
Oppenheimer has rendered its written opinions to the First Essex Board
dated July 30, 1996 and dated the date of this Proxy Statement--Prospectus that,
based upon and subject to the various considerations set forth therein, the
proposed Merger Consideration is fair to First Essex from a financial point of
view. No limitations were imposed by First Essex upon Oppenheimer with respect
to investigations made or procedures followed by Oppenheimer in rendering its
opinions.
The full text of Oppenheimer's opinion as of the date of this Proxy
Statement--Prospectus, which sets forth assumptions made, matters considered and
limits on the review undertaken by Oppenheimer, is attached hereto as Appendix
C. First Essex stockholders are urged to read the opinion in its entirety.
Oppenheimer's opinion is directed only to the Merger Consideration and does not
constitute a recommendation to any First Essex stockholder as to how such
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<PAGE>
stockholder should vote at the First Essex Meeting. The summary set forth in
this Proxy Statement--Prospectus of the Oppenheimer opinion is qualified in its
entirety by reference to the full text of the opinion attached hereto as
Appendix C.
In connection with rendering its opinion, Oppenheimer reviewed among
other things: (a) the Merger Agreement; (b) the Stockholders Agreement and the
Bank Merger Agreement; (c) audited consolidated financial statements and
management's discussion and analysis of the financial condition and results of
operations for each of First Essex and Finest for the three fiscal years ended
December 31, 1995 (as available); (d) unaudited consolidated financial
statements for each of First Essex and Finest for the six months ended June 30,
1996; (e) certain other publicly available business and financial information
relating to First Essex and Finest; (f) certain interim financial analyses,
budgets, projections and forecasts for First Essex and Finest, including
estimates as to the future cost savings relating to the Merger, prepared by and
reviewed with the management of First Essex; (g) certain other summary materials
and analyses with respect to Finest's loan portfolio and deposits prepared by
First Essex; (h) the views of senior management of First Essex and Finest of the
past and current business operations, results thereof, financial condition and
future prospects; (i) a comparison of certain financial information for First
Essex and Finest, in each case with similar information for certain other
companies considered comparable to First Essex and Finest; (j) the financial
terms of certain recent business combinations in the banking industry; (k) the
pro forma effect of the transaction on First Essex based on certain assumptions
provided by First Essex; (l) the current market environment generally and the
banking environment in particular; and (m) such other information, financial
studies, analyses and investigations and financial, economic and market criteria
as Oppenheimer considered appropriate in the circumstances.
Oppenheimer assumed and relied upon, without independent verification,
the accuracy and completeness of the information reviewed by it for the purposes
of its opinion. With respect to the financial projections, including the
estimates of cost savings expected to result from the Merger, Oppenheimer
assumed that they were reasonably prepared and reflected the best currently
available estimates and judgments of the future financial performance of First
Essex and Finest. Oppenheimer did not make any independent valuation or
appraisal of the assets or liabilities of First Essex or Finest, nor was it
furnished with any such appraisal. In addition, Oppenheimer did not examine any
individual loan credit files of First Essex or Finest. Oppenheimer's opinion was
based on economic, market and other conditions as in effect on, and the
information made available to it as of, the date of the opinion.
The projections furnished to Oppenheimer for each of First Essex and
Finest were prepared by the respective management of each company. As a matter
of policy, neither First Essex nor Finest publicly disclose internal management
projections of the type provided to Oppenheimer in connection with its analysis
of the Merger, and such projections were not prepared with a view toward public
disclosure. These projections were based on numerous variables and assumptions
which are inherently uncertain and which may not be within the control of
management, including, without limitation, factors relating to general economic
and competitive conditions and prevailing interest rates. Accordingly, actual
results could vary significantly from those set forth in such projections. See
"Risk Factors -- Special Note Regarding Forward Looking Statements".
The following is a summary of the analyses presented by Oppenheimer to
the First Essex Board at its meeting on July 29, 1996 in connection with
Oppenheimer opinion dated July 30, 1996:
Pro Forma Analysis. Oppenheimer analyzed the pro forma effects of the
Merger on the capital ratios, earnings per share and book value per share of
First Essex. This analysis indicated that the Merger would result in earnings
per share accretion of $0.11 per share (equal to 10%) in 1997, assuming that 50%
of the purchase price consists of First Essex Common Stock, and would result in
earnings per share accretion in 1997 of $0.07 (equal to 7%) if 62% of the
purchase price consists of First Essex Common Stock.
Comparable Companies Analysis. Using publicly available information,
Oppenheimer compared selected financial information for Finest with similar
information for the following five selected public Massachusetts and New
Hampshire bank holding companies with assets between $150 million and $350
million that Oppenheimer deemed comparable: Berlin City Bank, Beverly National
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Corp., Boston Private Bancorp, Inc., Granite State Bankshares, Inc., and
Westbank Corp. (collectively the "Comparable Companies"). For each of the
Comparable Companies, Oppenheimer calculated certain financial ratios and
percentages and compared the results of these calculations to calculations made
by Oppenheimer for Finest.
This analysis showed that Finest had a ratio of net loans/deposits at
June 30, 1996 of 60.50%, compared to the average for the Comparable Companies of
72.80%, and that Finest had a return on average assets and a return on average
equity for the six months ended June 30, 1996 (annualized on a fully-taxed
basis) of 1.85% and 18.07%, respectively, compared to 0.95% and 12.03%,
respectively, for the Comparable Companies. Finest's net interest margin,
general and administrative expenses/average assets and efficiency ratios for the
period were 4.80%, 3.03%, and 57.82%, respectively, as compared to the
Comparable Companies' averages of 4.42%, 3.18%, and 64.46%, respectively.
This analysis also showed that Finest's ratios of non-performing loans
to total gross loans and non-performing assets to total assets at June 30, 1996
were 2.10% and 1.67%, respectively, compared to average ratios for the
Comparable Companies of 1.64% and 1.39%, respectively. Finest's ratios of loan
loss reserves to non-performing loans and to total gross loans at such date were
192.55% and 4.05%, respectively, compared to averages for the Comparable
Companies of 147.00% and 1.86%, respectively. Finest's equity/assets ratio at
such date was 10.40% as compared to the Comparable Companies average of 7.81%.
Discounted Cash Flow Analysis. Using a discounted cash flow analysis,
Oppenheimer estimated the present value of the future streams of after-tax cash
flows that Finest could produce through December 31, 2000 based on projections
furnished by management of First Essex. In this analysis, Oppenheimer assumed
that Finest's net income was adjusted in each year to reflect an assumed net
charge-off ratio of 0.50% of total assets and a level of provision for loan
losses for each year based on an assumed ratio of loan loss reserves to total
loans which was reduced in each projected year by approximately 25 basis points
so as to reach 2.50% in the year 2000. No dividend payments were assumed, nor
did Oppenheimer's analysis reflect any cost savings anticipated to result from
the Merger. Oppenheimer calculated a range of terminal values by applying
earnings multiples of 12 and 13 (based upon its observation of price to earnings
multiples in the comparable transactions referred to below) to Finest's
estimated after-tax cash flows for the twelve months ended December 31, 2000.
The cash flows were discounted to present values using different rates (ranging
from 11% to 12%) chosen to reflect different assumptions regarding the required
rates of return to prospective buyers of Finest. This analysis indicated an
implied range of values for Finest ranging from $28.9 million to $31.8 million.
Comparable Transactions Analysis. Oppenheimer compared the financial
terms of the Merger to the financial terms, to the extent publicly available, of
17 transactions Oppenheimer believed to be comparable for purposes of
determining the imputed values of Finest. For this analysis, Oppenheimer
reviewed three groups of transactions: (i) selected New England bank
acquisitions between January 1, 1995 and July 20, 1996 (the "Recent New England
Bank Acquisitions"), with aggregate transaction values ranging from a high of
$3,635.2 million to a low of $4.2 million; (ii) a subset of the Recent New
England Bank Acquisitions consisting of acquisitions of New England banks with
total assets between $100 million and $500 million between January 1, 1995 and
July 9, 1996, with aggregate transaction values ranging from a high of $46.9
million to a low of $8.8 million (the "Small New England Bank Acquisitions");
and (iii) a subset of the Recent New England Bank Acquisitions consisting of
acquisitions of selected New Hampshire bank acquisitions between January 1, 1995
and July 9, 1996 (the "New Hampshire Bank Acquisitions"), with aggregate
transaction values ranging from a high of $170.7 million to a low of $11.0
million.
The Recent New England Bank Acquisitions included the following: Hubco,
Inc./Westport Bancorp, Hubco, Inc./Hometown Bancorp, Hubco, Inc./Lafayette
American, CFX Corporation/Safety Fund Corporation, New England Community
Bancorp/Manchester State Bank, Bank of Boston/BayBanks, Inc., Peoples Heritage
Financial/Bank of New Hampshire Corp., Center Financial Corp./Heritage Bank,
Chittenden Corp./Flagship Bank & Trust, Community Bankshares/Centerpoint Bank,
Norwich Financial Corp./Seconn Holding, Camden National Corp./United Corp., Bank
of New York/Putnam Trust Co., BayBanks, Inc./Cornerstone Financial, New England
Community Bancorp/Equity Bank, Peoples Heritage Financial/Bankcore, Inc. and
Fleet Financial Group/Shawmut National.
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The Small New England Bank Acquisitions included the following: Hubco,
Inc./Westport Bancorp, Hubco, Inc./Hometown Bancorp, CFX Corporation/Safety Fund
Corporation, Chittenden Corp./Flagship Bank & Trust, BayBanks, Inc./Cornerstone
Financial, New England Community Bancorp/Equity Bank and Peoples Heritage
Financial/Bankcore, Inc.
The New Hampshire Bank Acquisitions included the following: Peoples
Heritage Financial/Bank of New Hampshire Corp., Community Bankshares/Centerpoint
Bank, BayBanks, Inc./ Cornerstone Financial and Peoples Heritage
Financial/Bankcore, Inc.
For each of these transactions, Oppenheimer calculated, among other
things, the high, mean, median and low price to book value, price to last twelve
months ("LTM"), net income and core deposit premium (defined as the transaction
value minus book value divided by core deposits, excluding certificates of
deposit with balances equal to or greater than $100,000), and compared the
results of these calculations to calculations made by Oppenheimer for the
proposed Merger as follows.
Oppenheimer's analysis indicated that the Recent New England Bank
Acquisitions had a mean price/book multiple of 1.92x, price/LTM earnings
multiple of 13.55x, and a core deposit premium of 9.21%. The Small New England
Acquisitions had a mean price/book multiple of 2.01x, price/LTM earnings
multiple of 16.14x, and a core deposit premium of 8.63%. The New Hampshire Bank
Acquisitions had a mean price/book multiple of 1.88x, price/LTM earnings
multiple of 12.60x, and a core deposit premium of 8.37%. Oppenheimer then
calculated the comparable multiples implied by the Merger Consideration using
both Finest's actual book value at June 30, 1996, and its book value as of that
date adjusted to reflect approximately $1.5 million of pre-tax valuation
adjustments ($1.0 million on an after-tax basis) that First Essex proposes to
make in connection with the Merger. This analysis indicated, among other things,
that the Merger Consideration represented a multiple to book value of 1.61x
(1.70x adjusted book value), a multiple of LTM stated net income of 15.96x
(12.27x annualized last six months net income before nonrecurring expenses,
assuming a 34% tax rate), and a core deposit premium of 7.99% (8.71% based on
adjusted book value).
The implied values for Finest derived from this analysis were a mean of
$30.0 million and a median of $30.8 million based on the Recent New England Bank
Acquisitions, a mean of $31.6 million and a median of $30.6 million based on the
Small New England Bank Acquisitions, and a mean of $29.9 million and a median of
$30.7 million based on the New Hampshire Bank Acquisitions.
In connection with its opinion dated as of the date of this Proxy
Statement--Prospectus, Oppenheimer confirmed the appropriateness of its reliance
on the analyses used to render its July 30, 1996 opinion by performing
procedures to update certain of such analyses and by reviewing the assumptions
on which such analyses were based and the factors considered in connection
therewith.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description.
Oppenheimer believes that its analyses must be considered as a whole and that
selecting portions of its analyses, without considering the analyses taken as a
whole, would create an incomplete view of the process underlying the analyses
set forth in its opinions. In addition, Oppenheimer considered the results of
all such analyses and did not assign relative weights to any of the analyses, so
that the ranges of valuations resulting from any particular analysis described
above should not be taken to be Oppenheimer's view of the actual value of Finest
or the combined entity.
In performing its analyses, Oppenheimer made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of First Essex or Finest.
The analyses performed by Oppenheimer are not necessarily indicative of actual
values, which may be significantly more or less favorable than suggested by such
analyses. Such analyses were prepared solely as a part of Oppenheimer's July 30,
1996 opinion. The analyses do not purport to be appraisals or to reflect the
prices at which a company might actually be sold.
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The First Essex Board retained Oppenheimer based upon its experience
and expertise. Oppenheimer is a nationally recognized investment banking and
advisory firm. Oppenheimer, as part of its investment banking business, is
continuously engaged in the valuation of business and securities in connection
with mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. In the course of its market
making and other trading activities, Oppenheimer may, from time to time, have a
long or short position in, and may buy or sell, securities of First Essex both
for its own account and for the accounts of customers.
First Essex agreed to pay Oppenheimer a fee which was payable upon
delivery of its July 30, 1996 opinion. In addition, First Essex has agreed to
reimburse Oppenheimer for its reasonable out-of-pocket expenses incurred in
connection with the services provided by Oppenheimer and to indemnify and hold
harmless Oppenheimer and certain related parties to the full extent lawful from
and against certain liabilities and expenses, including certain liabilities
under the federal securities law, incurred in connection with Oppenheimer's
engagement.
Effective Time of the Merger; Closing Date
If the Merger Agreement is approved and adopted by the requisite vote
of First Essex and Finest stockholders, and the other conditions to the Merger,
including the consummation of the Bank Merger on the Closing Date, are satisfied
or (where permissible) waived, the Merger will be consummated and become
effective when the Articles of Merger ("Articles of Merger") are filed with the
Secretary of State of New Hampshire and the Certificate of Merger ("Certificate
of Merger") is filed with the Secretary of State of Delaware, or at such later
date and time as is specified therein (the "Effective Time"). Under the terms of
the Merger Agreement, the Closing Date shall be the date on which the Effective
Time occurs.
Conversion of Shares of Finest Common Stock Pursuant to the Merger
At the Effective Time, automatically and without any action on the part
of the holder thereof, each share of Finest Common Stock issued and outstanding
immediately prior to the Effective Time (other than shares held by dissenting
stockholders ("Dissenting Shares"), shares held directly or indirectly by First
Essex, other than shares in trust accounts, merged accounts and the like which
are beneficially owned by third parties ("Trust Account Shares") and other
shares held in respect of a debt previously contracted ("DPC Shares"), and any
shares held as treasury stock by Finest) shall become and be converted into (i)
the number of shares or fraction of a share of First Essex Common Stock
(together with the number of rights ("First Essex Rights") granted pursuant to a
Shareholder Rights Agreement dated as of October 12, 1989 as amended, between
First Essex and The First National Bank of Boston as Rights Agent ("Rights
Agreement") or fraction thereof associated therewith), rounded to the nearest
thousandth of a share, equal to the number obtained by dividing $20.25 (the
"Acquisition Price") by the Average Closing Price (the "Exchange Ratio" or the
"Stock Distribution") or (ii) an amount in cash equal to the Acquisition Price
(the "Cash Distribution"). If the Average Closing Price is greater than $11.50
per share, the Exchange Ratio shall equal 1.761 and if the Average Closing Price
is less than $9.50 per share, the Exchange Ratio shall equal 2.132. If the
Average Closing Price is less than $8.75 per share (the "Minimum Price"), Finest
shall have the right to terminate the Merger Agreement, unless First Essex
elects, in its sole discretion, to adopt as the Exchange Ratio the Adjusted
Exchange Ratio (as such term is defined below). As of the Effective Time, each
share of Finest Common Stock held directly or indirectly by First Essex, other
than Trust Account Shares and DPC Shares, and held by Finest as treasury stock
shall be canceled, retired and cease to exist, and no payment shall be made with
respect thereto.
"Average Closing Price" shall mean the average of the closing bid
prices of shares of First Essex Common Stock as reported on the NASDAQ-NMS for
the twenty consecutive trading days ending on the fifth business day prior to
the Closing Date. "Merger Consideration" shall mean the shares of First Essex
Common Stock and/or cash that holders of Finest Common Stock are entitled to
receive under the Merger Agreement. "Adjusted Exchange Ratio" shall mean that
number, rounded to the nearest thousandth, determined by dividing $18.65 by the
Average Closing Price. Each certificate which immediately prior to the Effective
Time represented outstanding shares of Finest Common Stock shall on and after
the Effective Time be deemed for all purposes to represent the Merger
Consideration into which the shares of Finest Common Stock represented by such
certificate shall have been converted.
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Election Procedures
Boston Equiserve, L.P., acting as an exchange agent appointed by First
Essex (the "Exchange Agent"), shall mail to each holder of record of shares of
Finest Common Stock outstanding at the Effective Time an election form (the
"Election Form"), together with appropriate transmittal materials, as promptly
as practicable after the Effective Time and in no event later than three
business days thereafter.
The Election Form shall permit a holder of shares of Finest Common
Stock to elect to receive, with respect to some or all of such holder's shares
of Finest Common Stock, (i) the Stock Distribution (the "Stock Election
Shares"), (ii) the Cash Distribution (the "Cash Election Shares"), or (iii) to
indicate that such holder makes no election (the "No Election Shares").
Any shares of Finest Common Stock with respect to which the holder
thereof shall not, as of the Election Deadline (as defined below), have made
such an election by submission to the Exchange Agent of a properly completed
Election Form, shall be deemed to be No Election Shares. "Election Deadline"
means 5:00 p.m., local time, on the fifteenth business day following but not
including the date of mailing of the Election Form or such other date as First
Essex and Finest shall mutually agree upon in writing.
Any election shall have been properly made only if the Exchange Agent
shall have received a properly completed Election Form by the Election Deadline.
An Election Form will be properly completed only if accompanied by either (i)
certificates representing all shares of Finest Common Stock covered thereby or
(ii) an appropriate guarantee of delivery of such certificates as set forth in
the Election Form from a member of a national securities exchange or the NASD,
or a commercial bank or trust company in the United States, provided that if the
certificates are not delivered by the time set forth in the guarantee of
delivery (which time may not be later than two business days after the Election
Deadline), the holder shall be entitled only to receive in respect of each share
of Finest Common Stock represented by such certificates the Merger Consideration
to be received by holders of No Election Shares. Any Election Form may be
revoked or changed by the person submitting such Election Form to the Exchange
Agent by written notice to the Exchange Agent, provided such notice is received
by the Exchange Agent at or prior to the Election Deadline. The Exchange Agent
shall have reasonable discretion to determine when any election, modification or
revocation is received and whether any such election, modification or revocation
has been properly made.
If the aggregate number of Stock Election Shares does not equal the
Stock Conversion Number (as defined below), within five business days after the
Election Deadline the Exchange Agent shall allocate among holders of shares of
Finest Common Stock outstanding at the Effective Time the right to receive with
respect to each such share the Stock Distribution or the Cash Distribution as
follows:
(i) if the aggregate number of Stock Election Shares is less than
the Stock Conversion Number (as defined below), then
(a) all Stock Election Shares will be converted into the
right to receive the Stock Distribution;
(b) the Exchange Agent will select, on a pro rata basis,
first from among the holders of No Election Shares
and then (if necessary) from among the holders of
Cash Election Shares, a sufficient number of such
shares ("Stock Designee Shares") such that the number
of Stock Designee Shares will, when added to the
number of Stock Election Shares, equal as closely as
practicable, but in no event be less than, the Stock
Conversion Number, and all Stock Designee Shares will
be converted into the right to receive the Stock
Distribution; and
(c) the Cash Election Shares and the No Election Shares
not so selected as Stock Designee Shares shall be
converted into the right to receive the Cash
Distribution; or
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(ii) if the aggregate number of Stock Election Shares is greater
than the Stock Conversion Number, then
(a) all Cash Election Shares will be converted into the
right to receive the Cash Distribution;
(b) the Exchange Agent will select, on a pro rata basis,
first from among the holders of No Election Shares
and then (if necessary) from among the holders of
Stock Election Shares, a sufficient number of such
shares ("Cash Designee Shares") such that the number
of Cash Designee Shares will, when added to the
number of Cash Election Shares, equal as closely as
practicable, but in no event will it exceed, the Cash
Conversion Number (as defined below), and all Cash
Designee Shares will be converted into the right to
receive the Cash Distribution; and
(c) the Stock Election Shares and the No Election Shares
not so selected as Cash Designee Shares shall be
converted into the right to receive the Stock
Distribution.
"Stock Conversion Number" means the number of outstanding shares of
Finest Common Stock as of the Effective Time multiplied by .50; provided,
however, if satisfaction of certain conditions relating to the delivery of
certain opinions of counsel regarding the tax treatment of the Merger and
related transactions depend upon the issuance by First Essex of a greater number
of shares of First Essex Common Stock than would otherwise result from the
utilization of such Stock Conversion Number, then the Stock Conversion Number
shall be increased to such number greater than .50 as is necessary to facilitate
the satisfaction of such condition(s); provided, further, however, that under no
circumstances shall the Stock Conversion Number be increased to a number greater
than .62. "Cash Conversion Number" means the number of outstanding shares of
Finest Common Stock as of the Effective Time multiplied by .50; provided,
however, if the Stock Conversion Number shall be increased, as provided for in
the preceding sentence, then under such circumstances the Cash Conversion Number
shall be reduced to equal the difference between 1.00 and such increased Stock
Conversion Number.
Certificate Exchange Procedures
Certificates which represent shares of Finest Common Stock that are
outstanding immediately prior to the Effective Time and are converted into the
Merger Consideration (the "Certificates"), shall, after the Effective Time, be
deemed to represent the Merger Consideration into which such shares have been
converted and shall be exchangeable by the holders thereof for (i) new
certificates representing the shares of First Essex Common Stock into which such
shares have been converted and/or (ii) a check for the total cash amount into
which such shares have been converted.
Upon surrender of a Certificate, together with a duly executed letter
of transmittal and any other required documents, the holder of such Certificate
shall be entitled to receive, in exchange therefor, as soon as practicable, a
certificate for the number of shares of First Essex Common Stock and/or a check
for the cash amount to which such holder is entitled, and such Certificate shall
forthwith be canceled. No interest shall be paid on the cash amount payable with
respect to any unsurrendered Certificate representing Cash Election Shares.
In lieu of the issuance of fractional shares of First Essex Common
Stock, a payment in cash, without interest, will be made to the holders of
Finest Common Stock in respect of any fractional share that would otherwise be
issuable equal to an amount in cash determined by multiplying such holder's
fractional interest by the Average Closing Price (rounded up to the nearest
cent). In the event any Certificate shall have been lost, stolen or destroyed,
upon receipt of appropriate evidence as to such loss, theft or destruction and
to the ownership of such Certificate by the person claiming such Certificate to
be lost, stolen or destroyed, and the receipt by First Essex of appropriate and
customary indemnification, First Essex will deliver in exchange for such lost,
stolen or destroyed Certificate the Merger Consideration and any fractional
share payment.
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If any Merger Consideration is to be issued in a name other than that
in which the Certificate surrendered in exchange therefor is registered, it
shall be a condition of the issuance thereof that the Certificate so surrendered
shall be properly endorsed (or accompanied by an appropriate instrument of
transfer) and otherwise in proper form for transfer and that the person
requesting such exchange shall pay to the Exchange Agent in advance any transfer
or other taxes required by reason of the delivery of the Merger Consideration.
Treatment of Finest Stock Options
Each stock option granted by Finest pursuant to Common Stock Options
dated as of October 1, 1995 and November 21, 1995, between Finest and Brian W.
Thompson and Irving J. Goss, respectively (collectively, the "Finest Employee
Option Agreements"), which is outstanding and unexercised immediately prior to
the Effective Time shall be converted into an option to purchase shares of First
Essex Common Stock and First Essex shall assume all such options. The number of
shares of First Essex Common Stock subject to the options shall be equal to the
product of the number of shares of Finest Common Stock previously subject to the
option and the Exchange Ratio (or the Adjusted Exchange Ratio, as applicable),
rounded up to the nearest whole share. The exercise price per share of First
Essex Common Stock shall be equal to the exercise price per share of Finest
Common Stock subject to the option, divided by the Exchange Ratio (or the
Adjusted Exchange Ratio, as applicable), rounded up to the nearest cent. The
duration and other terms of each option shall be unchanged, except that each
option shall become fully vested upon the Effective Time. See "Interests of
Certain Persons in the Merger".
Conduct of Business Pending the Merger
Pursuant to the Merger Agreement, each of Finest and Pelham Bank has
agreed that, except as specifically required or permitted pursuant to the Merger
Agreement or as otherwise specifically disclosed therein, prior to the Effective
Time, it will carry on its business in the ordinary course consistent with past
practice.
In addition, each of Finest and Pelham Bank has agreed that, except as
contemplated by the Merger Agreement, prior to the Effective Time, it will not,
directly or indirectly, do any of the following without the prior written
consent of First Essex:
(a) engage or participate in any material transaction or incur or
sustain any material obligation or liability except in the
ordinary, regular and usual course of its business consistent
with past practices, including without limitation entering
into any settlement agreement or understanding with respect to
any material litigation matters;
(b) accept, renew or roll over any "brokered deposit" or offer an
interest rate with respect to any deposit that would either
constitute an impermissible interest rate with respect to
deposits of an undercapitalized insured depository institution
or otherwise generally set interest rates on deposits that
depart from past practices of Pelham Bank;
(c) except in the ordinary, regular and usual course of business
consistent with past practices and in an immaterial aggregate
amount, sell, lease, transfer, assign, encumber or otherwise
dispose of or enter into any contract, agreement or
understanding to lease, transfer, assign, encumber or dispose
of any of its assets;
(d) relocate, or file any application to relocate, any branch
office;
(e) terminate, or give any notice (written or verbal) to customers
or governmental authorities or agencies to terminate the
operations of any branch office;
(f) waive any material right, whether in equity or at law, that it
has with respect to any asset except in the ordinary, regular
and usual course of business consistent with past practices;
(g) declare or pay any dividends on or make any other
distributions in respect of the Finest Common Stock, except
that Finest shall be permitted to declare and pay a special
cash dividend to its stockholders of $0.20 per share if the
Merger has not been completed by March 31, 1997 and shall be
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permitted to declare and pay an additional special cash
dividend to its stockholders of $0.20 per share if the Merger
has not been completed by June 30, 1997;
(h) except for the adoption of the Salary Continuation Policy and
Bonus Plan, adopt or amend in any material respect any pension
plan or benefit plan or enter into any employment, severance
or similar contract with any person or amend any such existing
agreements, plans or contracts to increase any amounts payable
thereunder or benefits provided thereunder, or grant or permit
any increase in compensation to its employees as a class,
except in the ordinary course of business consistent with past
practices, or pay any bonus except in accordance with the
terms of the Salary Continuation Policy and Bonus Plan or as
otherwise disclosed in the Merger Agreement;
(i) subject to its directors' fiduciary duties and obligations,
authorize, recommend, propose or announce an intention to
authorize, recommend or propose, or enter into an agreement
with respect to, any merger, consolidation, purchase and
assumption transaction or business combination (other than the
Merger), any acquisition of a material amount of assets or
securities or assumption of liabilities, any disposition of a
material amount of assets or securities, or any release or
relinquishment of any material contract rights not in the
ordinary course of business and inconsistent with past
practices;
(j) propose or adopt amendments to its articles of incorporation
or by-laws;
(k) issue, deliver or sell any shares of its capital stock except
upon exercise or fulfillment of options issued or existing on
the date of the Merger Agreement pursuant to the Finest
Employee Option Agreements, or effect any stock split, reverse
stock split, recapitalization, reclassification or similar
transaction or otherwise change its equity capitalization;
(l) grant, confer or award any options, warrants, conversion
rights or other rights, not existing on the date of the Merger
Agreement, to acquire any shares of its capital stock;
(m) purchase, redeem or otherwise acquire any shares of its
capital stock or any securities convertible into or
exercisable for any shares of its capital stock, except in a
fiduciary capacity;
(n) impose, or suffer the imposition, on any share of capital
stock held by it or by any of its subsidiaries of any material
lien, charge or encumbrance, or permit any such lien, charge
or encumbrance to exist;
(o) incur, or permit any of its subsidiaries to incur, any
additional debt obligation or other obligation for borrowed
money, or guaranty any additional debt obligation or other
obligation for borrowed money, except in the ordinary course
of business consistent with past practices;
(p) incur or commit to any capital expenditures or any obligations
or liabilities in connection therewith, other than capital
expenditures and such related obligations or liabilities
incurred or committed to in the ordinary and usual course of
business consistent with past practices, which, in all cases,
do not individually exceed $25,000 or cumulatively exceed
$75,000;
(q) change its methods of accounting in effect at December 31,
1995, except as may be required by changes in GAAP, or change
its fiscal year;
(r) make any loan or extension of credit or enter into any
commitment therefor on other than Pelham Bank's customary
terms, conditions and standards and in accordance with
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applicable law and regulation and consistent with prudent
banking practices, and in any event Finest and Pelham Bank are
required to provide First Essex with monthly reports of all
loans, extensions of credit and commitments therefor equal to
or greater than $250,000, individually, and to consult with
First Essex prior to making or entering into any new loan,
extension of credit or commitment therefor equal to or greater
than $500,000 individually, or which, when aggregated with all
other loans, extensions of credit and commitments therefor to
a single borrower or affiliated group of borrowers, equals at
least $1,000,000; and
(s) agree, in writing or otherwise, to take any actions prohibited
under the Merger Agreement or any action which would make any
of its representations or warranties contained in the Merger
Agreement untrue or incorrect or would otherwise violate any
of its other agreements or commitments contained in the Merger
Agreement in any material respect.
Each of Finest and Pelham Bank has also agreed that, except as may be
specifically required or permitted pursuant to the Merger Agreement or
specifically described therein or in the accompanying disclosure schedule, it
shall:
(a) use all reasonable efforts, and cause each of its subsidiaries
to use all reasonable efforts, to preserve intact its business
organization and goodwill in all material respects, keep
available the services of its officers and employees as a
group and maintain satisfactory relationships with borrowers,
depositors, other customers and others having business
relationships with it;
(b) at First Essex's request, use all reasonable efforts to
cooperate with First Essex with respect to preparation for the
combination and integration of the businesses, systems and
operations of Pelham Bank and First Essex Bank, including,
without limitation, arranging for the termination or non-
renewal of existing agreements and arrangements with
third-party service providers with respect to Pelham Bank's
data processing and related electronic informational systems
and conversion thereof to appropriate systems used by First
Essex Bank, and confer on a regular and frequent basis with
one or more representatives of First Essex and/or First Essex
Bank to report on operational and related matters;
(c) subject to any restrictions under applicable law or
regulation, promptly notify First Essex of any emergency or
other change in the normal course of its or its subsidiaries'
businesses or in the operation of its or its subsidiaries'
properties and of any governmental complaints, investigations
or hearings (or communications indicating that the same may be
contemplated) if such emergency, change, complaint,
investigation or hearing would be material to its or its
subsidiaries' assets, properties, liabilities, business,
results of operations, condition (financial or otherwise) or
prospects;
(d) file all reports, applications and other documents required to
be filed by it with the Federal Reserve Board, FDIC, New
Hampshire Banking Commissioner and any other governmental
agency or authority between the date of the Merger Agreement
and the Effective Time and shall furnish to First Essex copies
of all such reports promptly after the same are filed; and
(e) to the extent requested by First Essex, cooperate with First
Essex with the objective of seeking appropriate rescission in
connection with the Bank Merger, of any commitment letter,
written agreement, memorandum of understanding or order to
cease and desist with, or any resolutions adopted at the
request of, any federal or state governmental entity charged
with the supervision or regulation of banks or bank holding
companies or engaged in the insurance of bank deposits which
restricts materially the conduct of its business, or in any
manner relates to its capital adequacy, credit policies,
management or overall safety and soundness or its ability to
perform its obligations under the Merger Agreement.
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Conditions to Consummation of the Merger
Mutual Conditions. The respective obligations of First Essex, Finest
and Pelham Bank to consummate the Merger are subject to satisfaction at or prior
to the Effective Time of the following conditions:
(a) The Merger Agreement and the transactions contemplated thereby
shall have been approved and adopted by the requisite vote of
Finest and First Essex stockholders;
(b) Other than the filing of the Articles of Merger and
Certificate of Merger, all necessary approvals, authorizations
and consents of any court, administrative agency or commission
or other governmental authority or instrumentality (each a
"Governmental Entity") required to consummate the transactions
contemplated by the Merger Agreement and the Bank Merger
Agreement shall have been obtained and shall remain in full
force and effect and all statutory waiting periods in respect
thereof shall have expired or been terminated (all such
approvals and the expiration of all such waiting periods being
referred to herein as the "Requisite Regulatory Approvals");
(c) No order, injunction or decree issued by any court or agency
of competent jurisdiction or other legal restraint or
prohibition preventing the consummation of the Merger or any
of the other transactions contemplated by the Merger Agreement
shall be in effect; and
(d) No stop order suspending the effectiveness of the Form S-4
Registration Statement registering the shares of First Essex
Common Stock to be issued in the Merger (the "S-4") shall have
been issued and no proceedings for that purpose shall have
been initiated or threatened by the SEC.
Conditions to First Essex's Obligations. The obligation of First Essex
to effect the Merger and the transactions contemplated thereby is also subject
to the following conditions, any or all of which may be waived in whole or in
part by First Essex in its sole discretion:
(a) No material adverse changes shall have occurred in the
business, operations, results of operations, assets,
liabilities or condition of Finest or Pelham Bank;
(b) Receipt of assurances that Finest's representation and
warranties are true at the Closing Date and all of Finest's
pre-closing obligations have been complied with;
(c) Receipt of all required approvals of non-governmental third
parties that are the responsibility of Finest or Pelham Bank
to obtain;
(d) None of the Requisite Regulatory Approvals shall contain any
materially burdensome condition or restriction;
(e) Receipt of a legal opinion from Sullivan & Worcester LLP,
First Essex's outside counsel, that the Merger and the Bank
Merger will constitute tax-free reorganizations within the
meaning of Section 368(a) of the Internal Revenue Code;
(f) Receipt of a legal opinion from Edwards & Angell, Finest's
outside counsel, regarding certain corporate and other matters
as are customary in transactions of this type;
(g) Delivery by Finest of a letter identifying persons deemed to
be its affiliates and, to the extent received by Finest,
delivery of letters from such persons agreeing to comply with
certain limitations applicable after the Effective Time to
their sales of First Essex Common Stock received in the
Merger; and
(h) The Bank Merger shall have been consummated.
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Conditions to Finest's Obligations. The obligation of Finest to effect
the Merger and the other transactions contemplated in the Merger Agreement is
also subject to the satisfaction of the following conditions, any or all of
which may be waived by Finest in its sole discretion:
(a) No material adverse change in the business, operations,
results of operations, assets, liabilities, or condition of
First Essex;
(b) Receipt of assurances that First Essex's representation and
warranties are true at the Effective Time and all of First
Essex's pre-closing obligations have been complied with;
(c) Receipt of all required approvals of non-governmental third
parties that are the responsibility of First Essex to obtain;
(d) Receipt of a legal opinion from Edwards & Angell, Finest's
outside counsel, that the Merger will constitute a tax-free
reorganization within the meaning of Section 368(a) of the
Internal Revenue Code and any taxable gain realized by any
Finest stockholder as a result of the Merger will not exceed
the amount of cash received by such stockholder;
(e) The shares of First Essex Common Stock issuable at the
Effective Time shall have been authorized for listing on
NASDAQ-NMS upon official notice of issuance;
(f) Receipt of a legal opinion from Sullivan & Worcester LLP,
First Essex's outside counsel, regarding certain corporate and
other matters as are customary in transactions of this type;
and
(g) The Bank Merger shall have been consummated.
Termination
The Merger Agreement will be subject to termination (i) by mutual
agreement of the parties, (ii) if the Merger shall not have been consummated on
or before July 31, 1997, (iii) by either party if any Requisite Regulatory
Approval or the approval of the stockholders of Finest or the stockholders of
First Essex is not obtained or if consummation of the transactions contemplated
by the Merger Agreement is enjoined or otherwise prohibited, (iv) by either
party for a material breach of any representation, warranty or covenant or other
agreement contained in the Merger Agreement by the other party, which breach is
not cured after 30 days written notice thereof is given to the party committing
such breach, (v) by Finest if the Average Closing Price is less than $8.75 per
share, subject to First Essex's right to elect to increase the number of shares
of First Essex Common Stock issuable in the Merger by using the Adjusted
Exchange Ratio, and (vi) by First Essex if Finest's Board does not recommend to
Finest's stockholders the approval of the proposals to be submitted to such
stockholders in accordance with the Merger Agreement or if such recommendation
is subsequently withdrawn, modified or amended in any way that is materially
adverse to First Essex.
If either party terminates the Merger Agreement for any of the
foregoing reasons, neither party shall have any further liability under the
Merger Agreement; provided, however, in the event of a party's gross negligence
or willful breach, the breaching party shall remain liable for any and all
damages, costs and expenses sustained or incurred by the non-breaching party. In
addition, Finest may be liable for a cash payment of up to $2,000,000 if (i)
Finest or First Essex has terminated the Merger Agreement as a result of
Finest's failure to obtain the approval of Finest's stockholders or First Essex
has terminated the Merger Agreement due to the failure of Finest's Board to make
or maintain the required recommendations to Finest's stockholders or due to
Finest's gross negligence or willful breach of the Merger Agreement and (ii)
either within 12 months of such termination Finest has become involved in an
Alternative Transaction (as defined in the Merger Agreement) or, in the case of
a termination by First Essex due to the failure of Finest's Board to make or
maintain the required recommendations to Finest's stockholders, any person other
than First Essex or its affiliates has made a publicly disclosed, bona fide
proposal to Finest or its stockholders to engage in an Alternative Transaction
(as defined in the Merger Agreement).
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Amendment, Extension and Waiver
At any time prior to the consummation of the transactions contemplated
by the Merger Agreement or termination of the Merger Agreement, whether before
or after the approvals of the parties' respective stockholders, the parties may
amend the Merger Agreement, extend the time for the performance of any of the
obligations or other acts of any other party hereto, waive any inaccuracies in
the representations and warranties contained therein or in any document
delivered pursuant thereto, or waive compliance with any of the agreements or
conditions with respect to covenants of the parties or closing conditions of the
Merger (other than the mutual conditions described above); provided, however,
that there may not be, without further approval of the parties' stockholders, to
the extent required by law, any amendment, extension or waiver of the Merger
Agreement which changes the amount or form of the consideration to be delivered
to the Finest stockholders other than as may be expressly contemplated by the
Merger Agreement. The Merger Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties thereto. Any
agreement on the part of any party to any extension or waiver shall be valid
only if set forth in an instrument in writing signed on behalf of such party,
but such waiver or failure to insist on strict compliance with such obligation,
covenant, agreement or condition shall not operate as a waiver of, or estoppel
with respect to, any subsequent or other failure.
Requisite Regulatory Approvals
The Bank Merger is subject to the prior approval of the OTS under the
federal Bank Merger Act of 1978, as amended (the "BMA"), and applicable OTS
regulations, and an application for such approval has been filed by First Essex
Bank and Pelham Bank with the OTS. In reviewing the BMA application, the OTS
must take into consideration, among other factors, the financial and managerial
resources and future prospects of the institutions and the convenience and needs
of the communities to be served. In addition, the BMA prohibits the OTS from
approving the Bank Merger if it would result in a monopoly or be in furtherance
of any combination or conspiracy to monopolize or to attempt to monopolize the
business of banking in any part of the United States, or if its effect in any
section of the county may be substantially to lessen competition or to tend to
create a monopoly, or if it would in any other manner be a restraint on trade,
unless the OTS finds that the anticompetitive effects of the Bank Merger are
clearly outweighed by the public interest and the probable effect of the
transaction in meeting the convenience and needs of the communities to be
served. In addition, under the BMA, the Bank Merger may not be consummated until
the 30th day following the date of OTS approval of the Bank Merger, during which
time the Department of Justice may challenge the Bank Merger on antitrust
grounds. The commencement of an antitrust action during the waiting period would
stay the effectiveness of such approval unless a court specifically orders
otherwise.
As part of the application filed with the OTS under the BMA, First
Essex Bank has also provided notice as required under applicable OTS regulations
of its intention to effect a capital distribution to First Essex, in the form of
a cash dividend, in an amount sufficient to fund First Essex's payment of the
cash portion of the Merger Consideration to be paid to Finest's stockholders.
The OTS may object to such capital distribution if it determines that the
distribution would be inconsistent with the safe and sound operation of First
Essex Bank. See also "Business of First Essex-Regulation-Limitation on Capital
Distributions".
The parties are also required to provide notice of the Bank Merger to
the New Hampshire Banking Commissioner.
Although there can be no assurances given that all required regulatory
approvals will be received for the Merger and the Bank Merger, the parties
believe that all required regulatory approvals will be obtained.
Except for state securities ("blue sky") filings, the parties are not
aware of any other regulatory approvals or filings that are required for
consummation of the Merger or the Bank Merger, except as described above. Should
any other approvals or filings be required, it is presently contemplated that
such approvals or filings will be sought or made, as appropriate. There can be
no assurances given, however, that any other approvals, if required, will be
obtained.
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The Merger will not be consummated unless all of the requisite
regulatory approvals or other filings pertaining to the transactions
contemplated by the Merger Agreement, including the Bank Merger, are obtained or
made, as appropriate. See "-Conditions to Consummation of the Merger" above.
Expenses
Each party will pay its own expenses in connection with the Merger,
subject to provisions to the contrary contained in the Merger Agreement.
Stockholders Agreement
All of the Finest and Pelham Bank directors and executive officers and
their respective affiliates, and a certain principal stockholder of Finest, who
own a total of 410,890 shares of Finest Common Stock, representing approximately
27.8% of the shares of Finest Common Stock issued and outstanding on the Finest
Record Date, have executed a Stockholders Agreement, dated August 5, 1996,
pursuant to which such stockholders have agreed to certain restrictions on their
respective shares of Finest Common Stock. Specifically, such stockholders
agreed, with respect to all presently owned or after-acquired stock, (a) to vote
such stock in favor of the Merger and against any other merger or acquisition
transaction with a party other than First Essex or its affiliates, and (b)
generally not to sell, assign, transfer, encumber or otherwise dispose of such
stock. The Stockholders Agreement shall remain in effect until the earlier of
the consummation of the Merger or the termination of the Merger Agreement in
accordance with its terms.
No Solicitation
Neither Finest nor Pelham Bank shall (and Finest and Pelham Bank shall
use all reasonable efforts to cause its officers, directors, employees,
representatives and agents, not to), directly or indirectly, encourage, solicit,
initiate or, subject to the fiduciary obligations of the Finest Board (as
advised in writing by outside counsel), participate in any discussions or
negotiations with, or provide any information to, any corporation, partnership,
person or other entity or group (other than First Essex and its affiliates or
representatives) concerning any merger, tender offer, sale of substantial
assets, sale of shares of capital stock or debt securities or similar
transaction involving Finest or Pelham Bank (any of the foregoing, an
"Acquisition Transaction"). Notwithstanding the foregoing, Finest or its Board
of Directors is not prohibited from taking and disclosing to Finest's
stockholders a position with respect to a tender offer by a third party pursuant
to certain rules promulgated under the Exchange Act or from making such
disclosure to Finest's stockholders which, in the judgment of the Finest Board
with the written advice of outside counsel, may be required under applicable
law. Finest will immediately communicate to First Essex the terms of any
proposal, discussion, negotiation or inquiry and the identity of the party
making such proposal or inquiry. Any such communication shall be delivered no
less promptly than by telephone within twenty-four hours of Finest's receipt of
any such proposal or inquiry or its receipt of any request for information from
the Federal Reserve Board, Department of Justice or any other governmental
agency or authority with respect to a proposed Acquisition Transaction.
Interests of Certain Persons in the Merger
Continuation of Rights to Indemnification; D&O Insurance. The Merger
Agreement provides that the provisions with respect to indemnification existing
in favor of, and all limitations on the personal liability of, any director,
officer or other employee of Finest or any of its subsidiaries contained in the
Finest Articles and Finest By-laws on the date of the Merger Agreement with
respect to matters occurring prior to the Effective Time shall survive the
Merger and shall continue in full force and effect for a period of not less than
six years from the Effective Time. First Essex has also agreed to cause to be
maintained in effect for a period of not less than three years from the
Effective Time the current policies of the directors' and officers' liability
insurance of Finest (or substitute policies of at least the same coverage with
terms and conditions that are not less favorable than those presently maintained
by Finest), with respect to matters occurring at or prior to the Effective Time.
However, First Essex is not required to expend an aggregate amount in excess of
125% of the amount currently being paid by Finest for such insurance.
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Arrangements With Certain Finest Executive Officers. On the Closing Date,
First Essex and First Essex Bank will enter into certain employment and
severance arrangements with Brian W. Thompson and Irving J. Goss, which shall
take the place of and supersede the employment and severance arrangements
presently in effect for Messrs. Thompson and Goss with Finest and Pelham Bank.
Mr. Thompson has been President, Chief Executive Officer and a director of
Pelham Bank and Finest since October 1995. From 1991 to 1994, he was Executive
Vice President, Corporate Banking and Commercial Real Estate, at Peoples Bancorp
of Worcester, Inc. Mr. Thompson will be given the title of Executive Vice
President of First Essex and First Essex Bank, with responsibilities as head of
Corporate Banking. He will receive an annual salary of $150,000 and may be paid
an annual performance bonus of up to 30% of his annual salary. On the Closing
Date, Mr. Thompson will enter into an employment agreement with First Essex and
First Essex Bank, which will have an initial term of two years, and receive
certain perquisites, including all benefits available to other employees and
executives of First Essex Bank, and will be eligible to participate in any
future stock-based plans which may be offered generally by First Essex to senior
management. Mr. Thompson will also enter into a special termination agreement
with First Essex and First Essex Bank, which will contain change of control
provisions providing for a termination payment of three years' salary and bonus
upon the occurrence of a Termination Event (as defined therein) within three
years of a Change in Control (as defined therein) of First Essex. The form of
Mr. Thompson's employment and special termination agreements will be
substantially similar to the current employment and special termination
agreements among First Essex and First Essex Bank and David W. Dailey, Executive
Vice President and Chief Financial Officer of First Essex and First Essex Bank.
For the first year following the Effective Time, Mr. Thompson will be entitled
to voluntarily terminate his employment for any reason and receive a lump sum
severance payment of $225,000, which is equivalent to the change of control
payment which Mr. Thompson could receive under his existing employment
agreement.
Mr. Goss will receive an annual salary, as an employee of First Essex
Bank, of $100,000. Mr. Goss will also be entitled to all benefits accorded to
similarly situated executives of First Essex Bank, including participation in
any future stock-based plans which may be offered generally by First Essex to
senior management of First Essex and First Essex Bank. For up to one year
following the Effective Time, Mr. Goss may terminate his employment for any
reason and receive a lump sum severance payment of equal to (x) the amount, if
any, of the remaining balance of his full year salary for such initial year of
employment plus (y) $125,000, which is equivalent to the change of control
payment which Mr. Goss could receive under his existing employment agreement.
At the Effective Time, certain options granted to Messrs. Thompson and
Goss to purchase 50,000 and 15,000 shares of Finest Common Stock, respectively,
will become immediately exercisable in full pursuant to the accelerated vesting
provisions contained in the agreements under which such options were granted.
See "--Treatment of Finest Stock Options". If Messrs. Thompson and Goss were to
exercise all of their options immediately upon such acceleration, the value to
them (based upon the difference between the options' exercise prices and the
Acquisition Price) would be $337,500 and $ 101,250, respectively.
Employment Obligations
Following the Effective Time, First Essex will, or will cause First
Essex Bank to, honor in accordance with their terms all employment, severance
and other compensation contracts disclosed to First Essex under the Merger
Agreement between Finest or Pelham Bank and any director, officer or employee
thereof (other than the employment agreements with Messrs. Thompson and Goss,
which will be superseded at the Effective Time by the arrangements described
above), and all provisions for benefits or other amounts earned or accrued
through the Effective Time under Finest pension plans or benefit plans. First
Essex will cause each plan, program or arrangement included among the benefits
of First Essex to be provided to such employees after the Effective Time, except
for First Essex's defined benefit pension plan provided through SBERA, to treat
the prior service of each such employee with Finest or Pelham Bank, to the
extent such prior service is recognized under the comparable plan, program or
arrangement of Finest, as service rendered to First Essex or its affiliate, as
the case may be, for purposes of the eligibility to participate, vesting, and
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eligibility for special benefits under each such plan, program or arrangement of
First Essex, but not in any case for benefit accrual attributable to any period
before the Effective Time. Any employee of Finest or Pelham Bank who becomes an
employee of First Essex or First Essex Bank immediately following the Effective
Time and whose employment is involuntarily terminated at any time during the
twelve-month period from and after the Effective Time will be entitled to salary
continuation and benefits in accordance with the terms and conditions of the
Salary Continuation Policy and Bonus Plan described below. First Essex will not
be obligated under any circumstances to employ any person who is employed by
Finest or Pelham Bank immediately prior to the Effective Time; provided,
however, that it is First Essex's intention to offer employment to as many such
persons as is reasonably practicable.
Salary Continuation Policy and Bonus Plan
Finest and Pelham Bank have adopted a Salary Continuation and Bonus
Plan to provide salary continuation benefits to certain eligible employees.
Except as provided below, any employee of Pelham Bank who is involuntarily
terminated as a result of the elimination of the employee's position
("Terminated Employee") shall be eligible for salary continuation benefits. An
employee shall be deemed to be involuntarily terminated as a result of the
elimination of the employee's position if the employee is terminated for any
reason (other than for cause, death, disability or retirement) within a twelve
month period following a change in control, provided, however that any employee
who is subject to an existing employment agreement or change in control
agreement shall not be a Terminated Employee and shall not be eligible for
salary continuation benefits in accordance with this plan. A Terminated Employee
who is a full-time employee shall be paid up to fifty-two weeks of salary
continuation benefits, depending on that employee's job level and length of
service, at the weekly rate in effect on the last day of employment; a
Terminated Employee who is a part-time employee shall be paid eight weeks plus
two weeks of salary continuation benefits for each full year of service with
Pelham Bank at the weekly rate in effect on the last day of employment.
Salary continuation benefits to a Terminated Employee shall cease
automatically if the Terminated Employee is reemployed by the new owner of
Pelham Bank or the Terminated Employee refuses to accept a valid offer of
employment with the new owner of Pelham Bank that (i) is at a salary level that
is not less than 90% of the Terminated Employee's salary level in effect at the
time of termination, (ii) is under substantially the same conditions as the
position which was eliminated, and (iii) is within 25 miles of the work location
of the position which was eliminated. A Terminated Employee shall be entitled to
the continuation of group health and dental insurance benefits under the same
terms and conditions as if he or she remained an active employee of Pelham Bank
for either six months or the period during which the Terminated Employee
receives salary continuation benefits pursuant to the plan, whichever is
greater. Thereafter, the Terminated Employee shall be entitled to continuation
benefits provided pursuant to applicable federal or state law (such as COBRA)
for an additional 18-month period. A Terminated Employee shall also be eligible
for outplacement services, such as workshops and job search assistance.
Bonuses shall be awarded to those employees and officers of Pelham
Bank, at such times and in such amounts as its Board of Directors in its sole
discretion shall determine. It is anticipated that the bonus pool for the year
ended December 31, 1996, which will be payable notwithstanding the completion of
the Merger prior to such date, will be $125,000, excluding any bonuses that may
be payable to Messrs. Thompson and Goss. The directors of Pelham Bank are paid
an annual retainer of $2,500 per year and receive the full retainer for partial
years of service.
Resale of First Essex Common Stock
The shares of First Essex Common Stock to be issued pursuant to the
Merger Agreement have been registered under the Securities Act by means of the
registration statement of which this Proxy Statement-Prospectus forms a part.
Accordingly, such shares should be freely transferable under the Securities Act,
except for shares issued to persons who are affiliates of Finest or First Essex
at the time of the Finest Meeting and persons who are affiliates of First Essex
at the time of such proposed transfer. Such persons will generally be able to
resell such shares only pursuant to an effective registration statement under
the Securities Act or pursuant to a statutory or regulatory exemption or "safe
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harbor" from the registration requirements of the Securities Act. Affiliates of
a person are other persons who control, are controlled by, or are under common
control with the person. The affiliates of a corporation are generally thought
to include its executive officers, directors and significant (i.e., 10% or more)
stockholders.
Affiliates of First Essex who wished to dispose of shares of First
Essex Common Stock acquired in the Merger could utilize the "safe harbor"
provided by Rule 144 promulgated under the Securities Act ("Rule 144"). Rule 144
permits, among other things, the resale of such shares if certain conditions are
met. These conditions include the requirement that First Essex have filed all
reports required of it under the Exchange Act for the past 12 months, a
limitation on the number of shares sold by the affiliate in any three-month
period, and a restriction on the manner in which the sale is made. In most
cases, a notice of proposed sale must also be filed with the SEC.
Persons who are affiliates of Finest or First Essex at the time of the
Finest meeting and are not affiliates of First Essex at the time of a proposed
resale could utilize the resale provisions of Rule 145 promulgated under the
Securities Act ("Rule 145"). During the two years following the Effective Time,
such resale would be subject to the satisfaction of the conditions imposed under
Rule 144 which are described above, other than the notice of proposed sale.
After two years, only the condition relating to First Essex's Exchange Act
reports is applied and, after three years, Rule 145 imposes no restriction on
dispositions by persons who were not affiliates of First Essex for at least
three months preceding the proposed disposition.
This Proxy Statement-Prospectus does not cover the resale of any shares
of First Essex Common Stock to be issued in the Merger. First Essex is not
currently obligated to file a registration statement under the Securities Act to
facilitate resale of any such shares.
Material Federal Income Tax Consequences
The following discussion summarizes the material U.S. federal income
tax consequences of the Merger and the Bank Merger, including certain
consequences to stockholders of Finest who are citizens or residents of the
United States and who hold their shares as capital assets. It does not discuss
all aspects of federal income taxation that may be relevant to a particular
Finest stockholder in light of his or her personal circumstances (for example, a
Finest stockholder who acquired his or her shares of Finest Common Stock
pursuant to the exercise of employee stock options or otherwise as
compensation), or to Finest stockholders subject to special federal income tax
treatment (such as insurance companies, regulated investment companies, dealers
in securities, certain retirement plans, financial institutions, tax exempt
organizations, persons subject to the alternative minimum tax, persons who hold
Finest common stock as part of a hedging or conversion transaction or foreign
persons). In addition, this summary does not address any aspects of state,
local, foreign or other tax laws that may be relevant to holders of Finest
Common Stock.
It is the policy of the Internal Revenue Service ("IRS") not to rule
directly on the tax status of transactions such as the Merger and the Bank
Merger, and no such ruling will be sought. Each of First Essex's and Finest's
respective obligations to effect the Merger is conditioned upon its receipt from
its counsel of an opinion dated as of the Effective Time, in form and substance
reasonably satisfactory to it, substantially to the effect that for federal
income tax purposes the Merger (and, in the case of First Essex, the Bank
Merger) constitutes a reorganization within the meaning of section 368 of the
Code (noting, however, that the nontaxability of the stockholders of Finest
resulting from such reorganization does not extend to cash received as part of
the Merger Consideration, cash in lieu of a fractional share interest in First
Essex Common Stock or cash received by dissenting stockholders, if any). Such
opinions are not binding on the IRS and would not, in any event, prevent the IRS
from challenging the tax-free nature of the Merger or the Bank Merger under the
Code.
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Tax Consequences to Holders of Finest Common Stock
As noted above, Finest's obligation to effect the Merger is conditioned
on delivery of an opinion from Edwards & Angell, its counsel, dated as of the
Effective Time, based upon certain customary representations and warranties set
forth therein, substantially to the effect that for federal income tax purposes
the Merger constitutes a reorganization within the meaning of Section 368(a) of
the Code. Based on such opinion, and subject to the foregoing, the material
federal income tax consequences to holders of Finest Common Stock would be as
set forth below.
If a Finest stockholder's adjusted basis in the shares of Finest Common
Stock surrendered in the transaction is less than the sum of the fair market
value, as of the Effective Time, of the First Essex Common Stock and the amount
of any cash received, such stockholder will realize a gain on the transaction (a
"Realized Gain"). Such stockholder will recognize a gain equal to the lesser of
(i) such Realized Gain, or (ii) the amount of any cash received. Provided the
exchange does not have the effect of a dividend, the gain so recognized will be
characterized as capital gain (assuming the Finest Common Stock exchanged was a
capital asset in the hands of the stockholder). If a Finest stockholder realizes
a loss on the exchange, such loss will not be currently recognized for federal
income tax purposes. Such disallowed loss will be reflected in the adjusted tax
basis of the shares of First Essex Common Stock received in the Merger.
The determination of whether cash received in the Merger by a Finest
stockholder has the effect of the distribution of a dividend will be made by
comparing the proportionate interest of such stockholder after the Merger with
the proportionate interest the stockholder would have had if the stockholder had
received solely First Essex Common Stock in the Merger. This comparison is made
as though First Essex had issued in the Merger to such stockholder solely First
Essex Common Stock and, in a hypothetical redemption under the rules of section
302 of the Code, First Essex had then redeemed such portion of First Essex
Common Stock with a value, at the time of the Merger, equal to the amount of
cash the stockholder received. For this purpose, the constructive ownership
rules in section 318 of the Code apply. These rules apply in certain specified
circumstances to attribute ownership of shares of a corporation from the
stockholder actually owning the shares, whether an individual, a trust, a
partnership or a corporation, to certain members of the individual's family or
to certain individuals, trusts, partnerships or corporations in which that
stockholder has an ownership or beneficial interest, or which have an ownership
or beneficial interest in that stockholder. A stockholder is also considered
under these rules to own any shares with respect to which he holds exercisable
options. The amount of any such dividend, so determined, is limited to that
stockholder's ratable share of the accumulated earnings and profits of Finest at
the Effective Time.
Under IRS guidelines interpreting the rules of Section 302(b)(1) of the
Code, if a hypothetical redemption involves a minority First Essex stockholder
whose relative stock interest in First Essex is minimal, who exercises no
control over the affairs of First Essex and who experiences a reduction in his
proportionate stock interest, such stockholder will not receive dividend
treatment on cash received. Cash received in lieu of a fractional share by such
stockholder should be treated as paid for the fractional share and should result
in capital gain. Because the determination of whether the receipt of cash will
be treated as having the effect of the distribution of a dividend generally will
depend in part upon the facts and circumstances of each Finest stockholder, such
stockholders are strongly advised to consult their own tax advisors regarding
the tax treatment of cash received in the Merger.
A Finest stockholder's basis in the First Essex Common Stock received
will equal his basis in the Finest Common Stock surrendered in exchange therefor
less the amount of cash received, increased by any gain recognized. Provided the
Finest Common Stock surrendered was held as a capital asset at the time of the
exchange, the holding period of the First Essex Common Stock received will
include the holding period of the shares of Finest Common Stock surrendered.
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The transaction will be a fully taxable event for federal income tax
purposes for holders of shares of Finest Common Stock who seek appraisal and
receive solely cash in exchange for their shares. A Finest stockholder who
receives solely cash through the exercise of rights of appraisal and, as a
result of the surrender of all of his shares, owns no shares either directly or
through the constructive ownership rules of section 318 of the Code, would
recognize capital gain or loss (assuming that the shares are held by such
stockholder as a capital asset) equal to the difference between the amount of
cash received and the stockholder's tax basis in the shares.
Tax Consequences to Holders of First Essex Common Stock
First Essex has been advised by its counsel, Sullivan & Worcester LLP,
that the holders of First Essex Common Stock, as such, will not recognize gain
or loss as a result of the Merger or the Bank Merger. Such advice is based, in
part, on the anticipated receipt by such counsel from certain stockholders of
Finest of certain representations, warranties, covenants and agreements which
are a condition of the consummation of the Merger and the Bank Merger.
Backup Withholding
Under the federal income tax backup withholding rules, unless an
exemption applies, the Exchange Agent will be required to withhold, and will
withhold, 31% of any cash payments to which a Finest stockholder or other payee
is entitled pursuant to the Merger Agreement unless the Finest stockholder or
other payee provides his tax identification number (social security number or
employer identification number) and certifies that such number is correct. Each
Finest stockholder and, if applicable, each other payee should complete and sign
the substitute Form W-9 that will be included as part of the transmittal letter
to avoid back-up withholding, unless an applicable exemption exists and is
proved in a manner satisfactory to First Essex and the Exchange Agent. Any
amounts withheld will be allowed as a credit against the payee's federal income
tax liability.
THE FOREGOING DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF
THE INTERNAL REVENUE CODE, EXISTING AND PROPOSED U.S. TREASURY REGULATIONS
THEREUNDER AND CURRENT ADMINISTRATIVE RULINGS AND COURT DECISIONS. ALL OF THE
FOREGOING ARE SUBJECT TO CHANGE AND ANY SUCH CHANGE COULD AFFECT THE CONTINUING
VALIDITY OF THIS DISCUSSION. FINEST STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO THEM,
INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
Accounting Treatment
It is anticipated that the Merger will be accounted for as a "purchase"
transaction under generally accepted accounting principles ("GAAP"). Under such
method of accounting, the book value of the assets and liabilities of Finest, as
reported on its balance sheet, will be increased or decreased to their fair
value at the Effective Time and intangible assets will be recorded to the extent
that the purchase price exceeds the fair value of the net assets and liabilities
in addition to any assets or liabilities assumed or incurred as a result of the
Merger. The results of operations of Finest will be included in the consolidated
income of First Essex from the Effective Time and not for the entire fiscal
year.
48
<PAGE>
BUSINESS OF FIRST ESSEX
General
First Essex is a Delaware corporation whose primary activity is to act
as the parent holding company for First Essex Bank. Until December 1, 1993, the
business of First Essex was conducted through two banking subsidiaries, First
Essex Savings Bank, a Massachusetts chartered savings bank and First Essex
Savings Bank of New Hampshire, a New Hampshire guaranty savings bank, which in
turn was owned through a second tier holding company, First Essex Bancorp of New
Hampshire, Inc., which was merged into First Essex on December 1, 1993.
First Essex Bank was originally founded under a Massachusetts
legislative charter issued in 1847. On December 1, 1993, First Essex Savings
Bank converted to a federal savings bank with a charter issued by the OTS under
the name of First Essex Bank, FSB. On the same day First Essex Savings Bank of
New Hampshire was merged into First Essex Bank.
At December 31, 1995, First Essex Bank had total assets of $808.8
million. It is principally engaged in the business of attracting deposits from
the general public and investing in residential mortgage, construction,
commercial real estate, commercial and consumer loans. First Essex Bank also
makes investments in various investment securities to provide a source of
interest and dividend income. First Essex Bank currently maintains [ten] full
service banking offices at various locations throughout its market area.
Market Area
First Essex's market area is centered in the Merrimack Valley,
approximately 25 miles north of Boston and five miles south of New Hampshire, at
the intersection of two major highways. First Essex Bank's main office and two
of its branches are located in Lawrence, Massachusetts. Other branches are in
the surrounding communities of Andover, North Andover, Haverhill and Methuen,
Massachusetts and Londonderry, New Hampshire. First Essex also has loan centers
in Lowell and Wellesley, Massachusetts and in North Hampton, New Hampshire.
Current Market Conditions
The New England region, including those portions of northeastern
Massachusetts and southern New Hampshire that constitute First Essex's market
area, continues to recover from the severe economic difficulties of the last
several years. Although a recovery is evident, the growth rate has been modest.
Loan demand to finance new and existing home sales was stronger in 1995
than in the last several years. The decline in interest rates over the last half
of the year spurred refinance activity in the one to four family market. The
growth in commercial loans to small and mid-size businesses in the area has also
shown strength, although the competition among lenders for these loans is
intense. First Essex was still able to grow loans while adhering to its credit
quality guidelines. Automobile sales continued to show their strength in 1995
and First Essex has been able to participate in that growth through an indirect
automobile lending program that was begun early in 1994. The general improvement
in consumer confidence and the consumer's willingness to take on additional debt
has also resulted in growth in direct lending to consumers.
Regulation
General
The OTS is the primary regulator of First Essex and First Essex Bank.
First Essex Bank's deposits are insured up to applicable limits by the BIF.
First Essex and First Essex Bank must file reports with the OTS concerning
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other financial institutions. Periodic examinations are
conducted by the OTS to test First Essex's and First Essex Bank's compliance
with various regulatory requirements. First Essex Bank is also a member of the
Federal Home Loan Bank ("FHLB") system, which provides a central credit facility
49
<PAGE>
primarily for member institutions. First Essex, as a publicly-held savings and
loan holding company, is also required to file certain reports with, and
otherwise comply with the rules and regulations of, the OTS under the federal
banking laws and the SEC under the federal securities laws.
Business Activities
The activities of federal savings institutions are governed by the Home
Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the Federal
Deposit Insurance Act (the "FDI Act"). The HOLA and the FDI Act were amended by
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA").
FDICIA, among other things, requires that federal banking regulators intervene
promptly when a depository institution experiences financial difficulties,
mandates the establishment of a risk-based deposit insurance assessment system
and requires the imposition of numerous additional safety and soundness
operational standards and restrictions. FDICIA contains provisions affecting
numerous aspects of the operations of federal savings institutions and empowers
the OTS and the FDIC, among other agencies, to promulgate regulations
implementing its provision. See "Recent Legislation and Related
Matters--FDICIA".
Qualified Thrift Lender Test
The HOLA requires saving institutions to meet a qualified thrift lender
("QTL") test. Under the QTL test, as modified by FDICIA, a savings association
is required to maintain at least 65% of its "portfolio assets" (total assets
less (i) specified liquid assets up to 20% of total assets, (ii) intangibles,
including goodwill, and (iii) the value of property used to conduct the
association's business) in certain "qualified thrift investments" (primarily
residential mortgages and related investments, including certain mortgage-backed
securities) on a monthly basis in nine out of every twelve months.
Limitation on Capital Distributions
OTS regulations impose limitations upon all capital distributions,
other than stock dividends, by savings institutions. The rule establishes three
tiers of institutions, which are based primarily on an institution's capital
level. An institution that meets or exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
Association") and has not been advised by the OTS that it is in need of more
than normal supervision, could, after prior notice to the OTS, make capital
distributions during a calendar year equal to the greater of: (i) 100% of its
net income to date during the calendar year plus the amount that would reduce by
one-half its "surplus capital ratio" (the percentage by which its capital to
assets ratio exceeds the ratio of its fully phased-in capital requirements to
its assets) at the beginning of the calendar year; or (ii) 75% of its net income
for the previous four quarters. The OTS may object to any additional capital
distributions by a Tier 1 Association in excess of such "safe harbor" amount if
it determines that any such excess distribution would be inconsistent with the
safe and sound operation of such Tier 1 Association. In the event First Essex
Bank's capital fell below its fully-phased in requirement or the OTS notified
First Essex Bank that it was in need of more than normal supervision, First
Essex Bank's ability to make capital distributions would be restricted. In
addition, the OTS could prohibit any proposed capital distribution by any
institution if it determines that such distribution would constitute an unsafe
or unsound practice. Furthermore, under the OTS prompt corrective action
regulations, which took effect on December 19, 1992, First Essex Bank generally
would be prohibited from making any capital distribution if, after the
distribution, it would have (i) a total risk-based capital ratio of less than
8%, (ii) a Tier 1 risk-based capital ratio of less than 4% or (iii) a leverage
ratio of less than 3%. As of December 31, 1995, First Essex Bank had exceeded
all fully-phased in capital requirements and qualifies as a Tier 1 Association
for purposes of the OTS capital distribution regulations.
Branching
The HOLA and OTS regulations permit savings institutions to branch
nationwide provided the institutions meet certain asset composition tests. The
OTS authority preempts any state law purporting to regulate branching by savings
institutions. As of December 31, 1995, First Essex Bank has been permitted to
engage in such nationwide interstate branching.
50
<PAGE>
Capital Requirements
The OTS capital regulations require savings institutions to meet three
capital standards: (i) 1.5% tangible capital standard; (ii) 3% leverage (core
capital) ratio; and (iii) 8% risk-based capital standard. Core capital is
defined as common stockholders' equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus, minority interests
in equity accounts of consolidated subsidiaries less intangibles other than
certain qualifying supervisory intangible assets and certain purchased mortgage
servicing rights and supervisory goodwill. The OTS regulations also require
that, in meeting the leverage ratio, tangible and risk-based capital standards,
institutions must deduct investments in and loans to subsidiaries engaged in
activities not permissible for a national bank.
FDICIA requires that the OTS revise risk-based capital standards, with
appropriate transition rules, to ensure that they take account of interest rate
risk, concentration of risk and the risks of nontraditional activities. Under
OTS regulations effective January 1, 1994, a savings institution with interest
rate risk exposure above a specified percentage must deduct a specified interest
rate risk component when calculating total capital for purposes of determining
whether it meets OTS risk-based capital requirements. As of December 31, 1995,
First Essex Bank had exceeded all applicable capital requirements.
Insurance of Deposit Accounts
As required by FDICIA, in 1993, the FDIC established a risk-based
assessment system for insured depository institutions that takes into account
the risks attributable to different categories and concentrations of assets and
liabilities, the likely amounts of any loss, and the revenue needs of the
insurance fund.
Insurance of deposits may be terminated by the FDIC after notice and
hearing, upon finding by the FDIC that the savings institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, rule, regulation, order or
condition imposed by, or written agreement with, the FDIC. Additionally, if
insurance termination proceedings are initiated against a savings institution,
the FDIC temporarily may suspend insurance on new deposits received by an
institution under certain circumstances. Management is not aware of any activity
or condition which could result in a termination of its deposit insurance.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain noninterest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). Because required reserves must be
maintained in the form of either vault cash, a noninterest bearing account at a
Federal Reserve Bank or a pass-through account as defined by the Federal Reserve
Board, the effect of this reserve requirement is to reduce First Essex Bank's
interest-earning assets.
Holding Company Regulation
First Essex is a nondiversified unitary savings and loan holding
company within the meaning of the HOLA. As such, it has registered with the OTS
and is subject to OTS regulations, examinations, supervision and reporting
requirements. As a unitary savings and loan holding company, First Essex
generally will not be restricted under existing laws as to the types of business
activities in which it may engage, provided that First Essex Bank continues to
be a QTL. The HOLA requires First Essex to obtain regulatory approvals prior to
entering into certain transactions such as mergers with or acquisitions of other
savings associations or savings and loan holding companies.
Lending Activities
General
At December 31, 1995, the loan portfolio, before deducting the
allowance for possible loan losses, was $500.1 million, representing 61.8% of
total assets.
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<PAGE>
Loan originations increased in 1995 primarily due to the stabilization
of the New England residential real estate market and in the Massachusetts and
New Hampshire economies generally. The increase also reflects a stronger
marketing effort by First Essex Bank in the commercial and consumer loan areas.
First Essex originates residential first mortgage loans, commercial real estate
loans, construction loans, consumer loans and commercial loans. See "First Essex
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Financial Condition-Loan Origination".
The following table sets forth information concerning First Essex's
loan portfolio, including mortgage loans held for sale, at the dates indicated.
The balances shown in the table are net of unadvanced funds and unearned
discounts and fees. Disclosure regarding maturity distributions is shown under
"First Essex Management's Discussion and Analysis of Financial Condition and
Results of Operations-Asset/Liability Management".
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------------ ------------------ ----------------- ----------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Residential $235,204 47.0% $264,848 61.6% $203,574 70.1% $205,799 69.4% $268,436 72.1%
Commercial 53,504 10.7 25,786 6.0 28,755 9.9 38,134 12.9 45,776 12.3
Construction 14,210 2.8 15,527 3.6 14,482 5.0 7,194 2.4 6,246 1.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total mortgage loans 302,918 60.5 306,161 71.2 246,811 85.0 251,127 84.7 320,458 86.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Commercial loans 66,737 13.4 55,377 12.9 15,416 5.3 8,602 2.9 11,663 3.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Consumer loans:
Home equity 12,558 2.5 12,943 3.0 14,745 5.1 19,319 6.5 22,670 6.1
Automobile 76,590 15.3 34,906 8.1 2,435 0.8 5,182 1.7 1,212 0.3
Aircraft 14,478 2.9 522 0.1 -- 0.0 -- 0.0 -- 0.0
Other 26,770 5.4 19,902 4.7 11,100 3.8 12,404 4.2 16,061 4.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total consumer loans 130,396 26.1 68,273 15.9 28,280 9.7 36,905 12.4 39,943 10.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans $500,051 100.0% $429,811 100.0% $290,507 100.0% $296,634 100.0% $372,064 100.0%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
Residential Mortgage Loans
First Essex Bank has traditionally focused its lending activities on
the origination of residential first mortgage loans in its market area. In 1995,
First Essex Bank increased its product array through the addition of several
residential loan investors. This action allowed First Essex Bank to match the
prior year's level of loans originated while generating additional revenue in
the form of fee income. At December 31, 1995, the residential mortgage loan
portfolio was $235.2 million, representing 47.0% of the loan portfolio. Its
residential first mortgage loan products consist of six month, one-year and
three-year adjustable-rate mortgages and fixed-rate mortgages, having terms of
15 to 30 years.
Commercial Real Estate Loans
Generally, commercial real estate loans in the portfolio have been made
to finance the acquisition or retention of income producing properties. The
current policy of First Essex is to limit commercial real estate loans primarily
to properties in eastern Massachusetts and southern New Hampshire. In addition,
during 1995, First Essex Bank purchased from another bank approximately $24.7
million of commercial real estate loans, which consisted of 49 performing loans.
Commercial real estate loans generally reprice over periods ranging from six
months to five years based on a margin over a published prime rate or other
index. First Essex Bank also originates loans secured by commercial real estate,
such as manufacturing, retail, apartment and office buildings. At December 31,
1995, First Essex's commercial real estate loan portfolio had an outstanding
balance of $53.5 million, representing 10.7% of First Essex's loan portfolio.
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<PAGE>
Construction Loans
Construction loans are made to developers and builders for the
construction of single family properties. Construction loans have generally been
made with maturities of one year or less at a margin floating over the published
prime, subject to renewal or extension by First Essex Bank. Additionally, loans
are made to qualified individuals for construction of single-family
owner-occupied homes that convert to permanent mortgages upon completion of
construction. At December 31, 1995, First Essex Bank's construction loan
portfolio had an outstanding balance of $14.2 million, representing 2.8% of the
loan portfolio. At December 31, 1995, unadvanced commitments on construction
loans totaled $10.5 million.
Commercial Loans
First Essex Bank offers various types of commercial loans, which are
short term or have adjustable rates at a margin above the prime rate, including
secured and unsecured demand loans, time loans, term loans, lines of credit and
working capital loans. Commercial loans are originated by First Essex Bank's
commercial lending officers and supported by a credit, processing and
documentation staff. At December 31, 1995, the portfolio of commercial loans
totaled $66.7 million, representing 13.4% of the loan portfolio.
Consumer Loans
The portfolio of consumer loans, consisting of automobile loans, fully
or partially secured personal loans, boat loans, aircraft loans, second mortgage
loans and education loans, as well as unsecured personal loans, totaled $130.4
million at December 31, 1995, representing 26.1% of the loan portfolio.
Automobile loans include dealer indirect loans, as well as loans originated
directly in retail branches. First Essex Bank offers a variable rate home equity
line of credit called "First Line Equity Credit". This product consists of a
line of credit, secured by a second mortgage on residential property, with a
monthly adjustable interest rate at a margin above a published prime rate.
Residential Loan Servicing and Purchase and Sale of Loans
First Essex Bank has a general policy of writing residential mortgage
loans to meet the requirements for sale in the secondary market. From time to
time, it sells residential mortgage loans and residential loan servicing. Such
loan sales represent a potential source of liquidity to meet lending demand and
deposit flows. See "First Essex Management's Discussion and Analysis of
Financial Condition and Results of Operations-Asset/Liability Management". At
December 31, 1995, First Essex Bank's loan servicing portfolio totaled $74.3
million.
Non-Performing Assets
General
Non-performing assets consist of non-accruing, restructured and
impaired loans, other real estate owned and other foreclosed property. In 1995,
First Essex Bank experienced a reduction in the level of non-performing assets,
and a corresponding reduction in the level in the allowance for possible loan
losses. For further information regarding the impairment of loans see "First
Essex Management's Discussion and Analysis of Financial Condition and Results of
Operations-Provision for Possible Loan Losses".
Non-Accruing Loans
It is the practice of First Essex Bank to discontinue accrual of
interest on all loans for which payment of interest or principal is 90 days or
more past due and such other loans where collection of interest and principal is
doubtful. All previously accrued but uncollected interest is reversed against
current period interest income when a loan is placed on non-accrual status. At
December 31, 1995, First Essex Bank's non-accruing loans totaled $3.4 million.
For further information regarding First Essex Bank's non-accruing loans, see
"First Essex Management's Discussion and Analysis of Financial Condition and
Results of Operations-Financial Condition-Non-Performing Assets".
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<PAGE>
Restructured Loans
These are loans on which concessions have been made in light of the
debtor's financial difficulty with the objective of maximizing recovery and with
respect to which the renegotiated payment terms are being met. At December 31,
1995, First Essex Bank had restructured loans with principal balances of $1.0
million outstanding. For further information regarding restructured and impaired
loans, see "First Essex Management's Discussion and Analysis of Financial
Condition and Results of Operations-Non-Performing Assets".
Foreclosed Property
Foreclosed property at December 31, 1995 totaled $1.8 million, compared
to $3.0 million at December 31, 1994. Such properties were acquired through
foreclosure. There are no current commitments to expend additional funds in
connection with properties included in foreclosed property. However, First Essex
Bank may invest additional funds in order to attempt to preserve their values
and minimize potential losses. There can be no assurance that First Essex Bank's
plans for the disposition of these properties will be successful. For further
information regarding First Essex Bank's foreclosed property, see "First Essex
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Financial Condition-Non-Performing Assets".
Investment Activities
First Essex Bank maintains an investment portfolio to provide a source
of interest and dividend income and a potential source of liquidity to meet
lending demand and deposit flows. In addition, management believes that the
investment portfolio provides opportunities to increase the interest rate
sensitivity of interest earning assets. At December 31, 1995, the investment
portfolio, consisting of short-term investments, investment securities,
mortgage-backed securities, stock in the Federal Home Loan Bank of Boston and
stock of the Savings Bank Life Insurance Company of Massachusetts, was $275.9
million, or 34.1% of total assets.
Interest and dividend income on the investment portfolio generated
32.3% of total interest and dividend income for the year ended December 31,
1995. See "First Essex Management's Discussion and Analysis of Financial
Condition and Results of Operations-Financial Condition-Investments" for further
information regarding the investment portfolio.
First Essex Bank's investment strategy seeks to enhance liquidity and
seeks to realize current income while preserving principal. First Essex Bank
will generally invest only in government or corporate bonds or securities issued
in the United States and will only purchase bonds which are rated A or higher.
Deposits
First Essex Bank offers a range of deposit accounts including regular
passbook savings, NOW, money market and demand deposit accounts. First Essex
Bank offers a number of relationship products which allow customers to combine
balances in checking and savings accounts in order to avoid service and
maintenance fees, and obtain free banking services. It also includes discounts
on installment loans and bonus rates on certificates of deposit. First Essex
Bank also offers 60-day to five year term deposit certificates. Interest rates
on these certificates vary according to the term selected and are based upon
several indices, including the rates on government securities with similar
maturities. From time to time, First Essex Bank promotes various types of
accounts with the intention of changing the maturity schedule of its
liabilities. In February of 1995, First Essex Bank opened its tenth banking
center in Andover, Massachusetts.
First Essex Bank offers its retail banking customers a wide range of
deposit services and the convenience of drive- up ATMs. First Essex Bank is a
member of the NYCE(TM), EXCHANGE(TM), TX(TM) and CIRRUS(TM) networks. These
networks allow First Essex Bank's depositors access to their accounts through
ATMs at First Essex Bank, other banks and locations nationwide and worldwide.
54
<PAGE>
Competition
First Essex Bank faces competition both in originating loans and in
attracting deposits. Competition in originating loans comes from a variety of
sources, including, but not limited to, other thrift institutions, commercial
banks, mortgage companies, insurance companies and consumer and commercial
finance companies. First Essex Bank competes for loans principally on the basis
of interest rates and loan fees, the types of loans originated and the quality
of services provided to borrowers. In attracting deposits, the primary
competitors are other thrift institutions, commercial banks, mutual funds and
credit unions. The ability to attract and retain deposits depends on the ability
to provide investment opportunities that satisfy the requirements of investors
with respect to rate of return, liquidity, risk and other factors. First Essex
Bank competes for deposits on the basis of interest rates and by offering
convenient branch locations, extended business hours and an automated teller
network.
Employees
At December 31, 1995, First Essex Bank had 256 employees, of whom 38
were part-time. None of the employees of First Essex Bank are represented by a
collective bargaining group and management considers its relations with its
employees to be good.
MARKET FOR FIRST ESSEX COMMON STOCK
First Essex Common Stock is traded over-the-counter on the NASDAQ-NMS
under the symbol FESX.
At September 18, 1996, there were 6,058,935 shares outstanding and
approximately 1,210 stockholders of record. This does not reflect the number of
persons or entities who hold their stock in nominee or street name through
various brokerage firms.
The price information regarding First Essex common stock in the
following table is based on high and low closing sales prices on NASDAQ-NMS.
Price per Share Dividends
---------------- Declared
High Low per Share
---- --- ---------
1994
First Quarter $9 1/4 $6 5/8 $.06
Second Quarter 9 7/8 6 3/4 .06
Third Quarter 10 1/2 9 .08
Fourth Quarter 9 6 7/8 .08
1995
First Quarter $8 3/4 $7 5/8 $.08
Second Quarter 8 3/4 8 .08
Third Quarter 11 8 1/8 .12
Fourth Quarter 12 10 3/8 .12
1996
First Quarter 11 3/4 10 5/8 $.12
Second Quarter 11 10 3/8 .12
Third Quarter .12
Fourth Quarter (through October ___, 1996)
On August 2, 1996, the last business day prior to the public
announcement of the Merger, the closing price of First Essex Common Stock on
NASDAQ-NMS was $10 7/8.
55
<PAGE>
Dividends
The only funds available to First Essex for the payment of dividends
are cash and cash equivalents held at the holding company level, dividends from
First Essex Bank and borrowings. In addition, OTS regulations generally limit
the amounts available for the payment of dividends by First Essex Bank to First
Essex, see "Business of First Essex-Regulation-Limitation on Capital
Distributions". The Federal Reserve Act also restricts First Essex Bank in
lending or advancing funds to First Essex unless such loans are collateralized
by specific obligations, and limits collateralized loans to 10% of First Essex
Bank's capital stock and surplus.
First Essex Bank is prohibited from paying cash dividends, to the
extent that any such payment would reduce its capital below required regulatory
capital levels or would impair the liquidation account established in connection
with its conversion from mutual to stock form.
The payment of dividends by First Essex Bank could carry significant
adverse tax consequences. To the extent that distributions by First Essex Bank
to the holding company exceeds First Essex Bank's current and accumulated
earnings and profits (as computed for federal income tax purposes for taxable
years beginning after December 31, 1991), those distributions would be treated
for tax purposes as first being made out of First Essex Bank's bad debt reserve.
In that case, First Essex Bank would have federal taxable income equal to
approximately one and one-half times the amount of the actual stockholder
distribution that is treated as made out of First Essex Bank's bad debt
reserves.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF FIRST ESSEX AND SUBSIDIARIES
The following table sets forth certain historical and pro forma
consolidated financial data of First Essex. The selected data for the years
ended December 31, 1991 through 1995 is based on consolidated financial
statements, including the respective notes thereto, included in the Annual
Reports on Form 10-K prepared and filed with the SEC by First Essex. The
selected data for the six months ended June 30, 1996 and 1995 is based on
unaudited financial statements.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Years Ended December 31,
---------------------- ----------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $ 842,903 $ 841,500 $ 808,792 $ 806,872 $ 654,873 $ 506,913 $ 510,709
Loans receivable 522,362 479,768 493,499 422,574 282,760 284,875 353,760
Investment securities(1) 278,948 312,300 275,900 346,943 329,823 186,232 116,944
Foreclosed property 1,513 1,995 1,756 3,038 6,360 12,125 15,847
Deposits 508,080 484,107 491,469 456,878 398,233 412,218 449,032
Borrowed funds 256,695 276,264 245,569 279,948 185,001 40,000 9,417
Stockholders' equity 62,347 57,954 60,172 54,757 50,749 44,619 43,103
OPERATING DATA:
Interest and dividend income $ 30,563 $ 29,922 $ 60,914 $ 45,057 $ 36,183 $ 37,831 $ 45,347
Interest expense 17,975 18,045 37,081 22,707 16,654 19,240 30,675
--------- --------- --------- --------- --------- --------- ---------
Net interest income 12,588 11,877 23,833 22,350 19,529 18,591 14,672
Provision for loan losses 815 329 770 -- -- -- 10,952
Net gain (loss) on sales of
securities -- -- (13) -- -- 613 247
Gain on sale of mortgage loans
and mortgage servicing rights 930 295 1,431 260 730 234 316
Other income 1,217 1,153 2,290 2,301 2,465 2,252 1,897
Noninterest expense 10,017 9,744 19,244 19,190 18,395 20,579 23,420
Income tax provision (benefit) 19 20 75 (805) (2,621) 13 --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) before
extraordinary item 3,884 3,282 7,452 6,526 6,950 1,098 (17,240)
Extraordinary item(2) -- -- -- -- -- -- 800
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ 3,884 $ 3,232 $ 7,452 $ 6,526 $ 6,950 $ 1,098 $ (16,440)
========= ========= ========= ========= ========= ========= =========
COMMON SHARE DATA:
Earnings (loss) per share $ .63 $ .53 $ 1.22 $ 1.08 $ 1.15 $ .18 $ (2.73)
Dividends declared .24 .16 .40 .28 .11 .00 .00
Book value at end of period $ 10.31 $ 9.63 $ 9.99 $ 9.10 $ 8.44 $ 7.42 $ 7.17
AVERAGE BALANCES:
Total assets $ 814,896 $ 812,863 $ 84,747 $ 695,110 $ 561,973 $ 491,737 $ 534,494
Total borrowed funds 244,561 273,791 274,956 218,553 108,616 9,095 18,983
Total stockholders' equity 61,781 56,361 58,247 52,549 46,863 43,959 52,818
SELECTED FINANCIAL RATIOS:
Return on average assets 0.95% 0.80% 0.91% 0.94% 1.24% 0.22% (3.08)%
Return on average equity 12.57% 11.47% 12.79% 12.42% 14.83% 2.50% (31.13)%
Average equity as a percentage
of average assets 7.40% 6.86% 7.09% 7.56% 8.34% 8.94% 9.88%
Weighted average interest rate
spread 2.69% 2.60% 2.56% 3.02% 3.29% 3.57% 2.48%
Net yield on average earning
assets 3.19% 3.01% 2.99% 3.33% 3.60% 3.96% 2.90%
- ---------
<FN>
(1) Investment securities include short term investments, U.S. government and agency obligations, mortgage-backed securities,
other bonds and obligations, stock in the Federal Home Loan Bank of Boston and stock in the Savings Bank Life Insurance Company.
(2) On December 31, 1991, First Essex recorded the estimated value of its shares in the Savings Bank Life Insurance Company.
</FN>
</TABLE>
57
<PAGE>
FIRST ESSEX MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
General
The results of operations of First Essex consist primarily of the
results of operations of First Essex Bank which is First Essex's sole
subsidiary. Pretax income for 1995 rose $1.8 million or 32% over 1994. The
improvement was in large part due to the 18.6% increase in average earning
assets combined with decreased levels of nonperforming assets. See "Business of
First Essex-Current Market Conditions/Recent Operating Results".
Net income for the year ended December 31, 1995 totaled $7.5 million
(or $1.22 per share) compared to $6.5 million (or $1.08 per share) for the same
period in 1994. The increase in net income is mainly due to increases in net
interest income and noninterest income of $1.5 million and $1.1 million,
respectively, offset by an increase in the provision for possible loan losses of
$770,000 and a reduction in tax benefits when compared to the $805,000
recognized in 1994.
Net income for the six months ended June 30, 1996 was $3.9 million
compared to net income of $3.2 million for the same period in 1995. The increase
in net income over the comparative six months in 1995 was due primarily to
higher net interest income of $711,000 and higher non-interest income of
$699,000, as well as a decrease in non-interest expense related to lower FDIC
insurance premiums. This was offset by an increase in the provision for possible
loan losses of $486,000 and increased non-interest expense of $273,000.
58
<PAGE>
Analysis of Average Yields Earned and Rates Paid
The following table presents an analysis of average yields earned and
rates paid for the years indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------------------------------------
1995 1994 1993
--------------------------------- -------------------------------- ----------------------------------
Interest Average Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning Assets
Short-term investments $ 6,735 $ 342 5.08% $ 2,457 $ 107 4.35% $ 11,398 $ 307 2.69%
Investment securities 316,501 19,354 6.11 343,303 18,114 5.28 243,940 12,982 5.32
Mortgage loans(1) 318,418 26,024 8.17 256,960 20,399 7.94 243,536 19,342 7.94
Consumer and
commercial loans(1) 154,651 15,194 9.82 68.962 6,437 9.33 43,429 3,552 8.18
------- -------- -------- ------- ------- -------
Total loans 473,069 41,218 8.71 325,922 26,836 8.23 286,965 22,894 7.98
------- -------- ------- ------- ------- -------
Total earning assets 796,305 60,914 7.65 671,682 45,057 6.71 542,303 36,183 6.67
------- -------- ------- ------- ------- -------
Allowance for possible
loan losses (6,447) (7,332) (9,826)
------- ------- ---------
Total earning assets
less allowance for
possible loan losses 789,858 664,350 532,477
Other Assets 31,889 30,760 29,496
-------- -------- --------
Total Assets $821,747 $695,110 $561,973
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits
NOW accounts $ 28,664 325 1.13% $ 30,086 354 1.18% $ 29,186 463 1.59%
Money market accounts 79,593 1,586 1.99 105,181 2,210 2.10 119,000 3,036 2.55
Savings accounts 51,069 816 1.60 58,514 780 1.33 62,072 1,090 1.76
Time deposits 294,473 17,117 5.81 203,500 9,080 4.46 174,285 7,941 4.56
------- ------- -------- ------- -------- ------
Total interest bearing
deposits 453,799 19,844 4.37 397,281 12,424 3.13 384,543 12,530 3.26
Borrowed funds 274,956 17,237 6.27 218,553 10,283 4.71 108,616 4,124 3.80
------- ------- -------- ------- -------- -------
Total interest bearing
deposits and borrowed
funds 728,755 37,081 5.09 615,834 22,707 3.69 493,159 16,654 3.38
------- ------- ------- ------- -------- -------
Demand deposits 23,550 15,982 12,238
Other liabilities 11,195 10,745 9,713
-------- -------- --------
Total liabilities 763,500 642,561 515,110
Stockholders equity 58,247 52,549 46,863
-------- -------- --------
Total liabilities and
stockholders' equity $821,747 $695,110 $561,973
======== ======== ========
Net interest income $ 23,833 $ 22,350 $ 19,529
======== ======== ========
Weighted average interest
rate spread 2.56% 3.02% 3.29%
====== ====== ======
Net yield on average
earning assets(2) 2.99% 3.33% 3.60%
====== ====== ======
Return on average assets 0.91% 0.94% 1.24%
====== ====== ======
Return on average equity 12.79% 12.42% 14.83%
- ---------- ====== ====== ======
<FN>
(1) Loans on a non-accrual status are included in the average balance.
(2) Net interest income before provision for possible loan losses divided by average interest earning assets.
</TABLE>
59
<PAGE>
The following table presents an analysis of average yields earned and
rates paid for the periods indicated:
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------------------------------------------------------
1996 1995
--------------------------------------- ----------------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning Assets
Short-term investments $ 8,458 $ 219 5.18% $ 3,488 $ 79 4.53%
Investment securities 270,071 8,072 5.98 333,344 10,307 6.18
Mortgage loans(1) 299,490 12,379 8.27 315,462 12,800 8.12
Consumer loans(1) 142,723 6,247 8.75 86,792 3,859 8.89
Commercial loans (1) 69,104 3,646 10.55 49,297 2,877 11.67
-------- ------- -------- -------
Total loans(1) 511,317 22,272 8.71 451,551 19,536 8.65
-------- ------- -------- -------
Total earning assets 789,846 30,563 7.74 788,383 29,922 7.59
-------- ------- -------- -------
Allowance for possible loan losses (6,684) (6,492)
-------- --------
Total earning assets less
allowance for possible losses 783,162 781,891
Other assets 31,734 30,972
-------- --------
Total Assets $814,896 $812,863
-------- --------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits
NOW accounts $ 31,790 $ 191 1.20% $ 27,888 $ 157 1.13%
Money market accounts 73,478 791 2.15 83,616 807 1.93
Savings accounts 49,665 413 1.66 52,273 413 1.58
Time deposits 312,093 9,278 5.95 286,173 7,946 11.67
-------- ------- -------- -------
Total interest bearing deposits 467,026 10,673 4.57 449,950 9,323 4.14
Borrowed funds 244,561 7,302 5.97 273,791 8,722 11.67
-------- ------- -------- -------
Total interest bearing deposits and
borrowed funds 711,587 17,975 5.05 723,741 18,045 11.67
-------- ------- -------- -------
Demand deposits 30,078 20,660
Other liabilities 11,450 12,101
-------- --------
Total liabilities 753,115 756,502
Stockholders' equity 61,781 56,361
-------- --------
Total liabilities and stockholders
equity $814,896 $812,863
======== ========
Net interest income $ 12,588 $ 11,877
========= ========
Weighted average interest rate spread 2.69% 2.60%
====== ======
Net yield on average earning assets(2) 3.19% 3.01%
====== ======
Return on average assets 0.95% 0.80%
====== ======
Return on average equity 12.57% 11.47%
====== ======
- ----------
<FN>
(1) Loans on a non-accrual status are included in the average balance.
(2) Net interest income before provision for possible loan losses divided by average interest earning assets.
</FN>
</TABLE>
60
<PAGE>
Rate/Volume Analysis
The following table presents, for the periods indicated, the changes in
interest and dividend income and the changes in interest expense attributable to
changes in interest rates and changes in the volume of interest earning assets
and interest bearing liabilities. The change attributable to both volume and
rate has been allocated proportionally to the two categories.
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------------------
1995 Compared to 1994 1994 Compared to 1993
--------------------------------- ----------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
--------------------------------- ----------------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest and dividend income:
Mortgage loans $ 5,007 $ 618 $ 5,625 $ 1,066 $ (9) $ 1,057
Consumer and commercial loans 8,402 355 8,757 2,326 559 2,885
Investment securities (1,197) 2,437 1,240 5,242 (110) 5,132
Federal funds sold and short-term investments 214 21 235 (936) 736 (200)
-------- -------- -------- -------- -------- --------
Total interest and dividend income 12,426 3,431 15,857 7,698 1,176 8,874
-------- -------- -------- -------- -------- --------
Interest expense:
Savings deposits (595) (22) (617) (373) (872) (1,245)
Time deposits 4,792 3,245 8,037 1,300 (161) 1,139
Borrowed funds 3,039 3,915 6,954 4,982 1,177 6,159
-------- -------- -------- -------- -------- --------
Total interest expense 7,236 7,138 14,374 5,909 144 6,053
-------- -------- -------- -------- -------- --------
Net interest and dividend income $ 5,190 $ (3,707) $ 1,483 $ 1,789 $ 1,032 $ 2,821
======== ======== ======== ======== ======== ========
</TABLE>
Net Interest Income
Net interest income increased by $711,000 to $12.6 million for the six
months ended June 30, 1996. This represents an increase of 6.0% from $11.9
million when compared to the same period in 1995. The increase in net interest
income in this period is due primarily to increased net yield on average earning
assets.
Net interest income increased by $1.5 million to $23.8 million for the
year ended December 31, 1995, representing a 6.6% increase from $22.3 million in
1994. The increase in net interest income was primarily due to the $124.6
million increase (18.6%) in average earning assets offset by a 0.34% decrease in
the net yield on average earning assets. The decrease in net yield was
attributable to the rising interest cost of borrowed funds and interest bearing
deposits.
Net interest income increased by $2.8 million to $22.3 million for the
year ended December 31, 1994, representing a 14.5% increase from $19.5 million
in 1993. The increase in net interest income is primarily due to the $129.4
million increase (23.8%) in earning assets offset by a .27% decrease in the net
yield on average earning assets. The decrease in net yield is attributable to
the rising interest cost of borrowed funds.
Interest and Dividend Income
Interest and dividend income increased by $641,000 (2.1%) to $30.6
million for the six month period ended June 30, 1996, from $29.9 million
recorded in the same period in 1995. The increase is attributable to a shift
from lower yielding investments to higher earning loans for the six month period
ended June 30, 1996 when compared to the same period in 1995.
Interest and dividend income increased by $15.9 million (35.2%) to
$60.9 million for the year ended December 31, 1995 from $45.1 million in 1994.
This increase was primarily due to the increase in average earning assets.
Average earning assets increased from $671.7 million in 1994 to $796.3 million
in 1995, an 18.6% increase. The average weighted yield on loans rose .48% from
the 1994 yield of 8.23% to 8.71% in 1995. The average weighted yield on
investment securities rose from the 1994 yield of 5.28% to 6.11% in 1995.
61
<PAGE>
Interest and dividend income increased by $8.9 million (24.5%) to $45.1
million for the year ended December 31, 1994 from $36.2 million in 1993. This
increase was primarily due to the increase in average earning assets. Average
earning assets increased from $542.3 million in 1993 to $671.7 million in 1994,
a 23.8% increase. The average weighted yield on loans rose 0.25% from the 1993
yield of 7.98% to 8.23% in 1994, reflecting the rising interest rate environment
during 1994. The average weighted yield on investment securities declined
slightly from the 1993 yield of 5.32% to 5.28% in 1994.
Interest Expense
Interest expense for the six months ended June 30, 1996 and 1995
remained level at $18.0 million. Interest expense increased by $14.4 million
(63.3%) to $37.1 million for the year ended December 31, 1995 from $22.7 million
in 1994. The main reason for the increase was an increase of $112.9 million
(18.3%) in interest bearing liabilities utilized to support asset growth. The
remainder was primarily due to the 1.4% increase in the cost of funds. The total
weighted cost of funds increased from a level of 3.69% in 1994 to 5.09% in 1995.
Interest expense increased by $6.0 million (36.4%) to $22.7 million for
the year ended December 31, 1994 from $16.7 million in 1993. The main reason for
the increase was an increase of $122.7 million (24.9%) in interest bearing
liabilities utilized to support asset growth. The remainder was primarily due to
the 0.31% increase in the cost of funds, principally from the increase of
borrowed funds. The total weighted cost of funds increased from a level of 3.38%
in 1993 to 3.69% in 1994.
Provision for Possible Loan Losses
Beginning in 1995, First Essex adopted SFAS No. 114, as amended by SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114").
Under SFAS No. 114, First Essex considers a loan impaired if it is ninety days
or more past due as to principal and interest, or if management's credit risk
assessment determines that it is probable that principal and interest will not
be collected as contractually scheduled. In addition, loans which are
restructured at market rates and comparable to loans with similar risks are
considered impaired only in the year of the restructuring, so long as they
continue to perform according to the restructured terms. Excluded from the
impaired category, but otherwise considered non-accruing loans, are small
balance homogeneous loans which are ninety days or more past due. Small balance
homogeneous loans include residential mortgage loans, residential construction
loans to individuals (excluding builder construction loans) and consumer loans.
First Essex evaluates a loan's level of impairment by measuring the net present
value of the expected future cash flows using the loan's original effective
interest rate, or at the fair value of the collateral if the loan is collateral
dependent. When the difference between the net present value of the impaired
loan (or fair value of the collateral if the loan is collateral dependent) is
lower than the recorded investment of the loan, the difference is provided to
expense with a resulting valuation allowance.
Possible losses on loans are provided for under the accrual method of
accounting. Assessing the adequacy of the allowance for possible loan losses
involves substantial uncertainties and is based upon management's evaluation of
the amount required to meet estimated losses inherent in the loan portfolio
after weighing various factors. Among the factors management may consider are
the quality of specific loans, risk characteristics of the loan portfolio
generally, the level of non-accruing loans, current economic conditions, trends
in delinquencies and charge-offs and collateral values of the underlying
security. Ultimate losses may vary significantly from the current estimates.
Losses on loans, including impaired loans, are charged against the allowance
when management believes the collectibility of principal is doubtful.
The provisions for possible loan losses totaled $815,000 for the six
months ended June 30, 1996 of which $346,000, related to impaired loans. The
provision for possible loan losses was $329,000 for the six months ended June
30, 1995, of which $120,000 related to impaired loans.
Provisions for possible loan losses totaled $770,000 for the year ended
December 31, 1995. Included in that amount was $356,000 of provisions for
possible losses related to loans impaired under SFAS No. 114. There were no
provisions for possible loan losses for the years 1994 and 1993. Provisions
result from management's continuing internal review of the loan portfolio as
62
<PAGE>
well as its judgment as to the adequacy of the reserves in light of the
condition of the regional real estate market and the economy generally. As a
result of increased loans, there is an expectation that First Essex Bank will
continue to find it necessary to make provisions for possible loan losses in the
future. See "Financial Condition-Non-Performing Assets".
First Essex Bank's total allowance for possible loan losses was $6.6
million or 194.3% of non-accruing loans at December 31, 1995 compared to $7.2
million or 99.0% at December 31, 1994 and $7.7 million or 70.0% at December 31,
1993.
Noninterest Income
Beginning in 1996, First Essex adopted Financial Accounting Standards
Board Statement No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS No.
122"). SFAS No. 122 requires an enterprise involved in mortgage banking
activities to recognize, as separate assets, rights to service mortgage loans
for others regardless of the manner in which the servicing rights are acquired.
In addition, capitalized mortgage servicing rights are required to be assessed
for impairment based on the fair value of those rights. The impact of this
statement depends on the volume of mortgage loans originated and sold, and
servicing rights retained. During the six months ended June 30, 1996 First Essex
capitalized mortgage servicing rights totaling $100,000, which are included in
other assets on the balance sheet.
Non-interest income increased by $699,000 (48.3%) to $2.1 million for
the six months ended June 30, 1996, compared to $1.4 million for the same period
in 1995. The increase in non-interest income is due mainly to increased gains on
the sale of mortgage loans and mortgage servicing rights which totaled $930,000
(including $100,000 related to capitalized mortgage servicing rights) for the
six months ended June 30, 1996 compared to $295,000 for the same period in 1995.
The increase of $635,000 in gains from the sale of mortgage loans and mortgage
loan servicing rights resulted from the increased volume of loans sold which
totaled $54.0 million for the six month period ended June 30, 1996, compared to
$15.3 million for the same period in 1995.
Noninterest income increased to $3.7 million for the year ended
December 31, 1995 compared to $2.6 million in 1994. The primary reason for the
increase from 1994 to 1995 was increased gains from sales of loans and loan
servicing rights, which rose by $1.2 million from the gain of $260,000 in 1994
to the gain of $1.4 million in 1995.
Loan fees also increased by $84,000 from $393,000 in 1994 to $477,000 in 1995.
Noninterest income decreased to $2.6 million for the year ended
December 31, 1994 compared to $3.2 million in 1993. The primary reason for the
decrease from 1993 to 1994 was decreased gains from sales of loans which fell by
$470,000 from the gain of $730,000 in 1993 to the gain of $260,000 in 1994. Loan
fees also decreased by $251,000 from $644,000 in 1993 to $393,000 in 1994.
Noninterest income consists of net gains or losses from sales of
securities, net gains from sales of loans and loan servicing rights, fee and
other noninterest income.
Noninterest Expenses
Non-interest expense increased by $273,000 (2.8%) to $10.0 million for
the six months ended June 30, 1996, compared to $9.7 million for the same period
in 1995. Noninterest expenses increased by $54,000 (0.3%) to $19.2 million for
the year ended December 31, 1995 compared to $19.2 million in 1994 and $18.4
million in 1993. The increases were primarily due to a $1.3 million increase in
salary and employee benefits, and building and equipment costs, offset by a
decrease of $1.2 million in foreclosed property expenses.
Salaries and employee benefits increased by $492,000 (11.0%) to $5.0
million for the six months ended June 30, 1996, when compared to $4.5 million
for the same period in 1995, primarily due to increases in personnel to support
business growth. Salaries and employee benefits increased by $855,000 (10.5%) to
$9.0 million for the year ended December 31, 1995 from $8.1 million in 1994 and
$6.8 million in 1993. The increases for both years were primarily due to costs
associated with increases in personnel of 6% in 1995 and 10% in 1994 to support
business growth.
63
<PAGE>
Building and equipment costs increased by $225,000 to $1.8 million for
the six months ended June 30, 1996, compared to $1.5 million for the same period
in 1995 as a result of the new headquarters branch and a new operations center.
Building and equipment costs increased $456,000 to $3.3 million for 1995
compared to $2.8 million in 1994 and $2.6 million in 1993. The increase in 1995
was due in part to costs associated with the opening of a new branch in Andover,
Massachusetts as well as the consolidation of First Essex operations from
multiple low technology sites to a single high technology site in Lowell,
Massachusetts.
Foreclosed property expense decreased by $183,000 (37.3%) to $308,000
for the six months ended June 30, 1996, when compared to $491,000 for the
comparable period in 1995. First Essex's continued success in managing and
selling foreclosed property has resulted in lower levels in the costs associated
with professional services and operating expenses related to the properties in
foreclosure. Expenses associated with foreclosed property totaled $784,000 for
the year ended December 31, 1995 compared to $2.0 million in 1994 and $3.0
million in 1993. These expenses include $361,000 of additional write-downs of
the carrying values of properties during 1995 compared to $1.1 million in 1994
and $1.4 million in 1993. Other expenses associated with the ownership of
foreclosed property totaled $423,000 in 1995 compared to $934,000 in 1994 and
$1.1 million in 1993. While the regional economy and real estate market
continues to recover from the difficulties of the past several years, there is
no assurance that First Essex Bank will not experience further write-downs in
the carrying values of foreclosed property.
All other operating expenses decreased by $261,000 to $3.0 million for
the six months ended June 30, 1996, compared to $3.2 million recorded in the
same period in 1995. The reduction is primarily attributable to a reduction in
deposit insurance of $502,000, partially offset by the increases in professional
and marketing costs as described above. Other operating expenses increased by
$83,000 (.02%) to $6.2 million for the year ended December 31, 1995. During 1995
the FDIC lowered its deposit insurance rates which resulted in a $363,000
reduction in deposit insurance expense. This was offset by an overall 8.5%
increase in other operating expenses. Other operating expenses for 1994 and 1993
remained flat at $6.1 million
During 1994 First Essex closed two branch offices at an estimated cost
of $537,000, which was offset by a recovery of $420,000 from the opening of a
branch office previously abandoned.
Income Taxes
The net provision for income taxes amounted to $75,000 in 1995 compared
to a benefit of $805,000 recorded in 1994. The amounts recorded in each year
were based on management's quarterly review of the realizability of the deferred
tax asset, and reflects management's analysis of future taxable income.
Management has valued the deferred tax asset in accordance with regulatory
guidelines which provide for a one year income outlook and which results in a
valuation reserve of $4.2 million at December 31, 1995. There has also been a
significant decline in nonperforming assets. To the extent First Essex utilized
an income outlook beyond the one year regulatory guideline, there could have
been a significant tax benefit recorded in 1995.
Deferred tax assets and liabilities are established for the temporary
differences between the accounting bases and the tax bases of First Essex's
assets and liabilities at enacted tax rates expected to be in effect when the
amounts related to such temporary differences are realized or settled. First
Essex's deferred tax assets are reviewed quarterly and adjustments to such
assets are recognized as deferred income tax expenses or benefits based on
management's judgement relating to the realizability of such assets and reflects
management's analysis of future taxable income. Management has valued the
deferred tax asset in accordance with regulatory guidelines which provide for a
one year income outlook and which resulted in a valuation reserve of $4.2
million at December 31, 1995. The net provision for income taxes amounted to
$19,000 for the six months ended June 30, 1996 compared to $20,000 recorded for
the same period in 1995. Beginning in 1997, First Essex will begin to provide
for income taxes based on the federal and state tax rates that would be
generally applicable to it.
64
<PAGE>
Financial Condition
Total assets amounted to $842.9 million at June 30, 1996 an increase of
$34.1 million or 4.2% from $808.8 million at December 31, 1995. This increase is
primarily attributable to an increase of $12.6 million of investment securities
and an increase of $29.3 million in loans, excluding the allowance for possible
loan losses. Total assets amounted to $808.8 million at December 31, 1995, an
increase of $1.9 million or 0.24% from $806.9 million at December 31, 1994.
During 1995 there was an increase of $70.2 million in loans and a decrease of
$71.0 million in investment and mortgage-backed securities.
Loans
At December 31, 1995, the loan portfolio, excluding the allowance for
possible loan losses, was $500.1 million, representing 61.8% of total assets,
compared to $429.8 million or 53.3% of total assets at December 31, 1994. At
June 30, 1996, the loan portfolio, excluding the allowance for possible loan
losses, was $529.3 million, representing 62.8% of total assets, compared to
$500.1 million or 61.8% of total assets at December 31, 1995. See "Business of
First Essex-Lending Activities-General" for a table setting forth the
composition of the loan portfolio of First Essex Bank at the end of each of the
past five years.
Loan Origination
The following table summarizes the activity for loan originations for
the periods indicated:
Six Months Years Ended
Ended June 30, December 31,
----------------- -------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
Mortgage Loans:
Residential $ 61,700 $ 36,819 $ 91,700 $109,100 $101,900
Commercial real estate 5,490 5,429 15,800 14,700 3,800
Construction 19,669 17,357 42,800 43,600 31,800
-------- -------- -------- -------- --------
Total 86,859 59,605 150,300 167,400 137,500
Commercial 25,082 12,206 32,100 51,300 9,000
-------- -------- -------- -------- --------
Aircraft 14,351 4,859 15,700 700 --
Automobile 29,614 41,004 64,000 37,400 --
Other consumer 8,479 5,984 14,600 15,000 9,400
-------- -------- -------- -------- --------
Total 52,444 51,847 94,300 53,100 9,400
Total Loan Originations $164,385 $123,658 $276,700 $271,800 $155,900
======== ======== ======== ======== ========
The increases in loan originations are primarily attributable to
stabilization in the New England commercial real estate market and an increase
in consumer borrowing demand in the Massachusetts and New Hampshire economies
generally. During 1994 First Essex Bank initiated an indirect automobile lending
program which resulted in $64.0 million and $37.4 million of originations for
the years ending December 31, 1995 and 1994, respectively. Originations of
aircraft loans, a new lending activity for First Essex Bank, totaled $15.7
million in 1995 compared to $700,000 in 1994.
Loan originations for the six months ended June 30, 1996 totaled $164.4
million, compared to $123.7 million for the same period in 1995. First Essex
Bank's mortgage loan originations for the six month period totaled $86.9
million, compared to $59.6 million for the same period in 1995. Included in the
six month period were mortgage loans originated for sale of $56.1 million in
1996, and $18.4 million in 1995. Originations of aircraft loans, a lending
activity initiated in 1995, totaled $14.4 million for the six month period in
1996 compared to $4.9 million for the comparable period in 1995. During the
second quarter of 1995 First Essex Bank also purchased approximately $7.0
million of loans, primarily commercial real estate loans, at face value of the
outstanding principal amount.
65
<PAGE>
Non-Performing Assets
Non-performing assets consist of non-accruing, restructured and
impaired loans, and foreclosed property. Non-performing assets totaled $5.1
million at June 30, 1996, compared to $6.2 million at December 31, 1995, $10.3
million at December 31, 1994 and $17.4 million at December 31, 1993. See
"Business of First Essex-Current Market Conditions".
First Essex Bank's practice is to discontinue the accrual of interest
on all loans (including impaired loans) for which payment of interest or
principal is ninety days or more past due or for such other loans as considered
necessary by management if collection of interest and principal is doubtful.
When a loan is placed on non-accrual status, all previously accrued but
uncollected interest is reversed against current period interest income.
At December 31, 1995, the principal balance of restructured loans was
$1.0 million. There were no restructured loans outstanding in 1994 and 1993.
Restructured loans are loans on which concessions have been made in light of the
debtor's financial difficulty with the objective of maximizing recovery and with
respect to which the renegotiated payment terms are met.
If the non-accruing and restructured loans at December 31, 1995 and
1994 had been current in accordance with their original terms, the amount of
interest income that would have been recorded is $389,000 and $754,000,
respectively. The amount of interest collected and recorded as income in 1995 on
these loans was $511,000. The amount of interest collected on these loans in
1994 was $576,000 of which $116,000 was recorded as income.
Foreclosed property at December 31, 1995 totaled $1.8 million compared
to $3.0 million at December 31, 1994 and consists mainly of real estate
collateral from loans which were foreclosed.
Under SFAS No. 114, First Essex considers a loan impaired if it is
ninety days or more past due as to principal and interest, or if management's
credit risk assessment determines that it is probable that principal and
interest will not be collected as contractually scheduled. In addition, loans
which are restructured at market rates and comparable to loans with similar
risks are considered impaired only in the year of the restructuring, so long as
they continue to perform according to the restructured terms. Excluded from the
impaired category, but otherwise considered non-accruing loans, are small
balance homogeneous loans which are ninety days or more past due. Small balance
homogeneous loans include residential mortgage loans, residential construction
loans to individuals (excluding builder construction loans) and consumer loans.
First Essex evaluates a loan's level of impairment by measuring the net present
value of the expected future cash flows using the loan's original effective
interest rate, or at the fair value of the collateral if the loan is collateral
dependent. When the difference between the net present value of the impaired
loan (or fair value of the collateral if the loan is collateral dependent) is
lower than the recorded investment of the loan, the difference is provided to
expense with a resulting valuation allowance. At December 31, 1995, the recorded
investment in loans that are considered to be impaired under SFAS No. 114
totalled $1.9 million of which $663,000 had a related allowance for possible
loan losses of $273,000. The remaining $1.2 million of impaired loans did not
require a related allowance for possible loan losses. Of the $1.9 million of
loans considered to be impaired under SFAS No. 114, $1,043,000 are restructured
and are not included in the $3,373,000 of non-accruing loans discussed above.
The average recorded investment in impaired loans during 1995 was approximately
$1.4 million.
Interest income recognized on impaired loans (including restructured
loans), using the cash basis of income recognition, amounted to approximately
$136,000 for the six months ended June 30, 1996, compared to $72,000 for the
same period in 1995 and approximately $166,000 for the year ended December 31,
1995. The average recorded investment of impaired loans for the six months ended
June 30, 1996 was $2.1 million compared to $1.1 million for the same period in
1995 and $1.4 million for the twelve month period ended December 31, 1995.
66
<PAGE>
Investments
At June 30, 1996 the investment portfolio, consisting of short-term
investments, investment securities, mortgage-backed securities, Federal Home
Loan Bank ("FHLB") stock and stock in the Savings Bank Life Insurance Company of
Massachusetts, totaled $283.0 million or 33.6% of total assets, compared to
$275.9 million or 34.1% of total assets at December 31, 1995 and compared to
$346.9 million or 43.0% of assets at December 31, 1994. Interest and dividend
income on the investment portfolio generated 27.1% of total interest and
dividend income for the six months ended June 30, 1996 compared to 34.7% for the
comparable period in 1995. Interest and dividend income on First Essex's
investment portfolio generated 32.3% of total interest and dividend income for
the year ended December 31, 1995. During 1995 the investment portfolio decreased
by $71.0 million. The portfolio included U.S. government and agency obligations
having a book value of $17.1 million and a fair value of $17.1 million and
mortgage-backed securities with a book value of $209.8 million and a fair value
of $207.3 million.
First Essex does not have any investments in off balance sheet
financial instruments, except as noted in footnote 9 to First Essex's
consolidated financial statements.
To identify and control risks associated with the investment portfolio,
First Essex has established policies and procedures, which include stop loss
limits, stress testing on a periodic basis, diversification requirements and
credit standards, to control market risk on the investment portfolio.
The following table sets forth the composition of the investment
portfolio for the years indicated:
1995 1994 1993
------ ------ -----
(Dollars in thousands)
Short-term investments:
Interest bearing deposits $5,086 $ 217 $ 24
Federal funds sold 4,500 2,500 3,550
-------- -------- --------
Total short-term investments 9,586 2,717 3,574
Investment securities held-to-maturity:
U.S. government & agency obligations 17,080 54,271 38,887
Mortgage backed securities 118,018 209,747 218,384
Other bonds and obligations -- 31,039 22,133
-------- -------- --------
Total investment securities held-to-maturity 135,098 295,057 279,404
Investment securities available-for-sale:
Mortgage-backed securities 91,781 35,200 36,401
Other bonds and obligations 23,372 -- --
-------- -------- --------
Total investment securities available for sale 115,153 35,200 36,401
Stock in Federal Home Loan Bank of Boston 14,869 12,775 9,250
Stock in Savings Bank Life Insurance Company 1,194 1,194 1,194
-------- -------- --------
Total investments $275,900 $346,943 $329,823
======== ======== ========
Percent of total assets 34.1% 43.0% 51.1%
For further information regarding First Essex's investment portfolio,
including information regarding amortized cost and fair value as of December 31,
1995, see notes 1, 2 and 18 to First Essex's consolidated financial statements.
67
<PAGE>
Set forth below is a breakdown of yields and scheduled maturities for
the amortized cost of indicated investment securities at December 31, 1995.
U.S.
government Other bonds Mortgage-
and agency and backed
obligations obligations securities Total
----------- ----------- ---------- -----
(Dollars in thousands)
Due in 1 year or less:
Amount
Yield $17,080 $3,810 $2,841 $23,731
6.05% 6.71% 6.28% 6.18%
Due from 1 to 2 years:
Amount -- 1,406 21,728 23,134
Yield -- 6.79% 4.86% 4.97%
Due from 2 to 3 years:
Amount -- 3,311 13,159 16,470
Yield -- 5.46% 4.88% 5.00%
Due from 3 to 5 years:
Amount -- 14,914 -- 14,914
Yield -- 5.62% -- 5.62%
Due from 5 to 10 years:
Amount -- 158 11,254 11,412
Yield -- 6.80% 5.05% 5.08%
Due after 10 years:
Amount -- -- 161,267 161,267
Yield -- -- 6.51% 6.51%
------- ------- --------- ---------
Total:
Amount $17,080 23,599 $210,249 $250,928
Yield 6.05% 5.85% 6.15% 6.12%
Deposits
Deposits have historically been First Essex Bank's primary source of
funds for lending and investment activities. Deposit flows vary significantly
and are influenced by prevailing interest rates, market conditions, economic
conditions and competition. At June 30, 1996 First Essex Bank had total deposits
of $508.1 million representing a net increase of $16.6 million compared to total
deposits of $491.5 million at December 31, 1995. This increase is attributable
to an increase of $14.0 million in term deposits and by a net increase of $2.5
million in Demand Deposits, Savings, NOW and Money Market accounts. At December
31, 1995 First Essex's total deposits represented a net increase of $34.6
million compared to $456.9 million at December 31, 1994. During 1995, First
Essex Bank aggressively marketed time deposits resulting in increases of $45.6
million in time deposits, offset by a decrease of $11.0 million in other
deposits.
While deposit flows are by nature unpredictable, management attempts to
manage its deposits through selective pricing. Because of the uncertainty of
market conditions, it is not possible for First Essex Bank to predict how
aggressively it will compete for deposits in the future or the likely effect of
any such decision on deposit levels, interest expense and net interest income.
Strategies are currently in place to aggressively market more stable deposit
sources in such accounts as NOW and Regular Checking.
68
<PAGE>
The following table sets forth the composition of average deposits and
rates for the years indicated with respect to categories exceeding 10% of total
average deposits:
<TABLE>
<CAPTION>
1995 1994 1993
----------------------- ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Amount Interest Rate Amount Interest Rate Amount Interest Rate
------ ------------- ------ ------------- ------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW $ 28,664 1.13% $ 30,086 1.18% $ 29,186 1.59%
Money market accounts 79,593 1.99 105,181 2.10 119,000 2.55
Savings and notice accounts 51,069 1.60 58,514 1.33 62,072 1.76
Time deposits 294,473 5.81 203,500 4.46 174,285 4.56
-------- -------- --------
Total interest bearing deposits 453,799 4.37 397,281 3.13 384,543 3.26
Demand deposits 23,550 15,982 12,238
-------- -------- --------
Total deposits $477,349 $413,263 $396,781
======== ======== ========
</TABLE>
At December 31, 1995, 1994, and 1993, outstanding certificates of
deposits in denominations of $100,000 and over had maturities as follows:
Remaining Term to Maturity 1995 1994 1993
- -------------------------- ------- ------- -------
(Dollars in thousands)
Three months or less $ 3,265 $ 2,821 $ 3,973
Three to six months 8,324 2,596 2,728
Six to twelve months 10,549 3,195 2,369
Over twelve months 2,067 11,246 4,144
------- ------- -------
Total $24,205 $19,858 $13,214
======= ======= =======
Borrowed Funds
First Essex Bank is a member of FHLB and is entitled to borrow from the
FHLB by pledging certain assets. First Essex Bank also utilizes short term
repurchase agreements, generally with maturities less than three months, as an
additional source of funds. Repurchase agreements are secured by U.S. government
and agency securities. Borrowings are an alternative source of funds compared to
deposits and totaled $256.7 million at June 30, 1996 compared to $245.6 million
at December 31, 1995 and $279.9 million and $185.0 million at December 31, 1994
and 1993, respectively. The decrease in borrowings in 1995 from 1994 was a
result of an increase in deposit accounts. The increase in borrowings in 1994
was used to fund loan growth.
69
<PAGE>
The following table summarizes the maximum and average amounts of
short-term borrowings outstanding during 1995, 1994 and 1993 together with the
weighted average interest rates thereon.
<TABLE>
<CAPTION>
For Year Ended December 31, 1995 At December 31, 1995
-------------------------------- --------------------
Maximum Average Weighted Weighted
Amount Amount Average Amount Average
Outstanding Outstanding Interest Rate Outstanding Interest Rate
----------- ----------- ------------- ----------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
FHLB Borrowings $285,372 $263,298 6.22% $219,673 6.10%
Repurchase Agreement 27,019 8,432 5.50 25,896 5.72
<CAPTION>
For Year Ended December 31, 1994 At December 31, 1994
-------------------------------- --------------------
Maximum Average Weighted Weighted
Amount Amount Average Amount Average
Outstanding Outstanding Interest Rate Outstanding Interest Rate
----------- ----------- ------------- ----------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
FHLB Borrowings $255,489 $207,067 4.66% $225,017 6.10%
Repurchase Agreement 55,131 11,399 5.47 54,931 5.94
<CAPTION>
For Year Ended December 31, 1993 At December 31, 1993
-------------------------------- --------------------
Maximum Average Weighted Weighted
Amount Amount Average Amount Average
Outstanding Outstanding Interest Rate Outstanding Interest Rate
----------- ----------- ------------- ----------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
FHLB Borrowings $185,001 $108,722 3.80% $185,001 3.82%
</TABLE>
Asset/Liability Management
First Essex Bank's asset/liability management strategy is designed to
increase net interest income and provide adequate earnings in expected future
interest rate environments. As part of this strategy, a balance is sought
between the repricing characteristics of its' earning assets and funding sources
while maximizing the spread between interest income and expense. First Essex
Bank adjusts the level of its liquid assets and the mix of its loans and
investments based on management's judgment as to the quality of specific
investment opportunities and the relative attractiveness of their maturities and
yields.
In order to achieve a better repricing balance between its assets and
liabilities, First Essex Bank continued to originate and hold in portfolio
adjustable rate residential mortgage loans. First Essex Bank has a general
policy of writing substantially all newly originated fixed rate residential
loans to meet the requirements for sale in the secondary market. During 1995
First Essex Bank originated $91.7 million of residential mortgages. Of that
amount, $78.7 million was sold. First Essex Bank's commercial real estate,
construction, consumer, and commercial business lending programs also provide
opportunities to better match the interest rate sensitivity of its loan
portfolio and liabilities due to the adjustable rate or short term repricing
characteristics of these types of loans. Total loans grew by $70.2 million
during the year.
During 1995 investments declined by $71.0 million due to maturities,
amortization and prepayments. Most of this cash was redeployed to fund the
growth in the loan portfolio.
70
<PAGE>
First Essex Bank offers competitive rates for longer term deposits. The
rising interest rate environment early in 1995 made these types of investments
more attractive to consumers and led to an increase in deposits of $34.6 million
over the course of the year. Some of this growth was at the expense of lower
yielding money market and savings deposits.
It is management's opinion that interest rates will continue to exhibit
volatility. With this in mind, First Essex Bank will continue to follow a
strategy which seeks to achieve a balance in the repricing characteristics of
its assets and liabilities and provide adequate earnings in all plausible
interest rate environments.
The following table sets forth the maturity and repricing information
relating to interest sensitive assets and liabilities at December 31, 1995.
Fixed-rate mortgage loans and mortgage-backed investments are shown in the table
in the time period corresponding to computed principal amortization based on
their respective contractual maturity. Short term investments, adjustable-rate
loans, investment securities and adjustable mortgage-backed investments are
allocated to the period in which the rates would be next adjusted. The table
reflects an "expected" prepayment assumption on residential loans and
mortgage-backed investments. This prepayment assumption was derived from both
past experience and a market consensus of prepayment speeds for similar types of
loans and mortgage-backed investments. Since regular savings accounts and NOW
accounts are not subject to contractual interest rate adjustments, such accounts
have been included in the other deposits category and are assumed to reprice
within 1-3 years. First Essex Bank believes these deposits are less interest
rate sensitive over long periods of time.
<TABLE>
<CAPTION>
December 31, 1995
------------------------------------------------------------------------
1-180 181-365 1-3 3-5 5+
Days Days Years Years Years Total
---- ---- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Short-term investments $ 9,586 $ -- $ -- $ -- $ -- $ 9,586
Investment securities 54,130 184 999 -- 1,201 56,514
Mortgage-backed securities 89,573 69,316 32,301 3,842 14,768 209,800
Loans held for sale 5,821 -- -- -- -- 5,821
Fixed rate loans 27,512 20,342 50,257 50,985 111,876 260,972
Adjustable rate loans 95,484 53,489 22,540 48,036 13,709 233,258
--------- --------- --------- --------- --------- ---------
Total rate sensitive assets 282,106 143,331 106,097 102,863 141,554 775,951
--------- --------- --------- --------- --------- ---------
Interest-bearing liabilities:
Money market deposit accounts 73,730 -- -- -- -- 73,730
Certificates of deposit 103,767 69,242 70,850 24,658 38,182 306,699
Other deposits -- -- 80,649 -- -- 80,649
Borrowed funds 111,996 37,000 96,493 -- 80 245,569
--------- --------- --------- --------- --------- ---------
Total rate sensitive liabilities 289,493 106,242 247,992 24,658 38,262 706,647
--------- --------- --------- --------- --------- ---------
Excess (deficiency) of interest
sensitive assets over interest
sensitive liabilities $ (7,387) $ 37,089 $(141,895) $ 78,205 $ 103,292 $ 69,304
========= ========= ========= ========= ========= =========
Cumulative excess (deficiency)
of interest sensitive assets
over interest sensitive liabilities $ (7,387) $ 29,702 $(112,193) $ (33,988) $ 69,304
========= ========= ========= ========= =========
Cumulative excess (deficiency)
percentage of total assets (0.91)% 3.67% (13.87%) (4.20)% 8.57%
</TABLE>
71
<PAGE>
The following table reflects the scheduled maturities of selected loans
at December 31, 1995:
One
One year through Over Five
or less Five Years Years Total
-------- ---------- ----- -----
Construction loans $14,210 $ -- $-- $14,210
Commercial loans 14,640 52,097 -- 66,737
------- ------- -- -------
Total $28,850 $52,097 $-- $80,947
======= ======= === =======
A summary of the above categories of loans due after one year as to the
rate variability follows (dollars in thousands):
With predetermined rates $21,471
With floating or adjustable rates 30,626
-------
Total maturing or repricing after one year $52,097
=======
Liquidity and Capital Resources
First Essex Bank's principal sources of liquidity are customer
deposits, borrowings from the FHLB, repurchase agreements, scheduled
amortization and prepayments of loan principal, cash flow from operations,
maturities of various investments and loan sales.
Management believes it is prudent to maintain an investment portfolio
that not only provides a source of income, but also provides a potential source
of liquidity to meet lending demand and deposit flows. First Essex Bank adjusts
the level of its liquid assets and the mix of its loans and investments based
upon managements's judgment as to the quality of specific investment
opportunities and the relative attractiveness of their maturities and yields. At
December 31, 1995, short-term investments, bonds and obligations, and
mortgage-backed investments totaled $275.9 million, 23% of which either matures
or is estimated to be prepaid within one year. At December 31, 1994, short term
investments, bonds and obligations, and mortgage backed investments totaled
$346.9 million, 73% of which matured within one year.
At December 31, 1995, First Essex Bank had total outstanding borrowings
of $245.6 million, 61% of which matures within one year. In 1994 First Essex
Bank had outstanding borrowings of $279.9 million, 74% of which matured in one
year.
At June 30, 1996 First Essex Bank had outstanding commitments to loan
funds, under mortgage, construction, commercial and home equity lines of credit
amounting to $48.4 million compared to $39.9 million at June 30, 1995. At
December 31, 1995, First Essex Bank had outstanding commitments to loan funds
under mortgage, construction and commercial loans and home equity lines of
credit, amounting to $56.0 million, compared to $52.9 million in 1994.
Management believes the sources of liquidity previously discussed are sufficient
to meet its commitments.
Net cash provided by operating activities totaled $7.5 million for the
six months ended June 30, 1996 compared to $9.5 million for the same period in
1995. Net cash provided by operating activities totaled $5.9 million in 1995
compared to $13.8 million in 1994. Net income was $7.5 million compared to a net
income of $6.5 million for the respective periods. Included in these amounts
were non-cash write-downs of foreclosed properties of $361,000 in 1995 and $1.0
million in 1994. The provision for possible loan losses recorded in 1995 was
$770,000. There was no provision for possible loan losses recorded for 1994. Net
cash provided by operating activities totaled $13.8 million in 1994 compared to
$9.9 million in 1993. Net income was $6.5 million compared to a net income of
$7.0 million for the respective periods. Included in these amounts were non-cash
write-downs of foreclosed properties of $1.0 million in 1994 and $1.4 million in
1993. No provision for possible loan losses was recorded in 1994 or 1993.
Net cash used in investing activities totaled $40.6 million for the six
months ended June 30, 1996 compared to $24.1 million for the comparable period
in 1995. Net cash used in investing activities totaled $5.8 million for the
72
<PAGE>
year ended December 31, 1995 compared to $162.7 million in 1994 and $157.2
million in 1993. The 1995 decrease in net cash used by investing activities over
1994 was primarily attributable to a reduction in the purchase of investment
securities. The 1994 increase in net cash used by investing activities over 1993
was primarily attributable to increased loan originations.
Net cash provided by financing activities totaled $26.3 million for the
six months ended June 30, 1996, compared to net cash provided of $22.7 million
for the comparable period in 1995. The change reflects an increase in net
borrowings, and a decrease in the net growth of deposits when compared to the
prior period. Net cash used in financing activities totaled $3.0 million for the
year ended December 31, 1995 compared to net cash provided of $152.4 million for
the comparable period in 1994 and $130.4 million in 1993. Net cash used to
decrease borrowed funds (net of repayments) totaled $34.4 million in 1995,
compared to $94.9 million (net of repayments) of cash provided in 1994. Net cash
provided by deposits totaled $34.6 million in 1995 compared to $58.6 million in
1994. Net cash of $2.2 million was used to pay dividends in 1995.
First Essex Bank is in compliance with and exceeds federal regulatory
capital requirements. The standards are 3% core capital and 8% risk-adjusted
capital on December 31, 1995.
As a federal savings institution regulated by the OTS, First Essex Bank
is required to meet certain minimum regulatory capital requirements: tangible
capital, total capital, core/leverage capital, Tier 1 risk-based capital and
total risk-based capital. In addition, under the Prompt Corrective Action
provisions of FDICIA, First Essex Bank's capital position may be classified in
one of five different capital categories ranging from critically
undercapitalized to well capitalized. As of June 30, 1996, First Essex Bank met
all of the minimum regulatory requirements of the well capitalized category
under FDICIA. First Essex's total capital, tangible capital and tangible equity
ratios were equal to the core/leverage capital ratio.
Impact of Inflation
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation.
An important concept in understanding the effect of inflation on
financial institutions is the distinction between monetary and non-monetary
items. In a stable environment, monetary items are those assets and liabilities
which are or will be converted into a fixed amount of dollars regardless of
changes in prices. Examples of monetary items include cash, investment
securities, loans, deposits and borrowings. Non-monetary items are those assets
and liabilities which gain or lose general purchasing power as a result of the
relationships between specific prices for the items and price change levels.
Examples of non-monetary items include premises and equipment and real estate in
foreclosure. In the recent environment in the New England region, where real
estate values have dramatically decreased, the deflationary impact of changing
prices of real estate securing loans significantly affects a financial
institution's performance. Additionally, interest rates do not necessarily move
in the same direction, or in the same magnitude, as the prices of goods and
services as measured by the consumer price index. In a volatile interest rate
environment, liquidity and the management of the maturity structure of assets
and liabilities are critical in maintaining acceptable profitability levels.
Recent Accounting Developments
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights", which is to become effective for fiscal years beginning after
December 15, 1995. SFAS No. 122 requires that a mortgage banking enterprise
recognize as separate assets rights to service mortgage loans for others
regardless of the manner in which the servicing rights are acquired. First Essex
adopted SFAS No. 122 in January 1996. In June 1996, the FASB issued SFAS No.
125, "Accounting for Transfer and Servicing of Financial Assets and
Extinguishments of Liabilities", which supersedes SFAS No. 122 and will become
effective for First Essex on January 1, 1997. SFAS No. 125 requires that
liabilities and derivatives incurred or obtained by transferors as part of a
transfer of financial assets be initially measured at fair value, if
practicable. It also requires that servicing assets and other retained interests
73
<PAGE>
in the transferred assets be measured by allocating the previous carrying amount
between the assets sold, if any, and retained interests, if any, based on their
relative fair values at the date of the transfer.
In December, 1995, the FASB issued SFAS No. 123, "Stock-Based
Compensation", which is to become effective for fiscal years beginning after
December 15, 1995. SFAS No. 123 requires employee stock-based compensation be
either recorded or disclosed at its fair value. Management will continue to
account for employee stock-based compensation under Accounting Principles Board
Opinion No. 25 and will not adopt the new accounting provisions for employee
stock-based compensation under SFAS No. 123, but will include the additional
required disclosures in the 1996 consolidated financial statements.
Beginning in 1996, First Essex adopted SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The statement also requires that certain long-lived
assets and identifiable intangibles to be disposed of be reported at the lower
of the carrying amount or fair value less cost to sell. The application of the
new statement has not had a significant impact on the results of First Essex's
operations or financial condition.
74
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
OF FINEST AND SUBSIDIARY
The following table sets forth certain historical consolidated
financial data of Finest. The selected data for the years ended December 31, is
based on the respective consolidated financial statements, including the
respective notes thereto, which have been audited by Shatswell, MacLeod &
Company, P.C., independent certified public accountants, for 1995 and 1994 and
by Grant Thornton LLP, independent certified public accountants, for 1993, 1992
and 1991. Such financial statements and reports for 1995, 1994 and 1993, which
are contained in this Proxy Statement-Prospectus, refer to changes in accounting
for investment securities and income taxes and Note 15 to the financial
statements regarding litigation and should be read in conjunction therewith. The
selected data for the six months ended June 30, 1996 is based on unaudited
financial statements.
<TABLE>
<CAPTION>
At or for the Six At or for the Years Ended December 31,
Months Ended --------------------------------------------------------------------
June 30, 1996 1995 1994 1993 1992 1991
---------------- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets $ 179,328 $ 181,103 $ 178,012 $ 180,403 $ 177,841 $ 194,144
Total loans 100,137 107,238 108,263 110,319 120,225 141,060
Allowance for loan losses 4,057 4,136 3,746 3,660 4,335 3,031
Investments(1) 71,793 67,737 56,940 51,002 26,992 15,303
Other real estate owned 891 1,501 7,936 15,896 26,392 28,655
Deposits 158,187 161,669 161,364 164,022 162,433 175,036
Borrowed funds -- -- -- -- -- --
Stockholders' equity $ 18,650 $ 17,267 $ 15,281 $ 14,811 $ 14,378 $ 16,344
Results of Operations:
Interest and dividend income $ 6,845 $ 13,596 $ 11,556 $ 11,541 $ 12,684 $ 16,158
Interest expense 2,812 5,624 4,554 4,846 6,107 10,199
----------- ----------- ----------- ----------- ----------- -----------
Net interest and dividend
income 4,033 7,972 7,002 6,695 6,577 5,959
Provision for loan losses 169 1,600 600 2,125 3,200 5,338
Net gains (losses) from sale of
assets held for sale and
investments(1) -- (2) 1 11 91 --
Losses on real estate operations 109 360 393 834 1,083 2,172
Fees and service charges 294 489 495 506 867 530
Other income 125 366 378 473 519 570
Merger related expense 413 371 128 -- -- --
Non-interest expense 2,137 5,316 6,198 5,255 5,142 3,823
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income tax
expense (benefit) 1,624 1,178 557 (529) (1,371) (4,274)
Income tax expense (benefit) (2) (172) (453) (723) 515 (1,112)
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ 1,626 $ 1,350 $ 1,010 $ 194 $ (1,886) $ (3,162)
=========== =========== =========== =========== =========== ===========
Per Share Data(2):
Net income (loss) $ 1.10 $ .93 $ .69 $ .13 $ (1.29) $ (2.15)
Dividends declared -- $ .10 -- -- -- $ .20
Book value at end of period $ 12.61 $ 11.68 $ 10.48 $ 10.16 $ 9.86 $ 11.12
Average shares outstanding 1,478,736 1,458,750 1,458,530 1,458,050 1,463,180 1,470,685
Selected Financial Ratios:
Return (loss) on average assets 1.85% 0.77% 0.57% 0.11% (1.01)% (1.60)%
Return (loss) on average equity 18.07% 8.14% 6.65% 1.33% (12.28)% (17.52)%
Average of equity as a
percentage of average assets 10.26% 9.40% 8.52% 8.25% 8.24% 9.12%
Dividend payout ratio N/A 10.81% N/A N/A N/A (9.30)%
- -----------
<FN>
N/A - Not applicable.
(1) Includes investment securities, available-for-sale securities, held-to-maturity securities, federal funds sold
and Federal Home Loan Bank Stock, where applicable.
(2) Per share data reflects 10-for-1 stock split in February 1996.
</FN>
</TABLE>
75
<PAGE>
FINEST MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Finest is a New Hampshire corporation that was organized in 1986 to
become the holding company of Pelham Bank. Although Finest has corporate
authority to engage in any activity permitted by the NHBCA, Finest's sole
activity is to act as the holding company for Pelham Bank.
Pelham Bank is a New Hampshire-chartered trust company incorporated in
1968 and headquartered in Pelham, New Hampshire. Pelham Bank operates its
business from three banking offices located in Pelham, Salem, and Windham, New
Hampshire. Pelham Bank is engaged principally in the business of attracting
deposits from the general public and investing those deposits in residential and
commercial real estate loans, and in consumer and small business loans. Deposits
at Pelham Bank are insured by the FDIC up to $100,000 per separately insured
account.
As of June 30, 1996, Pelham Bank reported total assets of $179.1
million, total deposits of $158.3 million, net loans of $95.6 million and
stockholders' equity of $18.5 million.
Finest's results of operations depend to a great extent on Pelham
Bank's net interest income, the difference between income earned on its loan and
investment portfolios and the interest paid on its deposits, and the size of
Pelham Bank's provisions for loan losses and losses on real estate operations.
Net interest income is primarily affected by the level of earning assets as a
percentage of total assets, the level of interest-bearing liabilities, yields
earned on assets and rates paid on liabilities. Earnings are also affected by
non-interest income which consists primarily of transaction account fees and net
gains on OREO sales. The levels of operating expenses and income taxes also
affect earnings.
The following is a discussion and analysis of Finest's consolidated
results of operations for the six months ended June 30, 1996 and 1995 and the
last three fiscal years, as well as its financial condition at June 30, 1996 and
at December 31, 1995, 1994 and 1993. In order to understand this section in
context, it should be read in conjunction with Finest's Consolidated Financial
Statements and accompanying footnotes which are included in this Proxy
Statement-Prospectus.
Pelham Bank's operating results were adversely affected by the loss of
interest income resulting from non-performing loans and its provision for loan
losses. In 1995, the provision was $1.6 million but had decreased substantially
in the first six months of 1996 compared to the same period in 1995. The
decrease in the provision for the first half of 1996 was the result of overall
improved asset quality.
Results of Operations
General. Operating results for the first six months of 1996 improved
substantially from the comparable period in 1995. Finest had net income of $1.6
million, or $1.10 per share, as compared to $1.1 million, or $.75 per share for
the prior-year period. Return on average assets increased to l.85% in the first
six months of 1996 as compared to 1.27% for the same period in 1995, while
return on average stockholders' equity improved to 18.07% from 13.83% for the
same periods.
The improvement during the first six months of 1996 was driven by
significant improvements in asset quality as well as changes in the balance
sheet mix, which both enhanced Finest's net interest margins and lessened its
interest rate risk.
Operating results in 1995 improved for the fourth consecutive year and,
for the third consecutive year, Finest had positive earnings. Finest generated
net income of $1.3 million or $.93 per share in 1995, compared to $1.0 million
or $.69 per share in 1994, and $194,000 or $.13 per share in 1993. Finest's
76
<PAGE>
return on average assets increased to .77% in 1995 compared to .57% in 1994 and
.11% in 1993. Return on average stockholders' equity was 8.14% in 1995 versus
6.65% and 1.33% in 1994 and 1993, respectively.
Operating results in 1995, while improved, were hampered by a $1.0
million increase in the provision for loan losses, as management's review of the
loan portfolio and aggressive posture towards reducing the level of
non-performing loans required an additional provision in the fourth quarter.
Operating results in 1994 were affected by the continued economic
recovery and continued improvement in the real estate market in southern New
Hampshire. This improvement is reflected in decreasing provisions for loan
losses from $2.1 million in 1993 to $600,000 in 1994. The improvement in the
quality of Pelham Bank's loan portfolio is reflected in the decline in the
percentage of non-performing assets from 10.0% at December 31, 1993 to 1.7% at
June 30, 1996.
Net Interest and Dividend Income. Net interest and dividend income on a
tax equivalent basis increased to $4.0 million for the six months ended June 30,
1996 from $3.8 million for the prior-year period. Interest income on securities
increased $461,000 as the bank took advantage of its highly liquid and asset
sensitive position to shift investment securities from lower yielding short-term
Federal Funds to longer-term, higher-yielding U.S. Government and Agency
securities. In addition, while average loans outstanding decreased from $109.4
million to $103.8 million during the comparable periods, this was offset by a
decrease in non-performing loans of $3.4 million as well as a higher yield on
the portfolio. Interest expense increased $219,000 as the result of higher rates
paid on certificates of deposit during the latter part of 1995 that have not
been renewed at the lower rates prevailing in 1996. As a result of all of these
factors, net interest margin for the six months was stable at 4.80%, up slightly
from the 4.78% in the prior-year period. Net interest and dividend income on a
tax equivalent basis was $8.0 million in 1995, up from $7.0 million in 1994 and
$6.7 million in 1993. Much of this increase was due to the reduction in
non-performing assets.
Total interest and dividend income on a tax equivalent basis was $13.6
million in 1995 as compared to $11.6 million for the year ended December 31,
1994 and $11.5 million in 1993. These increases were primarily the result of an
increase in interest-earning assets. Average loans receivable, excluding
reclassifications, decreased during 1995, 1994 and 1993, while the average of
lower yielding investments increased. In spite of the shift from loans to lower
yielding investments, net interest income increased as a result of the decrease
in non-performing assets.
In 1995, interest expense amounted to $5.6 million compared to $4.6
million and $4.8 million in 1994 and 1993, respectively. The increase in 1995
was due to a higher rate environment which was more than offset by higher yields
on the asset side, while the decrease in 1994 was the result of an overall
decrease in the balance sheet due to continuing loan problems.
Non-performing assets decreased from $8.0 million at June 30, 1995 to
$3.0 million at June 30, 1996. Nonaccrual loans and OREO had decreased $3.4
million and $1.9 million, respectively, during the same period. An improving
economy coupled with more aggressive management of nonaccrual assets were the
primary factors in the decrease.
Non-performing assets include nonaccrual loans, foreclosed and
in-substance foreclosed property (OREO) and restructured loans. Loans are placed
on nonaccrual status either as a result of the past due status of principal
and/or interest, or a judgment by management that, although payments of
principal and/or interest are current, such action is prudent. Loans on which
payments are past due 90 days or more are placed on nonaccrual status, unless
they are well secured and in the process of collection. Non-performing assets at
December 31, 1995 were $5.5 million, consisting of $1.5 million of OREO and $4.0
million in nonaccrual and restructured loans, compared to $11.7 million of
non-performing assets at December 31, 1994, consisting of $7.9 million of OREO
and $3.8 million in nonaccrual and restructured loans, and $18.1 million of
non-performing assets at December 31, 1993, consisting of $15.9 million of OREO
and $2.2 million of nonaccrual loans.
77
<PAGE>
The following table presents an analysis of the average yields earned
and rates paid for the period indicated. Interest income is presented on a tax
equivalent basis which reflects a federal tax rate of 34% for the period
presented.
June 30, 1996
------------------------------------
Interest Average
Average Earned/ Yield/
Balance Paid Rate
--------- -------- -------
(Dollars in thousands)
ASSETS
Interest-earning assets:
Federal funds sold $ 4,761 $ 124 5.21%
-------- ------
Investment securities(1)(3):
Municipal obligations 2,830 128 9.05%
US Government and agencies 55,002 1,734 6.31%
Marketable equity securities 3,363 126 7.49%
-------- ------
Total investments 61,195 1,988 6.50%
-------- ------
Loans 103,800 4,776 9.20%
-------- ------
Total interest-earning assets 169,756 6,888 8.12%
------
Allowance for loan losses (4,128)
Other real estate owned 1,237
Other assets 8,602
--------
Total assets $175,467
LIABILITIES AND
STOCKHOLDERS' EQUITY
Borrowed funds $ 130 $ 4 6.15%
Deposits:
NOW accounts 8,997 94 2.09%
Regular savings accounts 24,065 285 2.37%
Pelham money fund 19,946 251 2.52%
Certificates of deposit 77,721 2,158 5.55%
-------- ------
Total interest-bearing deposits
and borrowed funds 130,859 2,792 4.27%
Other interest:
Interest on capital lease 210 20 19.05%
-------- ------
Total interest-bearing liabilities 131,069 2,812 4.29%
------
Demand deposits 23,456
Other liabilities 2,945
Total liabilities 157,470
Stockholders' equity 17,997
Total liabilities and
stockholders' equity $175,467
========
Net interest income $4,076
======
Interest rate spread 3.83%
Net yield on earning assets 4.80%
- ------------
(1) Included in the average balance amounts are the corresponding
components of the investment securities available-for-sale and held-to-
maturity. The yield is calculated using interest income divided by the
average balance of the amortized historical cost.
(2) Interest on nonaccrual loans has been included only to the extent
reflected in the statement of operations; however, the loan amounts are
included in the average amounts outstanding.
(3) Included in interest earned are tax effect increases to interest earned
on municipal obligations of $44,000 in 1996, $107,000 in 1995, $106,000
in 1994 and $116,000 in 1993.
78
<PAGE>
The following table presents and analysis of the average yields earned
and rates paid for the years indicated. Interest income is presented on a tax
equivalent basis which reflects a federal tax rate of 34% for all periods
presented.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------- ----------------------------- -------------------------------
Interest Average Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/ Average Yield/ Yield/
Balance Paid Rate Balance Paid Rate Balance Rate Rate
------- -------- -------- ------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Federal funds sold $ 5,943 $ 343 5.77% $ 13,765 $ 532 3.86% $ 13,521 $ 403 2.98%
-------- -------- -------- -------- -------- --------
Investment securities(1)(3):
Municipal obligations 3,433 317 9.23% 3,419 311 9.10% 3,395 341 10.04%
US Government and
agencies 44,630 2,723 6.10% 34,465 1,620 4.70% 17,279 763 4.42%
Marketable equity
securities 2,948 244 8.28% 2,854 234 8.20% 2,649 228 8.61%
-------- -------- -------- -------- -------- --------
Total investments 51,011 3,284 6.44% 40,738 2,165 5.31% 23,323 1,332 5.71%
-------- -------- -------- -------- -------- --------
Loans 112,307 10,076 8.97% 108,073 8,965 8.30% 110,859 9,922 8.95%
-------- -------- -------- -------- -------- --------
Total interest-
earning assets 169,261 13,703 8.10% 162,576 11,662 7.17% 147,703 11,657 7.89%
-------- -------- --------
Allowance for loan losses (3,527) (3,703) (3,998)
Other real estate owned 2,798 10,954 21,144
Other assets 7,922 8,599 12,097
-------- -------- --------
Total assets $176,454 $178,426 $176,946
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Borrowed Funds
Deposits:
NOW accounts $ 8,665 $ 248 2.86% $ 8,897 $ 253 2.84% $ 9,184 $ 274 2.98%
Regular savings accounts 24,342 658 2.70% 25,875 699 2.70% 23,475 624 2.66%
Pelham money fund 23,521 650 2.76% 28,136 776 2.76% 29,816 828 2.78%
Certificates of deposit 76,958 4,025 5.23% 74,352 2,782 3.74% 77,546 3,074 3.96%
-------- -------- -------- -------- -------- --------
Total interest-
bearing deposits 133,486 5,581 4.18% 137,260 4,510 3.29% 140,021 4,800 3.43%
Other interest:
Interest on capital lease 220 43 19.55% 231 45 19.48% 240 46 19.17%
-------- -------- -------- -------- -------- --------
Total interest-
bearing liabilities 133,706 5,624 4.21% 137,491 4,555 3.32% 140,261 4,846 3.45%
-------- -------- --------
Demand deposits 22,198 22,460 20,726
Other liabilities 3,960 3,280 1,365
-------- -------- --------
Total liabilities 159,864 163,231 162,352
Stockholders' equity 16,590 15,195 14,594
-------- -------- --------
Total liabilities and
stockholders'
equity $176,454 $178,426 $176,946
======== ======== ========
Net interest income $8,079 $7,107 $6,811
====== ====== ======
Interest rate spread 3.89% 3.85% 4.44%
===== ===== =====
Net yield on earning assets 4.77% 4.37% 4.61%
===== ===== =====
<FN>
(1) Included in the average balance amounts are the corresponding components of the investment securities
available-for-sale and held-to-maturity. The yield is calculated using interest income divided by the average
balance of the amortized historical cost.
(2) Interest on nonaccrual loans has been included only to the extent reflected in the statement of operations; however,
the loan amounts are included in the average amounts outstanding.
(3) Included in interest earned are tax effect increases to interest earned on municipal obligations of $44,000 in 1996,
$107,000 in 1995, $106,000 in 1994 and $116,000 in 1993.
</TABLE>
79
<PAGE>
Rate/Volume Analysis. The following table shows the changes in interest
income on a fully tax equivalent basis and interest expense caused by changes in
the volume of interest earning assets and interest bearing liabilities, and
changes in interest rates. The change attributable to a mix of volume and rate
has been allocated proportionally to the change due to volume and the change due
to rate.
Six Months Ended June 30,
-------------------------
1996 Compared to 1995
---------------------
Increase (Decrease) Due to
--------------------------
Volume Rate Total
------ ---- -----
(Dollars in thousands)
Interest and Dividend Income
Loans $(496) $ 477 $ (19)
Investments:
Federal funds sold 8 (20) (12)
Investment securities:
Municipal obligations (40) 8 (32)
US Government and agencies 426 56 482
Marketable equity securities 28 (26) 2
----- ----- -----
Total interest and dividend income (74) 495 421
----- ----- -----
Interest Expense
Borrowed funds 4 -- 4
NOW accounts 4 (30) (26)
Regular savings accounts (11) (32) (43)
Pelham money fund (46) (25) (71)
Certificates of deposit 64 293 357
Capital lease (2) -- (2)
----- ----- -----
Total interest expense 13 206 219
----- ----- -----
Net increase (decrease) in net interest
and dividend income $ (87) $ 289 $ 202
===== ===== =====
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 Compared to 1994 1994 Compared to 1993
--------------------- ---------------------
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------- --------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest and Dividend Income
Loans: $ 363 $ 748 $ 1,111 $ (246) $ (711) $ (957)
Investments:
Federal funds sold (382) 193 (189) 7 122 129
Investment securities:
Municipal obligations 1 5 6 5 (35) (30)
US Government and agencies 549 554 1,103 806 51 857
Marketable equity securities 8 2 10 17 (11) 6
------- ------- ------- ------- ------- -------
Total interest and dividend
income 539 1,502 2,041 589 (584) 5
------- ------- ------- ------- ------- -------
Interest Expense
NOW accounts (7) 2 (5) (8) (13) (21)
Regular savings accounts (41) 0 (41) 65 10 75
Pelham money fund (129) 3 (126) (46) (6) (52)
Certificates of deposit 101 1,142 1,243 (124) (168) (292)
Capital lease (2) 0 (2) (2) 1 (1)
------- ------- ------- ------- ------- -------
Total interest expense (78) 1,147 1,069 (115) (176) (291)
------- ------- ------- ------- ------- -------
Net increase (decrease)
in net interest and
dividend income $ 617 $ 355 $ 972 $ 704 $ (408) $ 296
======= ======= ======= ======= ======= =======
</TABLE>
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<PAGE>
Provision for Loan Losses. The allowance for loan losses is established
through a provision for loan losses charged to the statement of operations.
Assessing the adequacy of the allowance for loan losses involves substantial
uncertainties and is based upon management's evaluation of the amounts required
to meet estimated losses in the loan portfolio after weighing various factors.
Among the factors management considers are the quality of specific loans, risk
characteristics of the loan portfolio generally, the level of nonaccrual loans,
current economic conditions, trends in delinquencies and charge-offs, and
collateral values of the underlying security. Ultimate loan losses may vary from
current estimates and future additions may be necessary. In addition, regulatory
agencies, as an integral part of the examination process, review Pelham Bank's
allowance and may require it to provide additions to the allowance based on
their assessment, which may differ from that of management.
The provision for loan losses in the first six months of 1996 decreased
to $169,000 from $300,000 during the comparable period in 1995. Among the
factors contributing to Finest's ability to reduce the provision was the
improvement in asset quality, including reductions in delinquency and net
charge-offs, as well as the percentage coverage for the allowance as of June 30,
1996. The allowance for loan losses was 4.1% of total loans and 192.5% of
non-performing loans at June 30, 1996, compared to 2.5% and 54.4%, respectively,
at June 30, 1995. Net charge-offs totaled $248,000 for the first six months in
1996 compared to $1.2 million for the same period in 1995.
The provision for loan losses in 1995 was $1.6 million, an increase of
$1.0 million from 1994, reflecting an increase in net charges-offs and
management's reevaluation of certain long-term problem assets. The provision for
loan losses in 1993 was $1.5 million greater than in 1994, as both net
charge-offs and nonperforming assets were at significantly higher levels. During
this period from December 31, 1993 to December 31, 1995, the allowance for loan
losses increased from 3.3% to 3.9% of loans, a percentage that management
believes is more reflective of the risk profile of the portfolio.
While management believes it has been prudent in its analysis of the
allowance for loan losses, management is unable to predict the ultimate course
of the economy or the extent of its impact on Finest's financial condition.
Non-interest Income (Expense). Non-interest income decreased to
$419,000 for the first six months of 1996 from $592,000 for the same period in
1995. This decrease was due primarily to a $283,000 decrease in deferred gains
on real estate owned sales. This decrease reflects the ongoing reduction of real
estate owned, and therefore the potential for deferred gains, as well as
management's decision to reduce the amount of OREO properties sold that the bank
would finance. Fee and service charge income increased to $294,000 for the first
six months of 1996, from $236,000 for the prior-year period, because the bank
increased these charges in the first quarter of 1996 as a result of a strategic
and competitive analysis.
Non-interest income in 1995 totaled $853,000, as compared to $875,000
in 1994. Results in 1995 benefited from a $95,000 favorable variance in
recognition of deferred gains on OREO sale offset by some non-recurring fees
recognized in 1994. A decrease of $181,000 in deferred gains accounted for the
decrease in non-interest income from 1993 to 1994, which was the result of the
recognition of gains on some large properties sold and financed in 1992. Fees
and service charges decreased to $489,000 in 1995 from $495,000 in 1994,
following a decrease from $506,000 in 1993. These decreases resulted primarily
from reduced activity as well as customers' maintaining higher compensating
balances.
Operating Expenses. For the first six months of 1996, non-interest
expense decreased to $2.7 million from $2.9 million for the comparable period in
1995, primarily due to decreases in professional fees and deposit insurance
premiums of $375,000 and $202,000, respectively. Professional fees in 1995 were
high because they included investment banking, legal and accounting fees
associated with the terminated merger with Andover Bancorp, which was rejected
by Finest's stockholders, while the reduction in deposit fees reflects the
improvement in the cost of FDIC insurance. The decreases in the first six months
of 1996 were somewhat offset by an increase in charges to the provision for
OREO, the result of an aggressive attempt to sell remaining OREO properties, and
a one-time merger termination fee of $225,000 paid to Andover in conjunction
81
<PAGE>
with the termination of the attempted merger. Total operating expenses decreased
to $6.1 million in 1995, from $6.7 million in 1994, after having increased from
$6.1 million in 1993. Both the decrease in 1995 and the increase in 1994 were
due primarily to expenses associated with dealing with problem assets.
Finest accounts for OREO at the lower of cost or estimated net fair
value. Declines in value subsequent to foreclosure or substantive repossession
result in a charge to the valuation allowance. Changes to the valuation
allowance caused by declines in value resulted in charges of $72,000 and $0 for
the six months ended June 30, 1996 and 1995, respectively, and $218,000,
$900,000 and $700,000 in 1995, 1994 and 1993, respectively. The deterioration in
the New England real estate market during the early 1990s led to high levels of
OREO and corresponding administrative costs. Net gains (losses) on the sale of
OREO for the first six months of 1996 and 1995 were $96,000 and $158,000,
respectively, while the corresponding totals for the years 1995, 1994 and 1993
were $305,000, ($115,000) and $223,000, respectively. The costs of foreclosing
on loans, as well as the administrative costs of maintaining the non-performing
assets, correspond with the volume of problem assets. Net losses from real
estate operations were $360,000 in 1995, $393,000 in 1994 and $834,000 in 1993.
Reflecting the significant progress made in reducing non-performing assets, the
total for the first six months of 1996 was $109,000, reduced from $133,000 for
the corresponding period in 1995. The reduced costs reflect a decrease in the
average balance of OREO. These costs will continue to be incurred until the
level of non-performing assets significantly decreases.
Federal and State Income Tax Expense. The results for the six month
period ended June 30, 1995 reflect a tax expense of $124,000, based on Finest's
estimate of income for the year. For the same period in 1996, Finest has
recorded a tax benefit of $2,000, attributable to the estimated decrease in
the valuation allowance for deferred tax assets. Finest believes that it will be
in a taxable income position prior to the end of 1996.
Effective January 1, 1993, Finest adopted the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences between the
financial reporting and tax basis of Finest's assets and liabilities.
Measurement of deferred tax assets and liabilities is based upon the provisions
of enacted tax laws and the effects of future changes in tax laws or rates. No
adjustment to income resulted from the cumulative effect of the accounting
change at January 1, 1993. Under the old method, the deferred method, annual
income tax expense was matched with pretax accounting income by providing
deferred taxes at current tax rates for timing differences between the
determination of net income for financial reporting and tax purposes.
Management believes the existing net deductible temporary differences
as of December 31, 1995 that give rise to the net deferred income tax asset will
reverse in periods in which Finest generates net taxable income. For the years
ending December 31, 1995, 1994 and 1993, Finest generated taxable losses of
approximately $1.1 million, $443,000 and $1.7 million, respectively. The amounts
for years after 1991 are subject to examination of tax returns by the Internal
Revenue Service. These amounts differed from pre-tax book income primarily as a
result of income and expense being recognized for income tax purposes in a
different period for book income. In 1995, Finest recorded a decrease of the
valuation allowance for deferred tax assets, other than the net unrealized loss
on available-for-sale securities, of $506,000 based upon budgeted earnings for
1996.
At December 31, 1995, the net deferred tax asset was $893,000. Finest
would need to generate approximately $2,300,000 of future net taxable income to
realize the excess of the net deferred tax asset over recoverable income taxes
as of December 31, 1995. Management believes that the net deferred income tax
asset at December 31, 1995 will be realized based upon the significant reduction
in the level of non-performing assets over the past three years. It is
management's belief that the valuation allowance is adequate to reduce the total
deferred tax asset to an amount that is more likely than not to be realized. It
should be noted, however, that factors beyond management's control, such as the
general state of the economy and real estate values, can affect future levels of
taxable income and that no assurance can be given that sufficient taxable income
will be generated to fully absorb gross deductible temporary differences.
82
<PAGE>
At December 31, 1995, Finest had net operating loss carryforwards for
tax purposes of approximately $3.2 million which will expire in the years 2008
and 2009. These carryforwards may be subject to the limitations continued in
Section 382 of the Internal Revenue Code.
Financial Condition
Total assets at June 30, 1996 were $179.3, a $1.8 million or 1.0%
decrease from the $181.1 million at December 31, 1995. Decreases in total loans
($7.0 million), OREO ($610,000) and federal funds ($6.9 million) were partially
offset by increases in investments ($10.9 million) and cash ($1.0 million). The
decrease in loan and OREO balances reflect the successful effort to improve
asset quality, while the decrease in federal funds and increase in investments
were part of a balance sheet restructuring in conjunction with management's
attempt to achieve a better asset/liability mix.
Total assets at December 31, 1995 amounted to $181.1 million, compared
to $178.0 million and $180.4 million at December 31, 1994 and 1993,
respectively. The increase in 1995 reflected a decrease in OREO more than offset
by an increase in investments. The decrease in 1994 was mainly due to a decrease
in cash and cash equivalents and OREO totaling $20.6 million that was partially
offset by an increase of $19.3 million in investment and available-for-sale
securities.
Loans. Net loans, prior to the allowance for loan losses, decreased to
$99.7 million at June 30, 1996 from $106.8 million at December 31, 1995. A
decrease of $9.4 million in real estate loans was partially offset by increases
in commercial and construction loans. The primary reason for the decrease in
real estate mortgage loans was the continuing effort to improve asset quality.
Net loans at December 31, 1994, prior to the allowance for loan losses, amounted
to $107.7 million, a decrease of $1.9 million compared with $109.6 million at
December 31, 1993. Loan decreases during 1994 and 1995 were the result of
management's effort to improve asset quality.
The following table shows the composition of Finest's loan portfolio at
the dates indicated.
<TABLE>
<CAPTION>
December 31,
June 30, -----------------------------------------------------------
1996 1995 1994 1993 1992 1991
--------- ------- -------- ---------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage $ 90,100 $ 99,478 $ 98,268 $ 92,514 $ 97,031 $ 96,355
Commercial 4,272 3,548 2,978 11,310 17,719 23,761
Real estate construction 3,935 2,369 4,935 5,099 3,610 6,579
Installment and other 1,830 1,843 2,082 1,396 1,865 2,183
Bankers acceptances -- -- -- -- -- 3,182
Money market participations -- -- -- -- -- 9,000
--------- --------- --------- --------- --------- ---------
Total loans 100,137 107,238 108,263 110,319 120,225 141,060
Unearned discount -- -- -- -- -- (1)
Deferred loan fees (189) (197) (144) (250) (459) (607)
Deferred gains on sales of OREO (275) (278) (422) (432) (728) --
Allowance for loan losses (4,057) (4,136) (3,746) (3,660) (4,335) (3,031)
--------- --------- --------- --------- --------- ---------
Net loans $ 95,616 $ 102,627 $ 103,951 $ 105,977 $ 114,703 $ 137,421
========= ========= ========= ========= ========= =========
</TABLE>
Finest did not sell loans in the secondary market during 1993, 1994,
1995 or the first half of 1996, and was not servicing any loans for others at
June 30, 1996 and December 31, 1995, 1994 and 1993.
Outstanding commercial loans totaled $4.3 million at June 30, 1996, as
compared to $3.5 million on December 31, 1995, $3.0 million at December 31, 1994
and $11.3 million at December 31, 1993. Real estate mortgage loans totaled $90.1
83
<PAGE>
million at June 30, 1996, as compared to $99.5 million at December 31, 1995,
$98.3 million at December 31, 1994 and $92.5 at December 31, 1993. The decrease
in real estate loans in 1996 is attributable in large part to Finest's effort to
improve asset quality in the portfolio.
Real estate (commercial, construction and land, and residential) and
commercial loans transferred into OREO totaled $426,000 in the first six months
of 1996 and $2.9 million, $1.7 million and $4.3 million in 1995, 1994 and 1993,
respectively. Commercial real estate and construction and land loans involve
significant risks compared with single-family residential mortgage and consumer
lending.
Installment loans outstanding were $1.8 million at June 30, 1996 as
compared to $1.8 million at December 31, 1995, $2.1 million at December 31,
1994, and $1.4 million at year-end 1993.
The following table reflects the scheduled maturities and sensitivities
of selected loans at June 30, 1996 before deferred gains, unearned income and
the allowance for loan losses:
<TABLE>
<CAPTION>
Less than One One Through Five Over Five
Year Years Years Total
----------------- ------------------- --------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Construction and land loans $3,633 $ -- $ 302 $3,935
Commercial loans 4,148 86 38 4,272
------ ------ ------ ------
Total $7,781 $ 86 $ 340 $8,207
====== ====== ====== ======
</TABLE>
Risk Elements
The following table shows the composition of non-performing assets:
<TABLE>
<CAPTION>
December 31,
June 30, --------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
-------- -------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans $ 1,846 $ 3,705 $ 3,403 $ 2,163 $ 1,835 $ 3,172
Restructured loans 261 331 343 -- -- --
-------- -------- -------- -------- -------- --------
Total non-performing loans 2,107 4,036 3,746 2,163 1,835 3,172
Other real estate owned 891 1,501 7,936 15,896 26,392 28,655
-------- -------- -------- -------- -------- --------
Total non-performing assets $ 2,998 $ 5,537 $ 11,682 $ 18,059 $ 28,227 $ 31,827
======== ======== ======== ======== ======== ========
Total assets $179,328 $181,103 $178,012 $180,403 $177,841 $194,144
======== ======== ======== ======== ======== ========
Total non-performing assets as 1.7% 3.1% 6.6% 10.0% 15.9% 16.4%
a percentage of total assets
</TABLE>
Finest had experienced a sharp increase in the level of non-performing
assets and a corresponding rise in foregone income, loan losses and other costs
associated with non-performing assets beginning in 1990. Starting in 1993,
however, significant progress was made in reducing non-performing assets, and
that progress has continued through June 30, 1996. OREO was reduced by $8.0
million in 1994 and $6.4 million in 1995 and has further been reduced by 41% to
$891,000 as of June 30, 1996. Non-performing and restructured loans, which had
shown increases of $1.6 million and $290,000 respectively in 1994 and 1995, had
decreased by $1.9 million or 48% by June 30, 1996. There was no interest income
recorded in 1994, 1995 or for the first six months of 1996 on nonaccrual loans
84
<PAGE>
outstanding as of the period ends. Had these loans performed under their
original terms, the amount recorded would have been $283,000 for the first six
months of 1996 and $546,000 and $421,000 in 1995 and 1994, respectively.
The impact of existing non-performing assets on future interest income
will largely depend upon converting those assets to earning assets either
through a return to performing status or through foreclosure and subsequent
disposition of the property. It is expected that the level of foreclosures and
related expenses will continue to moderate during the remainder of 1996,
although the significant decreases in non-performing assets experienced in
recent periods are unlikely to be duplicated because of the reductions achieved
to date. In addition, changes in general economic conditions and specific
conditions affecting borrowers will cause fluctuations, including increases,
during certain periods.
Nonaccrual Loans. Management places loans, regardless of collateral
values, on nonaccrual status when interest is past due 90 days or more. All
previously accrued but uncollected interest is reversed against current period
interest income when a loan is placed on nonaccrual status. When collection
procedures do not bring a loan to performing status, Finest generally institutes
action to foreclose upon the property or to acquire it by deed in lieu of
foreclosure. Loans for which payments are less than 90 days past due are placed
on nonaccrual status where there exists serious doubt as to the ultimate
collectibility of the loan.
The following table shows the composition of nonaccrual loans:
<TABLE>
<CAPTION>
December 31,
June 30, ---------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
-------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential real estate $ 1,809 $ 3,693 $ 2,504 N/A N/A N/A
Commercial real estate -- -- 853 N/A N/A N/A
Construction and land -- -- -- N/A N/A N/A
Commercial 28 -- 46 N/A N/A N/A
Consumer 9 12 -- N/A N/A N/A
-------- -------- -------- -------- -------- --------
Total nonaccrual loans $ 1,846 $ 3,705 $ 3,403 $ 2,163 $ 1,835 $ 3,172
======== ======== ======== ======== ======== ========
Allowance for loans losses $ 4,057 $ 4,136 $ 3,746 $ 3,660 $ 4,335 $ 3,031
======== ======== ======== ======== ======== ========
Total loans $100,137 $107,238 $108,263 $110,319 $120,225 $141,060
======== ======== ======== ======== ======== ========
Allowance for loan losses
as a percentage of
nonaccrual loans 219.8% 111.6% 110.1% 169.2% 236.2% 95.6%
Allowance for loan losses
as a percentage of non-
performing loans 192.5% 102.5% 100.0% 169.2% 236.2% 95.6%
Allowance for loan losses
as a percentage of total
loans 4.1% 3.9% 3.5% 3.3% 3.6% 2.1%
- ---------------
<FN>
N/A - not readily available.
</FN>
</TABLE>
During the first six months of 1996, nonaccrual loans decreased $1.9
million. While this decrease reflects the ongoing effort to improve asset
quality at the bank, any deterioration in economic conditions in Pelham's market
area, as well as events impacting specific performing credits, could result in
an increased level in the future.
85
<PAGE>
During 1995, loans on nonaccrual increased from $3.4 million to $3.7
million. However, the December 31, 1995 amount includes $2.5 million in
reclassifications. On a comparable basis, nonaccrual loans decreased during 1995
from $5.9 million to $3.7 million.
Restructured Loans. A restructured loan is one for which Finest has
modified the terms to provide a temporary reduction in the rate of interest and,
in most instances, an extension of payments of principal or interest or both due
to the deterioration in the financial position of the borrowers. Restructured
loans are not returned to performing status until the obligation has been
performed for a reasonable period of time at a market rate of interest, and the
ultimate collectibility is no longer in doubt.
Restructured loans amounted to $261,000 at June 30, 1996, a decrease
from the $331,000 and $343,000 levels at December 31, 1995 and 1994,
respectively.
OREO. Finest's OREO, which had risen significantly during 1990 and 1991
due to the deterioration of the southern New Hampshire real estate market and
the economy, remained at high levels through 1994. A valuation allowance was
established during 1992 and represents management's attempt to record the asset
at estimated fair value less estimated cost to sell. During 1995, substantial
improvement in the level of OREO was achieved as the net balance, after
valuation allowance, was reduced from $7.9 million to $1.5 million. However,
included in the reduction is $2.5 million which was reclassified from OREO to
nonaccrual loans. Further progress was made during the first six months of 1996,
with the balance being reduced to $891,000. All OREO is carried at the lower of
the carrying value of the loan or the estimated net fair value of the property
constructively or actually received. There are no binding commitments for
capital expenditures on OREO at June 30, 1996.
The following table shows the composition of OREO:
<TABLE>
<CAPTION>
December 31,
June 30, ---------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
-------- --------- ---------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential real estate $ 722 $ 1,113 $ 1,851 $ 5,061 $ 11,587 $ 8,858
Commercial real estate -- 430 6,860 8,697 10,552 10,364
Multi-family real estate 45 84 11 102 145 -- (1)
Construction and land 274 13 55 2,036 5,208 6,272
Receivables under real estate
installment sales -- -- -- -- -- 3,580
-------- -------- -------- -------- -------- --------
1,041 1,640 8,777 15,896 27,492 29,074
Deferred gains on sales of
OREO -- -- -- -- -- (419)
Valuation allowance (150) (139) (841) -- (1,100) --
-------- -------- -------- -------- -------- --------
Total OREO $ 891 $ 1,501 $ 7,936 $ 15,896 $ 26,392 $ 28,655
======== ======== ======== ======== ======== ========
- --------
<FN>
(1) Amount included in residential real estate.
</FN>
</TABLE>
In-substance foreclosure ("ISF") loans, included in the above table,
with respect to which Pelham Bank had not completed the legal transfer of
ownership, totaled $2.5 million, $3.2 million and $8.5 million at December 31,
1994, 1993 and 1992 respectively. These loans were no longer classified as OREO
beginning in 1995.
86
<PAGE>
Allowance for Loan Losses. The following table summarizes the activity
in Finest's allowance for loan losses for the five years ended December 31, 1991
to 1995 and the six months ended June 30, 1996:
<TABLE>
<CAPTION>
December 31,
June 30, ------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
-------- --------- ---------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $ 4,136 $ 3,746 $ 3,660 $ 4,335 $ 3,031 $ 7,149
Provision 169 1,600 600 2,125 3,200 5,338
Charge-offs:
Real estate loans (400) (896) (930) (2,996) (590) (9,228)
Installment loans (3) (37) (4) (31) (26) (38)
Commercial and all other loans -- (921) (117) (382) (2,167) (1,048)
-------- -------- -------- -------- -------- --------
Total charge-offs (403) (1,854) (1,051) (3,409) (2,783) (10,314)
-------- -------- -------- -------- -------- --------
Recoveries:
Real estate loans 92 135 355 578 750 827
Installment loans 2 23 3 10 13 10
Commercial and all other loans 61 486 179 21 124 21
-------- -------- -------- -------- -------- --------
Total recoveries 155 644 537 609 887 858
-------- -------- -------- -------- -------- --------
Net charge-offs (248) (1,210) (514) (2,800) (1,896) (9,456)
-------- -------- -------- -------- -------- --------
Balance at end of period $ 4,057 $ 4,136 $ 3,746 $ 3,660 $ 4,335 $ 3,031
======== ======== ======== ======== ======== ========
Ratio of net charge-offs to average
loans outstanding 0.24% 1.08% 0.47% 2.48% 1.45% 6.40%
</TABLE>
Management analyzes the adequacy of allowance for loan losses at least
quarterly. Management measures the adequacy of the allowance by assigning loans
to risk categories based on a loan classification system modeled after the
regulatory classification system. In addition, an independent loan review
consultant monitors the risk assignment and prepares a written report for
management and the board on a quarterly basis. Finest also monitors its loan and
OREO portfolios through the use of "action plans" prepared for nonaccrual loans,
other loans and OREO identified as needing closer monitoring. These "action
plans" are prepared for loans that have been assigned adverse risk ratings and
are considered in determining the appropriate level of the allowance for loan
losses. While management believes that the adequacy of its allowance for loan
losses is adequate to cover potential losses, there are uncertainties regarding
future events, particularly those that might impact the regional economy and the
real estate market. Allocation of the allowance for loan losses to the various
categories of the portfolio is also made periodically based on management's
judgment in weighing various factors, including the quality of specific loans,
the level of nonaccrual loans in various categories, current economic
conditions, trends in delinquencies and prior charge-offs, and the collateral
value of the underlying security. Because of the many estimates and the high
degree of judgment involved, changes may be required in those allocations. It
should also be noted that by making these allocations, management is in no way
limited in the use of any portion of the allowance to address any problems that
may occur.
The allowance for loan losses as a percentage of total loans has
increased over the last several years and totaled 4.1% at June 30, 1996 compared
to 3.9%, 3.5% and 3.3% at December 31, 1995, 1994 and 1993, respectively. Net
charge-offs totaled $248,000 for the first six months of 1996 compared with $1.2
million in the prior-year period. Net charge-offs as a percentage of average
loans equaled 0.24% for the first six months of 1996 compared to 1.10% during
the same period in 1995.
87
<PAGE>
The following table summarizes the activity in Finest's allowance for
loan losses for the five years ended December 31, 1991 to 1995 and the six
months ended June 30, 1996:
<TABLE>
<CAPTION>
December 31,
June 30, --------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
----------------- --------------- ------------------- ------------------- ----------------- -----------------
Loan Loan Loan Loan Loan Loan
Category Category Category Category Category Category
As a % As a % As a % As a % As a % As a %
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
Loan Alloc- Loan Alloc- Loan Alloc- Loan Alloc- Loan Alloc- Loan Alloc- Loan
Category ated Portfolio ated Portfolio ated Portfolio ated Portfolio ated Portfolio ated Portfolio
- -------- ------- --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
Residential $1,303 49.7% $1,642 49.7% $ 658 56.1% $ 637 49.2% N/A 50.1% N/A 44.5%
Commercial 1,495 40.3 2,120 43.1 1,762 34.8 1,561 34.6 N/A 30.6 N/A 23.8
Construction
and land 59 3.9 43 2.2 -- 4.5 -- 4.6 N/A 3.0 N/A 4.7
------ ----- ------ ----- ------ ----- ------ ----- ------- ----- ------ -----
Total real
estate 2,857 93.9 3,805 95.0 2,420 95.4 2,198 88.4 N/A 83.7 N/A 73.0
Consumer 16 1.8 16 1.7 55 1.9 46 1.3 N/A 1.6 N/A 1.5
Commercial 79 4.3 233 3.3 249 2.7 240 10.3 N/A 14.7 N/A 25.5
Unallocated 1,105 -- 82 -- 1,022 -- 1,176 -- N/A -- N/A --
------ ----- ------ ----- ------ ----- ------ ----- ------- ----- ------- -----
Totals $4,057 100.0% $4,136 100.0% $3,746 100.0% $3,660 100.0% $ 4,335 100.0% $ 3,031 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ======= ===== ======= =====
<FN>
N/A - not readily available.
</FN>
</TABLE>
Notwithstanding the foregoing allocations, the entire allowance for
loan losses is available to absorb charge-offs in any category of loans.
Investments
As of June 30, 1996, Finest's investment portfolio totaled $68.9
million, a $10.8 million increase from December 31, 1995. Finest's total
securities portfolio was $48.4 million at year-end 1994, a $19.3 million
increase from $29.1 million at year-end 1993.
The increase in the portfolio over the last several years is due to the
decrease in loans and OREO as part of Finest's efforts to improve asset quality,
as well as the Bank's ability and desire to retain its deposit base to provide a
steady funding source.
Finest manages the investments portfolio in accordance with the
investment policy adopted by the Board of Directors. The primary objectives are
to provide interest and dividend income, to ensure adequate liquidity and
achieve an adequate asset/liability gap position.
On December 31, 1993, Finest adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). SFAS 115 requires that investments be classified in
one of three categories: held-to-maturity, trading or available-for-sale.
Debt securities are classified as held-to-maturity only when there is
positive intent and ability to hold them to maturity. Such securities are
recorded at amortized cost. Trading securities are debt and equity securities
held principally for the purpose of sale in the near term. Such securities are
recorded at fair value, with unrealized gains and losses recorded in earnings.
The Bank's current policy does not permit trading securities. Investments
available-for-sale are any debt or equity security not classified as either held
to maturity or trading securities.
88
<PAGE>
Investments available-for-sale are recorded at their fair value with
changes in fair value recorded as a separate component of stockholders' equity,
net of the related income taxes. Upon the adoption of SFAS 115 in 1993, Pelham
Bank transferred $11.8 million of various securities into investments
available-for-sale. The net unrealized gain on the investments
available-for-sale included in stockholders' equity, net of applicable income
taxes, was $210,000 at December 31, 1993. The net unrealized loss on the
investments available-for-sale included in stockholders' equity, net of
applicable income taxes, was $330,000 at December 31, 1994. Finest had an
unralized gain on investments available-for-sale of $181,000 at December 31,
1995 compared to an unrealized loss of $64,000 at June 30, 1996.
The following table sets forth information regarding the carrying
amounts of the investment portfolio at the period indicated:
<TABLE>
<CAPTION>
At December 31,
June 30, --------------------------------
1996 1995 1994 1993
------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Investments available-for-sale:
U.S. government and federal agency
obligations $32,134 $27,007 $ 6,830 $ 9,150
Marketable equity securities 2,803 2,837 2,811 2,660
------- ------- ------- -------
Total investments available-for-sale 34,937 29,844 9,641 11,810
------- ------- ------- -------
Investments held-to-maturity:
Mortgage-backed securities 17,305 11,508 -- --
------- ------- ------- -------
Corporate debt securities 100 100 100
U.S. government and federal agency
obligations 13,750 13,750 35,005 14,428
Municipal obligations 2,799 2,869 3,694 2,864
------- ------- ------- -------
Total investments held-to-maturity 33,954 28,227 38,799 17,292
------- ------- ------- -------
Total investments $68,891 $58,071 $48,440 $29,102
======= ======= ======= =======
</TABLE>
89
<PAGE>
The following table presents an analysis of the maturity distribution
and average yields of investments available-for-sale and held-to-maturity at
June 30, 1996, shown and calculated on the basis of the amortized cost and
effective yield weighted for the schedule maturity of each security. Yields on
tax exempt bonds and obligations have been adjusted for tax effects based on a
34% tax rate.
<TABLE>
<CAPTION>
Length of Time to Maturity
--------------------------
After One Year After Five Years
But Within Five But Within Ten
Within One Year Years Years After Ten Years Total
------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investments available-for-sale:
U.S. government and
federal agency obligations $11,463 6.67% $17,240 6.71% $3,596 7.49% -- -- $32,299 6.97%
------- ------- ------ ----- -------
Total investments
available-for-sale (1) 11,463 6.67% 17,240 6.71% 3,596 7.49% -- -- 32,299 6.97%
------- ------- ------ ----- -------
Investments held-to-maturity:
U.S. government and federal
agency obligations -- -- 13,750 6.40% -- -- -- -- 13,750 6.40%
Mortgaged-backed securities -- -- -- -- 8,259 6.45% 9,046 6.77% 17,305 6.67%
Tax-exempt bonds and
obligations -- -- 1,084 8.80% 1,615 5.46% 100 9.25% 2,799 6.52%
Other bonds and obligations -- -- 100 8.50% --(1) -- -- -- 100 8.50%
----- ----- ------- ----- ----- ---- ----- ------ ------ ----
Total investments
held-to-maturity -- -- 14,934 6.58% 9,874 6.27% 9,146 6.80% 33,954 6.61%
------- ------- ------ ----- -------
Total portfolios $11,463 6.67% $32,174 6.65% $13,470 6.67% $9,146 6.80% $66,253 6.71%
======= ==== ======= ==== ======= ==== ====== ==== ======= =====
- --------------
<FN>
(1) Not included is $2,742,000 in marketable equity securities.
</FN>
</TABLE>
The approximate market value of marketable equity securities available-
for-sale totaled $2.8 million at June 30, 1996.
The primary component of the total investment portfolio consists of
U.S. government and federal agency obligations, and other investment grade
securities.
Effective December 31, 1993, Finest adopted, on a prospective basis,
Statement of Financial Accounting Standards No. 115 (SFAS 115) "Accounting for
Certain Investments in Debt and Equity Securities" and revised its securities
accounting policies. See Note 2 of Notes to Finest Financial Statements.
90
<PAGE>
The following table sets forth the amortized cost basis and fair value
of held-to-maturity securities at the dates indicated:
<TABLE>
<CAPTION>
December 31,
June 30, --------------------------------------------------
1996 1995 1994
--------------------- ---------------------- ----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Basis Value Cost Basis Value Cost Basis Value
---------- ----- ---------- ----- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
United States Government and
Agency Obligations $13,750 $13,517 $13,750 $13,844 $35,005 $34,813
State and Municipal Obligations 2,799 2,866 2,869 2,907 3,694 3,722
Corporate Debt Securities 100 100 100 100 100 101
Mortgage-Backed Securities 17,305 16,760 11,508 11,587
$33,954 $33,243 $28,227 $28,438 $38,799 $38,636
======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth the amortized cost basis and fair value
of available-for-sale securities at the dates indicated:
<TABLE>
<CAPTION>
December 31,
June 30, --------------------------------------------------
1996 1995 1994
--------------------- ---------------------- ----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Basis Value Cost Basis Value Cost Basis Value
---------- ----- ---------- ----- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Marketable Equity Securities $ 2,742 $ 2,803 $ 2,742 $ 2,837 $ 2,992 $ 2,811
United States Government and
Agency Obligations 32,299 32,134 26,807 27,007 6,979 6,830
-------- -------- -------- -------- -------- --------
$ 35,041 $ 34,937 $ 29,549 $ 29,844 $ 9,971 $ 9,641
======== ======== ======== ======== ======== ========
</TABLE>
The following table sets forth the amortized cost basis of Federal Home
Loan Bank stock. The amortized cost basis approximates fair value:
December 31,
June 30, ---------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
Federal Home Loan Bank Stock $648 $566 $--
==== ==== ===
Deposits
Total deposits decreased by $3.5 million to $158.2 million from
December 31, 1995 to June 30, 1996. The decrease was due to seasonal
fluctuations, as the June 30, 1996 amount was flat when compared to the June 30,
1995 level. Deposit levels also remained flat between December 31, 1994 and
December 31, 1995, at approximately $161 million. Pelham has a relatively stable
deposit base, with deposits derived from customers who work or reside in its
market area. There were no brokered deposits at Finest in 1993, 1994, 1995 or
for the six months ended June 30, 1996.
91
<PAGE>
The following table reflects the balance of deposit accounts of Finest
at the date indicated and the weighted average interest rates at June 30, 1996:
June 30, 1996
---------------------------------------------
Percent Weighted
of Average
Amount Total Interest Rate
------ ------- -------------
(Dollars in thousands)
Demand deposits $ 26,153 16.5% --
NOW accounts 9,121 5.8 2.08%
Regular savings accounts 24,216 15.3 2.37
Pelham money fund 22,891 14.5 2.52
Fixed rate certificates 75,806 47.9 5.55
-------- ------
Total deposits $158,187 100.0% 3.62%
======== ====== =====
The following table indicates the balance of deposit accounts of Finest
at the dates indicated and the weighted average interest rates at December 31,
1995, 1994 and 1993:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1995 1994 1993
----------------------------- -------------------------------- --------------------------------
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
of Interest of Interest of Interest
Amount Total Rate Amount Total Rate Amount Total Rate
------ ----- ---- ------ ----- ---- ------ ----- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits $ 24,415 15.1% -- $ 24,635 15.3% -- $ 23,717 14.5% --
NOW accounts 8,664 5.4 2.86% 8,666 5.4 2.84% 9,128 5.6 2.98%
Regular savings account 24,410 15.1 2.70 25,474 15.7 2.70 24,169 14.7 2.66
Pelham money fund 24,581 15.2 2.77 28,430 17.6 2.76 30,980 18.9 2.78
Fixed rate certificates 79,599 49.2 5.23 74,159 46.0 3.74 76,028 46.3 3.96
-------- ----- -------- ----- -------- -----
Total deposits $161,669 100.0% 3.58% $161,364 100.0% 2.82% $164,022 100.0% 2.99%
======== ====== ===== ======== ====== ==== ======== ====== =====
</TABLE>
The following table presents Pelham Bank's outstanding time
certificates in denominations of $100,000 and over, with remaining maturities at
the dates indicated.
December 31,
June 30, ------------------------------------
Remaining Term to Maturity 1996 1995 1994 1993
- -------------------------- ------ ------ ------ ------
(Dollars in thousands)
Three months or less $ 4,576 $ 8,686 $ 7,347 $ 3,366
Three to six months 4,716 4,463 7,441 4,186
Six to twelve months 4,894 3,689 3,004 4,166
Over twelve months 2,171 2,696 1,582 2,526
------- ------- ------- -------
$16,357 $19,534 $19,374 $14,244
======= ======= ======= =======
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Asset and Liability Management
Pelham Bank's Investment Committee monitors and manages Pelham Bank's
overall balance sheet interest sensitivity position, the securities portfolios,
funding and liquidity. Interest sensitivity, as measured by Pelham Bank's gap
position, is affected by the level and direction of interest rates and current
liquidity preferences of its customers. Those factors, as well as projected
balance sheet growth, current and potential pricing actions, competitive
influences, monetary and fiscal policy, and the regional economic environment,
are considered in the asset and liability management decision process.
The following table sets forth the maturity and repricing information
relating to interest sensitive assets and liabilities at June 30, 1996:
<TABLE>
<CAPTION>
Interest Rate Sensitivity
At June 30, 1996
-------------------------------------------------------------------------
1-180 181-365 1-3 3-5 5+
Days Days Years Years Years Total
<S> <C> <C> <C> <C> <C> <C>
Interest sensitive assets:
Federal funds sold $ 2,200 $ -- $ -- $ -- $ -- $ 2,200
Investments available-for-sale 12,461 4,001 6,993 7,248 4,337 35,040
Investments held-to-maturity 1,448 3,121 6,863 13,880 8,642 33,954
FHLB stock 648 -- -- -- -- 648
Loans (fixed and adjustable rate) (1) 48,567 28,909 9,487 6,133 5,287 98,383
-------- -------- -------- -------- -------- --------
Total interest sensitive assets 65,324 36,031 23,343 27,261 18,266 170,225
-------- -------- -------- -------- -------- --------
Interest sensitive liabilities:
Non-interest bearing demand deposits -- -- -- -- 26,153 26,153
Money market deposit accounts 22,891 -- -- -- -- 22,891
Certificates of deposit 41,635 22,051 11,674 291 155 75,806
Other deposits -- -- -- -- 33,337 33,337
-------- -------- -------- -------- -------- --------
Total interest sensitive liabilities 64,526 22,051 11,674 291 59,645 158,187
-------- -------- -------- -------- -------- --------
Net interest rate sensitivity gap $ 798 $ 13,980 $ 11,669 $ 26,970 $(41,379) $ 12,038
======== ======== ======== ======== ======== ========
Cumulative net interest rate sensitivity gap $ 798 $ 14,778 $ 26,447 $ 53,417 $ 12,038
======== ======== ======== ======== ========
Cumulative net interest rate sensitivity gap
as a percentage of total assets 0.44% 8.24% 14.75% 29.79% 6.71%
<FN>
(1) Includes loans held-for-sale of $92,000 and excludes non-accrual loans of $1,846,000.
</FN>
</TABLE>
The balance of interest-sensitive asset and liability accounts has been
allocated among the various periods using generally accepted techniques. Loans
and investment securities are shown in the table in the time period
corresponding to the scheduled repricing of those assets based on the respective
contract or agreement. Deposits are allocated to the period in which the rates
could next be adjusted.
Regular savings and interest bearing checking accounts are considered
"core deposits" by management, and therefore, relatively insensitive to interest
rate fluctuation and any future changes to the interest rates paid on these
accounts is at the sole discretion of management. Based upon Finest's assessment
of current market conditions and historical experience, such accounts have been
included in the "Other Deposits" category and have been allocated to the
five-plus year time period. The interest rate sensitivity of Finest's assets and
liabilities illustrated in the above table would vary significantly if different
assumptions were used or if actual experience differed from that indicated by
such assumptions.
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Liquidity
Finest's only source of funds is dividends from Pelham Bank, which were
paid in 1993, 1995 and 1996, but not in 1994. Pursuant to the terms of the
Order, payments of dividends by Pelham Bank were subject to FDIC approval from
1992 to 1995 and subject to notification in 1996. Finest paid a dividend to its
stockholders in September 1995, but did not pay dividends in 1993, 1994 or
during the first six months of 1996.
Liquidity is measured by the ability of Finest to meet each maturing
obligation or customer demand for funds. Finest's principal sources of liquidity
are customer deposits, scheduled amortization and repayments of loan principal,
cash flow from operations and the maturing of various investments.
Management believes it is prudent to maintain an investment portfolio
that not only provides a source of income, but also provides a potential source
of liquidity to meet loan demand and deposit outflows. Finest adjusts the level
of its liquid assets and the asset mix based upon management's judgment as to
the quality of specific investment opportunities and the relative attractiveness
of their maturities and yields. At June 30, 1996, Finest's investments
available-for-sale and federal funds sold totaled $37.1 million, 58% of which
mature within one year.
Another source of liquidity is funds purchased from other banks and the
sale of securities under a master repurchase agreement. Finest may also obtain
funds from the Federal Reserve Bank of Boston and the Federal Home Loan Bank by
pledging certain assets.
At June 30, 1996, Finest had home equity, reserve credit and commercial
unused lines of credit totaling $2.7 million. Outstanding commitments to
originate real estate loans totaled $1.3 million. Unadvanced portions of
construction loans amounted to $2.2 million. Standby letters of credit were
$458,000. There were no loans sold with recourse. Management believes that its
sources of liquidity are sufficient to meet these commitments if and as called
upon.
Cash flows provided by operating activities increased by $723,000 or
129% to $1.3 million at June 30, 1996, as compared to June 30, 1995.
As of June 30, cash flows from investing activities decreased by $1.0
million from $4.3 million in net cash provided by investing activities in 1995
to $3.2 million in net cash used in investing activities in 1996. The change is
mainly due to an increase in the net cash used in and relating to securities
activity more than offsetting a decrease in loans.
Cash flows from financing activities were relatively stable at $3.5
million and $3.1 million for the first six months of 1996 and 1995,
respectively.
Capital Resources
At June 30, 1996, Finest's capital totaled $18.7 million or 10.4% of
total assets as compared to $17.3 million or 9.5% of total assets at December
31, 1995. At December 31, 1994, Finest reported total capital of $15.3 million,
or 8.6% of total assets and had $14.8 million or 8.2% of total assets at
December 31, 1993. Finest and Pelham Bank continue to maintain capital ratios in
excess of all applicable regulatory minimums.
The capital position of banks and bank holding companies are regulated
by various Federal and State agencies. Pelham Bank is in compliance with federal
regulatory capital requirements. See Note 14 to the consolidated financial
statements.
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Regulatory Agreements
From October 1992 through August 1995, Pelham Bank operated under the
Order issued by the FDIC and concurred to by the New Hampshire State Banking
Department, which Order was modified by action dated November 23, 1993. The
Order outlined corrective actions considered necessary to improve the condition
of Pelham Bank, including the development and implementation of plans, policies
and procedures to improve operations and conditions of certain assets of Pelham
Bank, particularly in the areas of asset quality. The Order was terminated by
the FDIC in a letter dated September 13, 1995 and was replaced by the MOU, which
has been terminated by the FDIC in a letter dated August 12, 1996.
Impact of Inflation
The Consolidated Financial Statements and related consolidated
financial data presented herein have been prepared in accordance with generally
accepted accounting principles which require the measurement of financial
position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The primary impact of inflation on operations of Pelham Bank is
reflected in increased operating costs. Unlike most industrial companies,
virtually all 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 effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
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DESCRIPTION OF FIRST ESSEX CAPITAL STOCK
The following description of First Essex capital stock is a summary and
is qualified in its entirety by the First Essex Certificate and the First Essex
By-Laws, which documents are incorporated herein by reference.
The authorized capital stock of First Essex is 25,000,000 shares of
First Essex Common Stock and 5,000,000 shares of preferred stock, par value
$.10, of which 100,000 shares have been designated Series A Junior Participating
Cumulative Preferred Stock ("Series A Preferred Stock").
First Essex Common Stock
As of June 30, 1996, there were 6,045,901 shares of First Essex Common
Stock issued and outstanding and 1,986,000 shares of First Essex Common Stock
held in treasury. In addition, as of June 30, 1996, there were 749,266 shares of
First Essex Common Stock reserved for issuance upon the exercise of outstanding
stock options pursuant to the Stock Option Plan.
Dividends. Holders of shares of First Essex Common Stock are entitled
to receive such dividends as may be declared by the First Essex Board out of
funds legally available for such purpose, but only after payment of dividends
required to be paid on outstanding shares of any other class or series of stock
having preference over First Essex Common Stock as to dividends.
Voting Rights. Each holder of shares of First Essex Common Stock shall
be entitled to one vote on all matters for each share held by such holder. There
are no cumulative voting rights in the election of the Directors of the First
Essex Board.
Under the First Essex Certificate, the vote of holders of at least 80%
of the voting power of First Essex voting stock, voting together as a single
class, is required for certain Business Combinations (as defined therein). The
Merger is not considered a Business Combination for these purposes. See
"Comparison of Rights of Holders of Finest Common Stock and First Essex Common
Stock". Affirmative vote of at least 66 2/3 % of the total votes of First Essex
voting stock is required to amend the First Essex By-Laws and, with certain
exceptions, the First Essex Certificate.
Liquidation Rights. In the event of liquidation, dissolution or winding
up of First Essex, after there shall have been paid to or set aside for the
holders of any class of stock having preference over First Essex Common Stock
the full preferential amounts to which such holders are entitled, the holders of
First Essex Common Stock and of any class or series of stock entitled to
participate in whole or in part therewith as to distribution of assets shall be
entitled (after payment of all debts and liabilities of the corporation) to a
ratable distribution of the remaining assets of First Essex.
Series A Preferred Stock
No shares of Series A Preferred Stock are issued and outstanding. As of
June 30, 1996, First Essex had 6,045,901 preferred stock purchase rights
("Purchase Rights") issued and outstanding pursuant to the First Essex Rights
Agreement. The Purchase Rights entitle the holders thereof to purchase shares of
Series A Preferred Stock under certain circumstances. As of June 30, 1996, there
were 100,000 shares of Series A Preferred Stock reserved for issuance upon
exercise of the Purchase Rights.
Holders of Series A Preferred Stock would be entitled to receive
quarterly dividends equal to the greater of (i) $8.00 per share or (ii) 100
times the per share amount of all dividends declared on First Essex Common Stock
in a specified period. Each share of Series A Preferred Stock would entitle the
holder thereof to 100 votes on all matters submitted to a vote of stockholders,
which number may be adjusted in accordance with First Essex Certificate. In
addition, in the event dividends for six quarters were to be in arrears, holders
of Series A Preferred Stock would have the right to elect two directors to the
First Essex Board. Shares of Series A Preferred Stock would be redeemable by
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First Essex at any time by the affirmative vote of a majority of directors by
paying $2,800 (plus accrued and unpaid dividends) per share. In the event of
liquidation, the holders of Series A Preferred Stock would receive, prior to any
distribution to holders of First Essex Common Stock, an amount equal to the
greater of $2,800 per share or 100 times the per share amount to be distributed
to the holders of First Essex Common Stock, plus all accrued and unpaid
dividends.
COMPARISON OF RIGHTS OF HOLDERS OF
FINEST COMMON STOCK AND FIRST ESSEX COMMON STOCK
At the Effective Time, the stockholders of Finest, except those
stockholders exercising dissenters' rights, will become stockholders of First
Essex. As stockholders of Finest, their rights are presently governed by New
Hampshire law and by the Finest Articles and the Finest By-laws. As stockholders
of First Essex, their rights will be governed by Delaware law, the First Essex
Certificate and the First Essex By-Laws. The following discussion summarizes the
material differences between the rights of holders of Finest Common Stock and
holders of First Essex Common Stock and differences between the charters and
by-laws of Finest and First Essex. This summary does not purport to be complete
and is qualified in its entirety by reference to the Finest Articles, the Finest
By-laws, the First Essex Certificate and the First Essex By-laws and the
relevant provisions of New Hampshire and Delaware law.
Special Meetings of Stockholders
Finest. New Hampshire law provides that special meetings of
stockholders may be called by the board of directors, the person or persons
authorized to do so by the articles of incorporation or by-laws or upon written
application to the secretary of the corporation by the holders of at least ten
percent of all the shares entitled to vote at the meeting. The Finest By-laws
provide that, unless otherwise prescribed by statute, a special meeting may be
called by the Chairman of the Board, if any, the President, or by a majority of
the board of directors, or upon written application therefor to the Secretary by
the holders of not less than ten percent of the shares entitled to vote at the
meeting.
First Essex. Delaware law provides that special meetings of
stockholders may be called only by the directors or by any other person as may
be authorized by the corporation's certificate of incorporation or by-laws. The
First Essex By-Laws provide that a special meeting may be called at any time
only by the Chairman of the Board, if one is elected, the President or by the
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affirmative vote of a majority of the directors then in office. The time, date
and place of the special meeting may be changed at any time by vote of the First
Essex Board. If at the time a special meeting is called, there is an Interested
Stockholder (as defined below), such call shall also require the affirmative
vote of a majority of the Continuing Directors (as defined below) then in
office. Only those matters set forth in the notice of the special meeting may be
considered or acted upon at such special meeting, unless otherwise provided by
law. "Interested Stockholder" means any person (other than First Essex, any
subsidiary of First Essex or any employee stock ownership plan formed by First
Essex and/or any subsidiary) who or which: (i) is the beneficial owner, directly
or indirectly, of more than 10% of the voting power of the then outstanding
voting stock of First Essex; (ii) is an affiliate of First Essex and at any time
within the two-year period immediately prior to and including the date in
question was the beneficial owner, directly or indirectly, of 10% or more of the
voting power of the then outstanding voting stock of First Essex; or (iii) is an
assignee of or has otherwise succeeded to the beneficial ownership of any shares
of voting stock which were at any time within the two-year period immediately
prior to and including the date in question beneficially owned by any Interested
Stockholder, if such assignment or succession shall have occurred in the course
of a transaction or series of transactions not involving a public offering
within the meaning of the Securities Act and such assignment or succession was
not approved by the affirmative vote of a majority of the Continuing Directors.
"Continuing Director" means (i) any member of the First Essex Board who is not
an Interested Stockholder or an affiliate or associate of an Interested
Stockholder and was a member of the First Essex Board prior to the time that the
Interested Stockholder became an Interested Stockholder, and (ii) any successor
of a Continuing Director who is not an affiliate or associate of the Interested
Stockholder and is recommended to succeed a Continuing Director by the
affirmative vote of a majority of the Continuing Directors. If at any relevant
time there is no Interested Stockholder, the term "Continuing Director" shall
mean any member of the First Essex Board.
Inspection Rights
Finest. Under New Hampshire law, stockholders may inspect and copy,
among other things, a corporation's articles of incorporation and any amendments
thereto, its by-laws and any amendments thereto, records of all minutes of all
stockholder meetings and records of all actions taken by stockholders without a
meeting for the past three years and all written communications to stockholders
within the past three years, if the stockholder's demand is in writing and
delivered to the corporation at least five business days before the date on
which the stockholder wishes to so inspect and copy. Further, stockholders may
inspect and copy excerpts from minutes of any meeting of the Board of Directors
or records of any action of a committee of the Board of Directors acting in lieu
thereof, records of action taken by the Board of Directors without a meeting,
accounting records of the corporation, and the record of stockholders, provided
that the stockholders' demand is in writing, is made in good faith, states a
proper purpose, describes with reasonable particularity the purpose and the
records desired to be inspected, and the records are directly connected with
such purpose. In addition, stockholders have the right to inspect the
stockholder list during the period such list is available for inspection
beginning two business days after the notice of the meeting is given for which
the list was prepared and continuing through the meeting.
First Essex. Under Delaware law, stockholders, upon demonstration of a
proper purpose, have the right to inspect a corporation's stock ledger,
stockholder list, and other books and records. In addition, under the First
Essex By-Laws, stockholders may inspect the stockholder list, for any purpose
germane to the meeting of stockholders for which such list was prepared, during
ordinary business hours, from at least 10 days prior to the meeting through the
meeting.
Action by Consent of Stockholders
Finest. Under New Hampshire law and the Finest By-laws, any action to
be taken by stockholders may be taken without a meeting if the action is taken
with the written consent of all stockholders entitled to vote on the action.
First Essex. Under Delaware law, unless the certificate of
incorporation provides otherwise, any action to be taken by stockholders may be
taken without a meeting, without prior notice, and without a vote, if the
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stockholders having the number of votes that would be necessary to take such
action at a meeting at which all stockholders were present and voted consent to
the action in writing. However, under the First Essex Certificate, any action
required or permitted to be taken by stockholders must be effected at a duly
called annual or special meeting and may not be effected by any consent in
writing.
Cumulative Voting
Finest. Under New Hampshire law, a corporation may provide in its
articles of incorporation for cumulative voting by stockholders in the election
of directors (i.e., each stockholder casts as many votes for directors as he has
shares of stock multiplied by the number of directors to be elected). The Finest
Articles do not provide for cumulative voting.
First Essex. Under Delaware law, a corporation may provide in its
certificate of incorporation for cumulative voting by stockholders in elections
of directors. The First Essex Certificate does not provide for cumulative
voting.
Preemptive Rights
Finest. Under New Hampshire law, stockholders do not have a preemptive
right to acquire the corporation's unissued shares except to the extent provided
in its articles of incorporation. Finest's Articles provide that stockholders do
not have preemptive rights.
First Essex. Unless otherwise provided in the charter, Delaware law
does not grant any preemptive rights. First Essex's Certificate provides that
stockholders do not have preemptive rights.
Dividends and Repurchases of Stock
Finest. Under New Hampshire law, the payment of dividends and the
repurchase of a corporation's stock are generally permissible, if such actions
do not violate the corporation's articles of incorporation and, if after giving
effect to such actions, the corporation is able to pay its debts as they become
due in the usual course of business and the corporation's total assets exceed
the sum of its total liabilities plus the amount needed to satisfy the rights of
those stockholders whose rights are superior to those receiving any dividend.
First Essex. Under Delaware law, a corporation generally is permitted,
subject to any restrictions contained in its charter, to declare and pay
dividends out of surplus or out of net profits for the current and/or preceding
fiscal year, provided that such dividends will not reduce capital below the
amount of capital represented by all classes of stock having a preference upon
the distribution of assets. Also under Delaware law, a corporation may generally
redeem or repurchase shares of its stock if such redemption or repurchase will
not impair the capital of the corporation.
Classification of the Board of Directors
Finest. New Hampshire law permits (but does not require) the articles
of incorporation to provide, if there are nine or more directors, for
classification of a corporation's board of directors into two or three classes,
with each group constituting 1/2 or 1/3 of the total. The Finest Articles
provide that the Finest Board is to be divided into three classes, with the
directors in each class being elected for staggered three-year terms.
First Essex. Delaware law permits (but does not require) classification
of a corporation's board of directors into one, two or three classes. The First
Essex Certificate provides that First Essex's Board of Directors is to be
divided into three classes, with the directors in each class being elected for
staggered three-year terms.
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Removal of Directors
Finest. Under New Hampshire law, stockholders may vote to remove
directors with or without cause, at a meeting expressly called for that purpose,
unless the corporation's articles of incorporation provide that directors may be
removed only for cause. The Finest Articles do not require that cause be shown
to remove a director, but do require the vote of the holders of at least sixty
percent of all shares of the corporation entitled to vote for the election of
directors. New Hampshire law does not provide for the removal of directors by
other directors.
First Essex. Under Delaware law, although stockholders may generally
remove directors with or without cause by a majority vote, stockholders may
remove members of classified boards only for cause unless the certificate of
incorporation provides otherwise. The First Essex Certificate does not provide
otherwise. The First Essex Certificate provides that any director may be removed
from office only with cause and by an affirmative vote of (i) at least
two-thirds of the total votes eligible to be cast at a meeting called expressly
for that purpose or (ii) a majority of the directors then in office, unless at
the time of such removal there shall be an Interested Stockholder, in which case
the affirmative vote of a majority of the Continuing Directors then in office
shall also be required. Delaware law may not permit directors to remove other
directors.
Vacancies on the Board of Directors
Finest. Under New Hampshire law, unless the articles of incorporation
provide otherwise, vacancies on the board or directors, including a vacancy
resulting from an increase in the number of directors, may be filled by
stockholders or directors. If the directors remaining in office constitute fewer
than a quorum of the board of directors, they may fill the vacancy by the
affirmative vote of a majority of the remaining directors. The Finest Articles
provide that vacancies shall be filled by the Finest Board and that a director
chosen to fill a vacancy shall hold office for the unexpired term of his or her
predecessor, although if the vacancy was created by an expansion of the board,
such director shall have a term extending only to the next annual meeting of
stockholders.
First Essex. Under Delaware law, unless otherwise provided in the
certificate of incorporation or by-laws, vacancies on the board of directors and
newly created directorships resulting from any increase in the authorized number
of directors may be filled by a majority of directors remaining in office. The
First Essex Certificate permits vacancies to be filled in accordance with
Delaware law, unless there is an Interested Stockholder, in which case the
filling of such vacancy shall also require the affirmative vote of a majority of
the Continuing Directors then in office. Any director so chosen shall hold
office for the remainder of the term to which the director has been selected and
until such director's successor shall have been elected and qualified.
Exculpation of Directors and Officers
Finest. New Hampshire law does not prevent a corporation from limiting
the liability of its directors and officers; however, in order to be effective
such limitation must be set forth in the corporation's articles of
incorporation. Finest's Articles contain a provision limiting the liability of
its directors and officers to the corporation or its stockholders for money
damages for any action taken, or failure to take any action, as a director or
officer, except liability for (i) the amount of financial benefit to which he
was not entitled; (ii) an intentional infliction of harm on the corporation or
its stockholders; (iii) a violation of NHRSA 293-A:8.33 (relating to
distributions which would render the corporation unable to pay its debts or
which would interfere with the rights of a holder of preferred stock upon
dissolution); or (iv) an intentional violation of criminal law.
First Essex. Delaware law permits, and the First Essex Certificate
provides, that no director shall be personally liable to First Essex, or its
stockholders for monetary damages for breaches of fiduciary duty except where
such exculpation is expressly prohibited. In Delaware, a director is not
exculpated from liability under provisions of Delaware law relating to unlawful
payments of dividends and unlawful stock purchases or redemptions. In addition,
the First Essex Certificate provides that the this limitation cannot apply to
liability of a director (i) for breach of the director's duty of loyalty to the
corporation or its stockholders; (ii) for acts and omissions not in good faith
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or which involve intentional misconduct or knowing violation of law; or (iii)
for any transaction from which the director derived an improper personal
benefit.
Indemnification of Directors, Officers and Others
Finest. Under New Hampshire law, a corporation may indemnify a
director, officer, employee or agent against liability if that person conducted
himself in good faith and with the reasonable belief that his conduct was in the
best interests of the corporation. An officer, employee or agent of the
corporation may, but need not, be similarly indemnified. In addition, New
Hampshire law provides that, unless limited by the corporation's articles of
incorporation, indemnification is mandatory if a director or officer was wholly
successful in defense of a claim, and that a court may impose an order to
enforce mandatory indemnification or to grant indemnification in an instance
where the director or officer is fairly and reasonably entitled to
indemnification in view of all relevant circumstances. Indemnification is not
permissible in connection with proceedings by or in the right of a corporation
or those charging improper personal benefit in which the director or officer is
adjudged liable. The Finest By-laws indemnify directors and officers, whether or
not then in office, unless such party is finally adjudged to have been derelict
in the performance of his duties.
First Essex. Delaware law generally permits indemnification of
directors and officers for expenses incurred by them by reason of their position
with the corporation, if the director or officer has acted in good faith and
with the reasonable belief that his conduct was in the best interests of the
corporation. Delaware law does not permit a corporation to indemnify persons in
actions brought by or in the right of the corporation if the person is adjudged
to be liable to the corporation (although it does permit indemnification in such
situations if , and only to the extent, approved by the Delaware Court of
Chancery). The First Essex By-laws provide indemnification to the fullest extent
permitted by the Delaware General Corporation Law to directors, officers,
employees and agents designated by the First Essex Board and any person serving,
at the request of the First Essex Board, as a director, officer, employee or
agent of another corporation or enterprise affiliated with First Essex;
provided, however, that except with respect to actions to enforce
indemnification rights, First Essex shall indemnify any such person for actions
initiated by that person only if the action was authorized or ratified by the
First Essex Board.
Interested Director Transactions
Finest. New Hampshire law provides that no transaction with the
corporation in which a director has an interest shall be voidable solely for
that reason, if any of the following is true: (i) material facts of the
transaction and the director's conflict of interest were disclosed to the
disinterested directors and the transaction was approved by a majority of such
directors; (ii) the material facts of the transaction and the director's
interest were disclosed to stockholders unaffiliated with the interested
director and the transaction was approved by a majority of such stockholders; or
(iii) the transaction was fair to the corporation.
First Essex. Delaware law provides that no transaction between a
corporation and one or more of its directors or officers, or an entity in which
one or more of its directors or officers are directors or officers or have a
financial interest, shall be void or voidable solely for that reason. In
addition, no such transaction shall be void or voidable solely because the
director or officer is present at, participates in, or votes at the meeting of
the board of directors or committee which authorizes the transaction. In order
that such a transaction not be found void or voidable, it must, after disclosure
of material facts, be approved by the disinterested directors, a committee of
disinterested directors, or the stockholders, or the transaction must be fair as
to the corporation. The First Essex Certificate provides that, unless entered
into in bad faith or in violation of the First Essex Certificate, no contract or
transaction by First Essex shall be void, voidable or in any way affected by
reason of the fact that it is with an Interested Stockholder. The First Essex
Certificate also provides that, unless entered into in bad faith or in violation
of the First Essex Certificate, no Interested Person shall be liable to First
Essex or to any other person or organization for any loss or expense incurred by
reason of such a contract or transaction or shall be accountable for any gain or
profit realized from such a contract or transaction.
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Mergers, Share Exchanges or Asset Sales
Finest. New Hampshire law requires that the board of directors shall
adopt and recommend a plan of merger or share exchange or a sale of all or
substantially all of the corporation's assets other than in the regular course
of business to the stockholders, unless the board of directors determines that
because of a conflict of interest or otherwise it should make no recommendation
and communicates the basis for its determination to the stockholders. New
Hampshire law requires the affirmative vote of the holders of a majority of the
shares of each voting group entitled to vote on the plan or transaction unless
the articles of incorporation or a board resolution requires otherwise. The
Finest Articles provide for increased voting requirements for certain "business
combinations", including mergers and asset sales, unless all stockholders are
receiving the same price in the transaction and the transaction is approved by
two-thirds of the directors of Finest who are not affiliated with or
stockholders of the acquiring party.
First Essex. Delaware law requires the approval of the directors and
the vote of the holders of a majority of the outstanding stock entitled to vote
thereon for the merger of the corporation into any other corporation, although
the certificate of incorporation may require a higher stockholder vote.
The First Essex Certificate provides that any Business Combination (as
defined below) involving First Essex and an Interested Stockholder must be
approved by the holders of at least 80% of the outstanding shares of First
Essex's voting stock (the "Voting Requirement") voting together as a single
class at a duly constituted meeting of stockholders called expressly for such
purpose. Such affirmative vote shall be in addition to and not in lieu of any
other vote required under applicable law and is required notwithstanding the
fact that no vote may be required or that a lesser percentage may be specified
by law. The Voting Requirement does not apply and the affirmative vote of only a
majority of First Essex's voting stock is required, if (i) the Business
Combination is approved by an affirmative vote of a majority of both the
Continuing Directors then in office or (ii) certain "fair price" (defined
generally to mean, among other things, that the consideration to be received by
stockholders in such Business Combination shall be in the same form and kind as
the consideration paid by the Interested Stockholder for First Essex's capital
stock owned by such person and shall be at least equal to the highest of the
following: (A) the highest per share price paid by such Interested Stockholder
in acquiring any of its holdings of First Essex Common Stock within the two year
period immediately prior to the first public announcement of the proposal of the
Business Combination (the "Announcement Date") or in the transaction through
which such person became an Interested Stockholder; (B) the highest Fair Market
Value (as defined in the First Essex Certificate) per share of First Essex
Common Stock on any date during the one-year period prior to and including the
Announcement Date; and (C) the price per share equal to (1) the Fair Market
Value per share of common stock on the Announcement Date or on the date on which
the Interested Stockholder became an Interested Stockholder, whichever is
higher, multiplied by (2) a fraction (x) the numerator of which is the highest
per share price paid by the Interested Stockholder for any share of First Essex
Common Stock acquired by it within the two-year period immediately prior to and
including the Announcement Date and (y) the denominator of which is the Fair
Market Value per share of First Essex Common Stock on the first day in such
two-year period on which the Interested Stockholder acquired any shares of First
Essex Common Stock) and other criteria are met.
As defined in the First Essex Certificate, a "Business Combination"
includes, among other things (i) any merger or consolidation of First Essex or
any subsidiary with an Interested Stockholder or affiliate thereof, (ii) the
sale, lease, exchange, mortgage, pledge, transfer or other disposition by First
Essex of assets having a fair market value of $1,000,000 or more to or with an
Interested Stockholder or an affiliate thereof, (iii) the issuance or transfer
by First Essex or any subsidiary (in one transaction or a series of
transactions) of any securities of First Essex or any subsidiary to an
Interested Stockholder or any affiliate thereof in exchange for cash, securities
or other property (or a combination thereof) having an aggregate fair market
value of $1,000,000 or more, (iv) the adoption of a plan or proposal for the
liquidation or dissolution of First Essex proposed by or on behalf of an
Interested Stockholder or an affiliate thereof and (v) any transaction that has
the effect, directly or indirectly, of increasing the proportionate share of any
class of equity or convertible security of First Essex or any subsidiary that is
beneficially owned by an Interested Stockholder or any affiliate thereof.
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Delaware Business Combination Statute
Under Delaware law, a corporation shall not engage in any "business
combination" with any "interested stockholder" for a period of three years
following the time that such stockholder became an interested stockholder,
unless (i) prior to such time the board of directors approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, or (ii) upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding the number of
shares owned by persons who are directors and also officers and employee stock
plans, or (iii) at or subsequent to such time the business combination is
approved by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
at least 662/3% of the outstanding voting stock which is not owned by the
interested stockholder.
The restrictions shall not apply if (i) the corporation's original
certificate of incorporation contains a provision expressly electing not to be
governed by this section; (ii) the corporation adopts an amendment to its bylaws
expressly electing not to be governed by this section; (iii) the corporation, by
action of its stockholders, adopts an amendment to its certificate of
incorporation or bylaws expressly electing not to be governed by this section,
such amendment to the certificate of incorporation or bylaws must be approved by
the affirmative vote of a majority of the shares entitled to vote; or (iv) the
corporation does not have a class of voting stock that is listed on a national
securities exchange, authorized for quotation on NASDAQ-NMS or held of record by
more than 2,000 stockholders. The First Essex Certificate and By-Laws contain no
provision expressly relating to the applicability of this section.
"Business combination" means: (i) any merger of consolidation with the
interested stockholder, or with any other corporation or other entity if the
merger or consolidation is caused by the interested stockholder; (ii) any sale,
lease, exchange, mortgage, pledge, transfer or other disposition of assets to or
with the interested stockholder; (iii) with certain exceptions, any transaction
which results in the issuance or transfer by the corporation or by any direct or
indirect majority-owned subsidiary of the corporation of any stock of the
corporation or of such subsidiary to the interested stockholder; (iv) any
transaction involving the corporation or any direct or indirect majority-owned
subsidiary which has the effect, directly or indirectly, of increasing the
proportionate share of the stock of any class or series, or securities
convertible into the stock of any class or series, of the corporation or of any
such subsidiary which is owned by the interested stockholder; or (v) any receipt
by the interested stockholder of the benefit, directly or indirectly, of any
loans, advances, guarantees, pledges, or other financial benefits.
"Interested stockholder" means, with certain exceptions, any person and
the affiliates and associates of such person who is the owner of 15% or more of
the outstanding voting stock of the corporation or is an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the 3-year period immediately prior
to the date at issue.
Amendments to Charter
Finest. Under New Hampshire law, unless the articles of incorporation
provide otherwise, a corporation's board of directors may amend the articles of
incorporation without stockholder action for certain limited purposes including
extending the corporation's duration (if it was incorporated at a time when
limited duration was required by law) and certain minor changes to the
corporation's name. All material charter amendments require recommendation of
the amendment by the corporation's board of directors to its stockholders
(unless because of a conflict of interest or other special circumstances the
board of directors communicates to stockholders that it will make no
recommendation), and approval of the amendment by the holders of a majority of
the shares of each voting group entitled to vote on the amendment, unless a
higher percentage is required by the articles of incorporation or by board
resolution. The Finest Articles require the vote of the holders of at least
sixty percent of all shares entitled to vote for the election of directors to
adopt any provision inconsistent with Article Seventh of the Finest Articles,
which provides for, among other things, a classified board of directors and
increased voting requirements for certain "business combinations".
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First Essex. Under Delaware law, charter amendments require the
approval of the directors and the vote of the holders of a majority of the
outstanding stock and a majority of each class of stock outstanding and entitled
to vote thereon as a class, unless the certificate of incorporation requires a
greater proportion. In addition, Delaware law requires a class vote when, among
other things, an amendment will adversely affect the powers, preferences or
special rights of a class of stock. Pursuant to the First Essex Certificate, no
amendment, addition, alteration, change or repeal of the First Essex Certificate
shall be made, unless the same is first adopted by the affirmative vote of a
majority of the board of directors of First Essex then in office, and thereafter
approved by the stockholders by not less than two-thirds of the total votes
eligible to be cast at a duly constituted meeting, or, in the case of Articles
1, 2, 3 and the first sentence of Article 4 of the First Essex Certificate, by
not less than a majority of the total votes eligible to be cast at a duly
constituted meeting provided, however, that if, at any time within the sixty day
period immediately preceding the meeting at which the stockholder vote is to be
taken, there is an Interested Stockholder, such amendment, addition, alteration,
change or repeal shall also require the approval of a majority of the Continuing
Directors then in office, prior to approval by the stockholders.
Amendments to By-laws
Finest. New Hampshire law provides that both stockholders and directors
may amend a corporation's by-laws unless the articles of incorporation reserve
that power to the stockholders in whole or part. The Finest Articles permit the
directors to amend the Finest By-laws, subject to repeal, change or adoption of
any contravening or inconsistent provision only by vote of the holders of at
least sixty percent of all shares entitled to vote on the matter.
First Essex. Under Delaware law, the power to adopt, amend or repeal
by-laws lies in stockholders entitled to vote; provided, however, that any
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal by-laws upon the directors. The First Essex Certificate provides
that the First Essex By-Laws may be amended by the affirmative vote of a
majority of the directors (unless at the time of such action there shall be an
Interested Stockholder, in which case such action shall also require the
affirmative vote of a majority of the Continuing Directors then in office) or by
vote of the holders of at least two-thirds of the shares, issued and
outstanding, entitled to vote thereon.
Dissenters' Appraisal Rights
Finest. New Hampshire law permits a stockholder to obtain fair value
for his shares in the event of, among others, consummation of a plan of merger
to which the corporation is a party, provided that the stockholder follows the
requirements of the Dissenters' Rights Statute. A stockholder wishing to assert
dissenters' rights must deliver to the corporation, before the vote at the
stockholders' meeting pursuant to which corporate action creating dissenters'
rights takes place, written notice of his intent to demand payment for his
shares if the proposed action is taken and such stockholder must not vote his
shares in favor of the proposed action. Failure to follow both these steps
prevents a stockholder from asserting dissenters' rights.
First Essex. Under Delaware law, appraisal rights are available in
connection with a statutory merger or consolidation in certain specified
situations. Appraisal rights are not available for shares of stock of a
corporation which is to be the surviving corporation if no vote of its
stockholders is required to approve the merger. In addition, unless otherwise
provided in the charter, no appraisal rights are available to holders of shares
of any class of stock which is either: (a) listed on a national securities
exchange or designated as a national market system security on an inter-dealer
quotation system by the National Association of Securities Dealers, Inc. or (b)
held of record by more than 2,000 stockholders, unless such stockholders are
required by the terms of the merger to accept anything other than: (i) shares of
stock of the surviving corporation; (ii) shares of stock of another corporation
which are or will be so listed on a national securities exchange or designated
as a national market system security on an inter-dealer quotation system by the
NASD or held of record by more than 2,000 stockholders; (iii) cash in lieu of
fractional shares of such stock; or (iv) any combination of the foregoing.
Holders of First Essex Common Stock will not have appraisal rights with
respect to the Merger.
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RECENT LEGISLATION AND RELATED MATTERS
In addition to extensive existing government regulation, Federal and
state statutes and regulations are subject to changes that may have significant
impact on the way in which banks may conduct business. The likelihood and
potential effects of any such changes cannot be predicted. Legislation enacted
in recent years has substantially increased the level of competition among
commercial banks, thrift institutions and nonbanking institutions, including
insurance companies, brokerage firms, mutual funds, investment banks and major
retailers. In addition, the enactment of recent banking legislation such as the
FDICIA and the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Interstate Act") have affected the banking industry by, among other
things, broadening the regulatory powers of the federal banking agencies in a
number of areas and enabling banks and bank holding companies to expand the
geographic area in which they may provide banking services. The following
summary is qualified in its entirety by the text of the relevant statutes and
regulations.
FDICIA
FDICIA, which was enacted on December 19, 1991, provides for, among
other things, increased funding for the BIF of the FDIC and expanded regulation
of depository institutions and their affiliates, including parent holding
companies. A summary of certain provisions of FDICIA and its implementing
regulations is provided below.
Risk Based Deposit Insurance Assessments. A significant portion of the
additional funding to the BIF is in the form of borrowings to be repaid by
insurance premiums assessed on BIF members. FDICIA also provides authority for
special assessments against insured deposits and for the development of a
general risk based assessment system.
As of July 1, 1996, the FDIC has set assessment rates for BIF-insured
institutions ranging from 0.00% to 0.27% of deposits (subject to payment by each
institution of an annual statutory minimum amount of $2,000), based on a risk
assessment of the institution.
Each financial institution is assigned to one of three capital groups -
"well capitalized", "adequately capitalized" or "undercapitalized" - and further
assigned to one of three subgroups within each capital group, on the basis of
supervisory evaluations of the institution's financial condition and the risk
posed to the applicable insurance fund. A well capitalized institution is one
that has a total risk-based capital ratio of 10% or more, a Tier 1 risk-based
capital ratio of 6% or more, a leverage ratio of 5% or more and is not subject
to any written agreement, order, capital directive, or prompt corrective action
directive issued by its primary federal regulator to meet and maintain a
specific capital level for any capital measure. An adequately capitalized
institution has a total risk-based capital ratio of 8% or more, a Tier 1
risk-based capital ratio of 4% or more, and a leverage ratio of 4% or more, but
does not qualify as a well-capitalized institution.
An undercapitalized institution is one that does not meet either of the
foregoing definitions. The actual assessment rate applicable to a particular
institution, therefore, depends in part upon the risk assessment classification
so assigned to the institution by the FDIC. As of December 31, 1995, First Essex
Bank was classified as "well capitalized" under these provisions and Pelham Bank
would have been classified as "well capitalized", but for the then outstanding
MOU (which has since been lifted.)
Prompt Corrective Action. FDICIA also provides the federal banking
agencies with broad powers to take prompt corrective action to resolve problems
of insured depository institutions, depending upon a particular institution's
level of capital. FDICIA establishes five tiers of capital measurement for
regulatory purposes ranging from "well capitalized" to "critically
undercapitalized". Under prompt corrective action regulations adopted by the
federal banking agencies in December 1992, a depository institution is (a) "well
capitalized" if it has a total risk-based capital ratio of 10% or more, a Tier 1
risk-based capital ratio of 6% or more, a leverage ratio of 5% or more and is
not subject to any written agreement, order or capital directive or prompt
corrective action directive issued by its primary federal regulator to meet and
maintain a specific capital measure; (b) "adequately capitalized"
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<PAGE>
if it is not well capitalized and has a total risk-based capital ratio of 8% or
more, a Tier 1 risk-based capital ratio of 4% or more and a leverage ratio of 4%
or more (3% or more if the bank is rated composite 1 under the CAMEL rating
system in its most recent examination and is not experiencing or anticipating
significant growth); (c) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less than
4% or a leverage ratio that is less than 4% (less than 3% if the bank is rated
composite 1 under the CAMEL rating system in its most recent examination and is
not experiencing or anticipating significant growth); (d) "significantly
undercapitalized" if the bank has a total risk-based capital ratio that is less
than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage
ratio that is less than 3%; and (e) "critically undercapitalized" if the
depository institution has a ratio of tangible equity to total assets that is
equal to or less than 2%, or otherwise fails to meet certain established
critical capital levels. A depository institution may be deemed to be in a
capitalization category that is lower than is indicated by its actual capital
position under certain circumstances. At December 31, 1995, First Essex Bank and
Pelham Bank each had capital ratios sufficient to be characterized as "well
capitalized" under the prompt corrective action regulations.
Undercapitalized and significantly undercapitalized depository
institutions must submit capital restoration plans to their primary federal
regulator and may be subject to a number of requirements and restrictions,
including orders to sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets and cessation of receipt of
deposits from correspondent banks. In addition, significantly undercapitalized
depository institutions also are prohibited from awarding bonuses or increasing
compensation of senior executive officers until approval of a capital
restoration plan. Critically undercapitalized depository institutions are
subject to appointment of a receiver or conservator.
Brokered Deposits and Pass-Through Deposit Insurance Limitations.
FDICIA also imposes limits on depository institutions, except well capitalized
depository institutions, accepting, renewing or rolling over brokered deposits.
A depository institution that is adequately capitalized may not accept, renew or
roll over any brokered deposit unless it obtains a waiver of FDICIA's
limitations from the FDIC. Even if an adequately capitalized institution
receives such a waiver, it may offer yields on brokered deposits only within
specified limits. An undercapitalized depository institution may not accept
brokered deposits. The definitions of "well capitalized", "adequately
capitalized" and "undercapitalized" generally conform to the definitions
described above for prompt corrective action.
In addition, "pass-through" insurance coverage may not be available for
certain employee benefit accounts and eligible deferred compensation plans
maintained by depository institutions that cannot accept brokered deposits.
Interest Rate Risk. The federal banking agencies have issued two recent
joint policy statements relating to depository institutions' overall management
of interest rate risk. Effective on September 1, 1995, the agencies implemented
a "risk assessment" approach, under which the adequacy of a depository
institution's capital for purposes of interest rate risk is evaluated on a
case-by-case basis, taking into account both quantitative and qualitative
factors. A second joint policy statement of the agencies, effective on June 26,
1996, provides guidance on prudent interest rate risk management practices,
which should be followed by all depository institutions.
Other Requirements. FDICIA also contains a variety of other provisions
that may affect First Essex Bank and Pelham Bank's respective operations,
including (i) restrictions on activities and investments of state-chartered
banks and their subsidiaries, (ii) uniform real estate lending rules, (iii)
standards for limiting the risks posed by credit exposure between banks, (iv)
changes in various consumer banking laws, (v) increased restrictions on insider
loans, (vi) additional standards to ensure bank safety and soundness and (vii)
additional requirements for institutions that have $500 million or more in
assets with respect to annual independent audits, audit committees and
management reports related to financial statements, internal controls and
compliance with designated laws and regulations.
Many of the provisions in FDICIA have recently been or will be
implemented through the adoption of regulations by the various federal banking
agencies and, therefore, their precise impact cannot be assessed at this time.
It is anticipated, however, that First Essex Bank and Pelham Bank, together with
the banking and thrift industries generally, will continue to incur significant
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expenses in the ordinary course of business due to regulatory compliance,
documentation and record-keeping requirements.
Interstate Banking Legislation
On September 29, 1994 the Interstate Act became law. Under the new law,
different types of interstate transactions and activities are permitted, each
with different effective dates. Interstate transactions and activities provided
for under the new law include: (i) bank holding company acquisitions of
separately held banks in a state other than a bank holding company's home state;
(ii) mergers between insured banks with different home states, including
consolidations of affiliated insured banks; (iii) establishment of interstate
branches either de novo or by branch acquisition; and (iv) affiliated banks
acting as agents for one another for certain banking functions without regard to
state law prohibitions on interstate branching or unauthorized banking. In
general, nationwide interstate bank acquisitions became permissible one year
after the date of enactment, irrespective of state law limitations. Interstate
mergers will be permissible on June 1, 1997, unless a state either passes
legislation either to prevent or to permit the earlier occurrence of interstate
mergers. States may at any time enact legislation permitting interstate de novo
branching. Commencing upon the date one year after the date of enactment,
affiliated banks are now permitted to act as agents for one another irrespective
of state boundaries. Each of the transactions and activities must be approved by
the appropriate federal bank regulator, with separate and specific criteria
established for each category.
Once the applicable effective date has occurred (and, in the case of
interstate mergers and de novo branching, subject to applicable state law
"opt-out" or "opt-in" provisions), the appropriate federal bank regulator may
approve the respective interstate transactions only if certain criteria are met.
First, in order for a banking institution (a bank or bank holding company) to
receive approval for an interstate transaction, it must be "adequately
capitalized" and "adequately managed". The phrase "adequately capitalized" is
generally defined as meeting or exceeding all applicable federal regulatory
capital standards, while the phrase "adequately managed" is left undefined.
Second, the appropriate federal bank regulator must consider the applicant's and
its affiliated institutions' records under the Community Reinvestment Act of
1977, as amended ("CRA"), as well as the applicant's record under applicable
state community reinvestment laws.
The Interstate Act applies deposit "concentration limits" to interstate
acquisition and merger transactions. Specifically, a banking institution may not
receive federal approval for interstate expansion if it and its affiliates would
control (i) more than 10% of the deposits held by all insured depository
institutions in the United States, or (ii) 30% or more of the deposits of all
insured depository institutions in any state in which the banks or branches
involved in the transactions (or any affiliated depository institution) overlap.
States may, by statute, regulation or order, raise or lower the 30% limit. In
addition, the Interstate Act law preempts certain existing state law
restrictions on interstate banking (such as regional compacts and certain
reciprocity requirements), effective one year after enactment. However, in order
to receive federal approval for an interstate merger or de novo branching
transaction, an applicant still also must comply with any non-discriminatory
host state filing and certain other requirements.
CRA Regulations
The federal banking agencies jointly issued amendments to the
regulations implementing the CRA effective July 1, 1995, which significantly
revised CRA compliance requirements. The new framework relies more than the
prior CRA regulations upon objective criteria of the performance of institutions
(with certain modified performance criteria for institutions with total assets
of less than $250 million) under three key assessment tests: a lending test, a
service test and an investment test. An institution's record of performance
under the CRA is a significant factor taken into account by the federal banking
agencies in considering various regulatory applications, including applications
for establishing or relocating branch offices, mergers, acquisitions and charter
conversions.
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LEGAL MATTERS
Certain legal matters relating to the validity of the shares of First
Essex Common Stock to be issued in the Merger and certain tax matters in
connection with the Merger will be passed upon by Sullivan & Worcester LLP.
The Merger Agreement provides as a condition to Finest's obligation to
consummate the Merger that Finest receive the opinion of Edwards & Angell, 2700
Hospital Trust Tower, Providence, Rhode Island 02903, substantially to the
effect that the Merger will constitute a "reorganization" under Section 368 of
the Code. Certain other legal matters in connection with the Merger will also be
passed upon by Edwards & Angell.
Stockholder proposals for the 1997 Annual Meeting of Stockholders of
First Essex must be received by First Essex on or before December 2, 1996 to be
considered for inclusion in the proxy statement and presented at the 1997 Annual
Meeting.
The Annual Meeting of Stockholders of Finest will only be held in the
event the Merger Agreement is not approved by the stockholders at the Finest
Meeting.
EXPERTS
The consolidated financial statements of First Essex included in this
Proxy Statement--Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and included herein in reliance upon the authority of said firm as
experts in accounting and auditing.
The consolidated financial statements of Finest as of December 31, 1993
and the consolidated statements of operations, cash flows and changes in
stockholders' equity for the year then ended included in this Proxy
Statement-Prospectus, have been included herein in reliance on the report of
Grant Thornton LLP, independent accountants, given on the authority of that firm
as experts in accounting and auditing. The consolidated financial statements of
Finest as of December 31, 1995 and 1994 and the consolidated statements of
operations, cash flows and changes in stockholders' equity for the two years
then ended included in this Proxy Statement-Prospectus, have been included
herein in reliance on the report of Shatswell, MacLeod & Company, P.C.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing. The reports of Shatswell, MacLeod & Company, P.C. and
Grant Thornton LLP refer to changes in Finest's method of accounting for
investment securities and income taxes.
108
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
FIRST ESSEX BANCORP, INC.
Report of Independent Public Accountants.............................................................. F-2
Consolidated Balance Sheets at June 30, 1996 (unaudited) and December 31, 1995 and 1994............... F-3
Consolidated Statements of Operations, six months ended June 30, 1996 and 1995 (unaudited)
and years ended December 31, 1995, 1994 and 1993.................................................... F-4
Consolidated Statements of Stockholders' Equity, years ended December 31, 1995, 1994 and 1993......... F-5
Consolidated Statements of Cash Flows, six months ended June 30, 1996 and 1995 (unaudited)
and years ended December 31, 1995, 1994 and 1993.................................................... F-6
Notes to Consolidated Financial Statements............................................................ F-7
FINEST FINANCIAL CORP.
Report of Grant Thornton LLP, Independent Public Accountants.......................................... F-29
Report of Shatswell, MacLeod & Company, P.C., Independent Accountants................................. F-30
Consolidated Balance Sheets, June 30, 1996 (unaudited) and December 31, 1995 and 1994................. F-31
Consolidated Statements of Income, six month periods ended June 30, 1996 and 1995
(unaudited) and years ended December 31, 1995, 1994 and 1993....................................... F-32
Consolidated Statements of Changes in Stockholders' Equity, years ended December 31, 1995,
1994 and 1993 and six month periods ended June 30, 1996 and 1995 (unaudited)....................... F-33
Consolidated Statements of Cash Flows, six month periods ended June 30, 1996 and 1995 (unaudited)
and years ended December 31, 1995, 1994 and 1993.................................................... F-34
Notes to Consolidated Financial Statements for the six month periods ended June 30, 1996
and 1995 (unaudited)................................................................................ F-36
Notes to Consolidated Financial Statements, years ended December 31, 1995, 1994 and 1993.............. F-37
FIRST ESSEX BANCORP, INC. PRO FORMA............................................................................ F-56
Pro Forma Condensed Balance Sheet at June 30, 1996.................................................... F-57
Pro Forma Condensed Statement of Operations, year ended December 31, 1995............................. F-58
Pro Forma Condensed Statement of Operations, six months ended June 30, 1996........................... F-59
Notes to Pro Forma Condensed Financial Statements..................................................... F-60
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of FIRST ESSEX BANCORP, INC.:
We have audited the accompanying consolidated balance sheets of First Essex
Bancorp, Inc. and subsidiaries (the "Company") as of December 31, 1995 and 1994,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Essex Bancorp, Inc. and
subsidiaries at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles.
As explained in Note 1 to the financial statements, the Company prospectively
adopted, effective January 1, 1993, Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" and adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" as of December 31, 1993.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 17, 1996 (except with
respect to the matter discussed
in Note 19, as to which the
date is August 5, 1996)
F-2
<PAGE>
<TABLE>
<CAPTION>
FIRST ESSEX BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1996 December 31,
------------- -------------------------
(unaudited) 1995 1994
--------- ---------
(Dollars in thousands)
ASSETS
<S> <C> <C> <C>
Cash and cash equivalents $ 20,573 $ 27,308 $ 18,714
Investment securities available-for-sale (Note 2) 146,077 115,153 35,200
Investment securities held-to-maturity
(fair value $114,838,000, $133,651,000
and $284,341,000) (Note 2) 116,808 135,098 295,057
Stock in Savings Bank Life Insurance Company 1,194 1,194 1,194
Stock in Federal Home Loan Bank of Boston (Note 6) 14,869 14,869 12,775
Mortgage loans held-for-sale 8,802 5,821 2,930
Loans receivable, less allowance for possible loan losses
of $6,970,000, $6,552,000 and $7,237,000 (Note 3) 513,560 487,678 419,644
Foreclosed property, net of valuation reserve of
$1,120,000, $1,316,000 and $1,934,000 1,513 1,756 3,038
Bank premises and equipment (Note 4) 9,381 10,047 8,347
Accrued interest receivable 4,589 4,466 4,537
Other assets 5,537 5,402 5,436
--------- --------- ---------
Total assets $ 842,903 $ 808,792 $ 806,872
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Depositors' accounts (Note 5) $ 508,080 $ 491,469 $ 456,878
Borrowed funds (Note 6) 256,695 245,569 279,948
Mortgagors' escrow accounts 600 718 1,804
Other liabilities 15,181 10,864 13,485
--------- --------- ---------
Total liabilities $ 780,556 $ 748,620 $ 752,115
--------- --------- ---------
STOCKHOLDERS' EQUITY (Note 13)
Serial preferred stock $.10 par value per share: 5,000,000 -- -- --
shares authorized, no shares issued or outstanding
Common stock $.10 par value per share; 25,000,000 $ 803 $ 801 $ 801
shares authorized, 8,031,901, 8,009,267 and
8,006,500 shares issued
Additional paid in-capital 58,375 58,208 58,192
Retained earnings 20,116 17,682 12,638
Treasury stock, at cost 1,986,000 shares (15,842) (15,842) (15,842)
Valuation allowance for unrealized losses on investment (1,105) (677) (1,032)
--------- --------- ---------
securities available-for-sale (Note 1)
Total stockholders' equity 62,347 60,172 54,757
--------- --------- ---------
Total liabilities and stockholders' equity $ 842,903 $ 808,792 $ 806,872
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
FIRST ESSEX BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended
June 30, Year Ended December 31,
------------------- --------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(unaudited)
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest and dividend income:
Interest on mortgage loans $ 12,379 $ 12,800 $ 26,024 $ 20,399 $ 19,342
Interest on other loans 9,893 6,736 15,194 6,437 3,552
Interest and dividends on investment securities held-to-maturity 4,410 2,968 5,192 5,325 5,971
Interest and dividends on investment securities available-for-sale 3,662 7,339 14,216 12,794 7,044
Interest on federal funds sold 219 79 288 102 274
--------- --------- --------- --------- ---------
Total interest and dividend income 30,563 29,922 60,914 45,057 36,183
--------- --------- --------- --------- ---------
Interest expense:
Interest on depositors' accounts 10,673 9,323 19,844 12,424 12,530
Interest on borrowed funds 7,302 8,722 17,237 10,283 4,124
--------- --------- --------- --------- ---------
Total interest expense 17,975 18,045 37,081 22,707 16,654
--------- --------- --------- --------- ---------
Net interest income 12,588 11,877 23,833 22,350 19,529
Provision for possible loan losses (Note 3) 815 329 770 -- --
--------- --------- --------- --------- ---------
Net interest income after provision
for possible loan losses 11,773 11,548 23,063 22,350 19,529
Non-interest income:
Net gain on sales of mortgage loans
and mortgage servicing rights 930 295 1,431 260 730
Net loss on sales of investment securities -- -- (13) -- --
Loan fees 283 228 477 393 644
Other fee income 911 900 1,759 1,862 1,791
Other 23 25 54 46 30
--------- --------- --------- --------- ---------
Total non-interest income 2,147 1,448 3,708 2,561 3,195
--------- --------- --------- --------- ---------
Non-interest expense:
Salaries and employee benefits 4,971 4,479 8,995 8,140 6,755
Building and equipment 1,759 1,534 3,256 2,800 2,580
Professional services 643 552 1,135 1,179 1,241
Computer expense 620 584 1,233 966 843
Insurance 95 578 690 1,146 1,289
Expenses, gains and losses on,
and write-downs of, foreclosed property 308 491 784 2,007 2,959
Other 1,621 1,526 3,151 2,835 2,728
Retail branch write-offs -- -- -- 117 --
--------- --------- --------- --------- ---------
Total non-interest expenses 10,017 9,744 19,244 19,190 18,395
--------- --------- --------- --------- ---------
Income before provision for income taxes 3,903 3,252 7,527 5,721 4,329
Provision for income taxes (Note 7) 19 20 75 (805) (2,621)
--------- --------- --------- --------- ---------
Net income $ 3,884 $ 3,232 $ 7,452 $ 6,526 $ 6,950
========= ========= ========= ========= =========
Earnings per share (Note 1) $ .63 $ .53 $ 1.22 $ 1.08 $ 1.15
========= ========= ========= ========= =========
Average common and equivalent shares outstanding 6,158,390 6,071,648 6,104,579 6,063,942 6,020,701
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
FIRST ESSEX BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Valuation
Allowance for
Unrealized Losses
Additional on Investment
Common Paid-In Retained Treasury Securities
Stock Capital Earnings Stock Available for Sale Total
---------- ---------- ---------- --------- ------------------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $ 800 $ 58,152 $ 1,509 $(15,842) $ -- $ 44,619
Net Income -- -- 6,950 -- -- 6,950
Cash dividends declared -- -- (662) -- -- (662)
Valuation allowance for unrealized
losses on investment securities
available-for-sale -- -- -- -- (158) (158)
-------- -------- -------- -------- -------- --------
Balance at December 31, 1993 800 58,152 7,797 (15,842) (158) 50,749
Net income -- -- 6,526 -- -- 6,526
Cash dividends declared -- -- (1,685) -- -- (1,685)
Stock options exercised 1 40 -- -- -- 41
Change in valuation allowance for
unrealized losses on investment
securities available-for-sale -- -- -- -- (874) (874)
-------- -------- -------- -------- -------- --------
Balance at December 31, 1994 801 58,192 12,638 (15,842) (1,032) 54,757
Net income -- -- 7,452 -- -- 7,452
Cash dividends declared -- -- (2,408) -- -- (2,408)
Stock options exercised -- 16 -- -- -- 16
Change in valuation allowance for
unrealized losses on investment
securities available-for-sale -- -- -- -- 355 355
-------- -------- -------- -------- -------- --------
Balance at December 31, 1995 $ 801 $ 58,208 $ 17,682 $(15,842) $ (677) $ 60,172
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
FIRST ESSEX BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended Year Ended
June 30, December 31,
------------------ ---------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,884 $ 3,232 $ 7,452 $ 6,526 $ 6,950
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for possible loan losses 815 329 770 -- --
Provision for depreciation and amortization 910 714 1,603 1,411 1,216
Gain on sales of foreclosed property (49) (52) (81) (141) (896)
Write-down of foreclosed property 58 265 361 1,023 1,423
Amortization of investment securities discounts and premiums, net 792 764 1,398 2,257 2,667
Deferred income taxes 19 20 55 (825) (2,621)
Proceeds from sales of mortgage loans and servicing rights 54,038 15,611 80,135 39,883 36,610
Mortgage loans originated for sale (56,089) (18,428) (81,595) (37,275) (37,096)
Realized investment securities loss -- -- 13 -- --
Realized gains on mortgage loan sales and mortgage servicing rights, net (930) (295) (1,431) (260) (730)
Decrease (increase) in accrued interest receivable (123) (122) 71 (803) 77
Decrease (increase) in other assets (135) (307) 34 (1,106) 568
Increase (decrease) in other liabilities 4,297 7,767 (2,917) 3,063 1,762
------- ------- ------- -------- -------
Net cash provided by operating activities 7,487 9,498 5,868 13,753 9,930
------- ------- ------- -------- --------
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities -- -- 28,292 9,237 --
Proceeds from maturities and principal payments of
available-for-sale securities 18,714 949 2,688 3,320 1,692
Proceeds from maturities and principal payments of held-to-maturity
securities 43,718 33,188 78,687 90,301 84,604
Purchases of available-for-sale securities (50,421) (1,274) (2,412) (12,122) (20,006)
Purchases of held-to-maturity securities (25,865) (773) (2,094) (111,729) (231,396)
Loans originated and purchased, net principal collected (27,644) (55,197) (99,765) (144,611) 120
Proceeds from sales of foreclosed property 1,181 1,616 3,658 5,155 8,104
Receipts for foreclosed property -- 245 302
Purchases of bank premises and equipment (244) (2,628) (3,303) (2,491) (584)
------- ------- ------- -------- -------
Net cash used in investing activities (40,561) (24,119) 5,751 (162,695) (157,164)
------- ------- ------- -------- -------
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW accounts and savings accounts 2,563 (12,013) (11,029) (24,689) (6,963)
Net increase (decrease) of time deposits 14,048 39,242 45,620 83,334 (7,022)
Net increase (decrease) in borrowed funds with maturities of three
months or less (7,657) (63,964) 7,544 13,001 (40,000)
Proceeds from borrowed funds with maturities in excess of three months 60,500 185,000 221,297 458,028 287,105
Repayments of borrowed funds with maturities in excess of three months (41,717) (124,720) (263,220) (376,082) (102,104)
Increase (decrease) in mortgagors' escrow accounts (118) 99 (1,086) 356 52
Dividends paid (1,449) (963) (2,167) (1,565) (662)
Stock options exercised 169 -- 16 41 --
------- ------- ------- -------- -------
Net cash provided by financing activities 26,339 22,681 (3,025) 152,424 130,406
------- ------- ------- -------- -------
Net increase (decrease) in cash and cash equivalents (6,735) 8,060 8,594 3,482 (16,828)
------- ------- ------- -------- -------
Cash and cash equivalents at beginning of the period 27,308 18,714 18,714 15,232 32,060
------- ------- ------- -------- -------
Cash and cash equivalents at end of the period $20,573 $26,774 $27,308 $ 18,714 $ 15,232
======= ======= ======= ======== ========
Supplemental disclosure of cash flow information:
Interest paid during the period $18,023 $18,124 $37,032 $ 21,974 $ 16,346
Income taxes paid during the period -- -- -- -- --
Supplemental schedule of noncash financing and investing activities:
Real estate acquired through, or deeds in lieu of, foreclosure $ 946 $ 786 $ 2,656 $ 2,961 $ 4,388
Held-to-maturity securities reclassified to available-for-sale $ -- $ -- $82,262 -- --
Securitized loans transferred to investments-for-sale $ -- $ -- $28,305 -- --
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
<PAGE>
FIRST ESSEX BANCORP, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of First Essex
Bancorp, Inc. ("the Company"), and its principal subsidiary, First Essex Bank,
FSB ("the Bank"). The 1993 financial statements also include amounts of First
Essex Bancorp of New Hampshire, Inc., which was merged into First Essex Bancorp,
Inc on December 1, 1993. All significant intercompany balances have been
eliminated in consolidation.
Unaudited Interim Financial Period
The consolidated financial statements for the six months ended June 30, 1996 and
1995 and the related information in the accompanying notes are unaudited. The
statements have been prepared by the Company on the same basis as the audited
financial statements and include all adjustments which are, in the opinion of
management, of a normal and recurring nature and necessary for the fair
presentation of the results of operations and cash flows pursuant to the rules
and regulations of the Securities and Exchange Commission. Results of interim
periods are not necessarily indicative of results for the entire year.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of income and expenses during the reporting periods.
Operating results in the future could vary from the amounts derived from
management's estimates and assumptions.
Investment Securities
In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Under this statement, investments in
debt securities may be classified as held-to-maturity and measured at amortized
cost only if the Company has the positive intent and ability to hold such
securities to maturity. Investments in debt securities that are not classified
as held-to-maturity and equity securities that have readily determinable fair
values are classified as trading securities or available-for-sale securities.
Trading securities are investments purchased and held principally for the
purpose of selling in the near term; available-for-sale securities are
investments not classified as trading or held-to-maturity. Unrealized holding
gains and losses for trading securities are included in earnings; unrealized
holding gains and losses for available-for-sale securities are reported in a
separate component of stockholders' equity. Effective December 31, 1993, the
Company adopted SFAS No. 115 which resulted in a decrease to stockholders'
equity of $158,000.
At December 31, 1995 the Bank made a one time reassessment of its classification
of investment securities held-to- maturity and reclassified $82.3 million to
investment securities available-for-sale, with an unrealized loss of $1.1
million, as allowed by the special report of implementation of SFAS No. 115.
This reclassification does not call into question the Company's intent to hold
its remaining investment securities classified as held-to-maturity.
Dividend and interest income, including amortization of premiums and discounts,
is included in earnings for all categories of investment securities. Discounts
and premiums related to debt securities are amortized using a method that
approximates the level-yield method, adjusted for estimated prepayments in the
case of mortgage-backed securities.
F-7
<PAGE>
FIRST ESSEX BANCORP, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
In October 1994, the FASB issued SFAS No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments". The statement is
effective for financial statements issued for fiscal years ending after December
15, 1994. Derivative Financial Instruments, as defined by SFAS No. 119, include
futures, forwards, swaps or option contracts, or other financial instruments
with similar characteristics. The Company did not have any such instruments as
of December 31, 1995 and 1994, except as noted in Note 9.
Loans Receivable
Real estate mortgage loans and other loans are stated at the amount of unpaid
principal, net of the allowance for possible loan losses, unearned discounts and
unearned net loan origination fees. Loan origination fees, discounts and certain
direct loan origination costs are deferred and amortized as an adjustment to the
related loan yield over the contractual life of the loan. When loans are sold or
fully repaid, the unamortized fees, discounts and costs are recognized in
income.
Interest on loans is included in income as earned based upon interest rates
applied to unpaid principal. Interest is not accrued on loans 90 days or greater
past due or on other loans when management believes collection is doubtful. When
a loan is placed on nonaccrual status, all interest previously accrued is
reversed against current-period interest income.
The allowance for possible loan losses is based on management's estimate of the
amount required to reflect the risks in the loan portfolio, based on
circumstances and conditions known or anticipated at each reporting date. There
are inherent uncertainties with respect to the final outcome of the Bank's loans
and nonperforming loans. Because of these inherent uncertainties, actual losses
may differ from the amounts reflected in these consolidated financial
statements. Factors considered in evaluating the adequacy of the allowance
include previous loss experience, current economic conditions and their effect
on borrowers, the performance of individual loans in relation to contract terms,
and estimated fair values of underlying collateral. Losses are charged against
the allowance when management believes the collectability of principal is
doubtful.
Key elements of the above estimates, including assumptions used in independent
appraisals, are dependent upon the economic conditions prevailing at the time of
the estimates. Accordingly, uncertainty exists as to the final outcome of
certain of the valuation judgments as a result of economic conditions in the
region. The inherent uncertainties in the assumptions relative to projected
sales prices or rental rates may result in the ultimate realization of amounts
on certain loans that are significantly different from the amounts reflected in
these consolidated financial statements.
Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" as amended by SFAS No. 118 ("SFAS No. 114").
This standard requires that impaired loans be measured based on the present
value of expected future cash flows discounted at each loan's effective interest
rate or, as a practical expedient, at each loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. The statement
also changes the accounting for in-substance foreclosures and troubled debt
restructurings. This statement is applied prospectively with any adjustment
reflected in the provision for possible loan losses. The adoption of this
statement did not have a material effect on the financial position or results of
operations of the Company.
Mortgage loans held-for-sale are carried at the lower of aggregate cost or fair
value. Gains and losses on sales of mortgage loans are recognized at the time of
sale and are adjusted when the interest rate charged to the borrower and the
interest rate paid to the purchaser, after considering a normal servicing fee
(in the case of mortgage-backed securities, a guarantee fee), differ. The
resulting deferred premium on the sale of mortgage loans is amortized using a
method that approximates the level-yield method over the remaining life of the
related loans, adjusted for estimated prepayments. Actual prepayment experience
is reviewed periodically, and when necessary, the deferred premium on sales of
mortgage loans is adjusted accordingly.
F-8
<PAGE>
FIRST ESSEX BANCORP, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights", which is to become effective for fiscal years beginning after December
15, 1995. SFAS No. 122 requires an enterprise involved in mortgage banking
activities to recognize, as separate assets, rights to service mortgage loans
for others regardless of the manner in which the servicing rights are acquired.
In addition, capitalized mortgage servicing rights are required to be assessed
for impairment based on the fair value of those rights. The impact of this
statement depends on the volume of mortgage loans originated and sold, and
servicing rights retained. The current practice of the Company is to sell most
of the mortgage loans it originates with servicing released. Therefore,
management believes the adoption of this statement will not have a material
effect on the financial position or results of operations of the Company.
Foreclosed Property
Collateral acquired through foreclosure is recorded at the lower of cost or fair
value, less estimated costs to sell, at the time of acquisition. A valuation
allowance is established for the estimated costs to sell and is charged to
expense. Subsequent changes in the fair value of other real estate owned are
reflected in the valuation allowance and charged or credited to expense. Net
operating income or expense related to foreclosed property is included in
noninterest expense in the accompanying consolidated statements of operations.
Because of current market conditions, there are inherent uncertainties in the
assumptions with respect to the estimated fair value of other real estate owned.
Because of these inherent uncertainties, the amount ultimately realized on other
real estate owned may differ from the amounts reflected in the consolidated
financial statements.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, amounts due from banks,
interest-bearing deposits, federal funds sold and investments with original
maturities of less than three months. Cash and cash equivalents are recorded at
cost which approximates fair value.
Bank Premises and Equipment
Real estate held for banking purposes, leasehold improvements and furniture and
fixtures are stated at cost, less accumulated depreciation and amortization.
Depreciation is computed principally on the straight-line method over estimated
service lives. Amortization of leasehold improvements is computed on the
straight-line method over the shorter of the estimated useful lives of the
assets or the related lease term. Expenditures for maintenance, repairs and
renewals of minor items are charged to expense as incurred.
Income Taxes
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes," which recognizes income taxes under the liability method. Under
this method, deferred tax assets and liabilities are established for the
temporary differences between the accounting bases and the tax bases of the
Company's assets and liabilities at enacted tax rates expected to be in effect
when the amounts related to such temporary differences are realized or settled.
The Company's deferred tax asset is reviewed quarterly and adjustments are
recognized in the benefit for income taxes based on management's judgments
relating to realizability. There was no cumulative effect of this change in
accounting principle as of January 1, 1993 on the accompanying consolidated
financial statements.
Earnings per Share
Earnings per common share are calculated using the weighted average number of
common shares and common stock equivalents outstanding.
F-9
<PAGE>
FIRST ESSEX BANCORP, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications
Certain reclassifications have been made to the 1994 and 1993 consolidated
financial statements to conform to the 1995 presentation.
Recent Accounting Pronouncements
In March 1995, the FASB issued SFAS No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long- Lived Assets to be Disposed Of", which is to
become effective for fiscal years beginning after December 15, 1995. SFAS No.
121 requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. The statement also requires that certain long-lived assets and
identifiable intangibles to be disposed of be reported at the lower of the
carrying amount or fair value less cost to sell. Management is currently
evaluating the Company's fixed assets and anticipates that the application of
the new statement will not have a significant impact on the results of
operations or financial condition.
2. INVESTMENT SECURITIES
Investment securities at December 31, 1995 and 1994 follow:
<TABLE>
<CAPTION>
1995 1994
------------------------------------------------- -------------------------------------------------
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gain Loss Value Cost Gain Loss Value
------ ------ ------ ------- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities held-
to-maturity:
U.S. government and
agency obligations $ 17,080 $ 42 $ -- $ 17,122 $ 54,271 $ 39 $ (611) $ 53,699
Mortgage-backed
securities 118,018 95 (1,584) 116,529 209,747 83 (10,071) 199,759
Other bonds and
obligations -- -- -- -- 31,039 95 (251) 30,883
--------- --------- --------- --------- --------- --------- --------- ---------
135,098 137 (1,584) 133,651 295,057 217 (10,933) 284,341
Investment securities
available-for-sale:
Mortgage-backed
securities 92,231 870 (1,320) 91,781 36,232 214 (1,246) 35,200
Other bonds and
obligations 23,599 32 (259) 23,372 -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
115,830 902 (1,579) 115,153 36,232 214 (1,246) 35,200
Total investment
securities $ 250,928 $ 1,039 $ (3,163) $ 248,804 $ 331,289 $ 431 $ (12,179) $ 319,541
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
At December 31, 1995 and 1994, U.S. government obligations and mortgage-backed
securities with amortized cost of $41,269,000 and $65,136,000, respectively, and
fair value of $40,965,000 and $61,995,000, respectively, were pledged to
collateralize certain deposit accounts and repurchase agreements.
The amortized cost of mortgage-backed securities available-for-sale at December
31, 1995 includes $54.1 million of collateralized mortgage obligations. There
were no collateralized mortgage obligations included in mortgage-backed
securities held-to-maturity.
F-10
<PAGE>
FIRST ESSEX BANCORP, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 1995, there were realized gross losses of
$13,000 from the sale of investment securities. There were no gains or losses
from the sale of investment securities in 1994. No investment securities were
sold in 1993.
The following table shows the maturity distribution of the amortized cost of the
Company's investment securities at December 31, 1995:
<TABLE>
<CAPTION>
Less than Greater than
1 year 1-5 Years 5-10 Years 10 Years Total
-------- --------- ---------- ---------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Investment securities held-to-maturity:
U.S. government and agency obligations $17,080 $ -- $ -- $ -- $ 17,080
Mortgage-backed securities(1) 758 621 34 116,605 118,018
Investment securities available-for-sale:
Mortgage-backed securities(1) 2,083 34,266 11,220 44,662 92,231
Other bonds and obligations 3,810 19,631 158 -- 23,599
--------
$250,928
========
- --------------------
<FN>
(1) Maturities of mortgage-backed securities are based on contractual maturities
but may differ because in most instances the issuers have the right to prepay
the obligations.
</FN>
</TABLE>
The following table shows the maturity distribution of the fair value of the
Company's investment securities at December 31, 1995:
<TABLE>
<CAPTION>
Less than Greater than
1 year 1-5 Years 5-10 Years 10 Years Total
-------- --------- ---------- ---------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Investment securities held-to-maturity:
U.S. government and agency
obligations $17,122 $ -- $ -- $ -- $ 17,122
Mortgage-backed securities(1) 758 613 36 115,122 116,529
Investment securities available-for-sale:
Mortgage-backed securities(1) 2,084 33,727 11,057 44,913 91,781
Other bonds and obligations 3,816 19,394 162 --
23,372
--------
$248,804
========
- ---------------
<FN>
(1) Maturities of mortgage-backed securities are based on contractual
maturities, but may differ because in most instances the issuers have the right
to prepay the obligations.
</FN>
</TABLE>
F-11
<PAGE>
FIRST ESSEX BANCORP, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
3. LOANS RECEIVABLE
Major classifications of loans receivable at December 31, 1995 and 1994 follow:
1995 1994
-------- --------
(Dollars in thousands)
Commercial $ 66,737 $ 55,377
Real Estate:
Residential 229,383 261,918
Commercial 53,504 25,786
Construction 14,210 15,527
-------- --------
Total Real Estate 297,097 303,231
-------- --------
Home equity 12,558 12,943
Automobile 76,590 34,906
Aircraft 14,478 522
Other Consumer 26,770 19,902
-------- --------
Total loans 494,230 426,881
Less:
Allowance for possible loan losses 6,552 7,237
-------- --------
Loans receivable $487,678 $419,644
======== ========
The Company's lending activities are conducted principally in eastern
Massachusetts and southern New Hampshire. The Company originates single family
and multifamily residential loans, commercial real estate loans, commercial
loans, aircraft loans, automobile loans and a variety of consumer loans. In
addition, the Company originates loans for the construction of residential
homes, multifamily properties, commercial real estate properties and land
development. Most loans originated by the Company are collateralized by real
estate. The ability and willingness of the single family residential and
consumer borrowers' to honor their repayment commitments is generally dependent
on the level of overall economic activity within the geographic areas and real
estate values. The ability and willingness of commercial real estate, commercial
and construction loan borrowers to honor their repayment commitments is
generally dependent on the health of the real estate economic sector in the
borrowers' geographic areas and the general economy.
During 1995, the Company purchased 54 performing commercial and commercial real
estate loans from another institution with a principal value of approximately
$26 million. The loans were acquired on a nonrecourse basis.
A summary of changes in the allowance for possible loan losses for the years
ended December 31, 1995, 1994 and 1993 follows:
1995 1994 1993
------ ------ ------
(Dollars in thousands)
Balance at beginning of year $ 7,237 $ 7,747 $ 11,759
Provision for possible loan losses 770 -- --
Charge-offs (2,485) (2,111) (5,571)
Recoveries 1,030 1,601 1,559
-------- -------- --------
Balance at end of year $ 6,552 $ 7,237 $ 7,747
======== ======== ========
At December 31, 1995 and 1994, there were approximately $3,373,000 and
$7,324,000, respectively, of non-accruing loans. Under SFAS No. 114, the Company
considers a loan impaired if it is ninety days or more past due as to principal
and interest, or if management's credit risk assessment determines that it is
F-12
<PAGE>
FIRST ESSEX BANCORP, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
probable that principal and interest will not be collected as contractually
scheduled. In addition, loans which are restructured at market rates and
comparable to loans with similar risks are considered impaired only in the year
of the restructuring, so long as they continue to perform according to the
restructured terms. Excluded from the impaired category, but otherwise
considered non-accruing loans, are small balance homogeneous loans which are
ninety days or more past due. Small balance homogeneous loans include
residential mortgage loans, residential construction loans to individuals
(excluding builder construction loans) and consumer loans. The Company evaluates
a loan's level of impairment by measuring the net present value of the expected
future cash flows using the loan's original effective interest rate, or at the
fair value of the collateral if the loan is collateral dependent. When the
difference between the net present value of the impaired loan (or fair value of
the collateral if the loan is collateral dependent) is lower than the recorded
investment of the loan, the difference is provided to expense with a resulting
valuation allowance. At December 31, 1995, the recorded investment in loans that
are considered to be impaired under SFAS No. 114 totalled $1.9 million of which
$663,000 had a related allowance for possible loan losses of $273,000. The
remaining $1.2 million of impaired loans did not require a related allowance for
possible loan losses. Of the $1.9 million of loans considered to be impaired
under SFAS No. 114, $1,043,000 are restructured and are not included in the
$3,373,000 of non-accruing loans discussed above. The average recorded
investment in impaired loans during 1995 was approximately $1.4 million.
At December 31, 1995, the principal balance of outstanding restructured loans
totalled $1,043,000. At December 31, 1994 and 1993, there were no restructured
loans outstanding. The amount of additional interest that would have been earned
had the nonaccrual and restructured loans performed in accordance with original
terms and conditions was $389,000, $754,000 and $856,000 for the years ended
December 31, 1995, 1994 and 1993, respectively.
Interest income recognized on impaired loans, using the cash basis of income
recognition, amounted to approximately $166,000 for the year ended December 31,
1995.
The maximum amount of aggregate loans to directors, executive officers and
principal stockholders for the year ended December 31, 1995 was less than 5% of
stockholders' equity.
At December 31, 1995 and 1994, the Bank was servicing loans sold to the Federal
National Mortgage Association, Federal Home Loan Mortgage Corporation,
Massachusetts Home Finance Agency and various other banks and institutions on a
nonrecourse basis (except as discussed in Note 9), in the amount of $74,330,000
and $109,523,000, respectively. The amount of loans sold and serviced for others
is not included in loans receivable.
F-13
<PAGE>
FIRST ESSEX BANCORP, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
4. BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment at December 31, 1995 and 1994 follows:
Estimated Useful
1995 1994 Life
--------- -------- ---------------
(Dollars in thousands)
Land $ 674 $ 674
Buildings 5,804 5,791 20 to 30 years
Leasehold improvements 5,672 2,664 1 to 14 years
Furniture and fixtures 9,586 7,465 3 to 10 years
Construction in process 271 2,067
------- -------
22,007 18,661
Less accumulated depreciation
and amortization 11,960 10,314
------- -------
$10,047 $ 8,347
======= =======
Depreciation expense was $1,603,000, $1,411,000 and $1,216,000 for 1995, 1994
and 1993, respectively.
5. DEPOSITORS' ACCOUNTS
A summary of depositors' accounts at December 31, 1995 and 1994 follows:
1995 1994
--------- ---------
(Dollars in thousands)
Personal and business checking
accounts (noninterest-bearing) $ 30,391 $ 19,171
NOW accounts 31,288 30,076
Money market accounts 73,730 92,230
Savings accounts 49,361 54,322
Time deposits 306,699 261,079
-------- --------
$491,469 $456,878
======== ========
The following is a summary of original maturities of time deposits as of
December 31, 1995:
(Dollars in thousands)
1996 $120,295
1997 80,764
Thereafter 105,640
--------
$306,699
========
The following table shows the remaining maturities of certificates of deposits
with balances in excess of $100,000 at December 31, 1995:
(Dollars in thousands)
Three months or less 3,265
Over 3 months and less than 6 months 8,324
Over 6 months and less than 12 months 10,549
12 months and over 2,067
-------
$24,205
=======
F-14
<PAGE>
FIRST ESSEX BANCORP, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
6. BORROWED FUNDS
Borrowed funds at December 31, 1995 and 1994 are summarized below:
1995 1994
-------- --------
(Dollars in thousands)
Due during 1995, interest rates from 3.98% to 6.98% $ -- $152,997
Due during 1996, interest rates from 4.84% to 6.98% 123,100 70,600
Due during 1997, interest at 6.24% 35,000 --
Due during 1998, interest rates from 5.82% to 6.42% 58,597 --
Due during 2000, interest rates from 5.29% to 5.97% 2,896 1,420
Due during 2005, interest at 6.08% 80 --
Repurchase agreements 25,896 54,931
-------- --------
$245,569 $279,948
======== ========
Total lines of credit available under both short-term and long-term borrowings
from the FHLB are dependent upon the amount of FHLB stock owned and other assets
available as collateral with the total credit available being $297,380,000, of
which $77,707,000 was unused at December 31, 1995. The advances from the FHLB
are secured by all FHLB stock (book value of $14,869,000 and $12,775,000 at
December 31, 1995 and 1994) and a pledge of certain assets as collateral.
Repurchase agreements outstanding at December 31, 1995 mature in three months or
less with interest rates of 4.50% to 5.875% and are secured by certain U.S.
government and agency securities.
The following table summarizes the maximum and average amounts of short-term
borrowings outstanding during 1995 and 1994 together with the weighted average
interest rates thereon.
<TABLE>
<CAPTION>
For the Year Ended December 31, 1995 At December 31, 1995
---------------------------------------------- ------------------------------
Maximum Average Weighted Weighted
Amount Amount Average Amount Average
Outstanding Outstanding Interest Rate Outstanding Interest Rate
----------- ----------- ------------- ----------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
FHLB Borrowings $258,372 $263,298 6.22% $219,673 6.10%
Repurchase Agreements 27,019 8,432 5.50 25,896 5.72
<CAPTION>
For the Year Ended December 31, 1994 At December 31, 1994
---------------------------------------------- ------------------------------
Maximum Average Weighted Weighted
Amount Amount Average Amount Average
Outstanding Outstanding Interest Rate Outstanding Interest Rate
----------- ----------- ------------- ----------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
FHLB Borrowings $255,489 $207,067 4.66% $225,017 6.10%
Repurchase Agreements 55,131 11,399 5.47 54,931 5.94
</TABLE>
F-15
<PAGE>
FIRST ESSEX BANCORP, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES
The provision (benefit) for income taxes for each of the three years in the
period ended December 31, 1995 consists of the following:
1995 1994 1993
---- ---- ----
(Dollars in thousands)
Current $ 20 $ 20 $ --
Deferred 55 (825) (2,621)
----- ------ --------
$ 75 $(805) $(2,621)
===== ====== ========
The difference between the total expected provision for income taxes computed by
applying the statutory federal income tax rate to income before provision
(benefit) for income taxes and the recorded provision (benefit) for income taxes
for the three years in the period ended December 31, 1995 follows:
1995 1994 1993
---- ---- ----
(Dollars in thousands)
Provision at statutory rate $ 2,559 $ 1,945 $ 1,472
State taxes, net of federal benefit 903 20 358
Tax-exempt interest income -- -- (6)
Dividend received deduction (10) (10) --
Change in valuation allowance (3,312) (2,770) (4,445)
Other, net (65) 10 --
------- ------- -------
Provision (benefit) for income taxes $ 75 $ (805) $(2,621)
======= ======= =======
F-16
<PAGE>
FIRST ESSEX BANCORP, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
The components of the net deferred tax asset at December 31, 1995 and 1994
follow (dollars in thousands):
1995 1994
---- ----
(Dollars in thousands)
Allowance for possible loan losses $ (2,227) $ (3,060)
Deferred tax loan loss reserve 2,548 (3,359)
Depreciation (789) (489)
Deferred loan fees (142) (266)
Deferred compensation (262) (309)
Net operating loss carryforwards (4,647) (1,824)
Limited partnership investments 525 614
Foreclosed property write-downs (851) (910)
Contributions (133) (123)
General business credits (490) (300)
AMT credits (291) (291)
Charge-off remaining lease payments (77) (142)
Unrealized loss on available-for-sale securities (230) (433)
State income taxes (202) (1,116)
Other, net (347) 814
-------- --------
(7,615) (11,194)
Valuation reserve 4,185 7,653
-------- --------
Net deferred tax asset included in other assets $ (3,430) $ (3,541)
======== ========
The change in the valuation allowance for the years ended December 31, 1995 and
1994 follows (dollars in thousands):
1995 1994
---- ----
(Dollars in thousands)
Balance at January 1 $ 7,653 $ 10,105
Decrease due to change in estimate of future
taxable earnings (3,468) (2,452)
-------- --------
Balance at December 31 $ 4,185 $ 7,653
======== ========
A valuation allowance is provided when it is more likely than not that some
portion of the net deferred tax asset will not be realized. The Company has
established a valuation allowance for the portion of the net deferred tax asset
in excess of the amount expected to be realized from estimated taxable income
for 1996.
At December 31, 1995, tax loss carryforwards, for tax return purposes, of
approximately $13,667,000 are available to be carried forward to future periods
and, if unused, will expire between 2006 and 2010.
For federal income tax purposes, the Bank is allowed a bad debt deduction
limited generally to 8% of taxable income, as defined, and subject to certain
limitations based on aggregate loans and savings account balances at the end of
year. If amounts that qualify as deductions for federal income tax purposes
exceed amounts that would qualify for a deduction based on the Bank's loss
experience, a federal tax provision will be required on such excess if such
amounts are used for purposes other than bad debt deductions. As of December 31,
1995, the Bank's bad debt reserves maintained for federal tax purposes did not
exceed amounts that qualify for a deduction under the experience method.
F-17
<PAGE>
FIRST ESSEX BANCORP, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
8. PENSION BENEFITS
The Company has a defined benefit pension plan covering most employees.
Employees are eligible to participate upon the attainment of age 21 and the
completion of one year of service. Benefits are based primarily on years of
service and employees' final average pay.
Contributions by the Company are consistent with the funding requirements of
federal law and regulations. Pension plan assets consist primarily of mutual
funds, bonds and government securities.
The weighted average discount rate was 7.0% in 1995 and 8.5% in 1994. The rate
of increase in future compensation levels used in determining the actuarial
present value of the projected benefit obligation was 4.0% in 1995 and 1994. The
expected long-term rate of return on assets was 8.0% in 1995 and 7.5% in 1994.
The following table sets forth the plan's funded status and amounts recognized
in the Company's consolidated financial statements at December 31, 1995 and
1994:
1995 1994
---- ----
(Dollars in thousands)
Actuarial present value of benefit obligation:
Accumulated benefit obligation, including vested benefit
of $3,064,000 and $2,934,000 $ 3,168 $ 2,994
Projected benefit obligation for service rendered to date 4,236 4,096
Plan assets at fair value 4,705 4,312
Excess of plan assets over projected benefit obligation 469 216
Unrecognized net gain from past experience different (1,252)
from that assumed and effects of changes in assumptions (821)
Unrecognized net asset at transition amortized over
approximately 15 years 83 89
------- -------
Accrued pension cost included in other liabilities at $ (700) $ (516)
December 31 ======= =======
Net pension cost for the years ended December 31, 1995, 1994 and 1993 included
the following components:
1995 1994 1993
------ ------ -----
(Dollars in thousands)
Service cost - benefits earned during the year $ 283 $ 265 $ 196
Interest cost on projected benefit obligation 290 (270) 266
Actual return on plan assets (811) (124) (638)
Net amortization and deferral 422 (124) 267
----- ----- -----
Net pension cost $ 184 $ 153 $ 91
===== ===== =====
The Company has no material postretirement or postemployment benefit
arrangements other than pension benefits with its employees and, therefore, is
not impacted by Statements of Financial Accounting Standards No. 106 and No. 112
issued in December 1990 and November 1992, respectively, regarding such
benefits.
F-18
<PAGE>
FIRST ESSEX BANCORP, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments, held for purposes other than trading, include
commitments to originate loans, standby letters of credit, recourse arrangements
on sold assets, unadvanced portions of construction loans, and forward
commitments. The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the accompanying
consolidated balance sheets. The contract or notional amounts of these
instruments reflect the extent of involvement the Company has in particular
classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments, standby letters of
credit and recourse arrangements 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. For forward commitments, the contract or notional amounts do not
represent exposure to credit loss. The Company controls the credit risk of its
forward commitments through credit approvals, limits and monitoring procedures.
Financial instruments with off-balance sheet risk at December 31, 1995 and 1994
follow:
Contract Amount
-------------------
1995 1994
------- -------
(Dollars in thousands)
Commitments to originate loans $24,104 $24,861
Unused lines, commercial and
standby letters of credit 21,430 18,688
Loans sold with recourse 2,758 3,051
Unadvanced portions of
construction loans 10,495 9,330
Forward commitments 5,821 5,530
Commitments to originate loans are agreements to lend to customers provided
there are no violations of any conditions established in the contracts.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. 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 upon
management's credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
Lease Commitments
The Company has operating leases on nine of its facilities. Most of the leases
have renewal options. Total rent expense under these leases for 1995, 1994 and
1993 was $661,000, $386,000 and $371,000, respectively.
F-19
<PAGE>
FIRST ESSEX BANCORP, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
The following is a schedule of future minimum lease payments for operating
leases (dollars in thousands):
Year Ending December 31,
- ------------------------
1996 $ 644
1997 604
1998 583
1999 479
2000 367
Thereafter 1,389
------
Total future minimum lease payments $4,066
======
Employment and Termination Agreements
The Company and the Bank entered into employment agreements with two executive
officers effective January 1, 1994. One agreement has an original term of three
years and the other agreement has an original term of two years. Each may be
extended annually for an additional year by vote of the Boards of Directors. The
employment agreements generally provide for the continued payment of specified
compensation and benefits to each executive officer for specified periods after
termination, unless the termination is for "cause" as defined in the employment
agreement. The Board of Directors voted to extend each employment agreement for
an additional year during 1995.
In addition, the Company, the Bank and the officers, referred to above, have
entered into special termination agreements that provide for the payment, under
certain circumstances, of a lump-sum amount upon termination following a "change
of control" which is generally defined to mean a person or group acquiring
ownership of 25% or more of the outstanding common stock of the Company, or
certain other events resulting in a change in control of the Company. The
lump-sum amounts are based on three times one of the executive officer's base
annual compensation and two times the other executive officer's base annual
compensation as defined in the agreements and would be in lieu of any benefits
under the officers' employment agreements, but in addition to amounts payable
pursuant to other benefit plans. Five other senior officers have similar
termination agreements effective following a "change of control". The lump-sum
amount for one senior officer is equivalent to two times the officer's base
annual compensation. The lump-sum amounts for the other four senior officers are
equivalent to each respective officer's base annual compensation.
Legal Proceedings
The Company is involved in various legal proceedings incidental to its business,
none of which is believed by management, based on discussion with legal counsel,
to be material to the financial condition or operations of the Company.
10. MANAGEMENT INCENTIVE COMPENSATION PLAN
The Company has a Management Incentive Compensation Plan (the "Incentive Plan")
as a means of recognizing achievement on the part of individual officers and
management as a whole. In 1995 and 1994 the Company awarded $117,000 and
$130,000, respectively, for bonuses in connection with the Incentive Plan. No
such bonuses were awarded in connection with the Incentive Plan in 1993.
11. STOCK OPTION PLAN
In 1988, the Company adopted a stock option plan as a performance incentive for
its directors, officers, employees and other key persons (the "Stock Option
Plan"). Options granted under the Stock Option Plan have an exercise price per
share equal to at least the fair market value of a share of the Company's common
stock on the date the option is granted and expire no later than 10 years after
the date of grant. The Company has reserved 800,000 shares for issuance pursuant
F-20
<PAGE>
FIRST ESSEX BANCORP, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
to options granted under the Stock Option Plan. Both "Incentive Stock Options"
and "Non-qualified Stock Options" may be granted pursuant to the Stock Option
Plan. As of December 31, 1995, options to purchase 421,733 shares were
outstanding at exercise prices ranging from $5.25 to $11.375 per share.
In December 1995, the FASB issued SFAS No. 123, "Stock-Based Compensation",
which is to become effective for fiscal years beginning after December 15, 1995.
SFAS No. 123 requires employee stock-based compensation to be either recorded or
disclosed at its fair value. Management will continue to account for employee
stock-based compensation under Accounting Principles Board Opinion No. 25 and
will not adopt the new accounting provisions for employee stock-based
compensation under SFAS No. 123 and will include the additional required
disclosures in the 1996 consolidated financial statements.
The following summarizes the Stock Option Plan activity for the three years
ended December 31, 1995, 1994 and 1993:
1995 1994 1993
---- ---- \ ----
Outstanding at beginning of year 423,000 242,500 149,500
Granted 10,000 195,000 125,000
Expired (13,500) (3,000) (32,000)
Exercised (2,767) (6,500) --
-------- -------- --------
Outstanding at end of year 421,733 428,000 242,500
======== ======== ========
Exercisable at end of year 233,470 139,000 114,200
======== ======== ========
12. EMPLOYEES' STOCK OWNERSHIP and 401(k) PLANS
The Company established an Employees' Stock Ownership Plan (the "ESOP") in 1986
for eligible employees. The ESOP was funded by Company contributions made in
cash or common stock. Benefits were paid in shares of common stock or in cash.
Employees had the right to receive benefits in shares.
During 1994, the Company established a 401(k) plan (the "Plan") covering most of
its employees and merged the ESOP into the Plan. All eligible employee benefits
in the ESOP became 100% vested at the time of the merger.
Under the Plan, an eligible employee ("participant") may make contributions up
to 15% of their compensation, with certain limitations. The Company may elect to
make basic matching contributions. During 1995 and 1994, the Company made basic
matching contributions equal to 50% of the first 4% of each participant's
compensation, or a maximum of 2%. Basic matching contributions for 1995 and 1994
amounted to $98,000 and $53,000, respectively. The Plan also provides for
discretionary supplemental matching contributions. These contributions are
allocated to participants in the same manner described above. Supplemental
matching contributions to the Plan for 1995 and 1994 amounted to $38,000 and
$25,000, respectively.
13. STOCKHOLDERS' EQUITY
At the time of conversion to stock form, the Bank established a liquidation
account in the amount of $41,426,000. In accordance with Massachusetts statutes,
the liquidation account is maintained for the benefit of Eligible Account
Holders who continue to maintain their accounts in the Bank after the
conversion. The liquidation account is reduced annually to the extent that
Eligible Account Holders have reduced their qualifying deposits. Subsequent
increases will not restore an Eligible Account Holder's interest in the
liquidation account. In the event of a complete liquidation, each Eligible
Account Holder is entitled to receive a distribution from the liquidation
account in a proportionate amount to the current adjusted qualifying balances
for the account then held. The balance in the liquidation account was $5,796,000
at December 31, 1995.
F-21
<PAGE>
FIRST ESSEX BANCORP, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
Capital Requirements
As a federal savings institution regulated by the Office of Thrift Supervision
("the OTS"), the Bank is required to meet certain minimum regulatory capital
requirements: tangible capital, total capital, core/leverage capital, Tier 1
risk-based capital and total risk-based capital. In addition, under the Prompt
Corrective Action provisions of the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), the Bank's capital position may be classified
in one of five different capital categories ranging from critically
under-capitalized to well-capitalized. As of December 31, 1995, the Bank met all
of the minimum regulatory capital requirements and satisfied the requirements of
the well-capitalized capital category under FDICIA. The Bank's core/leverage,
Tier 1 risk-based and total risk-based capital, together with related regulatory
minimum requirements, are summarized below. The Bank's total capital, tangible
capital and tangible equity ratios were equal to the core/leverage capital
ratio.
The Company may not declare or pay cash dividends on its shares of common stock
if the effect thereof would cause stockholders' equity to be reduced below
applicable capital maintenance requirements or if such declaration and payment
would otherwise violate regulatory requirements.
<TABLE>
<CAPTION>
Core/ Tier 1 Total
Leverage Risk-based Risk-based
Capital Capital Capital
-------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Stockholders' Equity $ 60,172 $ 60,172 $ 60,172
Unrealized loss on investment securities
available-for-sale not included in regulatory capital 677 677 677
General Valuation Allowance -- -- 5,925
-------- -------- --------
Regulatory Capital Measure $ 60,849 $ 60,849 $ 66,774
======== ======== ========
Total Assets $808,792 $808,792 $808,792
Adjusted Assets $808,792 $ -- $ --
Risk-based Assets (unaudited) -- 473,396 473,396
Capital Ratio (unaudited) 7.52% 12.85% 14.11%
Regulatory minimum requirement 3.00% 4.00% 8.00%
</TABLE>
F-22
<PAGE>
FIRST ESSEX BANCORP, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
14. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS - FIRST ESSEX BANCORP, INC.
Condensed financial statements of First Essex Bancorp, Inc. as of December 31,
1995 and 1994, and for the years ended December 31, 1995, 1994 and 1993 follow:
1995 1994
---- ----
(Dollars in thousands)
Balance Sheets
Assets
Cash and cash equivalents $ 5,928 $ 1,033
Investment securities held-to-maturity -- 3,879
Investment in first Essex Bank, FSB 55,550 50,910
Other assets 1 2
------- -------
Total assets $61,479 $55,824
======= =======
Liabilities and stockholders' equity
Other liabilities $ 1,307 $ 1,067
Stockholders' equity 60,172 54,757
------- -------
Total liabilities and stockholders' equity $61,479 $55,824
======= =======
1995 1994 1993
---- ---- ----
(Dollars in thousands)
Statements of Operations
Income
Interest on investments $ 221 $ 87 $ 9
Distributed income of First Essex Bank, FSB 3,000 3,000 3,200
------- ------- -------
Total income 3,221 3,087 3,209
------- ------- -------
Expenses
Operating expenses 7 45 55
------- ------- -------
Income before provision (benefit) for income
taxes and equity in undistributed net
income of First Essex Bank, FSB 3,214 3,042 3,154
Provision (benefit) for income taxes 75 (805) (2,621)
------- ------- -------
3,139 3,847 5,775
Equity in undistributed net income of First Esssex
Bank, FSB 4,313 2,679 1,175
------- ------- -------
Net income $ 7,452 $ 6,526 $ 6,950
======= ======= =======
F-23
<PAGE>
FIRST ESSEX BANCORP, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Statements of Cash Flows
Cash flows from operating activities
Net income $ 7,452 $ 6,526 $ 6,950
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Equity in income of First Essex Bank, FSB (7,313) (5,679) (4,374)
Deferred income taxes 55 (825) (2,621)
Accretion of investment
securities discounts (165) (71) (12)
Decrease in other assets 1 6 68
Increase (decrease) in other liabilities (28) 19 73
------- ------- -------
Net cash provided by (used in) operating activities 2 (24) 84
------- ------- -------
Cash flows from investing activities
Purchases of investment securities (2,253) (8,810) (1,970)
Maturities of investment securities 6,297 6,984 --
Dividends received from First Essex Bank, FSB 3,000 3,000 3,200
Investment in First Essex Bancorp of
New Hampshire, Inc. -- -- (500)
------- ------- -------
Net cash provided by investing activities 7,044 1,174 730
------- ------- -------
Cash flows from financing activities
Stock options exercised 16 41 --
Dividends paid (2,167) (1,565) (662)
------- ------- -------
Net cash used in financing activities (2,151) (1,524) (662)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 4,895 (374) 152
Cash and cash equivalents at beginning of year 1,033 1,407 1,255
------- ------- -------
Cash and cash equivalents at end of year $ 5,928 $ 1,033 $ 1,407
======= ======= =======
</TABLE>
15. RESTRICTIONS ON SUBSIDIARY BANK LOANS, ADVANCES AND DIVIDENDS
The Federal Reserve Act restricts the Bank with respect to lending or advancing
funds to the Company unless such loans are collateralized by specific
obligations and limits collateralized loans to 10% of the Bank capital stock and
surplus. At December 31, 1995, no amounts were available to be transferred from
the Bank to the Company in the form of loans or advances. In addition, under the
OTS prompt corrective action regulations, which took effect on December 19,
1992, the Bank generally would be prohibited from making any capital
distribution if, after the distribution, the Bank would have (i) a total
risk-based capital ratio of less than 8%, (ii) a Tier 1 risk-based capital ratio
of less than 3% or (iii) a leverage ratio of less than 3%.
F-24
<PAGE>
FIRST ESSEX BANCORP, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
16. QUARTERLY DATA (UNAUDITED)
A summary of quarterly financial data for the years ended December 31, 1995 and
1994 follows:
Year Ended December 31, 1995
----------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
(Dollars in thousands, except per share amounts)
Interest and dividend income $15,501 $15,491 $15,342 $14,580
Interest expense 9,411 9,625 9,336 8,709
------- ------- ------- -------
Net interest income 6,090 5,866 6,006 5,871
Provision for possible loan losses 232 209 200 129
------- ------- ------- -------
Net interest income after
provision for possible loan losses 5,858 5,657 5,806 5,742
Noninterest income 1,178 1,082 865 583
Noninterest expense (1) 5,264 4,236 4,880 4,864
------- ------- ------- -------
Income before income taxes 1,772 2,503 1,791 1,461
Provision for income taxes 45 10 19 1
------- ------- ------- -------
Net income $ 1,727 $ 2,493 $ 1,772 $ 1,460
======= ======= ======= =======
Earnings per share $ .28 $ .41 $ .29 $ .24
======= ======= ======= =======
(1) The third quarter reduction in noninterest expense reflects a
decrease of approximately $250,000 of deposit insurance expense, as well as a
reduction of approximately $360,000 in the net cost of foreclosed property.
<TABLE>
<CAPTION>
Year Ended December 31, 1994
----------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest and dividend income $ 13,542 $ 12,099 $ 10,144 $ 9,272
Interest expense 7,420 6,062 4,838 4,387
-------- -------- -------- --------
Net interest income 6,122 6,037 5,306 4,885
Provision for possible loan losses -- -- -- --
-------- -------- -------- --------
Net interest income after
provision for possible loan losses 6,122 6,037 5,306 4,885
Noninterest income 598 675 638 650
Noninterest expense 4,965 5,208 4,266 4,751
-------- -------- -------- --------
Income before income taxes 1,755 1,504 1,678 784
(Benefit) provision for income taxes (1) (608) 1 (74) (124)
-------- -------- -------- --------
Net income $ 2,363 $ 1,503 $ 1,752 $ 908
======== ======== ======== ========
Earnings per share $ .39 $ .25 $ .29 $ .15
======== ======== ======== ========
<FN>
(1) The benefit for income taxes recorded in 1994 was based on management's
quarterly review of the realizability of the deferred tax asset. The benefit
recognized during the year reflects management's analysis of future taxable
income.
</FN>
</TABLE>
F-25
<PAGE>
FIRST ESSEX BANCORP, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
17. PREFERRED STOCK
The Company's Board of Directors has authorized a series of 100,000 shares of
preferred stock designated as Series A Junior Participating Cumulative Preferred
Stock, par value $0.10 per share ("Series A Stock") and has declared a dividend
distribution of one Preferred Stock Purchase Right (the "Right") for each
outstanding share of the Company's common stock.
Pursuant to the Company's Shareholder Rights Plan, each Right entitles the
holder to purchase from the Company a unit consisting of one one-hundredth of a
share of Series A Stock, par value $0.10 per share, at an initial cash exercise
price of $28 per unit, subject to adjustment. The Rights are not exercisable and
remain attached to all outstanding shares of the Company's common stock until
the earliest of (i) ten days following a public announcement that a person or
group of affiliated or associated persons (an "Acquiring Person") has acquired
beneficial ownership of 20% or more of the outstanding shares of the Company's
common stock (the date of said announcement being referred to as the "Stock
Acquisition Date"), (ii) ten business days following the commencement of a
tender offer or exchange offer that would result in a person or group becoming
an Acquiring Person or (iii) the declaration by the Company's Board of Directors
that a person is an "Adverse Person," as such term is defined in the Company's
Shareholder Rights Plan.
In the event that a Stock Acquisition Date occurs or the Board determined that a
person is an Adverse Person, each holder of a Right will be entitled to receive,
upon exercise, that number of units of Series A Stock having a fair value of two
times the exercise price of the Right. In the event that, at any time following
the Stock Acquisition Date, (i) the Company is acquired in a merger or other
business combination transaction or (ii) 50% or more of the Company's assets or
earning power is sold, each holder of a Right shall thereafter have the right to
receive, upon exercise, common stock of the acquiring company having a fair
value equal to two times the exercise price of the Right. The holders of Series
A Stock would be entitled to preferred rights with respect to dividends, voting
and liquidation.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, amounts due from banks,
interest-bearing deposits, federal funds sold and investments with original
maturities of less than three months. Cash and cash equivalents are recorded at
cost which approximates fair value.
Investment Securities
Fair values for investment securities, excluding Federal Home Loan Bank (FHLB)
and Savings Bank Life Insurance (SBLI) stock, are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments. The carrying values of
FHLB and SBLI stock approximates fair value.
Loans Receivable
For variable rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying values. The fair values for
certain mortgage loans (e.g., one-to-four family residential) are based on
quoted market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. The fair values
of other loans (e.g., commercial real estate and rental property mortgage loans,
commercial, industrial loans, and consumer loans) are estimated using a
discounted cash flow analysis, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality. The carrying
F-26
<PAGE>
FIRST ESSEX BANCORP, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
amount of mortgage loans held-for-sale and accrued interest approximates its
fair value. As of December 31, 1995 and 1994, mortgage loans held-for-sale
totalled $5,821,000 and $2,930,000, respectively.
Depositors' Accounts
The fair values disclosed for certain deposits (e.g., interest and
noninterest-bearing checking, passbook savings, and certain types of money
market accounts) are, by definition, equal to the amount payable on demand at
the reporting date (i.e., their carrying amounts). Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on a schedule of aggregated
expected monthly maturities on time deposits. The carrying amount of accrued
interest payable approximates its fair value.
Borrowed Funds
The carrying amounts of borrowings within ninety days approximate their fair
values. Fair values of other borrowings are estimated using discounted cash flow
analyses based on the Company's current borrowing rates for similar types of
borrowing arrangements. The carrying value for repurchase agreements
approximates fair value due to the short term nature of these instruments.
Off Balance-sheet Instruments
The fair values of the Company's off-balance-sheet instruments (lending
commitments and letters of credit) are based on fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreement and the counterparties' credit standing.
At December 31, 1995, the estimated fair value of off-balance sheet financial
instruments, consisting primarily of loan commitments, were not material.
Assumptions
Fair value estimates are made at a specific point in time, based on relevant
market information about specific financial instruments. These estimates do not
reflect any premium or discount that could result from offering for sale at one
time the Company's entire holdings of a particular financial instrument. Because
no market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
F-27
<PAGE>
FIRST ESSEX BANCORP, INC.
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair values of the Company's financial instruments follow:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 27,308 $ 27,308 $ 18,714 $ 18,714
Investment securities available-for-sale 115,153 115,153 35,200 35,200
Investment securities held-to-maturity 135,098 133,651 295,057 284,341
Stock in Federal Home Loan Bank of Boston
and Savings Bank Life Insurance Company 16,063 16,063 13,969 13,969
Loans receivable, net 487,678 491,847 419,644 417,145
Mortgage loans held-for-sale 5,821 5,821 2,930 2,930
Accrued interest receivable 4,466 4,466 4,537 4,537
Financial liabilities:
Demand, savings and time deposits 491,469 486,196 456,878 451,851
Borrowed funds 245,569 244,514 279,948 277,382
</TABLE>
19. THE MERGER
On August 5, 1996, the Company entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") with Finest Financial Corp. ("Finest").
Pursuant to the Merger Agreement, the Company will acquire all of the
outstanding shares of Finest for total consideration of approximately $30
million or $20.25 per share. The Merger Agreement provides for payment of the
purchase price utilizing a combination of cash and the common stock of the
Company subject to an overall limitation that a minimum of 50% and a maximum of
62% of the total number of outstanding shares of Finest common stock shall be
converted into shares of the Company's common stock, with the remaining
outstanding shares of Finest common stock to be converted into cash. The Merger
Agreement further provides for amendment to the purchase price if certain
conditions occur.
F-28
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Finest Financial Corp.
We have audited the accompanying consolidated statements of income,
stockholders' equity, and cash flows of Finest Financial Corp. and Subsidiary
for the year ended December 31, 1993. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements of Finest
Financial Corp. and Subsidiary referred to above present fairly, in all material
respects, the consolidated results of their operations and their consolidated
cash flows for the year ended December 31, 1993, in conformity with generally
accepted accounting principles.
As discussed in note 2 to the consolidated financial statements, the
Bank changed its method of accounting for certain investments in debt and equity
securities and income taxes for the year ended December 31, 1993.
In our report dated February 18, 1994 (except for note 15 as to which
the date was January 19, 1995), our opinion contained an explanatory paragraph
with respect to the ultimate outcome of certain litigation which could not be
determined at that time. As discussed in note 15 to the consolidated financial
statements, this litigation was settled on August 2, 1996. Accordingly, our
present opinion on the 1993 consolidated statement of operations, stockholders'
equity and cash flows for the year ended December 31, 1993, as presented herein,
is different from that expressed in our previous report.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Boston, Massachusetts
February 18, 1994 (except
for note 15 as to which the
date is August 2, 1996)
F-29
<PAGE>
To the Board of Directors
Finest Financial Corp.
Pelham, New Hampshire
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Finest Financial
Corp. and Subsidiary as of December 31, 1995 and 1994 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the two-year period ended December 31, 1995.
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. The consolidated statements of income,
changes in stockholders' equity and cash flows of Finest Financial Corp. and
Subsidiary for the year ended December 31, 1993 were audited by other auditors.
Their report was dated February 18, 1994, except for Note 15, as to which the
date was January 19, 1995. Their report has been updated to remove an
explanatory paragraph resulting from the settlement of litigation discussed in
Note 15 to the consolidated financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 1995 and 1994 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Finest Financial Corp. and Subsidiary as of December 31, 1995 and
1994, and the consolidated results of their operations and their cash flows for
each of the years in the two-year period ended December 31, 1995, in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 109 "Accounting for Income Taxes,"
effective January 1, 1993.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities" as of December 31, 1993.
/s/ Shatswell, MacLeod & Company, P.C.
SHATSWELL, MacLEOD & COMPANY, P.C.
February 9, 1996, except for
Note 15, as to which the date
is August 2, 1996, Note 20, as
to which the date is August 5,
1996, and Note 17, as to which
the date is September 24, 1996
F-30
<PAGE>
<TABLE>
<CAPTION>
FINEST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and December 31, 1995 and 1994
June 30, December 31,
------- ------------
1996 1995 1994
------ ------ ------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 5,858,080 $ 4,815,329 $ 5,347,857
Federal funds sold 2,200,000 9,100,000 8,500,000
Investments in available-for-sale securities (at fair value) 34,937,159 29,844,022 9,641,408
(Note 3)
Investments in held-to-maturity securities (fair values of
$28,437,676 as of December 31, 1995 and
$38,635,572 as of December 31, 1994) (Note 3) 33,954,049 28,226,865 38,798,889
Federal Home Loan Bank stock, at cost 648,100 566,100 --
Loans, net (Note 4) 95,615,792 102,627,014 103,951,268
Loans held-for-sale 92,000 74,800 --
Other real estate owned (Note 5) 891,418 1,501,041 7,935,577
Premises and equipment (Note 6) 1,689,273 1,767,926 1,769,346
Accrued interest receivable 1,424,308 1,440,487 731,546
Income taxes receivable and net deferred tax asset 1,816,157 1,048,450 1,238,826
Other assets 201,430 90,922 96,798
------------- ------------- -------------
$ 179,327,766 $ 181,102,956 $ 178,011,515
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 7) $ 158,187,075 $ 161,668,652 $ 161,364,119
Accrued interest payable 1,042,767 1,243,901 621,335
Other liabilities 1,447,912 923,527 744,880
------------- ------------- -------------
Total liabilities 160,677,754 163,836,080 162,730,334
------------- ------------- -------------
Commitments and contingent liabilities (Notes 10, 11 and 15)
Stockholders' equity: (Note 17)
Common stock, par value $.10 per share; authorized
2,000,000 shares; 1,478,750 shares issued and outstanding
at June 30, 1996, 1,478,650 shares issued and outstanding
at December 31, 1995 and 1,474,520 shares issued and
1,458,550 shares outstanding at December 31, 1994 147,875 147,865 147,452
Paid-in capital 7,507,848 7,506,508 7,306,971
Retained earnings 11,057,861 9,431,809 8,227,995
Treasury stock (15,970 shares, at cost) -- -- (71,400)
Net unrealized holding gain (loss) on available-for-sale
securities (63,572) 180,694 (329,837)
------------- ------------- -------------
Total stockholders' equity 18,650,012 17,266,876 15,281,181
------------- ------------- -------------
$ 179,327,766 $ 181,102,956 $ 178,011,515
============= ============= =============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-31
<PAGE>
<TABLE>
<CAPTION>
FINEST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Six Month Periods Ended June 30, 1996 and 1995 and
Years Ended December 31, 1995, 1994 and 1993
June 30, December 31,
---------------------------- -----------------------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 4,775,540 $ 4,794,541 $ 10,075,972 $ 8,965,237 $ 9,922,239
Interest and dividends on securities:
Taxable 1,734,519 1,251,990 2,722,976 1,620,285 762,710
Tax-exempt 84,291 105,594 209,508 205,229 224,974
Dividends on marketable equity securities 126,036 124,351 243,850 233,757 228,179
Other interest 124,323 136,088 343,125 531,764 402,661
------------ ------------ ------------ ------------ ------------
Total interest and dividend income 6,844,709 6,412,564 13,595,431 11,556,272 11,540,763
------------ ------------ ------------ ------------ ------------
Interest expense:
Interest on deposits (Note 7) 2,787,669 2,571,371 5,581,102 4,509,820 4,799,959
Interest on capitalized leases (Note 11) 20,405 21,581 42,594 44,668 46,381
Interest on short-term borrowings 4,133 -- -- -- --
------------ ------------ ------------ ------------ ------------
Total interest expense 2,812,207 2,592,952 5,623,696 4,554,488 4,846,340
------------ ------------ ------------ ------------ ------------
Net interest and dividend income 4,032,502 3,819,612 7,971,735 7,001,784 6,694,423
Provision for loan losses (Note 4) 169,000 300,000 1,600,000 600,000 2,125,000
------------ ------------ ------------ ------------ ------------
Net interest and dividend income after
provision for loan losses 3,863,502 3,519,612 6,371,735 6,401,784 4,569,423
------------ ------------ ------------ ------------ ------------
Other income:
Fees and service charges 294,161 236,398 489,408 495,178 506,408
Securities gains (losses), net -- -- (1,858) 1,288 10,925
Recognition of deferred gain on other
real estate owned sales 25,459 308,865 287,988 193,300 374,505
Other income 99,596 46,944 77,688 184,829 97,912
------------ ------------ ------------ ------------ ------------
Total other income 419,216 592,207 853,226 874,595 989,750
------------ ------------ ------------ ------------ ------------
Other expense:
Salaries and employee benefits (Note 9) 1,174,207 1,218,080 2,535,282 2,352,324 2,000,690
Occupancy expense 202,102 179,931 358,825 349,278 317,686
Equipment expense 58,797 51,636 110,126 98,742 66,244
Professional fees 389,332 764,021 1,124,066 956,129 1,132,572
Deposit insurance premium 23,444 225,914 375,241 460,766 452,467
Data processing 102,754 106,839 229,642 209,316 204,380
Insurance expense 56,525 67,201 136,540 135,729 143,903
Writedowns and provisions for market
value decline in other real estate owned
(Note 5) 71,872 -- 217,898 900,000 700,000
Net loss (gain) on sales of other real estate
owned (96,139) (158,012) (305,473) 115,420 (223,349)
Net loss from real estate operations 108,958 132,594 359,614 393,418 834,414
Merger Agreement Termination Fee 225,000 -- -- -- --
Loss on litigation -- -- 275,000 -- --
Other expense 341,974 300,239 630,521 748,142 458,792
------------ ------------ ------------ ------------ ------------
Total other expense 2,658,826 2,888,443 6,047,282 6,719,264 6,087,799
------------ ------------ ------------ ------------ ------------
Income (loss) before income tax (benefit) expense 1,623,892 1,223,376 1,177,679 557,115 (528,626)
Income tax (benefit) expense (Note 8) (2,160) 123,842 (172,000) (452,501) (722,780)
------------ ------------ ------------ ------------ ------------
Net income $ 1,626,052 $ 1,099,534 $ 1,349,679 $ 1,009,616 $ 194,154
============ ============ ============ ============ ============
Earnings per share: (Note 17)
Weighted average shares outstanding 1,478,736 1,474,520 1,458,750 1,458,530 1,450,850
============ ============ ============ ============ ============
Net income per share $ 1.10 $ .75 $ .93 $ .69 $ .13
============ ============ ============ ============ =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-32
<PAGE>
<TABLE>
<CAPTION>
FINEST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993 and
Six Month Periods Ended June 30, 1996 and 1995
Net
Unrealized
Holding Gain
(Loss) On
Available-
Common Paid-in Retained Treasury For-Sale
Stock Capital Earnings Stock Securities Total
------------ ------------ ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 $ 147,452 $ 7,306,971 $ 7,024,225 $ (74,400) $ (26,000) $ 14,378,248
Sale of 500 shares of common stock
from treasury -- -- -- 2,000 -- 2,000
Net income -- -- 194,154 -- -- 194,154
Change in net unrealized gain (loss)
on available-for-sale securities -- -- -- -- 236,122 236,122
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1993 147,452 7,306,971 7,218,379 (72,400) 210,122 14,810,524
Net income -- -- 1,009,616 -- -- 1,009,616
Sales of treasury stock -- -- -- 1,000 -- 1,000
Change in unrealized holding gain on
available-for-sale securities -- -- -- -- (539,959) (539,959)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1994 147,452 7,306,971 8,227,995 (71,400) (329,837) 15,281,181
Net income -- -- 1,349,679 -- -- 1,349,679
Sales of treasury stock -- 144,195 -- 71,400 -- 215,595
Issuance of common stock 413 55,342 -- -- -- 55,755
Dividends declared ($.10 per share) -- -- (145,865) -- -- (145,865)
Change in unrealized holding loss on
available-for-sale securities -- -- -- -- 510,531 510,531
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 $ 147,865 $ 7,506,508 $ 9,431,809 $ -- $ 180,694 $ 17,266,876
============ ============ ============ ============ ============ ============
Balance, December 31, 1995 $ 147,865 $ 7,506,508 $ 9,431,809 $ -- $ 180,694 $ 17,266,876
Net income -- -- 1,626,052 -- -- 1,626,052
Issuance of common stock 10 1,340 -- -- -- 1,350
Net change in unrealized holding gain
on available-for-sale securities -- -- -- -- (244,266) (244,266)
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 1996 (unaudited) $ 147,875 $ 7,507,848 $ 11,057,861 $ $ (63,572) $ 18,650,012
============ ============ ============ ============ ============ ============
Balance, December 31, 1994 $ 147,452 $ 7,306,971 $ 8,227,995 $ (71,400) $ (329,837) $ 15,281,181
Net income -- -- 1,099,534 -- -- 1,099,534
Net change in unrealized holding loss
on available-for-sale securities -- -- -- -- 469,429 469,429
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 1995 (unaudited) $ 147,452 $ 7,306,971 $ 9,327,529 $ (71,400) $ 139,592 $ 16,850,144
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-33
<PAGE>
<TABLE>
<CAPTION>
FINEST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Month Periods Ended June 30, 1996 and 1995
and Years Ended December 31, 1995, 1994 and 1993
June 30, December 31,
------------------- -----------------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $1,626,052 $1,099,534 $1,349,679 $1,009,616 $ 194,154
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sales of equipment, net -- -- -- (1,813) --
Depreciation and amortization 89,552 78,420 159,638 137,574 121,403
Provision for loan losses 169,000 300,000 1,600,000 600,000 2,125,000
Provision for market decline of other real estate owned 71,872 -- 217,898 900,000 700,000
Net (gain) loss on sales of other real estate owned (96,139) (158,012) (305,473) 115,420 (223,349)
Amortization of deferred gains on sales of other real
estate owned (2,965) (344,625) (331,468) (11,343) (82,996)
Change in deferred loan fees (8,094) 79,851 52,362 (105,417) (209,866)
Accretion, net of amortization of securities (239,699) (706,384) (1,261,634) (1,079,886) (223,233)
Securities loss (gains), net -- -- 1,858 (1,288) (10,925)
(Increase) decrease in accrued interest receivable 16,179 (295,193) (708,941) 44,467 177,476
Decrease (increase) in prepaid expenses (48,700) (161,497) 7,946 (33,122) 5,056
Increase (decrease) in accrued interest payable (201,134) 291,964 622,566 31,044 --
Increase (decrease) in accrued expenses 38,554 264,533 440,205 (260,126) 540,536
Deferred tax (benefit) expense (182,000) (141,000) (172,000) (452,501) 107,780
(Decrease) increase in taxes payable 49,376 251,048 (2,038) 76,942
Decrease in income tax receivable -- -- -- -- 92,301
---------- ---------- ---------- ---------- ----------
Net cash provided by operating activities 1,281,854 558,639 1,670,598 969,567 3,313,337
---------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchases of available-for-sale securities (14,842,535) (13,395,927) (29,130,850) (7,045,972) --
Proceeds from sales of available-for-sale securities 974,821 -- 247,742 176,288 --
Proceeds from maturities of available-for-sale securities 8,505,361 1,499,834 13,981,870 8,500,000 --
Purchases of held-to-maturity securities (7,557,017) (21,730,758) (48,858,391) (61,809,323) --
Proceeds from maturities of held-to-maturity securities 1,940,789 35,730,181 56,013,038 41,273,445 --
(Increase) decrease in federal funds sold 6,900,000 1,800,000 (600,000) 13,400,000 (15,700,000)
Purchase of Federal Home Loan Bank stock (82,000) -- (566,100) -- --
Net (increase) decrease in loans 6,661,187 (57,607) 3,538,125 101,426 3,610,723
Increase in loans held-for-sale (17,200) (58,000) (74,800) -- --
Recoveries of previously charged-off loans 158,083 202,935 644,537 536,968 --
(Increase) decrease in other assets (61,808) 5,843 (2,070) (10,843) --
Increase (decrease) in other liabilities 4,441 (3,919) (10,837) (17,128) --
Proceeds from sales of other real estate owned 667,541 356,009 2,225,765 7,607,341 11,854,407
Principal payments recovered on other real estate owned 360 600 117,044 241,005 1,232,738
Proceeds from sales of equipment -- -- -- 2,050 --
Capital expenditures (10,899) (88,300) (158,218) (241,145) (66,380)
Proceeds from sales and maturities of investment securities -- -- -- -- 29,704,490
Purchase of investment securities -- -- -- -- (35,435,914)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) investing activities 3,241,124 4,260,891 (2,633,145) 2,714,112 (4,799,936)
---------- ---------- ---------- ---------- ----------
F-34
<PAGE>
<CAPTION>
FINEST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Month Periods Ended June 30, 1996 and 1995
and Years Ended December 31, 1995, 1994 and 1993
June 30, December 31,
------------------- -----------------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW, money
market and savings accounts 310,586 (4,876,292) (5,135,189) (1,016,061) --
Net increase (decrease) in time deposits (3,792,163) 1,783,742 5,439,723 (1,869,082) --
Net increase in depositors' accounts -- -- -- -- 1,588,614
Dividends paid -- -- (145,865) -- --
Issuance of common stock 1,350 -- 55,755 -- --
Sales of treasury stock -- -- 215,595 1,000 2,000
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing activities (3,480,227) (3,092,550) 430,019 (2,884,143) 1,590,614
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 1,042,751 1,726,980 (532,528) 799,536 104,015
Cash and cash equivalents at beginning of period 4,815,329 5,347,857 5,347,857 4,548,321 4,444,306
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of period $5,858,080 $7,074,837 $4,815,329 $5,347,857 $4,548,321
========== ========== ========== ========== ==========
Supplemental disclosures:
Loans originated from sales of other real estate owned $ 372,000 $4,202,750 $4,955,013 $3,721,462 $ --
Loans transferred to other real estate owned 406,011 1,558,360 2,933,740 1,658,773 4,263,000
Available-for-sale securities transferred from held-to-maturity -- -- 4,383,907 -- --
Other real estate owned transferred to loans -- 2,727,703 2,523,763 -- --
Interest paid 3,013,341 2,310,988 5,001,130 4,523,444 4,683,588
Income taxes paid (received) 130,464 13,794 2,038 (76,942) 632,675
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-35
<PAGE>
FINEST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months ended June 30, 1996 and 1995
(unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and accordingly do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of the management of Finest Financial Corp. ("Company"), all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included.
NOTE B - ACCOUNTING POLICIES
The accounting principles followed by the Company and the methods of applying
these principles which materially affect the determination of financial
position, results of operations and changes in financial position are consistent
throughout.
F-36
<PAGE>
FINEST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
NOTE 1 - NATURE OF OPERATIONS
Finest Financial Corp. (Company) is a New Hampshire corporation that was
organized in 1986 to become the holding company of Pelham Bank and Trust Company
(Bank). The Company's primary activity is to act as the holding company for the
Bank. The Bank is a state chartered bank, which was incorporated in 1968 and is
headquartered in Pelham, New Hampshire. The Bank operates its business from
three banking offices located in New Hampshire. The Bank is engaged principally
in the business of attracting deposits from the general public and investing
those deposits in residential, real estate, consumer and small business loans.
NOTE 2 - ACCOUNTING POLICIES
The accounting and reporting policies of the Company and its Subsidiary conform
to generally accepted accounting principles and predominant practices within the
banking industry. The consolidated financial statements of the Company were
prepared using the accrual basis of accounting. The significant accounting
policies of the Company and its subsidiary are summarized below to assist the
reader in better understanding the consolidated financial statements and other
data contained herein.
PERVASIVENESS OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make 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 the estimates.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, the Bank. All significant
intercompany accounts and transactions have been eliminated in the
consolidation.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, cash items and due from banks.
SECURITIES:
As of December 31, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Under SFAS No. 115, 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 and debt and equity securities not classified as
held-to-maturity are classified as available-for-sale and reported at
fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity, net of
estimated income taxes. Upon adoption, the Company classified its
investment securities into two categories: held-to-maturity and
available-for-sale. As a result of the adoption, stockholders' equity
F-37
<PAGE>
FINEST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
was increased by approximately $236,000, representing the net
unrealized gain on investment securities available-for-sale, less
applicable income taxes.
Prior to the adoption of SFAS No. 115, investment securities were
carried at amortized cost and investment securities held for sale were
carried at the lower of cost or market value.
Premiums and discounts on investment securities are amortized or
accreted into income on the straight-line method over the life of the
investments. Income recognized by use of this method does not differ
materially from that which would be recognized by use of the
level-yield method. If a decline in fair value below the amortized cost
basis of an investment security if judged to be other than temporary,
the cost basis of the investment is written down to fair value as a new
cost basis and the amount of the writedown is included as a charge
against gain on sale of investment securities. Gains and losses on the
sale of investment securities are recognized at the time of sale on a
specific identification basis.
LOANS:
Loans receivable that management has the intent and ability to hold for
the foreseeable future, or until maturity or payoff, are reported at
their outstanding principal balances. These balances are reduced by
amounts due borrowers on unadvanced loans, any charge-offs, the
allowance for loan losses and any deferred fees or costs on originated
loans, or unamortized premiums or discounts on purchased loans.
Interest on loans is generally recognized on a simple interest basis.
Interest on loans is generally not accrued when loans become 90 days or
more overdue.
Loan origination, commitment fees and certain direct origination costs
are deferred, and the net amount is being amortized as an adjustment of
the related loan's yield. The Company is generally amortizing these
amounts over the contractual life of the related loans.
Cash receipts of interest income on impaired loans is credited to
principal to the extent necessary to eliminate doubt as to the
collectibility of the net carrying amount of the loan. Some or all of
the cash receipts of interest income on impaired loans is recognized as
interest income if the remaining net carrying amount of the loan is
deemed to be fully collectible. When recognition of interest income on
an impaired loan on a cash basis is appropriate, the amount of income
that is recognized is limited to that which would have been accrued on
the net carrying amount of the loan at the contractual interest rate.
Any cash interest payments received in excess of the limit and not
applied to reduce the net carrying amount of the loan, are recorded as
recoveries of charge-offs until the charge-offs are fully recovered.
ALLOWANCE FOR POSSIBLE LOAN LOSSES:
An allowance is available for losses which may be incurred in the
future on loans in the current portfolio. The allowance is increased by
provisions charged to current operations and is decreased by loan
losses, net of recoveries. The provision for loan losses is based on
management's evaluation of current and anticipated economic conditions,
changes in the character and size of the loan portfolio and other
indicators. The balance in the allowance for possible loan losses is
considered adequate by management to absorb any reasonably foreseeable
loan losses.
F-38
<PAGE>
FINEST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
As of January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan," as amended by SFAS No. 118. According to SFAS No. 114, a
loan is impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. The Statement
requires that impaired loans be measured on a loan by loan basis by
either the present value of expected future cash flows discounted at
the loan's effective interest rate, the loan's observable market price
or the fair value of the collateral if the loan is collateral
dependent.
The Statement is applicable to all loans, except large groups of
smaller balance, homogeneous loans that are collectively evaluated for
impairment, loans that are measured at fair value or at the lower of
cost or fair value, leases, convertible or nonconvertible debentures,
bonds and other debt securities.
The financial statement impact of adopting the provisions of this
Statement was not material.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Cost and related allowances for
depreciation and amortization of premises and equipment retired, or
otherwise disposed of, are removed from the respective accounts with
any gain or loss included in income or expense. Depreciation and
amortization are calculated principally on the straight-line method
over the estimated useful lives of the assets.
OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:
Other real estate owned includes properties acquired through
foreclosure and properties classified as in-substance foreclosures in
accordance with Financial Accounting Standards Board Statement No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructuring".
These properties are carried at the lower of cost or estimated fair
value less estimated cost to sell. Any write-down from cost to
estimated fair value required at the time of foreclosure or
classification as in-substance foreclosure is charged to the allowance
for possible loan losses. Expenses incurred in connection with
maintaining these assets, subsequent write-downs and gains or losses
recognized upon sale are included in other expense.
Beginning in 1995, in accordance with Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a
Loan,"the Company classifies loans as in-substance repossessed or
foreclosed if the Company receives physical possession of the debtor's
assets regardless of whether formal foreclosure proceedings take place.
INCOME TAXES:
The Company and its subsidiary file consolidated Federal income tax
returns on the accrual basis for taxable years ending December 31.
In February 1992, the Financial Accounting Standards Board issued SFAS
No. 109, "Accounting for Income Taxes". SFAS No. 109 required a change
from the deferred method to the asset and liability method of
accounting for income taxes. Under the asset and liability method,
deferred tax assets and liabilities 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 and operating loss and tax credit carryforwards.
F-39
<PAGE>
FINEST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
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. Under
SFAS No. 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date.
Effective January 1, 1993, the Company adopted SFAS No. 109. The
cumulative effect of this change did not have a significant impact on
the Company's consolidated financial statements.
Pursuant to the deferred method which was applied in 1992, deferred
income taxes were recognized for income and expense items that are
reported in different years for financial reporting purposes and income
tax purposes using the tax rate applicable in the year of the
calculation. Under the deferred method, deferred taxes were not
adjusted for subsequent changes in tax rates.
Tax credits are accounted for under the flow-through method as a
reduction of income tax expense in the period they are realized.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments,"requires that the Company disclose
estimated fair value for its financial instruments. Fair value methods
and assumptions used by the Bank in estimating its fair value
disclosures are as follows:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and federal funds sold approximate those assets' fair
values.
Securities: Fair values for securities are based on quoted market
prices, where available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable
instruments.
Loans receivable: For variable-rate loans that reprice frequently and
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.
Deposit liabilities: The fair values disclosed for demand deposits
(e.g., interest and non-interest checking, passbook savings and money
market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). 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.
Off-balance sheet instruments: The fair value of commitments to
originate loans is estimated using the fees currently charged to enter
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments and the unadvanced portion of loans, fair
value also considers the difference between current levels of interest
rates and the committed rates. The fair value of letters of credit is
based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligation
with the counterparties at the reporting date.
F-40
<PAGE>
FINEST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
NOTE 3 - SECURITIES
Investments in available-for-sale securities are carried at fair value on the
balance sheet and are summarized as follows as of December 31, 1995:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding
Cost Basis Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Marketable equity securities $ 2,742,153 $ 112,969 $ 18,125 $ 2,836,997
Debt securities issued by the U.S. Treasury and
other U.S. government corporations and agencies 26,807,483 209,478 9,936 27,007,025
----------- ----------- ----------- -----------
$29,549,636 $ 322,447 $ 28,061 $29,844,022
=========== =========== =========== ===========
</TABLE>
Information about the contractual maturities of investments in debt securities
classified as available-for-sale is summarized as follows as of December 31,
1995:
Amortized
Cost Basis Fair Value
----------- -----------
Due within one year $14,803,187 $13,899,211
Due after one year through five years 12,004,296 13,107,814
----------- -----------
$26,807,483 $27,007,025
=========== ===========
During 1995, proceeds from sales of available-for-sale securities amounted to
$247,742. Gross realized gains and gross realized losses on those sales amounted
to $797 and $2,655, respectively.
In 1995, the Bank transferred, at fair value, certain debt securities from
securities classified as held-to-maturity to securities classified as
available-for-sale. The unrealized holding gain of $7,327 at the date of
transfer has been recognized as a separate component of stockholders' equity.
The transfer was a result of a reassessment of the appropriateness of the
classification of all securities held as of December 31, 1995. In accordance
with a Special Report of the Financial Accounting Standards Board regarding SFAS
No. 115, this transfer will not call into question the intent of the Bank to
hold other debt securities to maturity in the future.
Investments in available-for-sale securities are carried at fair value on the
balance sheet and are summarized as follows as of December 31, 1994:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding
Cost Basis Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Marketable equity securities $2,991,753 $ 9,500 $ 190,128 $2,811,125
Debt securities issued by the U.S. Treasury and
other U.S. government corporations and agencies 6,979,492 -- 149,209 6,830,283
---------- ---------- ---------- ----------
$9,971,245 $ 9,500 $ 339,337 $9,641,408
========== ========== ========== ==========
</TABLE>
F-41
<PAGE>
FINEST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
During 1994, proceeds from sales of available-for-sale securities amounted to
$176,288. Gross realized gains on those sales amounted to $1,288.
Investments in held-to-maturity securities are carried at amortized cost on the
balance sheet and are summarized as follows as of December 31, 1995:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding
Cost Basis Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Debt securities issued by the U.S. Treasury and $13,750,000
other U.S. government corporations and agencies $ 95,781 $ 1,875 $13,843,906
Debt securities issued by states of the United 2,868,490
States and political subdivisions of the states 38,714 -- 2,907,204
Corporate debt securities 99,954 46 -- 100,000
Mortgage-backed securities 11,508,421 78,145 -- 11,586,566
----------- ----------- ----------- -----------
$28,226,865 $ 212,686 $ 1,875 $28,437,676
=========== =========== =========== ===========
</TABLE>
Information about the contractual maturities of investments in debt securities
classified as held-to-maturity is summarized as follows as of December 31, 1995:
Amortized
Cost Basis Fair Value
----------- -----------
Debt securities other than
mortgage-backed securities:
Due after one year through five years $15,003,154 $15,117,110
Due after five years through ten years 1,615,290 1,634,000
Due after ten years 100,000 100,000
Mortgage-backed securities 11,508,421 11,586,566
----------- -----------
$28,226,865 $28,437,676
=========== ===========
Investments in held-to-maturity securities are carried at amortized cost on the
balance sheet and are summarized as follows as of December 31, 1994:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding
Cost Basis Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Debt securities issued by the U.S. Treasury and $35,005,378
other U.S. government corporations and agencies $ 3,509 $ 195,764 $34,813,123
Debt securities issued by states of the United 3,693,570
States and political subdivisions of the states 27,879 -- 3,721,449
Corporate debt securities 99,941 1,059 -- 101,000
----------- ----------- ----------- -----------
$38,798,889 $ 32,447 $ 195,764 $38,635,572
=========== =========== =========== ===========
</TABLE>
F-42
<PAGE>
FINEST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
Gross gains and losses on sales of equity securities amounted to $13,773 and
$2,848, respectively in 1993.
There were no securities of issuers whose aggregate carrying amount exceeded 10%
of stockholders' equity as of December 31, 1995.
A total par value of $8,000,000 and $11,000,000 of debt securities was pledged
to secure treasury, tax and loan and public funds on deposit as of December 31,
1995 and 1994, respectively.
NOTE 4 - LOANS
Loans consisted of the following as of December 31:
1995 1994
------------- -------------
Commercial, financial and agricultural $ 3,548,460 $ 2,976,858
Real estate - construction and land development 2,369,425 4,934,951
Real estate - residential 53,226,984 56,160,489
Real estate - commercial 46,249,771 42,110,268
Consumer 1,741,747 2,014,568
Other 101,322 65,936
------------- -------------
107,237,709 108,263,070
Deferred loan fees (196,832) (144,470)
Deferred gains on sales of real estate owned (278,122) (421,763)
Allowance for possible loan losses (4,135,741) (3,745,569)
------------- -------------
Net loans, carrying amount $ 102,627,014 $ 103,951,268
============= =============
Information with respect to nonaccrual and past-due loans is as follows as of
December 31:
1995 1994
----------- -----------
Nonaccrual loans $3,704,848 $3,403,227
Accruing loans past-due 90 days or more 210,724 71,665
----------- -----------
$3,915,572 $3,474,892
=========== ===========
There was no interest income recorded during 1995 and 1994 on nonaccrual loans
outstanding as of December 31, 1995 and 1994. Had these loans performed under
their original terms, the amount recorded would have been $545,505 and $420,880
in 1995 and 1994, respectively.
As of December 31, 1995, loans restructured in a troubled debt restructuring
before the effective date of SFAS No. 114 that are not impaired based on the
terms specified by the restructuring agreement totaled $330,787. The gross
interest income that would have been recorded in the year ended December 31,
1995 if such restructured loans had been current in accordance with their
original terms was $41,820. The amount of interest income on such restructured
loans that was included in net income for the year ended December 31, 1995 was
$20,256.
F-43
<PAGE>
FINEST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
As of December 31, 1994, there was one restructured loan in the amount of
$342,881. Had this loan performed under its original terms, the amount of
interest would have been $41,907. The actual interest earned during 1994 was
$13,866.
Certain directors and executive officers of the Bank and companies in which they
have significant ownership interest were customers of the Bank during 1995.
Total loans to such persons and their companies amounted to $4,630,257 as of
December 31, 1995 and $4,378,933 as of December 31, 1994. During 1995, $513,103
in advances were made and repayments totaled $261,779.
Change in the allowance for possible loan losses were as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period $ 3,745,569 $ 3,659,765 $ 4,335,247
Provision for loan losses 1,600,000 600,000 2,125,000
Loans charged off (1,854,365) (1,051,164) (3,409,804)
Recoveries of previously charged-off loans 644,537 536,968 609,322
----------- ----------- -----------
Balance at end of period $ 4,135,741 $ 3,745,569 $ 3,659,765
=========== =========== ===========
</TABLE>
Information about loans that meet the definition of an impaired loan in
Statement of Financial Accounting Standards No. 114 is as follows as of December
31, 1995:
<TABLE>
<CAPTION>
Recorded Related
Investment In Allowance For
Impaired Credit
Loans Losses
------------- -------------
<S> <C> <C>
Loans for which there is a related allowance for credit losses $2,306,352 $ 484,010
Loans for which there is no related allowance for credit losses
---------- ----------
Totals $2,306,352 $ 484,010
========== ==========
Average recorded investment in impaired loans during the year ended
December 31, 1995 $2,989,989 --
========== ==========
Related amount of interest income recognized during the time, in the
year ended December 31, 1995, that the loans were impaired
Total recognized $ 98 --
========== ==========
Amount recognized using a cash-basis method of
accounting $ 0 --
========== ==========
F-44
<PAGE>
FINEST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
NOTE 5 - OTHER REAL ESTATE OWNED
Other real estate owned consisted of the following as of December 31:
1995 1994
----------- -----------
Land $ 349,396 $ 1,273,199
Commercial 241,429 6,054,139
Residential 1,049,320 1,448,410
----------- -----------
1,640,145 8,775,748
Allowance for decline in real estate value (139,104) (840,171)
----------- -----------
$ 1,501,041 $ 7,935,577
=========== ===========
Changes in the allowance for decline in real estate value were as follows for
the years ended December 31:
1995 1994 1993
-------- -------- ----------
Balance at beginning of period $840,171 $ 0 $1,100,000
Provision 217,898 900,000 700,000
Elimination of allowance on property sold (750,000) -- --
Loss on sales (157,966) -- --
Permanent writedowns of property (10,999) (59,829) (1,800,000)
-------- -------- ----------
Balance at end of period $139,104 $840,171 $ 0
======== ======== ==========
In 1995, in accordance with SFAS No. 15 as amended by SFAS No. 114 the Bank
reclassified assets of $2,523,763 from other real estate owned to loans.
NOTE 6 - PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31:
</TABLE>
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Land $ 325,000 $ 325,000
Buildings 1,374,934 1,374,934
Leasehold improvements 398,605 329,957
Fixtures and equipment 1,267,736 1,178,166
Leased property and equipment under capitalized lease (Note 11) 282,964 282,964
----------- -----------
3,649,239 3,491,021
Accumulated depreciation and amortization (1,881,313) (1,721,675)
----------- -----------
$ 1,767,926 $ 1,769,346
=========== ===========
</TABLE>
Depreciation expense amounted to $159,638 and $137,574 for the years ended
December 31, 1995 and 1994, respectively.
F-45
<PAGE>
FINEST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
NOTE 7 - DEPOSITS
Deposits consisted of the following as of December 31:
1995 1994
------------ ------------
Demand $ 24,415,117 $ 24,635,327
Regular savings 24,410,233 25,473,825
NOW accounts 8,663,963 8,665,897
Money market accounts 24,580,622 28,430,075
Time deposits, $100,000 and over 19,533,642 19,373,782
Other time deposits 60,065,075 54,785,213
------------ ------------
$161,668,652 $161,364,119
============ ============
Interest on deposits classified by type is as follows for the years ended
December 31:
1995 1994 1993
---------- ---------- ----------
Regular savings $ 657,977 $ 698,926 $ 624,220
NOW accounts 247,740 253,110 273,880
Money market accounts 650,675 776,354 828,256
Time deposits 4,024,710 2,781,430 3,073,603
---------- ---------- ----------
$5,581,102 $4,509,820 $4,799,959
========== ========== ==========
NOTE 8 - INCOME TAX BENEFIT
The components of income tax benefit are as follows for the years ended December
31:
1995 1994 1993
---------- ---------- ----------
Current:
Federal $ 0 $ 0 $(615,000)
--------- --------- ---------
Deferred:
Federal 195,176 68,073 (102,242)
State 138,708 58,050 --
Change in valuation allowance (505,884) (578,624) (5,538)
--------- --------- ---------
(172,000) (452,501) (107,780)
--------- --------- ---------
Total income tax benefit $(172,000) $(452,501) $(722,780)
========= ========= =========
F-46
<PAGE>
FINEST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
The following reconciles the income tax provision from the statutory rate to the
amount reported in the consolidated statements of income for the years ended
December 31:
<TABLE>
<CAPTION>
% of % of % of
1995 Income 1994 Income 1993 Income
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax at statutory rate $ 400,411 34.0 % $ 189,419 34.0 % $(179,733) (34.0) %
Increase (decrease) in tax resulting from:
Tax exempt income (71,233) (6.1) (69,778) (12.52) (37,384) (7.07)
Dividends received deduction (55,790) (4.7) (55,400) (9.94) (54,307) (10.27)
Interest expense to carry municipal
obligations 7,171 0.6 5,808 1.04 17,260 3.26
Other (38,222) (3.2) 23,264 4.17 376 .07
(Reserve) credit for additional taxes -- -- -- -- (463,454) (87.67)
State, net of federal tax benefit 91,547 7.8 32,810 5.89 -- --
--------- ---- --------- ------ --------- ------
333,884 28.4 126,123 22.64 (717,242) (135.68)
--------- ---- --------- ------ --------- ------
Change in valuation allowance (505,884) (43.0) (578,624) (103.86) (5,538) (1.05)
--------- ---- --------- ------ --------- ------
$(172,000) (14.6)% $(452,501) (81.22)% $(722,780) (136.73)%
========= ==== ========= ====== ========= ======
</TABLE>
The major components of deferred income tax benefit attributable to income are
as follows for the years ended December 31:
1995 1994 1993
---------- --------- ---------
Net operating loss carryforward $(394,047) $ 203,186 $(132,402)
Allowance for possible loan losses (123,555) (8,873) 440,647
Real estate owned 623,028 (727,710) (506,333)
Interest-nonaccrual loans 175,755 340,325 (43,969)
Depreciation 1,769 (9,281) 36,915
Installment sales -- -- 83,777
Deferred gains on sales of real estate 56,896 19,643 --
Deferred loan fees (16,062) 23,814 (17,806)
Effect of IRS audit -- 275,000 --
Other 10,100 10,019 36,929
Change in valuation allowance (505,884) (578,624) --
--------- --------- ---------
$(172,000) $(452,501) $(102,242)
========= ========= =========
F-47
<PAGE>
FINEST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
The Company had gross deferred tax assets and gross deferred tax liabilities as
follows as of December 31:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,136,276 $ 742,229
Allowance for possible loan losses 320,823 197,268
Real estate owned 74,576 697,604
Interest - nonaccrual loans 242,051 417,806
Other 154,085 164,562
Deferred gains on sales of real estate 107,411 164,307
----------- -----------
Gross deferred tax assets 2,035,222 2,383,776
Valuation allowance (943,459) (1,449,343)
----------- -----------
1,091,763 934,433
----------- -----------
Deferred tax liabilities:
Depreciation (14,485) (12,716)
Net unrealized gain on available-for-sale securities (113,692) --
Deferred loan fees (56,739) (72,801)
Other (13,258) (13,635)
----------- -----------
Gross deferred tax liabilities (198,174) (99,152)
----------- -----------
Net deferred tax asset $ 893,589 $ 835,281
=========== ===========
</TABLE>
The deferred tax assets and liabilities at December 31, 1994 have been adjusted
to reflect the results of an examination of the Company's federal income tax
returns of prior years by the Internal Revenue Service.
As of December 31, 1995, the Company had net operating loss carryforwards for
tax purposes of approximately $3,249,000 which will expire in the years 2008
through 2010.
NOTE 9 - EMPLOYEE BENEFITS
The Bank had a non-contributory defined benefit pension plan (Plan) covering
substantially all of its employees.
Contributions under the Plan were based upon an actuarial cost method, the
projected unit credit method, and are within the minimum and maximum funding
provisions as set forth by the Tax Reform Act.
The Bank terminated this defined benefit pension plan. To effect this plan
termination, the accrual of benefits and plan participation was frozen, as of
December 31, 1993, by a plan amendment. The Bank selected February 25, 1994 as
the proposed termination date. The required notices concerning plan termination
and curtailment of benefits were provided to all plan participants. Filings were
prepared to initiate the plan termination with the Pension Benefit Guaranty
Corporation and the Internal Revenue Service. This action resulted in a
reduction in the projected benefit obligation and the recognition of curtailment
losses in the net periodic pension cost for 1993. During 1994, $468,621 of plan
assets was distributed to plan participants.
F-48
<PAGE>
FINEST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
The Company incurred no pension expense in 1995 or 1994 under this plan. Net
pension costs for the year ended December 31, 1993 included the following
components:
Service cost $ 35,270
Interest cost 34,460
Return on plan assets (3,299)
Net amortization and deferral (1,222)
Curtailment loss-net 205,041
---------
$ 270,250
=========
NOTE 10 - FINANCIAL INSTRUMENTS
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to originate loans, standby letters of
credit and unadvanced funds on loans. The instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
consolidated balance sheets. The contract amounts of those instruments reflect
the extent of involvement the Company has in particular classes of financial
instruments.
The Company's exposure to credit loss, in the event of nonperformance by the
other party to the financial instrument for loan commitments and standby letters
of credit, is represented by the contractual amounts of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluated 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 borrower. Collateral held varies, but may
include secured interest in mortgages, accounts receivable, inventory, property,
plant and equipment and income-producing properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. Of the total standby letters of
credit outstanding as of December 31, 1995, $119,972 are secured by deposit
accounts held by the Bank.
F-49
<PAGE>
FINEST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
The estimated fair values of the Company's financial instruments, all of which
are held or issued for purposes other than trading, were as follows as of
December 31:
<TABLE>
<CAPTION>
1995 1994
------------------------- -------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $4,815,329 $4,815,329 $5,347,857 $5,347,857
Federal funds sold 9,100,000 9,100,000 8,500,000 8,500,000
Available-for-sale securities 29,844,022 29,844,022 9,641,408 9,641,408
Held-to-maturity securities 28,226,865 28,437,676 38,798,889 38,635,572
Federal Home Loan Bank stock 566,100 566,100 -- --
Loans 102,627,014 102,714,000 103,951,268 103,856,212
Loans held-for-sale 74,800 74,800 -- --
Accrued interest receivable 1,440,487 1,440,487 731,546 731,546
Financial liabilities:
Deposits 161,668,652 162,075,000 161,364,119 161,284,124
</TABLE>
The carrying amounts of financial instruments shown in the above table are
included in the consolidated balance sheet under the indicated captions.
Notional amounts of financial instrument liabilities with off-balance sheet risk
are as follows as of December 31:
1995 1994
---------- ----------
Notional Notional
Amount Amount
---------- ----------
Commitments to originate loans $6,673,860 $2,119,063
Unused lines and standby letters of credit 2,842,276 3,055,168
Unadvanced portions of construction loans 1,245,062 538,713
There is no material difference between the notional amount and the estimated
fair value of the off-balance sheet liabilities as of December 31, 1995.
The Company has no derivative financial instruments subject to the provisions of
SFAS No. 119, "Disclosure About Derivative Financial Instruments and Fair Value
of Financial Instruments."
NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES
The following is a schedule by years of future minimum payments under a capital
lease for office space leased by the Bank from a stockholder of the Company and
the present value of future minimum rentals as of December 31, 1995:
F-50
<PAGE>
FINEST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
Year Ending
December 31
-----------
1996 $ 54,504
1997 54,504
1998 54,504
1999 54,504
2000 54,504
Thereafter 131,718
--------
Total minimum lease payments required 404,238
Less: amount representing interest 189,993
--------
$214,245
========
The leased space is in property that secures a mortgage loan granted to the
stockholder by the Bank. The loan principal balance as of December 31, 1995 was
$662,626 with interest payable at prime.
The following is a schedule by years of future minimum payments required under
operating leases which the Bank had entered into that have initial or remaining
noncancellable lease terms in excess of one year as of December 31, 1995:
Year Ending
December 31
-----------
1996 $ 80,338
1997 78,458
1998 40,426
1999 13,528
2000 13,528
Thereafter 23,675
--------
Total minimum lease payments required $249,953
========
Rental expense for operating leases totaled $80,338 and $78,081 for the years
ended December 31, 1995 and 1994, respectively.
NOTE 12 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Company's business activity is with customers located within the
state. There are no concentrations of credit to borrowers that have similar
economic characteristics. The majority of the Company's loan portfolio is
comprised of loans collateralized by real estate located in southern New
Hampshire and Massachusetts.
NOTE 13 - REGULATORY AGREEMENTS
In October 1992, the FDIC, together with the New Hampshire State Banking
Department, issued a formal regulatory action, "Order to Cease and
Desist"(Order). The Order outlined corrective actions, as defined, considered
necessary to improve the condition of the Bank including the development and
implementation of plans, policies and procedures to improve operations and
conditions of certain assets of the Bank, particularly in the areas of asset
quality, management and capital. This included reducing nonperforming loans and
other real estate owned.
The Bank agreed not to declare or pay any dividends to the Company without
obtaining the prior approval of the regional director of the FDIC and banking
commissioner of the State of New Hampshire.
F-51
<PAGE>
FINEST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
The Order was issued in October 1992. In September, 1993, a modification to the
Order was issued, which outlined additional corrective actions in the areas of
asset quality, management and capital considered necessary to improve the
condition of the Bank.
In August 1995, the Order was terminated and replaced by a "Memorandum of
Understanding"(Memorandum). In the Memorandum, the Bank agreed to prepare
various plans and policies, to take certain corrective actions to continue to
maintain a Tier 1 Leverage Capital Ratio of at least 6.5%, and to not declare or
pay any dividends unless the following two items are met:
a. Notice is given to the Regional Director of the FDIC and the
Commissioner of the Banking Department of the State of New
Hampshire before the declaration and payment of dividends
b. After payment of such dividends the Tier 1 Leverage Capital
Ratio shall not be less than 6.5 percent
NOTE 14 - REGULATORY CAPITAL
Bank regulators have established Risk Based and Leverage Capital requirements
that establish the minimum level of capital. Under the requirements a minimum
level of capital will vary among banks based on safety and soundness of
operations.
The various capital ratios and regulatory guidelines for the Bank are as
follows:
Minimum
Actual as of Regulatory
December 31, 1995 Guidelines
----------------- ----------
Risk-Based Capital Ratio
Tier 1 Capital 16.16% 4.0%
Total Capital 17.90 8.0
Leverage Ratio
Tier 1 Capital 9.24 4.0
In addition, the Bank must comply with the capital requirements of the
Memorandum which specify a minimum Tier 1 capital ratio of 6.5%. The Bank is in
compliance with Federal regulatory net worth requirements and in compliance with
the capital requirements of the Memorandum.
NOTE 15 - LITIGATION
The Bank was a co-defendant in a lender liability action arising out of an
alleged breach of an oral contract. Plaintiff's initial claim was in the amount
of $10.8 million which was on December 9, 1994 reduced to a demand of
approximately $3.1 million for settlement purposes. On October 18, 1994, Pelham
Bank's Motion to Dismiss based upon Plaintiff's failure to file the claim within
the period required by the statute of limitations was denied by the New
Hampshire Superior Court. As of August 2, 1996, the claim was settled and the
settlement did not exceed the amount that the Bank had previously accrued.
F-52
<PAGE>
FINEST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
NOTE 16 - STOCK OPTIONS
In 1995 the Company granted to the president and chief financial officer of the
Bank options to purchase 65,000 shares of the common stock of the Company at
$13.50 per share. The options expire after October 1, 2005. The right to
exercise the options begins on October 1, 1996 for up to 13,000 of the option
shares and on each October 1 thereafter for up to an additional 13,000 shares
until, on October 1, 2000, the options may be exercised as to all of the option
shares. The options shall become fully vested and immediately exercisable for
100% of the option shares upon the occurrence of a change of control.
NOTE 17 - STOCK SPLIT
On January 30, 1996 the Company amended its Articles of Incorporation to (1)
increase the aggregate number of shares of common stock which the Company shall
have authority to issue from 500,000 shares to 2,000,000 shares and (2) to
reduce the par value of such stock from $1.00 per share to $.10 per share. The
Board of Directors of the Company voted to issue a ten-for-one stock split to
stockholders of record as of February 12, 1996. On September 24, 1996, in order
to comply with requirements of the New Hampshire Business Corporation Act, the
Board of Directors voted to further amend the Articles of Incorporation to
increase the authorized shares from 2,000,000 to 5,000,000. The number of shares
outstanding, earnings and dividends per share and the number of stock options
granted to purchase shares of the common stock of the Company have been restated
retroactively to reflect the issuance of the ten-for-one stock split.
NOTE 18 - RECLASSIFICATION
Certain amounts in the prior year have been reclassified to be consistent with
the current year's statement presentation.
F-53
<PAGE>
FINEST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
NOTE 19 - FINEST FINANCIAL CORP. (PARENT ONLY FINANCIAL INFORMATION)
<TABLE>
<CAPTION>
Balance sheets
December 31,
-------------------------
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Cash deposit in Pelham Bank and Trust Company $ 272,315 $ 2,951
Investment in subsidiary, Pelham Bank and Trust Company 16,885,114 15,405,695
Other assets 172,447 --
----------- -----------
$17,329,876 $15,408,646
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses $ 63,000 $ 15,303
Due to subsidiary -- 112,162
----------- -----------
Total liabilities 63,000 127,465
----------- -----------
Stockholders' equity 17,266,876 15,281,181
----------- -----------
$17,329,876 $15,408,646
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Statements of income
December 31,
----------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Dividends from subsidiary $ 596,000 $ -- $ --
General and administrative expenses 387,309 128,780 49,995
----------- ----------- -----------
Income (loss) before income tax benefit and equity in
undistributed net income of subsidiary 208,691 (128,780) (49,995)
Federal income tax benefit 172,000 -- --
----------- ----------- -----------
Income (loss) before equity in undistributed net income
of subsidiary 380,691 (128,780) (49,995)
Equity in undistributed net income of subsidiary 968,988 1,138,396 244,149
----------- ----------- -----------
Net income $ 1,349,679 $ 1,009,616 $ 194,154
=========== =========== ===========
</TABLE>
F-54
<PAGE>
FINEST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
PARENT ONLY STATEMENTS OF CASH FLOWS
December 31,
-----------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,349,679 $ 1,009,616 $ 194,154
Adjustments to reconcile net income to net cash used in
operating activities:
Increase (decrease) in amount due to subsidiary (112,162) 112,162 --
Undistributed net income of subsidiary (968,988) (1,138,396) (195,583)
Increase in accrued expense 47,797 15,303 --
Increase in other assets (447) -- --
Deferred income tax benefit (172,000) -- --
Miscellaneous -- (78) --
----------- ----------- -----------
Net cash provided by (used in) operating activities 143,879 (1,393) (1,429)
----------- ----------- -----------
Cash flows from financing activities:
Sale of treasury stock 215,595 1,000 2,000
Issuance of common stock 55,755 -- --
Dividends paid (145,865) -- --
----------- ----------- -----------
Net cash provided by financing activities 125,485 1,000 2,000
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 269,364 (393) 571
Cash and cash equivalents at beginning of year 2,951 3,344 2,773
----------- ----------- -----------
Cash and cash equivalents at end of year $ 272,315 $ 2,951 $ 3,344
=========== =========== ===========
</TABLE>
The Parent Only Statements of Changes in Stockholders' Equity are identical to
the Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1995, 1994 and 1993 and therefore are not reprinted here.
NOTE 20 - MERGER
On August 5, 1996, the Company entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") with First Essex Bancorp, Inc. ("First
Essex"). Pursuant to the Merger Agreement, First Essex will acquire all of the
outstanding shares of the Company for total consideration of approximately $30
million or $20.25 per share. The Merger Agreement provides for payment of the
purchase price utilizing a combination of cash and First Essex common stock
subject to an overall limitation that a minimum of 50% and a maximum of 62% of
the total number of outstanding shares of the Company's common stock shall be
converted into shares of First Essex common stock, with the remaining
outstanding shares of the Company's common stock to be converted into cash. The
Merger Agreement further provides for amendment to the purchase price if certain
conditions occur.
F-55
<PAGE>
FIRST ESSEX BANCORP, INC. PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated balance sheets have been
prepared to reflect the Merger using the purchase method of accounting, assuming
the Merger had occurred on January 1, 1995. Under the purchase method of
accounting, the purchase price will be allocated to assets acquired and
liabilities assumed based on their estimated fair values at the Effective Time.
Income of the newly-consolidated company will not include income (or loss) of
Finest prior to the Effective Time. The unaudited pro forma condensed statements
of operations present the results of operations of First Essex and Finest for
the six months ended June 30, 1996 and for the year ended December 31, 1995,
assuming the Merger had been effective on January 1, 1995. See "The Merger--
Accounting Treatment". The pro forma financial statements reflect the exchange
of 56% of the shares of Finest Common Stock for First Essex Common Stock in
connection with the Merger at the rate of 1.901 shares of First Essex Common
Stock for each share of Finest Common Stock and the payment of $13.18 million in
cash for the balance of the shares of Finest Common Stock. This unaudited pro
forma financial data should be read in conjunction with the consolidated
historical financial statements of Finest and First Essex, including the
respective notes thereto, which are included in this Proxy
Statement--Prospectus.
The pro forma financial data is for information purposes only and is
not necessarily indicative of the results of future operations of the
consolidated entity or the actual results that would have been achieved had the
Merger been consummated prior to the period indicated. Moreover, the pro forma
condensed financial statements reflect preliminary pro forma adjustments made to
combine Finest with First Essex utilizing the purchase method of accounting. The
actual adjustments will be made as of the Effective Time of the Merger and may
differ from those reflected in the pro forma financial statements.
F-56
<PAGE>
<TABLE>
<CAPTION>
FIRST ESSEX BANCORP - FINEST FINANCIAL CORPORATION
PRO FORMA CONDENSED BALANCE SHEETS
June 30, 1996
(Dollars in thousands)
Unaudited
Pro forma
First Essex Finest Adjustments
(Historical) (Historical) Dr (Cr) Pro Forma
------------ ----------- ------------ ---------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 20,573 $ 8,058 $(13,176) (5) $ 15,455
Investment securities available for sale 146,077 34,937 181,014
Investment securities held for investment 132,871 34,602 (640) (1) 166,833
Loans 529,332 99,673 (500) (1) 628,505
Allowance for loan losses (6,970) (4,057) (11,027)
-------- -------- ------- --------
Net loans 522,362 95,616 (500) 617,478
Bank premises and equipment 9,381 1,689 11,070
Intangibles 0 0 14,092 (7) 14,092
Accrued interest receivable 4,589 1,424 6,013
Foreclosed property 1,513 891 2,404
Other assets 5,537 2,111 881 (4) 8,529
-------- -------- ------- ----------
Total assets $842,903 $179,328 $ 657 $1,022,888
LIABILITIES AND STOCKHOLDERS EQUITY
Liabilities:
Total deposits $508,080 $158,187 $ 666,267
Short-term borrowings 256,695 0 256,695
Other liabilities 15,781 2,491 (2,100) (2,3) 20,372
-------- -------- ------- ---------
Total liabilities 780,556 160,678 (2,100) 943,334
Stockholders Equity:
Common Stock 803 148 (9) (6) 960
Additional paid in capital 58,375 7,508 (9,542) (6) 75,425
Retained earnings 20,116 11,058 11,058 (6) 20,116
Valuation allowance for unrealized losses 0
on investment securities available for sale (1,105) (64) (64) (6) (1,105)
Treasury stock at cost (15,842) (5) (15,842)
-------- -------- ------- ----------
Total stockholders equity 62,347 18,650 1,443 79,554
-------- -------- ------- ----------
Total liabilities and stockholders equity $842,903 $179,328 $ (657) $1,022,888
======== ======== ======= ==========
</TABLE>
F-57
<PAGE>
<TABLE>
<CAPTION>
SELECTED UNAUDITED COMBINED FINANCIAL DATA
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
(Dollars in Thousands except per share data)
(Unaudited)
First Essex Finest Pro forma
(Historical) (Historical) Adjustments Pro Forma
------------ ------------ ------------ ---------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 41,218 $ 10,180 $ 61 (8) $ 51,459
Interest and dividends on securities 19,408 3,072 128 (8) 22,608
Other 288 343 631
-------- -------- -------- --------
Total interest income 60,914 13,595 189 74,698
Interest expense:
Deposits 19,844 5,581 25,425
Other 17,237 43 17,280
-------- -------- -------- --------
Total interest expense 37,081 5,624 -- 42,705
Net interest income 23,833 7,972 189 31,994
Provision for possible loan losses 770 1,600 2,370
-------- -------- -------- --------
Net interest income after provision for possible loan losses 23,063 6,372 189 29,624
Non-interest income 3,708 853 4,561
Non-interest expense 19,244 6,047 939 (9) 26,230
Income before income taxes 7,527 1,178 (750) 7,955
Provision (benefit) for income taxes 75 (172) 64 (10) (33)
-------- -------- -------- --------
Net income (loss) $ 7,452 $ 1,350 $ (814) $ 7,988
========= ======== ========= =========
Average common and equivalent shares outstanding (11) 6,104,579 1,615,754 (11) 7,720,333
Earnings per share (12)
Fully diluted $1.22 $1.03
Primary $1.22 $1.03
</TABLE>
F-58
<PAGE>
<TABLE>
<CAPTION>
FIRST ESSEX BANCORP - FINEST FINANCIAL CORPORATION
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1996
(Dollars in Thousands except per share data)
(Unaudited)
First Essex Finest Pro forma
(Historical) (Historical) Adjustments Pro Forma
------------ ------------ ------------ ---------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 22,272 $ 4,776 $ 31 (8) $ 27,079
Interest and dividends on securities 8,072 1,945 64 (8) 10,081
Other 219 124 343
-------- ------- ------- ---------
Total interest income 30,563 6,845 95 37,503
Interest expense:
Deposits 10,673 2,788 13,461
Other 7,302 24 7,326
-------- ------- ------- ---------
Total interest expense 17,975 2,812 -- 20,787
Net interest income 12,588 4,033 95 16,716
Provision for possible loan losses 815 169 984
-------- ------- ------- ---------
Net interest income after provision for possible loan losses 11,773 3,864 95 15,732
Non-interest income 2,147 419 2,566
Non-interest expense 10,017 2,659 470 (9) 13,146
Income before income taxes 3,903 1,624 (375) 5,152
Provision (benefit) for income taxes 19 (2) 32 (10) 49
-------- ------- ------- ---------
Net income (loss) $ 3,884 $ 1,626 $ (407) $ 5,103
========= ======= ========= =========
Average common and equivalent shares outstanding (11) 6,158,390 1,615,754 (11) 7,774,144
Earnings per share (12)
Fully diluted $0.63 $0.66
Primary $0.63 $0.66
</TABLE>
F-59
<PAGE>
<TABLE>
<CAPTION>
FIRST ESSEX BANCORP - FINEST FINANCIAL CORPORATION
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
(Dollars in Thousands)
Debit (Credit)
--------------
<S> <C> <C>
Note 1.
To adjust the assets and liabilities to their estimated fair values:
Loans $ (500)
Investments (640)
Note 2.
Accrued expenses (600)
Note 3.
To accrue estimated costs associated with merger (1,500)
Note 4.
To reflect tax effects of transaction:
Tax effect of fair value adjustments 388
Tax effect of accrued expenses 204
Tax effect of other costs associated with merger 289
Note 5.
To reflect issuance of stock and payment of cash to Finest stockholders:
Market value of 1,574,556 shares of First Essex Common Stock at effective
time (assumes 56% of purchase price paid in First Essex
common stock with an assumed market value per share of $10.65)
(including effect of stock with options assumed) 17,207
Total cash to be paid 13,176
--------
$ 30,383
========
<CAPTION>
Six Months
Ended
June 30, 1996
-------------
<S> <C> <C>
Note 6.
Elimination of Finest equity capital:
Common stock $ 148
Additional paid in capital 7,508
Retained earnings 11,058
Valuation allowance for unrealized losses on investment
securities available for sale (64)
Treasury stock at cost --
--------
Total stockholders equity $ 18,650
========
Note 7.
Goodwill is calculated as follows:
Stockholders equity of Finest at June 30, 1996 $ 18,650
Increase (decrease) to Finest's equity as a result of adjustments:
Loans (500)
Investments (640)
Accrued expenses (600)
Accrued estimated professional and other costs associated with (1,500)
Merger Tax effects of fair value adjustments, accrued expenses,
and estimated professional and other expenses associated
with the merger 881
--------
(2,359)
Unallocated purchase price (goodwill) 14,092
--------
Total purchase price (including merger costs) $30,383
========
</TABLE>
F-60
<PAGE>
<TABLE>
<CAPTION>
Note 8.
To accrete fair value adjustments for loans and investments.
Note 9.
To amortize intangibles:
Six Months Year Ended
Ended December 31,
June 30, 1996 1995
------------- ----------
<S> <C> <C> <C>
Goodwill (15 years) 470 939
</TABLE>
Note 10.
To record tax impact of or accretion and amortization of fair value
adjustments.
Note 11.
Pursuant to the Merger Agreement and assuming that 56% of the
purchase price will be paid in common stock, First Essex will issue
1,574,556 shares of common stock in connection with the Merger,
provided that the price of First Essex Common Stock at the Effective
Time, as defined in the Merger Agreement, is greater than $9.50 per
share (minimum price) and less than $11.50 per share (maximum
price). Common stock issued, taking into account First Essex's
assumption of Finest's options and assuming that 56% of the purchase
price will be paid in common stock, will be 1,615,754.
Note 12.
Pursuant to the Merger Agreement, the portion of the purchase price
stock may range from 50% (minimum) to 62% (maximum) dependant on
taxpaid in considerations. The following table represents the pro
forma effect earnings per share data assuming these minimum portions
of First Essex on Common Stock at a value of $10.65 per share.
<TABLE>
<CAPTION>
Minimum Maximum
------- -------
<S> <C> <C>
Weighted average common stock equivalents:
Year ended December 31, 1995 7,551,630 $7,889,035
Six months ended June 30, 1996 7,605,441 7,942,846
Earnings per share:
Year ended December 31, 1995 $1.06 $1.01
Six months ended June 30, 1996 $0.67 $0.64
</TABLE>
F-61
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of DGCL provides that a corporation may indemnify any
director or officer made a party to any proceeding against judgments, penalties,
fines, settlements and reasonable expenses, unless it is established that (i)
the act or omission of the director was material to the matter giving rise to
the proceeding, and was committed in bad faith or was a result of deliberate
dishonesty, (ii) director actually received an improper personal benefit or
(iii) in a criminal proceeding, director had reasonable cause to believe the act
or omission was unlawful. A director may not be indemnified in any proceeding
charging improper personal benefit, if director was adjudged to be liable and,
in a derivative action, there shall not be indemnification if the director has
been adjudged liable to the corporation. A director or officer of a corporation
who has been successful in the defense of any proceeding shall be indemnified
against reasonable costs incurred in such defense. Indemnification may not be
made unless authorized pursuant to a determination that the director has met the
requisite standard of conduct.
Article V of the First Essex By-Laws provides that any director,
officer or any person serving as a director, officer or agent of another
corporation at the request of First Essex Board (as evidenced by a vote of First
Essex Board) (the "Indemnitee") shall be indemnified and held harmless by First
Essex to the fullest extent authorized by DGCL, against all expenses, liability
and loss reasonably incurred or suffered by the Indemnitee; provided, however,
that, except for actions by such Indemnitee against First Essex to enforce the
indemnification provision, First Essex shall indemnify Indemnitee only if the
proceeding for which indemnification is sought was authorized and ratified by
the First Essex Board.
<TABLE>
<CAPTION>
Item 21. Exhibits and Financial Statement Schedules.
Exhibit No. Item Exhibit
- ----------- ---- -------
<S> <C> <C>
2.1 Agreement and Plan of Reorganization by and Filed herewith in Appendix A to the Proxy
among First Essex, Finest and Pelham Bank, Statement--Prospectus
dated August 5, 1996 ("Merger Agreement")
2.2 Form of Amendment No. 1 to the Merger Filed herewith in Appendix A to the Proxy
Agreement, dated as of September __, 1996 Statement--Prospectus
2.3 Agreement and Plan of Merger between First Filed herewith as Exhibit 2.3
Essex Bank and Pelham Bank, dated as of
August 5, 1996 ("Bank Merger Agreement")
2.4 Form of Amendment No. 1 to the Bank Merger Filed herewith as Exhibit 2.4
Agreement, dated as of September __, 1996
3.1 Restated Certificate of Incorporation of First Incorporated by reference to Exhibit 3.1 to
Essex Amendment No. 1 to First Essex's
Registration Statement on Form S-1, Reg. No.
33-10966, filed on April 17, 1987
3.2 Amended and Restated By-Laws of First Essex Incorporated by reference to Exhibit 4.1 of
First Essex's Report on Form 8-K dated
December 28, 1992
II-1
<PAGE>
<CAPTION>
Exhibit No. Item Exhibit
- ----------- ---- -------
<S> <C> <C>
4.1 Shareholder Rights Agreement, dated as of Incorporated by reference to First Essex's
October 12, 1989, as amended, between First Report on Form 8-K dated October 12, 1989
Essex and the First National Bank of Boston and to Exhibit 28.2 of First Essex's Report on
as Rights Agent Form 8-K dated February 12, 1990
5.1 Opinion of Sullivan & Worcester LLP To be filed by amendment
8.1 Opinion of Sullivan & Worcester LLP as to To be filed by amendment
tax matters
10.1 First Essex 1987 Stock Option Plan Incorporated by reference to Appendix B to
First Essex Report on Form S-8, Reg. No.
33-21292, filed on April 15, 1988
10.2 Amended and Restated Employment Incorporated by reference to Exhibit 10.3 to
Agreement between First Essex, First Essex First Essex's Annual Report on Form 10-K
Bank and Leonard A. Wilson for the year ended December 31, 1994
10.3 Amended and Restated Employment Incorporated by reference to Exhibit 10.4 to
Agreement between First Essex, First Essex First Essex's Annual Report on Form 10-K
Bank and David D. Dailey for the year ended December 31, 1994
10.5 Special Termination Agreement between First Incorporated by reference to Exhibit 10.5 to
Essex, First Essex Bank and Leonard A. First Essex's Annual Report on Form 10-K
Wilson for the year ended December 31, 1993
10.6 Special Termination Agreement between First Incorporated by reference to Exhibit 10.6 to
Essex, First Essex Bank and David W. Dailey First Essex's Annual Report on Form 10-K
for the year ended December 31, 1993
10.7 Executive Salary Continuation Agreement Incorporated by reference to Exhibit 10.15 to
between First Essex, First Essex Bank and First Essex's Annual Report on Form 10-K
Leonard A. Wilson for the year ended December 31, 1988
10.8 Form of Special Termination Agreement Incorporated by reference to Exhibit 10.8 to
between First Essex, First Essex Bank and First Essex's Annual Report on Form 10-K
each of John M. DiGaetano, David L. Savoie for the year ended December 31, 1993
and William F. Burke (at one year terms) and
Wayne C. Golon (at a two year term)
10.9 First Essex Senior Management Incentive Incorporated by reference to Exhibit 10.9 to
Compensation Plan First Essex's Annual Report on Form 10-K
for the year ended December 31, 1994
10.10 Employment Agreement between First Essex, To be filed by amendment
First Essex Bank and Brian W. Thompson
10.11 Special Termination Agreement between First To be filed by amendment
Essex, First Essex Bank and Brian W. Thompson
II-2
<PAGE>
<CAPTION>
Exhibit No. Item Exhibit
- ----------- ---- -------
<S> <C> <C>
10.12 Pelham Bank Salary Continuation Policy and To be filed by amendment
Bonus Plan
21 Subsidiaries of First Essex Incorporated by reference to Exhibit 22 to
First Essex's Annual Report on Form 10-K
for the year ended December 31, 1993
23.1 Consent of Sullivan & Worcester LLP Contained in Exhibit 5.1
23.2 Consent of Arthur Andersen LLP Filed herewith as Exhibit 23.2
23.3 Consent of Shatswell, MacLeod & Company, Filed herewith as Exhibit 23.3
P.C.
23.4 Consent of Grant Thornton LLP Filed herewith as Exhibit 23.4
25 Power of Attorney Contained in Page II-5 of Registration
Statement--Prospectus
</TABLE>
Item 22. Undertakings.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
First Essex Bancorp, Inc. has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the Town
of Andover, Commonwealth of Massachusetts, on this 26th day of September, 1996.
FIRST ESSEX BANCORP, INC.
By: /s/Leonard A. Wilson
Name: Leonard A. Wilson
Title: President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form S-4 relating to Common Stock has been signed
below by the following persons in the capacities and on the dates indicated; and
each of the undersigned officers and directors of First Essex Bancorp, Inc.
hereby severally constitutes and appoints Leonard A. Wilson and David W. Dailey,
and each of them, to sign for him, and in his name in the capacity indicated
below, such Registration Statement on Form S-4 relating to Common Stock of First
Essex Bancorp, Inc. for the purpose of registering such securities under the
Securities Act of 1933, as amended, and any and all amendments thereto,
including without limitation any registration statements or post-effective
amendment thereof filed under and meeting the requirements of Rule 462(b) under
the Securities Act, hereby ratifying and confirming our signatures as they may
be signed by our attorneys to such Registration Statement and any and all
amendments thereto.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/Leonard A. Wilson President, Chief Executive Officer
Leonard A. Wilson and Director September 26, 1996
/s/David W. Dailey Principal Financial and Accounting
David W. Dailey Officer, Executive Vice President September 26, 1996
/s/Thomas S. Barenboim
Thomas S. Barenboim Director September 26, 1996
/s/William L. Lane
William L. Lane Director September 26, 1996
/s/Frank J. Leone, Jr.
Frank J. Leone, Jr. Director September 26, 1996
/s/Robert H. Watkinson
Robert H. Watkinson Director September 26, 1996
/s/Robert H. Pangione
Robert H. Pangione Director September 26, 1996
/s/Augustine J. Fabiani
Augustine J. Fabiani Director September 26, 1996
/s/Walter W. Topham
Walter W. Topham Director September 26, 1996
</TABLE>
II-4
<PAGE>
CONFORMED COPY
AGREEMENT AND PLAN OF REORGANIZATION
By and Among
FIRST ESSEX BANCORP, INC.
FINEST FINANCIAL CORP.
and
PELHAM BANK AND TRUST COMPANY
August 5, 1996
A-1
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement"), dated as of
August 5, 1996, by and among First Essex Bancorp, Inc., a Delaware Corporation
(the "Buyer"), Finest Financial Corp., a New Hampshire corporation (the
"Seller") and Pelham Bank and Trust Company, the wholly owned subsidiary of the
Seller and a New Hampshire trust company (the "Bank").
The parties deem it advisable and in the best interests of their
respective stockholders to consummate the business combination provided for
herein.
In consideration of the mutual covenants, representations, warranties
and agreements contained herein, and in consideration of the execution and
delivery by the Principal Stockholders of the Seller Stockholders' Agreement (as
such terms are defined in Article I hereof) as a condition and inducement to the
Buyer to enter into this Agreement, the parties agree as follows:
ARTICLE I
DEFINITIONS
Except as otherwise provided herein or as otherwise clearly required by
the context, the following terms shall have the respective meanings indicated
when used in this Agreement:
"Acquisition Merger" shall mean the merger of Seller with and into
Buyer in accordance with the terms and conditions of this Agreement.
"Acquisition Price" shall have the meaning ascribed thereto in Section
2.09(a) hereof.
"Acquisition Transaction" shall have the meaning ascribed thereto in
Section 5.03 hereof.
"Adjusted Exchange Ratio" shall have the meaning ascribed thereto in
Section 2.09(a) hereof.
"Agreement" shall mean this Agreement and Plan of Reorganization by and
among the Buyer, the Seller and the Bank.
"Alternative Transaction" shall have the meaning ascribed thereto in
Section 8.02(b) hereof.
"Average Closing Price" shall have the meaning ascribed thereto in
Section 2.09(a) hereof.
"Bank" shall have the meaning ascribed thereto in the preamble to this
agreement.
"Bank Merger" shall mean the merger of the Bank with and into the
Savings Association in accordance with the terms and conditions of the Bank
Merger Agreement.
"Bank Merger Agreement" shall mean that certain Agreement and Plan of
Merger of even date herewith by and between the Bank and the Savings Association
in the form attached hereto as Exhibit C.
"Bank Merger Effective Time" shall mean the specific time at which the
Bank Merger has become effective in accordance with the terms and conditions
contained in the Bank Merger Agreement and applicable law.
"BHCA" shall mean the Bank Holding Company Act of 1956, as amended.
A-2
<PAGE>
"Buyer" shall have the meaning ascribed thereto in the preamble to this
Agreement.
"Buyer Balance Sheet" shall have the meaning ascribed thereto in
Section 3.05 hereof.
"Buyer Common Stock" shall have the meaning ascribed thereto in Section
3.02(a) hereof.
"Buyer Benefit Plan" shall have the meaning ascribed thereto in Section
3.16 hereof.
"Buyer Pension Plan" shall have the meaning ascribed thereto in Section
3.16 hereof.
"Buyer Preferred Stock" shall have the meaning ascribed thereto in
Section 3.02(a) hereof.
"Buyer Registration Statement" shall have the meaning ascribed thereto
in Section 5.04 hereof.
"Buyer Reports" shall have the meaning ascribed thereto in Section 3. l
1 hereof.
"Buyer Rights Agreement" shall mean that Shareholder Rights Agreement
dated as of October 12, 1989, as amended, between the Buyer and The First
National Bank of Boston as Rights Agent.
"Cash Conversion Number" shall have the meaning ascribed thereto in
Section 2.14(f) hereof.
"Cash Designee Shares" shall have the meaning ascribed thereto in
Section 2.14(e) hereof.
"Cash Distribution" shall have the meaning ascribed thereto in Section
2.09(a) hereof.
"Cash Election Shares" shall have the meaning ascribed thereto in
Section 2.14(b) hereof.
"Certificate" shall have the meaning ascribed thereto in Section
2.11(a) hereof.
"Closing Date" shall mean the date on which the Effective Time occurs.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Companies" shall have the meaning ascribed thereto in Section 4.10(a)
hereof.
"Confidentiality Agreement" shall mean that certain letter agreement
between the Buyer and the Seller dated February 15, 1996.
"Confidential Information" shall have the meaning ascribed thereto in
Section 5.02(b) hereof.
"Constituent Corporations" shall have the meaning ascribed thereto in
Section 2.01 hereof.
"Delaware Certificate" shall have the meaning ascribed thereto in
Section 2.07 hereof.
"DGCL" shall mean the Delaware General Corporation Law, as amended.
"Dissenting Holder" shall have the meaning ascribed thereto in section
2.09(c) hereof.
"Dissenting Shares" shall have the meaning ascribed thereto in Section
2.09(c) hereof.
"DOJ" shall mean the United States Department of Justice.
A-3
<PAGE>
"DPC Shares" shall have the meaning ascribed thereto in Section 3.14
hereof.
"Effective Time" shall mean the specific time on the Closing Date at
which the Acquisition Merger has become effective pursuant to the laws of the
State of Delaware and the State of New Hampshire.
"Election Deadline" shall have the meaning ascribed thereto in Section
2.14(c) hereof.
"Election Form" shall have the meaning ascribed thereto in Section
2.14(a) hereof.
"EPA" shall mean the United States Environmental Protection Agency.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"ERISA Affiliate" shall mean, with reference to any person, within the
meaning of Section 414 (b), (c), (m) or (o) of the Code, (a) any member of a
controlled group of corporations that includes such person, (b) any trade or
business, whether or not incorporated, under common control with such person,
(c) any member of an affiliated service group with such person, and (iv) any
member of a group that is treated as a single employer by regulation and that
includes such person.
"Exchange Act" shall have the meaning ascribed thereto in Section 3.05
hereof.
"Exchange Agent" shall have the meaning ascribed thereto in Section
2.13 hereof.
"Exchange Ratio" shall have the meaning ascribed thereto in Section
2.09(a) hereof.
"FDIA" shall mean the Federal Deposit Insurance Act, as amended.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
"Federal Reserve Board" shall mean the Board of Governors of the
Federal Reserve System or the Federal Reserve Bank of Boston, as applicable.
"GAAP" shall mean generally accepted accounting principles and
practices in effect from time to time within the United States applied
consistently throughout the period involved.
"HOLA" shall mean the Home Owners Loan Act of 1933, as amended.
"Injunction" shall have the meaning ascribed thereto in Section 6.01(d)
hereof.
"IRS" shall mean the United States Internal Revenue Service.
"Loans" shall have the meaning ascribed thereto in Section 4.24 hereof.
"Massachusetts Board" shall have the meaning ascribed thereto in
Section 3.04 hereof.
"Material Adverse Effect" shall mean with respect to Buyer or Seller,
or any other entity, a material adverse effect on the assets, liabilities,
business, operations, results of operations or condition (financial or
otherwise) of Buyer or Seller or such other entity, as the case may be, and its
subsidiaries, taken as a whole, except for any such effect resulting from a
decline in the value of an entity's investment securities portfolio due to an
increase in interest rates.
"Merger Consideration" shall have the meaning ascribed thereto in
Section 2.09(a) hereof.
A-4
<PAGE>
"Minimum Price" shall have the meaning ascribed thereto in Section
2.09(a) hereof.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"NASDAQ - NMS" shall mean the National Association of Securities
Dealers Automated Quotation - National Market System.
"New Hampshire Articles" shall have the meaning ascribed thereto in
Section 2.07 hereof.
"New Hampshire Commissioner" shall have the meaning ascribed thereto in
Section 3.04.
"NHBCA" shall mean the New Hampshire Business Corporation Act.
"No Election Shares" shall have the meaning ascribed thereto in Section
2.14(b) hereof.
"OTS" shall mean the Office of Thrift Supervision of the United States
Department of the Treasury.
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
"Principal Stockholders" shall mean those persons identified in Section
1 of the Seller Disclosure Schedule.
"Proxy Statement" shall have the meaning ascribed thereto in Section
5.04(a) hereof.
"Recapitalization" shall have the meaning ascribed thereto in Section
2.10 hereof.
"Records" means all records and original documents in the Seller's
possession which pertain to and are utilized by the Seller and its subsidiaries
to administer, reflect, monitor, evidence or record information respecting
Seller's consolidated business and operations, including but not limited to all
records and documents relating to (a) corporate, regulatory, supervisory and
litigation matters, (b) tax planning and payment of taxes, (c) personnel and
employment matters, and (d) the business or conduct of the consolidated business
of the Seller.
"Regulatory Agreement" shall have the meaning ascribed thereto in
Section 4.12 hereof.
"Requisite Regulatory Approvals" shall have the meaning ascribed
thereto in Section 6.01(b) hereof.
"Salary Continuation Policy and Bonus Plan" means that certain Salary
Continuation Policy and Bonus Plan to be adopted by the Board of Directors of
Seller and the Bank, the specific terms and conditions of which are set forth in
Exhibit D hereto.
"Savings Association" shall have the meaning ascribed thereto in the
preamble to this Agreement.
"SEC" shall have the meaning ascribed thereto in Section 3.04 hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Seller" shall have the meaning ascribed thereto in the preamble to
this Agreement.
"Seller Affiliates" shall have the meaning ascribed thereto in Section
5.06 hereof.
"Seller Affiliates Agreement" shall mean the form of written agreement
to be executed and delivered to the Buyer prior to the Effective Time by the
Seller Affiliates, substantially in the form attached hereto as Exhibit B.
A-5
<PAGE>
"Seller Balance Sheet" shall have the meaning ascribed thereto in
Section 4.05 hereof.
"Seller Benefit Plans" shall have the meaning ascribed thereto in
Section 4.11(a) hereof.
"Seller Common Stock" shall have the meaning ascribed thereto in
Section 4.02(a) hereof.
"Seller Disclosure Schedule" shall have the meaning ascribed thereto in
Section 4.02(b) hereof.
"Seller Employee Option Agreements" mean those certain Common Stock
Options dated as of October 1, 1995 and November 21, 1995, between Seller and
Brian Thompson and Irving Goss, respectively, pursuant to which Seller has
granted options to purchase shares of Seller Common Stock to Messrs. Thompson
and Goss.
"Seller Other Plans" shall have the meaning ascribed thereto in Section
4.11(a) hereof.
"Seller Pension Plans" shall have the meaning ascribed thereto in
Section 4.11(a) hereof.
"Seller Reports" shall have the meaning ascribed thereto in Section
4.15 hereof.
"Seller Stockholders' Agreement" means that certain letter agreement or
agreements of even date herewith executed and delivered to the Buyer by each of
the Principal Stockholders in the form attached hereto as Exhibit A.
"Stock Conversion Number" shall have the meaning ascribed thereto in
Section 2.14(e) hereof.
"Stock Designee Shares" shall have the meaning ascribed thereto in
Section 2.14(e) hereof.
"Stock Distribution" shall have the meaning ascribed thereto in Section
2.09(a) hereof.
"Stock Election Shares" shall have the meaning ascribed thereto in
Section 2.14(b) hereof.
"subsidiaries" shall mean, when used with reference to a party, any
corporation or other organization, whether incorporated or unincorporated, of
which such party or any other subsidiary of such party is a general partner
(excluding partnerships the general partnership interests of which held by such
party or any subsidiary of such party do not have a majority of the voting
interests in such partnership) or, with respect to such corporation or other
organization, at least a majority of the securities or other interests having by
their terms ordinary voting power to elect a majority of the board of directors
or others performing similar functions is directly or indirectly owned or
controlled by such party or by any one or more of its subsidiaries, or by such
party and one or more of its subsidiaries.
"Surviving Corporation" shall have the meaning ascribed thereto in
Section 2.01 hereof.
"Tax" shall have the meaning ascribed thereto in Section 4.10(t)(A)
hereof.
"Tax Return" shall have the meaning ascribed thereto in Section
4.10(t)(B) hereof.
"Termination Date" shall have the meaning ascribed thereto in Section
8.01(b) hereof.
"Trust Account Shares" shall have the meaning ascribed thereto in
Section 3.12 hereof.
"Valuation Period" shall have the meaning ascribed thereto in Section
2.09(a) hereof.
A-6
<PAGE>
ARTICLE II
THE ACQUISITION MERGER
2.01 Surviving Corporation. In accordance with the provisions of this
Article II, Section 252 of the DGCL and Section 293-A:11.07 of the NHBCA, at the
Effective Time, Seller shall be merged with and into Buyer (the two merging
corporations being sometimes collectively referred to herein as the "Constituent
Corporations") and the separate corporate existence of Seller shall cease. Buyer
shall be the surviving corporation in the Acquisition Merger (hereinafter
sometimes referred to as the "Surviving Corporation") and shall continue its
corporate existence under the laws of the State of Delaware. The name of the
Surviving Corporation shall continue to be "First Essex Bancorp, Inc."
2.02 Purposes and Authorized Capital Stock of Surviving Corporation. As
of the Effective Time, the purposes and authorized capital stock of the
Surviving Corporation shall be as stated in the Certificate of Incorporation of
Buyer immediately prior to the Effective Time.
2.03 Effect of the Acquisition Merger.
(a) At the Effective Time, all of the estate, property,
rights, privileges, powers and franchises of the Constituent
Corporations and all of their property, real, personal and mixed, and
all the debts due on whatever account to any of them, as well as all
stock subscriptions and other choses in action belonging to any of
them, shall be transferred to and vested in the Surviving Corporation,
without further act or deed, and all claims, demands, property and
other interest shall be the property of the Surviving Corporation, and
the title to all real estate vested in any of the Constituent
Corporations shall not revert or be in any way impaired by reason of
the Acquisition Merger, but shall be vested in the Surviving
Corporation.
(b) From and after the Effective Time, the rights of creditors
of any Constituent Corporation shall not in any manner be impaired, nor
shall any liability or obligation, including taxes due or to become
due, or any claim or demand in any cause existing against such
corporation, or any stockholder, director, or officer thereof, be
released or impaired by the Acquisition Merger, but the Surviving
Corporation shall be deemed to have assumed, and shall be liable for,
all liabilities and obligations of each of the Constituent Corporations
in the same manner and to the same extent as if the Surviving
Corporation had itself incurred such liabilities or obligations. The
stockholders, directors, and officers of the Constituent Corporations
shall continue to be subject to all liabilities, claims and demands
existing against them as such at or before the Acquisition Merger. No
action or proceeding then pending before any court or tribunal of the
State of Delaware, the State of New Hampshire or otherwise in which any
Constituent Corporation is a party, or in which any such stockholder,
director, or officer is a party, shall abate or be discontinued by
reason of the Acquisition Merger, but any such action or proceeding may
be prosecuted to final judgment as though no merger had taken place, or
the Surviving Corporation may be substituted as a party in place of any
Constituent Corporation by the court in which such action or proceeding
is pending.
2.04 Additional Actions. If, at any time after the Effective Time,
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of either of the Constituent Corporations acquired or to be
acquired by the Surviving Corporation as a result of, or in connection with, the
Acquisition Merger or to otherwise carry out this Agreement, the officers and
directors of the Surviving Corporation shall and will be authorized to execute
and deliver, in the name and on behalf of the Constituent Corporations or
otherwise, all such deeds, bills of sale, assignments and assurances and to take
and do, in the name and on behalf of the Constituent Corporations or otherwise,
all such other actions and things as may be necessary or desirable to vest,
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perfect or confirm any and all right, title and interest in, to and under such
rights, properties or assets in the Surviving Corporation or to otherwise carry
out the purposes and intent of this Agreement.
2.05 Certificate of Incorporation and By-laws. The Certificate of
Incorporation and the By-Laws of Buyer, as in effect immediately prior to the
Effective Time, shall be the Certificate of Incorporation and the By-laws of the
Surviving Corporation and shall thereafter continue to be the Surviving
Corporation's Certificate of Incorporation and By-Laws until amended as provided
therein or by applicable law.
2.06 Directors and Officers. The directors and officers of Buyer
immediately prior to the Effective Time shall be the directors and officers of
the Surviving Corporation, each to hold office in accordance with the
Certificate of Incorporation and By-Laws of the Surviving Corporation.
2.07 Effective Time; Conditions. If all of the conditions precedent set
forth in Article VI hereof have been satisfied or waived (to the extent
permitted by law), and this Agreement has not otherwise been properly terminated
under Article VIII hereof, the appropriate form of certificate of merger with
respect to the Acquisition Merger shall be prepared by Buyer and Seller and
filed and recorded pursuant to Section 252 of the DGCL with the Delaware
Secretary of State (as so filed and recorded, the "Delaware Certificate") and
the appropriate form of articles of merger with respect to the Acquisition
Merger shall be prepared by Buyer and Seller and filed and recorded pursuant to
Sections 293-A:11.07 and 293-A:11.05 of the NHBCA with the New Hampshire
Secretary of State (as so filed and recorded the "New Hampshire Articles"). The
Acquisition Merger shall become effective at, and the Effective Time shall be,
the time specified in the Delaware Certificate and the New Hampshire Articles.
2.08 Dissenters' Appraisal Rights. Any Dissenting Holder (i) who files
with Seller an objection to the Acquisition Merger in writing before the
approval of this Agreement by the stockholders of Seller and who states in such
objection that he intends to demand payment for his shares of Seller Common
Stock if the Acquisition Merger is concluded and (ii) whose shares of Seller
Common Stock are not voted in favor of the Acquisition Merger shall be entitled
to demand payment for his shares of Seller Common Stock and an appraisal of the
value thereof, in accordance with the provisions of Sections 293-A:13.01 through
293-A:13.31 of the NHBCA.
2.09 Effect on Outstanding Shares.
(a) Seller Common Stock. By virtue of the Acquisition Merger,
automatically and without any action on the part of the holder thereof,
and subject to Section 2.14 hereof, each share of Seller Common Stock
issued and outstanding immediately prior to the Effective Time (other
than Dissenting Shares and any such shares held directly or indirectly
by Buyer, other than Trust Account Shares and DPC Shares, and any such
shares held as treasury stock by Seller) shall become and be converted
into (i) the number of shares or fraction of a share of Buyer Common
Stock (together with the number of Buyer Rights or fraction thereof
associated therewith), rounded to the nearest thousandth of a share,
equal to the number obtained by dividing $20.25 (such per share price
being referred to herein as the "Acquisition Price") by the Average
Closing Price (such number being referred to herein as the "Exchange
Ratio" or the "Stock Distribution") or (ii) an amount in cash equal to
the Acquisition Price (the "Cash Distribution"); provided, however,
that if the Average Closing Price is greater than $11.50 per share the
Exchange Ratio shall equal 1.761 and if the Average Closing Price is
less than $9.50 per share the Exchange Ratio shall equal 2.132.
Notwithstanding the foregoing, however, if the Average Closing Price is
less than $8.75 per share (the "Minimum Price"), then Seller shall have
the right to terminate this Agreement pursuant to Section 8.01(f) of
this Agreement, unless Buyer elects, in its sole discretion, to adopt
as the Exchange Ratio the Adjusted Exchange Ratio (as such term is
defined below). As of the Effective Time, each share of Seller Common
Stock held directly or indirectly by Buyer, other than Trust Account
Shares and DPC Shares, and held by Seller as treasury stock shall be
canceled, retired and cease to exist, and no payment shall be made with
respect thereto. For purposes of this Agreement, (i) "Average Closing
Price" shall mean the average of the closing bid prices of shares of
Buyer Common Stock as reported on the NASDAQ-NMS composite transactions
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reporting system for the twenty consecutive trading days (the
"Valuation Period") ending on the fifth business day prior to the
Closing Date, (ii) "Merger Consideration" shall mean the shares of
Buyer Common Stock and/or cash that holders of Seller Common Stock are
entitled to receive hereunder and (iii) "Adjusted Exchange Ratio" shall
mean that number, rounded to the nearest thousandth, determined by
dividing $18.65 by the Average Closing Price. Each certificate which
immediately prior to the Effective Time represented outstanding shares
of Seller Common Stock shall on and after the Effective Time be deemed
for all purposes to represent the Merger Consideration into which the
shares of Seller Common Stock represented by such certificate shall
have been converted pursuant to this Section 2.09(a).
(b) Buyer Common Stock. Each share of Buyer Common Stock
issued and outstanding immediately prior to the Effective Time, shall
remain issued and outstanding upon the Effective Time and shall
constitute such number of shares of common stock of the Surviving
Corporation ("Surviving Corporation Common Stock"). Each certificate
which immediately prior to the Effective Time represented outstanding
shares of Buyer Common Stock shall on and after the Effective Time be
deemed for all purposes to represent such like number of shares of
Surviving Corporation Common Stock issued and outstanding as of the
Effective Time in accordance with this Section 2.09(b).
(c) Dissenting Shares. No conversion under Section 2.09(a)
hereof shall be made with respect to the shares of Seller Common Stock
held by a Dissenting Holder (such shares being referred to herein as
"Dissenting Shares"); provided, however, (i) each Dissenting Share
outstanding immediately prior to the Effective Time and held by a
Dissenting Holder who shall, at or prior to the Effective Time,
withdraw his demand for appraisal or lose his right of appraisal, in
either case pursuant to the applicable provisions of the NHBCA, shall
be deemed to be converted, as of the Effective Time, into the Merger
Consideration payable with respect to such Dissenting Share in
accordance with the terms of Section 2.09(a) hereof and (ii) each
Dissenting Share outstanding immediately prior to the Effective Time
and held by a Dissenting Holder who shall, after the Effective Time,
withdraw his demand for appraisal or lose his right of appraisal, in
either case pursuant to the applicable provisions of the NHBCA, shall
be deemed to be converted, as of the Effective Time, into the Stock
Distribution or the Cash Distribution as the Buyer shall determine in
its sole and absolute discretion, subject to its obligations under
Section 5.10 hereof. For purposes of this Agreement, the term
"Dissenting Holder" shall mean a holder of shares of Seller Common
Stock who has demanded appraisal rights in compliance with the
applicable provisions of the NHBCA concerning the right of such holder
to dissent from the Acquisition Merger and demand appraisal of such
holder's shares of Seller Common Stock.
2.10 Anti-Dilution. In the event that during the period beginning on
the first day of the Valuation Period and ending on the Closing Date the
outstanding shares of Buyer Common Stock (or the number of Buyer Rights) shall
have been increased, decreased, changed into or exchanged for a different number
or kind of shares or securities through reorganization, recapitalization,
reclassification, stock (or other non-cash) dividend, stock split, reverse stock
split, or other like changes in Buyer's capitalization (a "Recapitalization"),
then to the extent necessary or appropriate an appropriate and proportionate
adjustment shall be made to the number and/or kind of securities to be delivered
to the holders of Seller Common Stock who are to receive the Stock Distribution
so that each such holder of Seller Common Stock shall receive under Section
2.09(a) hereof the number of shares of Buyer Common Stock (or the number of
Buyer Rights) and/or other securities that such holder would have received if
the Recapitalization had occurred immediately after the Effective Time. Nothing
contained in this Section 2.10 is intended to mean that Buyer may engage in a
Recapitalization for the intended purpose of affecting the Average Closing Price
in a way that would be adverse to the interests of Seller and its stockholders.
2.11 Exchange Procedures.
(a) Certificates which represent shares of Seller Common Stock
that are outstanding immediately prior to the Effective Time (each, in
each case, a "Certificate") and are converted into the Merger
Consideration pursuant to this Article II shall, after the Effective
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Time, be deemed to represent the Merger Consideration into which such
shares have been converted and shall be exchangeable by the holders
thereof in the manner provided in the transmittal materials described
below for (i) new certificates representing the shares of Buyer Common
Stock into which such shares have been converted and/or (ii) a check
for the total cash amount into which such shares have been converted.
(b) Buyer shall use all reasonable efforts to cause the
Exchange Agent to send to each holder of record of shares of Seller
Common Stock outstanding at the Effective Time, as promptly as
practicable, and in no event later than three business days thereafter,
transmittal materials and the Election Form as provided for in Section
2.14 hereof (which materials and form shall be approved by Seller,
which approval shall not be unreasonably withheld) for use in
exchanging the Certificates for such shares for the Merger
Consideration into which such shares of Seller Common Stock have been
converted pursuant to this Article II. Upon surrender of a Certificate,
together with a duly executed letter of transmittal and any other
required documents, the holder of such Certificate shall be entitled to
receive, in exchange therefor, as soon as practicable, a certificate
for the number of shares of Buyer Common Stock and/or a check for the
cash amount to which such holder is entitled, and such Certificate
shall forthwith be canceled. No dividend or other distribution payable
after the Effective Time with respect to Buyer Common Stock shall be
paid to the holder of any unsurrendered Certificate representing Stock
Election Shares until the holder thereof surrenders such Certificate in
accordance with the provisions of this Article II and the transmittal
materials, at which time such holder shall receive all dividends and
distributions, without interest thereon, previously payable but
withheld from such holder pursuant hereto. No interest shall be paid on
the cash amount payable with respect to any unsurrendered Certificate
representing Cash Election Shares and such cash amount shall be paid at
such time as such Certificate is properly surrendered by the holder
thereof. After the Effective Time, there shall be no transfers on the
stock transfer books of Seller of shares of Seller Common Stock which
were issued and outstanding at the Effective Time and converted
pursuant to the provisions of this Article II. If, after the Effective
Time, Certificates are presented for transfer to Seller, they shall be
canceled and exchanged for the Merger Consideration deliverable in
respect thereof as determined in accordance with the provisions and
procedures set forth in this Article II.
(c) In lieu of the issuance of fractional shares of Buyer
Common Stock pursuant to the applicable provisions of Section 2.09(a)
hereof, cash adjustments, without interest, will be paid to the holders
of Seller Common Stock in respect of any fractional share that would
otherwise be issuable and the amount of such cash adjustment shall be
equal to an amount in cash determined by multiplying such holder's
fractional interest by the Average Closing Price (rounded up to the
nearest cent). For purposes of determining whether, and in what
amounts, a particular holder of Seller Common Stock would be entitled
to receive cash adjustments under this Section 2.11(c), shares of
record held by such holder and represented by two or more Certificates
shall be aggregated.
(d) After the Effective Time, holders of Seller Common Stock
shall have no rights as stockholders of Seller, other than (i) to
receive the Merger Consideration into which such shares of Seller
Common Stock have been converted and fractional share payments, if any,
pursuant to the provisions of Section 2.11(c) above and (ii) the rights
afforded to any Dissenting Holder under applicable provisions of the
NHBCA.
(e) Notwithstanding the foregoing, neither Buyer nor Seller
nor any other person shall be liable to any former holder of shares of
Seller Common Stock for any shares or any dividends or distributions
with respect thereto or any other cash amounts properly delivered to a
public official pursuant to applicable abandoned property, escheat or
similar laws.
(f) In the event any Certificate shall have been lost, stolen
or destroyed, upon receipt of appropriate evidence as to such loss,
theft or destruction and to the ownership of such Certificate by the
person claiming such Certificate to be lost, stolen or destroyed, and
the receipt by Buyer of appropriate and customary indemnification,
Buyer will deliver in exchange for such lost, stolen or destroyed
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Certificate the Merger Consideration and the fractional share payment,
if any, deliverable in respect thereof as determined in accordance with
this Article II.
(g) If any Merger Consideration is to be issued in a name
other than that in which the Certificate surrendered in exchange
therefor is registered, it shall be a condition of the issuance thereof
that the Certificate so surrendered shall be properly endorsed (or
accompanied by an appropriate instrument of transfer) and otherwise in
proper form for transfer (including, but not limited to, that the
signature of the transferor shall be properly guaranteed by a
commercial bank, trust company or member firm of the New York Stock
Exchange or other eligible guarantor institution), and that the person
requesting such exchange shall pay to the Exchange Agent in advance any
transfer or other taxes required by reason of the delivery of the
Merger Consideration in any name other than that of the registered
holder of the Certificate surrendered, or required for any other
reason, or shall establish to the reasonable satisfaction of the
Exchange Agent that such tax has been paid or is not payable.
2.12 Treatment of Seller Stock Options. Each stock option granted by
Seller pursuant to the Seller Employee Option Agreements outstanding and
unexercised immediately prior to the Effective Time shall be converted into an
option to purchase shares of Buyer Common Stock with the following terms:
(a) The number of shares of Buyer Common Stock shall be equal
to the product of the number of shares of Seller Common Stock
previously subject thereto and the Exchange Ratio (or the Adjusted
Exchange Ratio to the extent utilized by the parties under Section
2.09(a) above), rounded up to the nearest whole share; and
(b) The exercise price per share of Buyer Common Stock shall
be equal to the exercise price per share of Seller Common Stock
previously subject thereto divided by the Exchange Ratio (or the
Adjusted Exchange Ratio to the extent utilized by the parties under
Section 2.09(a) above), rounded up to the nearest cent; and
(c) The duration and other terms of the option shall be
unchanged, including that the option shall become fully vested upon the
Effective Time pursuant to its terms, except that all references to
Seller shall be deemed to be references to Buyer; and
(d) Buyer shall assume the option.
2.13 Exchange Agent. Prior to the Effective Time, Buyer shall appoint
an exchange agent reasonably acceptable to Seller for the purpose of exchanging
certificates representing shares of Buyer Common Stock for Certificates (the
"Exchange Agent"). Buyer shall issue and deliver on the Closing Date to the
Exchange Agent certificates representing the shares of Buyer Common Stock to be
issued and shall pay to the Exchange Agent the aggregate cash amount to be paid
in consideration of the aggregate Cash Distribution and in lieu of fractional
share interests, all in accordance with the terms of this Article II.
2.14 Election Procedures. The election to receive shares of Buyer
Common Stock or cash in exchange for shares of Seller Common Stock and the
allocation of shares of Buyer Common Stock and cash among holders of shares of
Seller Common Stock shall be conducted as follows:
(a) The Exchange Agent shall mail to each holder of record of
shares of Seller Common Stock outstanding at the Effective Time an
election form (the "Election Form"), together with appropriate
transmittal materials, as promptly as practicable after the Effective
Time and in no event later than three business days thereafter.
(b) The Election Form shall permit a holder of shares of
Seller Common Stock to elect to receive, with respect to some or all of
such holder's shares of Seller Common Stock, (i) the Stock Distribution
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(the "Stock Election Shares"), (ii) the Cash Distribution (the "Cash
Election Shares"), or (iii) to indicate that such holder makes no
election (the "No Election Shares").
(c) Any shares of Seller Common Stock with respect to which
the holder thereof shall not, as of the Election Deadline (as defined
below), have made such an election by submission to the Exchange Agent,
of a properly completed Election Form shall be deemed to be No Election
Shares. "Election Deadline" means 5:00 p.m., local time, on the
fifteenth business day following but not including the date of mailing
of the Election Form or such other date as Buyer and Seller shall
mutually agree upon in writing.
(d) Any election shall have been properly made only if the
Exchange Agent shall have received a properly completed Election Form
by the Election Deadline. An Election Form will be properly completed
only if accompanied by either (i) certificates representing all shares
of Seller Common Stock covered thereby or (ii) an appropriate guarantee
of delivery of such certificates as set forth in the Election Form from
a member of a national securities exchange or the NASD, or a commercial
bank or trust company in the United States, provided that if the
certificates are not delivered by the time set forth in the guarantee
of delivery (which time may not be later than two business days after
the Election Deadline), the holder shall be entitled only to receive in
respect of each share of Seller Common Stock represented by such
certificates the Merger Consideration to be received by holders of No
Election Shares, subject to the allocation and other provisions of this
Section 2.14 and Section 2.11 hereof. Any Election Form may be revoked
or changed by the person submitting such Election Form to the Exchange
Agent by written notice to the Exchange Agent, provided such notice is
received by the Exchange Agent at or prior to the Election Deadline.
The Exchange Agent shall have reasonable discretion to determine when
any election, modification or revocation is received and whether any
such election, modification or revocation has been properly made.
(e) If the aggregate number of Stock Election Shares does not
equal the Stock Conversion Number (as defined below), within five
business days after the Election Deadline the Exchange Agent shall
allocate among holders of shares of Seller Common Stock outstanding at
the Effective Time the rights to receive with respect to each such
share the Stock Distribution or the Cash Distribution as follows:
(i) if the number of Stock Election Shares is less than
the Stock Conversion Number, then
(A) all Stock Election Shares will be converted into
the right to receive the Stock Distribution,
(B) the Exchange Agent will select, on a pro rata
basis, first from among the holders of No Election Shares and
then (if necessary) from among the holders of Cash Election
Shares, a sufficient number of such shares ("Stock Designee
Shares") such that the number of Stock Designee Shares will,
when added to the number of Stock Election Shares, equal as
closely as practicable, but in no event will it be less than,
the Stock Conversion Number, and all Stock Designee Shares
will be converted into the right to receive the Stock
Distribution, and
(C) the Cash Election Shares and the No Election
Shares not so selected as Stock Designee Shares shall be
converted into the right to receive the Cash Distribution; or
(ii) if the aggregate number of Stock Election Shares is
greater than the Stock Conversion Number, then
(A) all Cash Election Shares will be converted into
the right to receive the Cash Distribution,
(B) the Exchange Agent will select, on a pro rata
basis, first from among the holders of No Election Shares and
then (if necessary) from among the holders of Stock Election
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Shares, a sufficient number of such shares ("Cash Designee
Shares") such that the number of Cash Designee Shares will,
when added to the number of Cash Election Shares, equal as
closely as practicable, but in no event will it exceed, the
Cash Conversion Number (as defined below), and all Cash
Designee Shares will be converted into the right to receive
the Cash Distribution, and
(C) the Stock Election Shares and the No Election
Shares not so selected as Cash Designee Shares will be
converted into the right to receive the Stock Distribution.
"Stock Conversion Number" means the number of outstanding shares of Seller
Common Stock as of the Effective Time multiplied by .50; provided, however, if
satisfaction of the condition set forth in Section 6.02(d) hereof and/or the
condition set forth in Section 6.03(d) hereof depends upon the issuance by Buyer
of a greater number of shares of Buyer Common Stock than would otherwise result
from the utilization of such Stock Conversion Number, then the Stock Conversion
Number shall be increased to such number greater than .50 as is necessary to
facilitate the satisfaction of such condition(s); provided, further, however,
that under no circumstances (including without limitation a failure to satisfy
either or both of such conditions) shall the Stock Conversion Number be
increased to a number greater than .62. "Cash Conversion Number" means the
number of outstanding shares of Seller Common Stock as of the Effective Time
multiplied by .50; provided, however, if the Stock Conversion Number shall be
increased, as provided for in the preceding sentence, then under such
circumstances the Cash Conversion Number shall equal the difference between 1.00
and such increased Stock Conversion Number.
(f) The proration process to be used by the Exchange Agent
shall be as the Exchange Agent deems equitable in its sole reasonable
discretion.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller and the Bank as follows:
3.01 Corporate Organization.
(a) The Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
The Buyer has the corporate power and authority to own, lease or
operate all of its properties and assets and to carry on its business
as it is now being conducted, and is duly licensed or qualified to do
business in each jurisdiction in which the nature of the business
conducted by it or the character or location of the properties and
assets owned, leased or operated by it makes such licensing or
qualification necessary, except where the failure to be so licensed or
qualified would not result in, with respect to the Buyer, a Material
Adverse Effect. The Buyer is a savings and loan holding company duly
registered with the OTS under the HOLA. The certificate of
incorporation and bylaws of Buyer, copies of which have been previously
made available to Seller, are true and complete copies of such
documents as in effect as of the date of this Agreement.
(b) Each subsidiary of the Buyer is duly organized, validly
existing and in corporate good standing under the laws of the
jurisdiction of its incorporation. Each subsidiary of the Buyer has the
corporate power and authority to own, lease or operate all of its
properties and assets and to carry on its business as it is now being
conducted, and is duly licensed or qualified to do business in each
jurisdiction in which the nature of the business conducted by it or the
character or location of the properties and assets owned, leased, or
operated by it makes such licensing or qualification necessary, except
where the failure to be so licensed or qualified would neither
individually nor in the aggregate, result in, with respect to the
Buyer, a Material Adverse Effect. The charter and bylaws of the Savings
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Association, copies of which have been previously made available to
Seller, are true and complete copies of such documents as in effect as
of the date of this Agreement.
3.02 Capitalization. The authorized capital stock of the Buyer consists
of 25,000,000 shares of common stock, par value $0.10 per share (the "Buyer
Common Stock"), and 5,000,000 shares of preferred stock, par value $0.10 per
share (the "Buyer Preferred Stock"). As of the close of business on June 30,
1996 there were 6,045,901 shares of the Buyer Common Stock issued and
outstanding and no shares of the Buyer Preferred Stock issued and outstanding.
As of the close of business on June 30, 1996, the Buyer had 6,045,901 preferred
stock purchase rights issued and outstanding pursuant to the Buyer Rights
Agreement, which entitle the holders thereof to purchase shares of Series A
Junior Participating Cumulative Preferred Stock under certain circumstances. As
of the close of business on June 30, 1996, there were 100,000 shares of Series A
Junior Participating Cumulative Preferred Stock reserved for issuance upon
exercise of such preferred stock purchase rights, none of which shares were
issued and outstanding. There were also 1,986,000 shares of the Buyer Common
Stock held in the Buyer's treasury as of the close of business on June 30, 1996.
In addition, as of December 31, 1995, there were 421,733 shares of the Buyer
Common Stock reserved for issuance upon exercise of outstanding stock options.
All issued and outstanding shares of the Buyer Common Stock have been duly
authorized and validly issued and are fully paid, nonassessable and free of
preemptive rights, with no personal liability attaching to the ownership
thereof.
3.03 Authority; No Violation.
(a) The Buyer has full corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby have been duly
and validly approved by the Board of Directors of the Buyer. The Board
of Directors of Buyer has directed that Buyer's issuance of shares of
Buyer Common Stock in connection with the Acquisition Merger, in
accordance with the terms of this Agreement, be submitted to the
stockholders of Buyer for approval at a meeting of such stockholders
and no other corporate proceedings on the part of the Buyer are
necessary to consummate any of the transactions so contemplated by this
Agreement. This Agreement has been duly and validly executed and
delivered by the Buyer and (assuming due authorization, execution and
delivery by the Seller) constitutes the valid and binding obligation of
the Buyer, enforceable against the Buyer in accordance with its terms,
except that enforcement hereof may be limited by the receivership,
conservatorship and supervisory powers of bank regulatory agencies
generally as well as bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting enforcement of creditors' rights
generally and except that enforcement thereof may be subject to general
principles of equity (regardless of whether enforcement is considered
in a proceeding in equity or at law) and the availability of equitable
remedies.
(b) The Savings Association has full corporate power and
authority to execute and deliver the Bank Merger Agreement and to
consummate the Bank Merger. The execution and delivery of the Bank
Merger Agreement and the consummation of the Bank Merger have been duly
and validly approved by the Board of Directors of the Savings
Association and by the Buyer as the sole stockholder of the Savings
Association. No other corporate proceedings on the part of the Savings
Association are necessary to consummate the Bank Merger. The Bank
Merger Agreement has been duly and validly executed by the Savings
Association and (assuming due authorization, execution and delivery by
the Bank) constitutes the valid and binding obligation of the Savings
Association, enforceable against the Savings Association in accordance
with its terms, except that enforcement thereof may be limited by
receivership, conservatorship and supervisory powers of bank regulatory
agencies generally as well as bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting enforcement of creditors'
rights generally and except that enforcement thereof may be subject to
general principles of equity (regardless of whether enforcement is
considered in a proceeding in equity or at law) and the availability of
equitable remedies.
(c) Neither the execution and delivery of this Agreement and
the Bank Merger Agreement by the Buyer and the Savings Association,
respectively, nor the consummation by the Buyer and the Savings
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Association, as applicable, of the transactions contemplated by this
Agreement and the Bank Merger Agreement, nor compliance by the Buyer
and the Savings Association, as applicable, with any of the terms or
provisions of this Agreement and the Bank Merger Agreement, will (i)
assuming that the consents and approvals referred to in Section 3.04
hereof are duly obtained, violate any statute, code, ordinance, rule,
regulation, judgment, order, writ, decree or injunction applicable to
the Buyer or any of its subsidiaries or any of their respective
properties or assets, or, (ii) violate, conflict with, result in a
breach of any provisions of, constitute a default (or an event which,
with notice or lapse of time, or both, would constitute a default)
under, result in the termination of, accelerate the performance
required by, or result in a right of termination or acceleration or the
creation of any lien, security interest, charge or other encumbrance
upon any of the respective properties or assets of the Buyer or any of
its subsidiaries under, any of the terms, conditions or provisions of
(A) the certificate of incorporation or other charter document of like
nature or by-laws of the Buyer, or such Buyer subsidiary, as the case
may be, or (B) any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which
the Buyer or any of its subsidiaries is a party thereto as issuer,
guarantor or obligor, or by which they or any of their respective
properties or assets may be bound or affected, except, in the case of
clause (ii)(B) above, for such violations, conflicts, breaches or
defaults which either individually or in the aggregate will not result,
with respect to the Buyer, in a Material Adverse Effect.
3.04 Consents and Approvals. Except for consents, waivers or approvals
of, notice to, or filings or registrations with, the Federal Reserve Board, the
Massachusetts Board of Bank Incorporation (the "Massachusetts Board"), the OTS,
the New Hampshire Bank Commissioner (the "New Hampshire Commissioner"), the
Securities and Exchange Commission (the "SEC"), the NASD, the DOJ, the Delaware
Secretary of State, the New Hampshire Secretary of State and certain state "Blue
Sky" or securities commissioners, no consents, waivers or approvals of, notices
to, or filings or registrations with, any public body or authority are
necessary, and no permits, consents, waivers, clearances, approvals or
authorizations of or notices to any non-governmental or non-regulatory third
parties (which term does not include the Board of Directors or the stockholders
of the Buyer and the Savings Association) are necessary, in connection with (i)
the execution and delivery by the Buyer of this Agreement, (ii) the execution
and delivery by the Savings Association of the Bank Merger Agreement or (iii)
the consummation by the Buyer and the Savings Association of the transactions
contemplated by this Agreement and the Bank Merger Agreement.
3.05 Financial Statements. The Buyer has made available to the Seller
copies of (a) the consolidated balance sheets of the Buyer and its subsidiaries
as of December 31 for the fiscal years 1993 through 1995, inclusive, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the fiscal years 1993 through 1995, inclusive, as reported in the
Buyer's Annual Reports on Form 10-K for each of the three fiscal years ended
December 31, 1993 through December 31, 1995 filed with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), in each case
accompanied by the audit report of Arthur Andersen LLP, independent accountants
for the Buyer, and (b) the unaudited consolidated balance sheets of Buyer and
its subsidiaries as of June 30, 1996 and June 30, 1995, the related unaudited
consolidated statements of income and changes in stockholders' equity for the
six months ended June 30, 1996 and June 30, 1995 and the related unaudited
consolidated statements of cash flows for the six months ended June 30, 1996 and
June 30, 1995, all as reported in Buyer's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 filed with the SEC under the Exchange Act. The
December 31, 1995 consolidated balance sheet of the Buyer (the "Buyer Balance
Sheet") (including the related notes, where applicable) and the other financial
statements referred to herein (including the related notes, where applicable)
fairly present, and the financial statements to be included in any reports or
statements (including reports on Forms 10-Q 10-K and 8-K) to be filed by the
Buyer with the SEC after the date hereof will fairly present, the consolidated
financial position and results of the consolidated operations and cash flows and
changes in stockholders' equity of the Buyer and its subsidiaries for the
respective fiscal periods or as of the respective dates therein set forth; and
each of such statements (including the related notes, where applicable) has been
and will be prepared in accordance with GAAP consistently applied during the
periods involved, except as otherwise set forth in the notes thereto (subject,
in the case of unaudited interim statements, to normal year-end adjustments).
The books and records of the Buyer and its subsidiaries have been, and are
being, maintained in accordance with GAAP and applicable legal and regulatory
requirements and reflect only actual transactions.
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3.06 Absence of Undisclosed Liabilities. As of December 31, 1995, none
of the Buyer or any of its subsidiaries had any obligation or liability
(contingent or otherwise) that is material on a consolidated basis to the Buyer,
or that when combined with all similar obligations or liabilities would be
material on a consolidated basis to the Buyer, except as disclosed or reflected
in the Buyer's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996.
3.07 Broker's Fees. Neither the Buyer nor any of its officers or
directors has employed any broker or finder or incurred any liability for any
broker's fees, commissions or finder's fees in connection with any of the
transactions contemplated by this Agreement and the Bank Merger Agreement,
except that Buyer has engaged, and will pay a fee or commission to, Oppenheimer
& Co., Inc..
3.08 Absence of Certain Changes or Events. Since December 31, 1995, the
Buyer and its subsidiaries have not incurred any material liability, except in
the ordinary course of their business consistent with their past practices, nor
has there been any change in the business, assets, condition (financial or
otherwise) or results of operations of the Buyer or any of its subsidiaries
which has had or could be reasonably expected to have, individually or in the
aggregate, a Material Adverse Effect on the Buyer.
3.09 Legal Proceedings. There is no pending or threatened legal,
administrative, arbitral, or other proceeding, claim, action or governmental
investigation against Buyer or any subsidiary of the Buyer or challenging the
validity or propriety of the transactions contemplated by this Agreement or the
Bank Merger Agreement, as to which there is a reasonable probability of an
adverse determination and which, if adversely determined, would have or could be
reasonably expected to have, individually or in the aggregate, a Material
Adverse Effect on the Buyer or otherwise materially adversely affect the Buyer's
or the Savings Association's ability to perform its obligations under this
Agreement or the Bank Merger Agreement, as applicable, nor is there any
judgment, decree, injunction, rule or order of any legal, administrative or
governmental body or arbitrator outstanding against the Buyer or any subsidiary
of the Buyer having any such effect.
3.10 Agreements with Banking Authorities. Neither Buyer nor any of its
subsidiaries is a party to any commitment letter, written agreement, memorandum
of understanding or order to cease and desist with, or has adopted any
resolutions at the request of, any federal or state governmental entity charged
with the supervision or regulation of banks, bank holding companies, savings
associations or savings and loan holding companies or engaged in the insurance
of bank or savings association deposits which restricts materially the conduct
of its business, or in any manner relates to its capital adequacy, credit
policies, management or overall safety and soundness or such entity's ability to
perform its obligations hereunder.
3.11 Reports. Since January 1, 1993, the Buyer and its subsidiaries
have filed, and subsequent to the date hereof will file, all reports,
registrations and statements, together with any amendments required to be made
with respect thereto, that were and are required to be filed with (a) the SEC,
including, but not limited to, Forms 10-K, Forms 10-Q, Forms 8-K and proxy
statements (and all such reports, registrations and statements have been or will
be made available by the Buyer to the Seller), (b) the OTS, (c) the FDIC, (d)
the Federal Reserve Board and (e) any applicable state securities or banking
authorities (except, in the case of state securities authorities, no such
representation is made as to filings which are not material) (all such reports
and statements are collectively referred to herein as the "Buyer Reports"). As
of their respective dates, the Buyer Reports complied and, with respect to
filings made after the date of this Agreement, will at the date of filing
comply, in all material respects with all of the statutes, rules and regulations
enforced or promulgated by the regulatory authority with which they were filed.
As of their respective dates, the Buyer Reports did not contain and, with
respect to filings made after the date of this Agreement, will not at the date
of filing contain, any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
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3.12 Compliance with Applicable Law. Buyer and its subsidiaries hold
all material licenses, franchises, permits and authorizations necessary for the
lawful conduct of Buyer's consolidated business, and Buyer and its subsidiaries
have complied with, and are not in default in any respect under any, applicable
law, statute, order, rule, regulation or policy of, or agreement with, any
federal, state or local governmental agency or authority relating to Buyer on a
consolidated basis, other than where such default or noncompliance does not have
and could not reasonably be expected to have a Material Adverse Effect on Buyer
or otherwise materially adversely affect Buyer's or the Savings Association's
ability to perform its obligations under this Agreement or the Bank Merger
Agreement, as applicable.
3.13 Buyer Common Stock. The Buyer Common Stock (and the associated
Buyer Rights) to be issued in connection with the Acquisition Merger is duly
authorized and, when issued in accordance with Article II hereof, will be
validly issued, fully paid and nonassessable and not subject to preemptive
rights, with no personal liability attaching thereto.
3.14 Ownership of Seller Common Stock. Neither the Buyer nor, to its
best knowledge, any of its affiliates or associates (as such terms are defined
under the Exchange Act), (a) beneficially own, directly or indirectly, or (b)
are parties to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of, in each case, shares of capital
stock of the Seller, which in the aggregate represent five percent (5%) or more
of the outstanding shares of capital stock of the Seller entitled to vote
generally in the election of directors (other than shares in trust accounts,
managed accounts and the like that are beneficially owned by third parties (any
such shares, "Trust Account Shares") and any other shares held in respect of a
debt previously contracted (any such shares, "DPC Shares").
3.15 Financing. Buyer's ability to pay the total amount of the cash
consideration to be paid with respect to those shares of Seller Common Stock
that are converted into the Cash Distribution in accordance with Section 2.09(a)
above is not contingent upon raising additional equity capital or obtaining
specific financing from any third-party lender.
3.16 Buyer Benefit Plans. Buyer represents that with respect to each
employee pension benefit plan (as defined in Section 3(2) of ERISA ("Buyer
Pension Plan") and each employee welfare benefit plan (as defined in Section
3(1) of ERISA) ("Buyer Benefit Plan") which the Buyer, any subsidiary of Buyer
or any ERISA Affiliate maintains or to which the Buyer, any subsidiary of Buyer
or any ERISA Affiliate contributes, each such plan has been administered in
compliance with its terms in all material respects and is in compliance in all
material respects with the applicable provisions of ERISA, the Code and other
applicable laws, and each of the Buyer Pension Plans intended to qualify under
Section 401(a) of the Code is so qualified. Neither the Buyer nor any subsidiary
of Buyer has taken any action, nor has any event occurred, that has resulted, or
will likely result in liability under Title IV of ERISA or has engaged in a
prohibited transaction (within the meaning of Section 406 of ERISA or Section
4975 of the Code).
3.17 Buyer Information. The information relating to the Buyer and its
subsidiaries to be contained or incorporated by reference in the Buyer
Registration Statement and the Proxy Statement, as described in Section 5.04
hereof, and any other documents filed with the SEC or any regulatory agency in
connection herewith, to the extent such information is provided in writing by
the Buyer, will not contain any untrue statement of a material fact or omit to
state a material fact necessary to make such information not misleading.
3.18 Disclosure. No representation or warranty contained in this
Agreement, and no statement contained in any certificate, list or other writing
furnished to the Seller pursuant to the provisions hereof, contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements herein or therein not misleading. No information
believed by Buyer to be material to Seller's interests in the transactions
contemplated by this Agreement, which has not otherwise been disclosed to Seller
in connection with this Agreement, has been intentionally withheld from Seller.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER AND THE BANK
Seller and the Bank hereby represent and warrant to Buyer as follows:
4.01 Corporate Organization.
(a) The Seller is a corporation duly organized, validly
existing and in good standing under the laws of the State of New
Hampshire. The Bank is a trust company duly organized and validly
existing under the laws of the State of New Hampshire. Each of the
Seller and the Bank has the corporate power and authority to own, lease
or operate all of its properties and assets and to carry on its
business as it is now being conducted, and is duly licensed or
qualified to do business in each jurisdiction in which the nature of
the business conducted by it or the character or location of the
properties and assets owned, leased or operated by it makes such
licensing or qualification necessary, except where the failure to be so
licensed or qualified would not result in, with respect to the Seller,
any Material Adverse Effect. The deposits of the Bank are insured by
the FDIC in accordance with the FDIA, and the Bank has paid all
assessments that have become due and payable to the FDIC. The Seller is
a bank holding company registered with the Federal Reserve Board under
the BHCA.
(b) Seller has no subsidiaries other than the Bank.
(c) The minute books of the Seller and its subsidiaries
contain complete and accurate records of all meetings and other
corporate actions authorized at such meetings held or taken since
December 31, 1992 by its stockholders and Board of Directors. The
articles of incorporation and the by-laws of the Seller and the Bank,
copies of which have been provided to the Buyer, are true, complete and
correct copies of such documents as in effect on the date hereof.
4.02 Capitalization.
(a) Subject to stockholder approval, to the extent required by
applicable law, if at all, the authorized capital stock of the Seller
consists of 2,000,000 shares of common stock, par value $.10 per share
(the "Seller Common Stock"), and no shares of preferred stock. As of
the date of this Agreement, there were 1,478,750 shares of the Seller
Common Stock issued and outstanding, -0- shares of the Seller Common
Stock held in the Seller's treasury and 65,000 shares of the Seller
Common Stock reserved and available for future issuance under
outstanding options under the Seller Employee Option Agreements.
Subject to any required stockholder approval, all issued and
outstanding shares of the Seller Common Stock have been duly authorized
and validly issued and are fully paid, nonassessable and free of
preemptive rights, with no personal liability attaching to the
ownership thereof. Except as referred to in this Section 4.02 and
except for the Seller Employee Option Agreements, the Seller does not
have and is not bound by any outstanding subscriptions, options,
warrants, calls, commitments or agreements of any character calling for
the Seller to issue, deliver or sell, or cause to be issued, delivered
or sold any shares of the Seller Common Stock or any other equity
security of the Seller or any the Seller subsidiary or any securities
convertible into, exchangeable for or representing the right to
subscribe for, purchase or otherwise receive any shares of the Seller
Common Stock or any other equity security of the Seller or any Seller
subsidiary or obligating the Seller to grant, extend or enter into any
such subscriptions, options, warrants, calls, commitments or
agreements. As of the date hereof, there are no outstanding contractual
obligations of the Seller to repurchase, redeem or otherwise acquire
any shares of capital stock of the Seller or any Seller subsidiary.
(b) Section 4.02(b) to the disclosure schedule prepared by the
Seller and delivered to the Buyer on the date hereof in conjunction
with the parties' execution and delivery of this Agreement (the "Seller
Disclosure Schedule") lists each of the subsidiaries of the Seller as
of the date of this Agreement and indicates for such subsidiary as of
such date: (i) the number, percentage and type of equity securities
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owned or controlled by the Seller; and (ii) the jurisdiction of
incorporation. No subsidiary of the Seller has or is bound by any
outstanding subscriptions, options, warrants, calls, commitments or
agreements of any character calling for such Seller subsidiary to
issue, deliver or sell, or cause to be issued, delivered or sold, any
equity security of the Seller or of any Seller subsidiary or any
securities convertible into, exchangeable for or representing the right
to subscribe for, purchase or otherwise receive any such equity
security or obligating a Seller subsidiary to grant, extend or enter
into any such subscriptions, options, warrants, calls, commitments or
agreements. As of the date hereof, there are no outstanding contractual
obligations of any Seller subsidiary to repurchase, redeem or otherwise
acquire any shares of capital stock of the Seller or any Seller
subsidiary. All of the shares of capital stock of each of the Seller's
subsidiaries held by the Seller are fully paid and nonassessable and
are owned by the Seller free and clear of any claim, lien, encumbrance
or agreement with respect thereto.
4.03 Authority; No Violation.
(a) The Seller has full corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby have been duly
and validly approved by the Board of Directors of the Seller. The Board
of Directors of Seller has directed that this Agreement and the
transactions contemplated hereby be submitted to the stockholders of
the Seller for approval at a meeting of such stockholders and no other
corporate proceedings on the part of Seller are necessary to consummate
any of the transactions so contemplated by this Agreement. This
Agreement has been duly and validly executed and delivered by the
Seller and (assuming due authorization, execution and delivery of this
Agreement by the Buyer) constitutes the valid and binding obligation of
the Seller, enforceable against it in accordance with its terms, except
that enforcement thereof may be limited by the receivership,
conservatorship and supervisory powers of bank regulatory agencies
generally as well as bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting enforcement of creditors' rights
generally and except that enforcement thereof may be subject to general
principles of equity (regardless of whether enforcement is considered
in a proceeding in equity or at law) and the availability of equitable
remedies.
(b) The Bank has full corporate power and authority to execute
and deliver the Bank Merger Agreement and to consummate the Bank
Merger. The execution and delivery of the Bank Merger Agreement and the
consummation of the Bank Merger have been duly and validly approved by
the Board of Directors of the Bank and by the Seller as the sole
stockholder of the Bank. No other corporate proceedings on the part of
the Bank are necessary to consummate the Bank Merger. The Bank Merger
Agreement has been duly and validly executed by the Bank and (assuming
due authorization, execution and delivery by the Savings Association)
constitutes the valid and binding obligation of the Bank, enforceable
against the Bank in accordance with its terms, except that enforcement
thereof may be limited by receivership, conservatorship and supervisory
powers of bank regulatory agencies generally as well as bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
enforcement of creditors' right generally and except that enforcement
thereof may be subject to general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law)
and the availability of equitable remedies.
(c) Neither the execution and delivery of this Agreement and
the Bank Merger Agreement by the Seller and the Bank, as applicable,
nor the consummation by the Seller and the Bank of the transactions
contemplated hereby and thereby, nor compliance by the Seller and the
Bank, as applicable, with any of the terms or provisions hereof or
thereof, will (i) assuming that the consents and approvals referred to
in Section 4.04 are duly obtained, violate any statute, code,
ordinance, rule, regulation, judgment, order, writ, decree or
injunction applicable to the Seller or any of its subsidiaries or any
of their respective properties or assets, or (ii) except as set forth
in Section 4.03(c) of the Seller Disclosure Schedule, violate, conflict
with, result in a breach of any provisions of, constitute a default (or
an event which, with notice or lapse of time, or both, would constitute
a default) under, result in the termination of, accelerate the
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performance required by, or result in a right of termination or
acceleration or the creation of any lien, security interest, charge or
other encumbrance upon any of the respective properties or assets of
the Seller or any of its subsidiaries under, any of the terms,
conditions or provisions of (A) the articles of incorporation or other
charter documents of like nature or by-laws of the Seller or such
Seller subsidiary, as the case may be, or (B) any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other instrument
or obligation to which the Seller or any of its subsidiaries is a party
thereto as issuer, guarantor or obligor, or by which they or any of
their respective properties or assets may be bound or affected, except,
in the case of clause (ii)(B) above, for such violations, conflicts,
breaches or defaults which either individually or in the aggregate will
not result, with respect to the Seller, in a Material Adverse Effect.
4.04 Consents and Approvals. Except for consents, waivers or approvals
of, notices to, or filings or registrations with, the Federal Reserve Board, the
Massachusetts Board, the OTS, the New Hampshire Commissioner, the SEC, the DOJ,
the Delaware Secretary of State, the New Hampshire Secretary of State or as may
be set forth in Section 4.04 or 4.03(c) of the Seller Disclosure Schedule, no
consents, waivers or approvals of, notices to, or filings or registrations with,
any public body or authority are necessary, and no permits, consents, waivers,
clearances, approvals or authorizations of or notices to any non-governmental or
non-regulatory third parties (which term does not include the Board of Directors
or the stockholders of the Seller and the Bank) are necessary, in connection
with the execution and delivery by the Seller and the Bank, as applicable, of
this Agreement and the Bank Merger Agreement or the consummation by the Seller
and the Bank, as applicable, of the transactions contemplated by such
agreements. The affirmative vote of holders of a majority of the outstanding
shares of the Seller Common Stock is the only vote of the holders of any class
or series of the Seller's capital stock or other securities necessary to approve
this Agreement and the transactions contemplated hereby, including without
limitation the Acquisition Merger and the Bank Merger.
4.05 Financial Statements. The Seller has made available to the Buyer
copies of (a) the consolidated balance sheets of the Seller and its subsidiaries
as of December 31 for the fiscal years 1993 through 1995, inclusive, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the fiscal years 1993 through 1995, inclusive, in each case
accompanied by the audit report of Seller's independent accountants (Shatswell,
MacLeod & Company, P.C. for the years ended December 31, 1995 and December 31,
1994 and Grant Thornton LLP for the year ended December 31, 1993) and (b) the
unaudited consolidated balance sheets of Seller and its subsidiaries as of June
30, 1996 and June 30, 1995 and the related unaudited consolidated statements of
income and changes in stockholders' equity for the six months ended June 30,
1996 and June 30, 1995, all as prepared by Seller's management. The December 31,
1995 consolidated balance sheet of the Seller (the "Seller Balance Sheet")
(including the related notes, where applicable) and the other financial
statements referred to herein (including the related notes, where applicable)
fairly present, and the financial statements to be included in any reports or
statements to be filed by the Seller with the Federal Reserve Board, the FDIC or
any other governmental agency or otherwise provided to Buyer after the date
hereof will fairly present, the consolidated financial position and results of
the consolidated operations and cash flows and changes in shareholders' equity
of the Seller and its subsidiaries for the respective fiscal periods or as of
the respective dates therein set forth; and each of such statements (including
the related notes, where applicable) has been and will be prepared in accordance
with GAAP consistently applied during the periods involved, except as otherwise
set forth in the notes thereto (subject, in the case of unaudited interim
statements, to normal year-end adjustments). The books and records of the Seller
and its subsidiaries have been, and are being, maintained in accordance with
GAAP and applicable legal and regulatory requirements and reflect only actual
transactions.
4.06 Absence of Undisclosed Liabilities. As of December 31, 1995, none
of the Seller or any of its subsidiaries had any obligation or liability
(contingent or otherwise) that is material on a consolidated basis to the
Seller, or that when combined with all similar obligations or liabilities would
be material on a consolidated basis to the Seller, except as disclosed or
reflected in the Seller's interim financial statements at and for the period
ended June 30, 1996 or Section 4.06 of the Seller Disclosure Schedule.
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4.07 Broker's Fees. Neither the Seller or any of its subsidiaries nor
any of their respective officers or directors has employed any broker or finder
or incurred any liability for any broker's fees, commissions or finder's fees in
connection with any of the transactions contemplated by this Agreement and the
Bank Merger Agreement, except that Seller has engaged, and will pay a fee or
commission to, Keefe, Bruyette & Woods, Inc.
4.08 Absence of Certain Changes or Events. Except as disclosed in
Schedule 4.08 of the Seller Disclosure Schedule, since December 31, 1995 the
Seller and its subsidiaries have not incurred any material liability, except in
the ordinary course of their business consistent with their past practices, nor
has there been any change in the business, assets, condition (financial or
otherwise) or results of operations of the Seller or any of its subsidiaries
which has had or could be reasonably expected to have, individually or in the
aggregate, a Material Adverse Effect on the Seller.
4.09 Legal Proceedings. Except as disclosed in Section 4.09 of the
Seller Disclosure Schedule, there is no pending or threatened legal,
administrative, arbitral, or other proceeding, claim, action or governmental
investigation against the Seller or any subsidiary of the Seller or challenging
the validity or propriety of the transactions contemplated by this Agreement or
the Bank Merger Agreement, as to which there is a reasonable probability of an
adverse determination and which, if adversely determined, would have or could be
reasonably expected to have, individually or in the aggregate, a Material
Adverse Effect on the Seller or otherwise materially adversely affect the
Seller's or the Bank's ability to perform its obligations under this Agreement
or the Bank Merger Agreement, as applicable, nor is there any judgment, decree,
injunction, rule or order of any legal, administrative or governmental body or
arbitrator outstanding against the Seller or any subsidiary of the Seller having
any such effect.
4.10 Taxes and Tax Returns. Except as may be set forth in Section 4.10
of the Seller Disclosure Schedule:
(a) The Seller has timely filed all Tax Returns required to be
filed by it, each such Tax Return has been prepared in compliance with
all applicable laws and regulations, and all such Tax Returns are true
and accurate in all respects material to the financial condition of the
Seller and its subsidiaries, taken as a whole. All Taxes shown on such
Tax Returns as due and payable by Seller have been paid and Seller will
not be liable for any additional Taxes for any taxable period ending on
or before the Effective Time in excess of the amounts set up as
reserves for taxes on the Seller Balance Sheet. Seller has made
available to Buyer correct and complete copies of all federal income
Tax Returns filed with respect to Seller for taxable periods ended on
or after December 31, 1990, and all examination reports, and statements
of deficiencies assessed against or agreed to by Seller with respect to
such taxable periods;
(b) Seller has neither requested nor been granted an extension
of the time for filing any Tax Return to a date later than the
Effective Time;
(c) With respect to each taxable period of Seller, either such
taxable period has been audited by the relevant taxing authority or the
time for assessing or collecting income Tax with respect to each such
taxable period has closed and such taxable period is not subject to
review by any relevant taxing authority;
(d) Seller has not consented to extend the time in which any
Tax may be assessed or collected by any tax authority;
(e) No deficiency or proposed adjustment which has not been
settled or otherwise resolved for any amount of Tax has been asserted
or assessed by any taxing authority against Seller, and Seller has not
executed or entered into a closing agreement pursuant to Code Section
7121 or any predecessor provision thereof or any similar provision of
state, local or foreign law;
(f) There is no action, suit, taxing authority proceeding or
audit now in progress, pending or, to the knowledge of Seller,
threatened against or with respect to Seller with respect to any Tax;
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(g) No claim has ever been made by a taxing authority in a
jurisdiction where Seller does not pay Tax or file Tax Returns that
Seller is or may be subject to Taxes assessed by that jurisdiction;
(h) There are no liens for Taxes (other than current Taxes not
yet due and payable) on the assets of Seller;
(i) Seller has not filed or been included in a combined,
consolidated or unitary income Tax Return (other than consolidated Tax
Returns in which it is the parent corporation);
(j) Seller has neither made nor is affected by any elections
under Code Sections 108(b)(5), 338(g), or 565, or Treasury Regulation
Section 1.1502-20(g);
(k) Seller is not a party to or bound by any Tax allocation or
Tax sharing agreement nor does Seller have any current or potential
contractual obligation to indemnify any other person or entity with
respect to Taxes (other than the tax sharing agreement among Seller and
its subsidiaries, a copy of which has been made available to Buyer);
(l) Seller has withheld and paid all Taxes required to have
been withheld and paid in connection with amounts paid or owing to any
employee, creditor, independent contractor or other third party;
(m) Seller has no permanent establishment in any foreign
country, as defined in the relevant tax treaty between the United
States of America and such foreign country, nor otherwise operates or
conducts business through any branch in any foreign country;
(n) Seller will not be required, as a result of a change in
method of accounting for any period ending on or before the Effective
Time, to include any adjustment under Section 481(c) of the Code (or
any similar or corresponding provision or requirement of federal,
state, local or foreign income Tax law) in taxable income for any
period ending after the Effective Time;
(o) None of the assets of Seller directly or indirectly
secures any indebtedness the interest on which is tax-exempt under
Section 103(a) of the Code, and Seller is not directly or indirectly an
obligor or a guarantor with respect to any such indebtedness;
(p) Seller has not filed a consent under Code Sec. 341(f)
concerning collapsible corporations;
(q) Seller has not made any payments, nor is obligated to make
any payments, nor is it a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code Sec. 280G;
(r) Seller and each of its subsidiaries is not currently, has
not been within the last five years and does not anticipate becoming a
"United States real property holding corporation" within the meaning of
Code Section 897(c) .
(s) The liabilities of the Bank will not, as of the Bank
Merger Effective Time, exceed the tax basis of its assets;
(t) For purposes of this Section 4.10:
(A) "Tax" means any federal, state, local or foreign
income, gross receipts, franchise, estimated, alternative
minimum, add-on minimum, sales, use, transfer, registration,
value added,
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excise, natural resources, severance, stamp, occupation,
premium, windfall profit, environmental, customs, duties, real
property, personal property, capital stock, intangibles,
social security, unemployment, disability, payroll, license,
employee or other tax or levy, of any kind whatsoever,
including any interest, penalties or additions to tax in
respect of the foregoing.
(B) "Tax Return" means any return, declaration,
report, claim for refund, information return or other document
(including any related or supporting estimates, elections,
schedules, statements or information) filed or required to be
filed in connection with the determination, assessment or
collection of any Tax or the administration of any laws,
regulations or administrative requirements relating to any
Tax.
4.11 Employees. Except as set forth in Section 4.11 of the Seller
Disclosure Schedule:
(a) Neither the Seller, any of its subsidiaries, nor any ERISA
Affiliate of the Seller or any of its subsidiaries maintains or
contributes to any "employee pension benefit plan" (the "Seller Pension
Plans"), as such term is defined in Section 3(2) of ERISA, "employee
welfare benefit plan" (the "Seller Benefit Plans"), as such term is
defined in Section 3(1) of ERISA, for the employees of Seller, any of
its subsidiaries, or any ERISA Affiliate of Seller or any of its
subsidiaries, and neither Seller nor any of its subsidiaries maintains
or contributes to any stock option plan, stock purchase plan, deferred
compensation plan, other employee benefit plan for employees of the
Seller or any subsidiary thereof, or any other plan, program or
arrangement of the same or similar nature that provides benefits to
non-employee directors of the Seller or any subsidiary thereof
(collectively, the "Seller Other Plans").
(b) The Seller shall have delivered to the Buyer prior to, or
contemporaneously with, the delivery of the Seller Disclosure Schedule
a complete and accurate copy of each of the following with respect to
each of the Seller Pension Plans, the Seller Benefit Plans and the
Seller Other Plans: (i) plan document; (ii) trust agreement or
insurance contract, if any; (iii) most recent IRS determination letter,
if any; (iv) most recent actuarial report, if any; and (v) most recent
annual report on Form 5500, if any.
(c) The current value of the assets of each of the Seller
Pension Plans subject to Title IV of ERISA exceeds that plan's "Benefit
Liabilities" as that term is defined in Section 4001(a)(16) of ERISA,
when determined under actuarial factors that would apply if that plan
terminated in accordance with all applicable legal requirements .
(d) Neither Seller, any of its subsidiaries, any of their
ERISA Affiliates, nor any plan administrator of a Seller Pension Plan
subject to Title IV of ERISA has given notice of intent to terminate
such plan, nor, to the knowledge of Seller or any of its subsidiaries,
has the PBGC instituted proceedings to terminate any such plan.
(e) Neither Seller, any of its subsidiaries, nor any of their
ERISA Affiliates has incurred any liability to the PBGC (other than for
premium payments that are not yet due), to any Seller Pension Plan
subject to Title IV of ERISA, or to any trustee under Section 4042 of
ERISA, on account of the termination of or withdrawal as a contributing
employer from, any Seller Pension Plan, which liability has not been
satisfied in full as of the date of this representation.
(f) Each of the Seller Pension Plans and each of the Seller
Benefit Plans has been administered in compliance with its terms in all
material respects and is in compliance in all material respects with
the applicable provisions of ERISA (including, but not limited to, the
funding and prohibited transactions provisions thereof), the Code and
other applicable laws.
(g) There has been no reportable event within the meaning of
Section 4043(c) of ERISA (except for any such event, notice of which
has been waived by PBGC regulation) or any waived funding deficiency
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within the meaning of Section 412(d)(3) (or any predecessor section) of
the Code with respect to any Seller Pension Plan.
(h) There is no "accumulated funding deficiency" (within the
meaning of Section 302 of ERISA and Section 412 of the Code), whether
or not waived, with respect to any Seller Pension Plan. The Seller, its
subsidiaries, and their ERISA Affiliates have made all contributions to
the Seller Pension Plans and Seller Benefit Plans required thereunder
as of the date of this representation, and have established adequate
reserves on their books for all contributions to Seller Pension Plans
and Seller Benefit Plans required thereunder for the period prior to
the date of this representation, to the extent such contributions are
not required to have been made, and have not been made, prior to the
date of this representation.
(i) Neither the Seller, any of its subsidiaries, nor any of
their ERISA Affiliates has, since September 2, 1974, contributed to any
"Multiemployer Plan," as such term is defined in Section 3(37) of
ERISA.
(j) Each of the Seller Pension Plans which is intended to be a
qualified plan within the meaning of Section 401(a) of the Code is so
qualified, and Seller is not aware of any fact or circumstance which
would adversely affect the qualified status of any such plan.
(k) Neither the Seller nor any of its subsidiaries has engaged
in a prohibited transaction (within the meaning of Section 406 of ERISA
or Section 4975 of the Code) which could have a Material Adverse Effect
on Seller or its subsidiaries.
(l) There are no material pending or, to the knowledge of the
Seller, threatened or anticipated claims by or on behalf of any of the
Seller Pension Plans, Seller Benefit Plans, or Seller Other Plans, by
any employee or beneficiary covered under any such plan, or otherwise
involving such plan, other than routine claims for benefits.
(m) Neither Seller, any of its subsidiaries, nor any of their
ERISA Affiliates is party to or maintains any contract or other
arrangement with any employee or group of employees, providing
severance payments, stock or stock-equivalent payments or
post-employment benefits other than health benefit continuation rights
under federal or state law, of any kind or providing that any otherwise
disclosed plan, program or arrangement will irrevocably continue, with
respect to any or all of its participants, for any period of time.
4.12 Agreements with Banking Authorities. Except as set forth in
Section 4.12 of the Seller Disclosure Schedule, neither the Seller nor any of
its subsidiaries is a party to any commitment letter, written agreement,
memorandum of understanding or order to cease and desist with, or has adopted
any resolutions at the request of, any federal or state governmental entity
charged with the supervision or regulation of banks or bank holding companies or
engaged in the insurance of bank deposits which restricts materially the conduct
of its business, or in any manner relates to its capital adequacy, credit
policies, management or overall safety and soundness or such entity's ability to
perform its obligations hereunder (any of which being referred to herein as a
"Regulatory Agreement"), and the Bank is in compliance in all material respects
with all of the requirements of any such Regulatory Agreement.
4.13 Material Agreements. Except as disclosed in Section 4.13 of the
Seller Disclosure Schedule and except for this Agreement and the agreements
specifically referred to herein, neither the Seller nor any of its subsidiaries
is a party to or is bound by (a) any agreement, arrangement, or commitment other
than contracts entered into in the ordinary course of the Bank's banking
business that are consistent with past practice and have terms of not more than
one year and require payments by the Seller or any subsidiary of not more than
$25,000 annually; (b) any written (or oral, if material) agreement, arrangement,
or commitment relating to the employment (including severance) of any person;
(c) any contract, agreement, or understanding with any labor union; or (d) any
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other contract or agreement or amendment thereto that is material to the
business, operations, results of operations or condition (financial or
otherwise) of the Seller on a consolidated basis.
4.14 Ownership of Property. The Seller and its subsidiaries have good
and marketable title to all assets and properties, whether real or personal,
tangible or intangible (including, without limitation, the capital stock of its
subsidiaries and all other assets and properties), reflected on the Seller
Balance Sheet, or acquired subsequent thereto subject to no encumbrances, liens,
mortgages, security interests or pledges, except (a) those items that secure
liabilities that are reflected in the Seller Balance Sheet or the notes thereto
or incurred in the ordinary course of business after the date of such balance
sheet, (b) statutory liens for amounts not yet delinquent or which are being
contested in good faith, (c) those items that secure public or statutory
obligations or any discount with, borrowing from, or other obligations to any
Federal Reserve Bank, Federal Home Loan Bank, inter-bank credit facilities, or
any transaction by the Seller or any subsidiary acting in a fiduciary capacity,
and (d) such encumbrances, liens, mortgages, security interests, and pledges
that are not in the aggregate material to the Seller on a consolidated basis.
The Seller and its subsidiaries as lessees have the right under valid and
existing leases to use, possess and control all of the personal property and
real estate leased by Seller and its subsidiaries as presently used, possessed
and controlled by the Seller and its subsidiaries.
4.15 Reports. Since January 1, 1993, the Seller and its subsidiaries
have filed, and subsequent to the date hereof will file, all reports,
registrations and statements, together with any amendments required to be made
with respect thereto, that were and are required to be filed with (a) the
Federal Reserve Board, (b) the FDIC, (c) the New Hampshire Commissioner and (d)
any applicable state securities authorities (except, in the case of state
securities authorities, no such representation is made as to filings which are
not material) (all such reports, registrations and statements have been or will
be, as applicable, made available by Seller to Buyer and are collectively
referred to herein as the "Seller Reports"). As of their respective dates, the
Seller Reports complied and, with respect to filings made after the date of this
Agreement, will at the date of filing comply, in all material respects with all
of the statutes, rules and regulations enforced or promulgated by the regulatory
authority with which they were filed. As of their respective dates, the Seller
Reports did not contain and, with respect to filings made after the date of this
Agreement, will not at the date of filing contain, any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
4.16 Compliance with Applicable Law. Seller and its subsidiaries hold
all material licenses, franchises, permits and authorizations necessary for the
lawful conduct of Seller's consolidated business, and each of the Seller, its
subsidiaries and each "institution-affiliated party" of Seller or the Bank, as
such term is defined in Section 3(u) of the FDIA, has complied with and is not
in default in any respect under any, applicable law, statute, order, rule,
regulation or policy of, or agreement with, any federal, state or local
governmental agency or authority relating to the Seller or its business on a
consolidated basis or any such institution-affiliated party, other than where
such default or noncompliance does not have and could not reasonably be expected
to have a Material Adverse Effect on Seller or otherwise materially adversely
affect Seller's or the Bank's ability to perform its obligations under this
Agreement or the Bank Merger Agreement, as applicable, or otherwise result in
the imposition of civil money penalties or other financial penalty under Section
8(i) of the FDIA or applicable state law ("CMPs") on the Seller, the Bank or any
such institution-affiliated party, and neither the Seller nor the Bank has
received notice of any violation of, or commencement of any proceeding in
connection with any violation (including without limitation any hearing or
investigation relating to the imposition or contemplated imposition of CMPs) of
any such law, statute, order, rule, regulation, policy or agreement, which could
have any such result.
4.17 Environmental Matters. Except as disclosed in Section 4.17 of the
Seller Disclosure Schedule, Seller and its subsidiaries are in compliance and to
the knowledge of Seller have always been in compliance with all environmental
laws, rules, regulations and standards promulgated, adopted or enforced by the
United States Environmental Protection Agency (the "EPA") and of similar
agencies in states in which they conduct their respective business, except for
any noncompliance that singly or in the aggregate would not have a Material
Adverse Effect on Seller. Except as disclosed in Section 4.17 of the Disclosure
Schedule, there is no suit, claim, action or proceeding now pending before any
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court, governmental agency or board or other forum or, to the knowledge of
Seller, threatened by any person, as to which there is a reasonable probability
of an adverse determination and which, if adversely determined, would,
individually or in the aggregate, have a Material Adverse Effect on Seller (i)
for alleged noncompliance with any environmental law, rule or regulation or (ii)
relating to the discharge or release into the environment of any hazardous
material or waste at or on a site presently or formerly owned, leased or
operated by Seller or any subsidiary of Seller or to the knowledge of Seller in
which Seller or any Seller subsidiary has a lien or other security interest.
4.18 Antitakeover Statutes Not Applicable. Assuming the accuracy of
Buyer's representation in Section 3.14 above, no "fair price," "moratorium,"
"control share acquisition" or other form of antitakeover statute or regulation
is applicable to the transactions contemplated by this Agreement.
4.19 Ownership of Buyer Common Stock. As of the date hereof, neither
the Seller nor, to its best knowledge, any of its affiliates or associates (as
such terms are defined under the Exchange Act), (a) beneficially own, directly
or indirectly, or (b) are parties to any agreement, arrangement or understanding
for the purpose of acquiring, holding, voting or disposing of, in each case,
shares of capital stock of the Buyer, which in the aggregate represent five
percent (5%) or more of the outstanding shares of capital stock of the Buyer
entitled to vote generally in the election of directors (other than Trust
Account Shares or DPC Shares).
4.20 Insurance. The Seller and each of its subsidiaries is presently
insured, and since January 1, 1993 has been insured, for reasonable amounts
against such risks as companies engaged in a similar business in a similar
location would, in accordance with good business practice, customarily be
insured.
4.21 Labor. No work stoppage involving the Seller or any of its
subsidiaries is pending or, to the best knowledge of the Seller, threatened.
Neither the Seller nor any of its subsidiaries is involved in, or, to the best
knowledge of the Seller, threatened with or affected by, any dispute,
arbitration, lawsuit or administrative proceeding relating to labor or
employment matters which might reasonably be expected to result in a Material
Adverse Effect with respect to the Seller. No employees of the Seller or any of
its subsidiaries are represented by any labor union, and, to the best knowledge
of the Seller, no labor union is attempting to organize employees of the Seller
or any of its subsidiaries.
4.22 Material Interests of Certain Persons. Except as disclosed in
Section 4.22 of the Seller Disclosure Schedule, no officer or director of the
Seller, or any "associate" (as such term is defined in Rule 14a-1 under the
Exchange Act) of any such officer or director, has any material interest in any
material contract or property (real or personal), tangible or intangible, used
in or pertaining to the business of the Seller or any of its subsidiaries.
4.23 Absence of Registration Obligations. Neither the Seller nor any of
its subsidiaries is under any obligation, contingent or otherwise, by reason of
any agreement to register or otherwise issue any of its securities which will
continue after the Effective Time.
4.24 Loans. All currently outstanding loans of, or current extensions
of credit by, Seller or the Bank (individually, a "Loan," and collectively, the
"Loans") were solicited, originated and currently exist in material compliance
with all applicable requirements of federal and state statutory and common law
and regulations and regulatory policies promulgated thereunder. Except as
disclosed in Section 4.24 of the Seller Disclosure Schedule, each note
evidencing a Loan or loan or credit agreement or security instrument related to
the Loans constitutes a valid, legal and binding obligation of the obligor
thereunder, enforceable in accordance with the terms thereof, except where the
failure thereof, individually or in the aggregate, would not have a Material
Adverse Effect with respect to Seller. To the best of Seller's knowledge, there
are no oral modifications or amendments or additional agreements related to the
Loans that are not reflected in Seller's records, no claims of defense as to the
enforcement of any Loan has been asserted and Seller is aware of no acts or
omissions which would give rise to any claim or right of rescission, set-off,
counterclaim or defense, except where any of the foregoing would not have,
either individually or in the aggregate, a Material Adverse Effect with respect
to Seller. Seller currently maintains, and shall continue to maintain, an
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allowance for loan losses allocable to the Loans which is adequate to provide
for all known and estimable losses, net of any recoveries relating to such
extensions of credit previously charged off, on the Loans, such allowance for
loan losses complying in all material respects with all applicable loan loss
reserve requirements established in accordance with GAAP and by any governmental
authorities having jurisdiction with respect to Seller or any of its
subsidiaries. Except as disclosed in Section 4.24 of the Seller Disclosure
Schedule, (i) none of the Loans are presently serviced by third parties and
there is no obligation which could result in any Loan becoming subject to any
third party servicing and (ii) no Loan has been sold with continuing recourse
liability on the part of Seller or any of its subsidiaries.
4.25 Investment Securities. Except as disclosed in Section 4.25 of the
Seller Disclosure Schedule, none of the investments reflected in the
consolidated balance sheet of Seller at June 30, 1996, and none of the
investments made by the Seller or the Bank since June 30, 1996, is subject to
any restriction (contractual, statutory or otherwise) that would materially
impair the ability of the entity holding such investment freely to dispose of
such investment at any time. Seller and the Bank have (a) properly reported as
such any investment securities which are required under GAAP to be classified as
"available for sale" at fair value, and (b) accounted for any decline in the
market value of its securities portfolio in accordance with Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 115, including
without limitation the recognition through the Seller's consolidated statement
of income of any unrealized loss with respect to any individual security as a
realized loss in the accounting period in which a decline in the market value of
such security is determined to be "other than temporary".
4.26 Derivative Transactions. Neither Seller nor the Bank has engaged
in transactions in or involving forwards, futures, options on futures, swaps or
other derivative instruments.
4.27 Intellectual Property. Seller and the Bank each owns or possesses
valid and binding licenses and other rights to use all material patents,
copyrights, trade secrets, trade names, servicemarks and trademarks used in its
businesses, each without payment, and neither Seller nor the Bank has received
any notice of conflict with respect thereto that asserts the rights of others.
Seller and the Bank have performed in all material respects all the obligations
required to be performed by them and are not in default in any material respect
under any contract, agreement, arrangement or commitment relating to any of the
foregoing.
4.28 Seller Information. The information relating to the Seller and its
subsidiaries to be contained or incorporated by reference in the Buyer
Registration Statement and the Proxy Statement as described in Section 5.04
hereof, and any other documents filed with the SEC or any regulatory agency in
connection herewith, to the extent such information is provided in writing by
the Seller, will not contain any untrue statement of a material fact or omit to
state a material fact necessary to make such information not misleading.
4.29 Disclosure. No representation or warranty contained in this
Agreement, and no statement contained in any certificate, list or other writing,
including but not necessarily limited to the Seller Disclosure Schedules,
furnished to the Buyer pursuant to the provisions hereof, contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements herein or therein not misleading. No information
believed by Seller to be material to Buyer's interests in the transactions
contemplated by this Agreement, which has not otherwise been disclosed to Buyer
in connection with this Agreement, has been intentionally withheld from Buyer.
ARTICLE V
COVENANTS OF THE PARTIES
5.01 Conduct of the Business of Seller. During the period from the date
of this Agreement to the Effective Time, and except as may be specifically
required or permitted pursuant to this Agreement or as specifically described in
Section 5.01 of the Seller Disclosure Schedule, the Seller and the Bank:
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(a) shall, and shall cause each of its subsidiaries to,
conduct its business and engage in transactions only in the ordinary
and usual course of business consistent with past practices, which
shall mean (i) conducting its banking, trust and other businesses in
the ordinary and usual course, (ii) refraining from any of the
activities described in Section 5.01(b) below and (iii) not entering
into any material transactions except in the ordinary and usual course
of business consistent with past practices;
(b) shall not and shall not permit any of its subsidiaries to,
without the prior written consent of the Buyer:
(i) engage or participate in any material transaction
or incur or sustain any material obligation or liability
except in the ordinary, regular and usual course of its
businesses consistent with past practices, including without
limitation entering into any settlement agreement or
understanding with respect to any material litigation matters
(including without limitation those litigation matters
disclosed in Section 4.09 of the Seller Disclosure Schedule);
(ii) accept, renew or roll over any "brokered
deposit" as defined under 12 C.F.R. 337.6(a)(3) or offer an
interest rate with respect to any deposit that would either
constitute an impermissible interest rate with respect to
deposits of an undercapitalized insured depository institution
pursuant to the limitations contained under 12 C.F.R.
337.6(b)(3)(ii) or otherwise set interest rates on deposits
that depart from past practices of the Bank with respect to
the setting of interest rates on deposits, unless such
interest rates are necessary for the Bank to remain
competitive in its established market area;
(iii) except in the ordinary, regular and usual
course of business consistent with past practices (including
dispositions of foreclosed real estate) and in an immaterial
aggregate amount, sell, lease, transfer, assign, encumber or
otherwise dispose of or enter into any contract, agreement or
understanding to lease, transfer, assign, encumber or dispose
of any of its assets;
(iv) relocate, or file any application to relocate,
any branch office;
(v) terminate, or give any notice (written or verbal)
to customers or governmental authorities or agencies to
terminate the operations of any branch office; or
(vi) waive any material right, whether in equity or
at law, that it has with respect to any asset except in the
ordinary, regular and usual course of business (including loan
workouts) consistent with past practice;
(c) shall use all reasonable efforts, and cause each of its
subsidiaries to use all reasonable efforts, to preserve intact its
business organization and goodwill in all material respects, keep
available the services of its officers and employees as a group and
maintain satisfactory relationships with borrowers, depositors, other
customers and others having business relationships with it;
(d) shall, at the Buyer's request, use all reasonable efforts
to cooperate with the Buyer with respect to preparation for the
combination and integration of the businesses, systems and operations
of the Bank and the Savings Association, including without limitation
arranging for the termination or non-renewal of existing agreements and
arrangements with third-party service providers with respect to the
Bank's data processing and related electronic informational systems and
conversion thereof to appropriate systems used by the Savings
Association, and shall confer on a regular and frequent basis with one
or more representatives of the Buyer and/or the Savings Association to
report on operational and related matters;
(e) shall, subject to any restrictions under applicable law or
regulation, promptly notify the Buyer of any emergency or other change
in the normal course of its or its subsidiaries' businesses or in the
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operation of its or its subsidiaries' properties and of any
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated) if such emergency,
change, complaint, investigation or hearing would be material to the
assets, properties, liabilities, business, results of operations,
condition (financial or otherwise) or prospects of the Seller or any of
its subsidiaries;
(f) shall not declare or pay any dividends on or make any
other distributions in respect of the Seller Common Stock, except that
Seller shall be permitted to declare and pay a special cash dividend to
its stockholders of $0.20 per share if the Acquisition Merger has not
been completed by March 31, 1997 and shall be permitted to declare and
pay an additional special cash dividend to its stockholders of $0.20
per share if the Acquisition Merger has not been completed by June 30,
1997;
(g) except for the adoption of the Salary Continuation Policy
and Bonus Plan by the Board of Directors of Seller and the Bank, shall
not adopt or amend (other than amendments required by applicable law or
amendments that reduce amounts payable by it or its subsidiaries) in
any material respect any Seller Pension Plan, any Seller Benefit Plan
or any Seller Other Plan or enter (or permit any of its subsidiaries to
enter) into any employment, severance or similar contract with any
person (including, without limitation, contracts with management which
might require that payments be made upon the consummation of the
transactions contemplated hereby, including without limitation the
consummation of the Acquisition Merger and the Bank Merger) or amend
any such existing agreements, plans or contracts to increase any
amounts payable thereunder or benefits provided thereunder, or grant or
permit any increase in compensation to its or its subsidiaries'
employees as a class, except in the ordinary course of business
consistent with past practices, or pay any bonus except in accordance
with the terms of the Salary Continuation Policy and Bonus Plan or as
otherwise disclosed in Section 5.01(g) of the Seller Disclosure
Schedule;
(h) subject to its directors' fiduciary duties and obligations
referred to in Section 5.03 below, shall not, with respect to itself or
any of its subsidiaries, authorize, recommend, propose or announce an
intention to authorize, recommend or propose, or enter into an
agreement with respect to, any merger, consolidation, purchase and
assumption transaction or business combination (other than the
Acquisition Merger and the Bank Merger), any acquisition of a material
amount of assets or securities or assumption of liabilities (including
deposit liabilities), any disposition of a material amount of assets or
securities, or any release or relinquishment of any material contract
rights not in the ordinary course of business and consistent with past
practices;
(i) shall not propose or adopt amendments to its articles of
incorporation or by-laws, except as may be required pursuant to Section
4.02 above;
(j) shall not issue, deliver or sell any shares (whether
original issuance or from treasury shares) of its capital stock or
securities convertible into or exercisable for shares of its capital
stock (or permit any of its subsidiaries to issue, deliver or sell any
shares of such subsidiaries' capital stock or securities convertible
into or exercisable for shares of such subsidiaries' capital stock),
except upon exercise or fulfillment of options issued or existing on
the date hereof pursuant to the Seller Employee Option Agreements and
listed in Section 5.01(j) of the Seller Disclosure Schedule, or effect
any stock split, reverse stock split, recapitalization,
reclassification or similar transaction or otherwise change its equity
capitalization as it exists on the date hereof;
(k) shall not grant, confer or award any options, warrants,
conversion rights or other rights, not existing on the date hereof, to
acquire any shares of its capital stock;
(l) shall not purchase, redeem or otherwise acquire, or permit
any of its subsidiaries to purchase, redeem or otherwise acquire, any
shares of its capital stock or any securities convertible into or
exercisable for any shares of its capital stock, except in a fiduciary
capacity;
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(m) shall not impose, or suffer the imposition, on any share
of capital stock held by it or by any of its subsidiaries of any
material lien, charge, or encumbrance, or permit any such lien, charge,
or encumbrance to exist;
(n) shall not incur, or permit any of its subsidiaries to
incur, any additional debt obligation or other obligation for borrowed
money, or to guaranty any additional debt obligation or other
obligation for borrowed money, except in the ordinary course of
business consistent with past practices, which shall include but not
necessarily be limited to creation of deposit liabilities, purchases of
federal funds, sales of certificates of deposit, borrowings from the
Federal Home Loan Bank of Boston and entry into repurchase agreements
or other similar arrangements commonly employed by banks;
(o) shall not incur or commit to any capital expenditures or
any obligations or liabilities in connection therewith, other than
capital expenditures and such related obligations or liabilities
incurred or committed to in the ordinary and usual course of business
consistent with past practices, which, in all cases, do not
individually exceed $25,000 or cumulatively exceed $75,000;
(p) shall not change its methods of accounting in effect at
December 31, 1995, except as may be required by changes in GAAP as
concurred in by the Seller's and the Buyer's respective independent
auditors, and the Seller shall not change its fiscal year;
(q) shall file all reports, applications and other documents
required to be filed by it with the Federal Reserve Board, FDIC, New
Hampshire Commissioner and any other governmental agency or authority
between the date of this Agreement and the Effective Time and shall
furnish to the Buyer copies of all such reports promptly after the same
are filed;
(r) to the extent requested by Buyer, shall cooperate with
Buyer with the objective of seeking appropriate rescission of any
Regulatory Agreement in connection with the Bank Merger;
(s) shall not make any loan or extension of credit or enter
into any commitment therefor on other than the Bank's customary terms,
conditions and standards and in accordance with applicable law and
regulation and consistent with prudent banking practices, and in any
event shall provide Buyer with monthly reports of all loans, extensions
of credit and commitments therefor equal to or greater than $250,000,
individually, and shall consult with Buyer prior to making or entering
into any new loan, extension of credit or commitment therefor equal to
or greater than $500,000 individually, or which, when aggregated with
all other loans, extensions of credit and commitments therefor to a
single borrower or affiliated group of borrowers equals at least
$1,000,000; and
(t) shall not agree, in writing or otherwise, to take any of
the actions prohibited under this Section 5.01 or any action which
would make any of its representations or warranties contained in this
Agreement untrue or incorrect or would otherwise violate any of its
other agreements or commitments contained in this Agreement in any
material respect.
5.02 Access to Properties and Records; Confidentiality.
(a) The Seller shall permit the Buyer reasonable access to its
properties and those of its subsidiaries, and shall disclose and make
available to the Buyer all Records, including all books, papers and
records relating to the assets, stock ownership, properties,
operations, obligations and liabilities of the Seller and its
subsidiaries, including, but not limited to, all books of account
(including the general ledger), tax records, minute books of directors
and stockholders meetings, organizational documents, by-laws, material
contracts and agreements, filings with any regulatory authority,
accountants' work papers, litigation files, plans affecting employees,
and any other business activities or prospects in which the Buyer may
reasonably have an interest in light of the transactions contemplated
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hereby. The Seller shall make arrangements with each third party
provider of services to the Seller to permit the Buyer reasonable
access to all of the Seller's Records held by each such third party.
The Buyer shall permit the Seller reasonable access to such properties
and records of the Buyer and/or its subsidiaries in which the Seller
may reasonably have an interest in light of the transactions
contemplated hereby. Neither the Buyer nor the Seller nor any of their
respective subsidiaries shall be required to provide access to or to
disclose information where such access or disclosure would violate or
prejudice the rights of any customer, would jeopardize the
attorney-client privilege of the institution in possession or control
of such information, or would contravene any law, rule, regulation,
order, judgment, decree or binding agreement. The parties will use all
reasonable efforts to make appropriate substitute disclosure
arrangements under circumstances in which the restrictions of the
preceding sentence apply.
(b) All Confidential Information, as such term is defined
below, furnished by each party hereto to the other, or to any of its
affiliates or to any of its affiliates' directors, officers, employees,
or representatives or agents (such persons being referred to
collectively herein as "Representatives") shall be treated as the sole
property of the party furnishing the information until consummation of
the transactions contemplated hereby, and, if such transactions shall
not occur, the party receiving the information, or any of its
affiliates or Representatives, as the case may be, shall, upon request,
return to the party which furnished such information all documents or
other materials containing, reflecting or referring to such
information, shall keep confidential all such information for the
period hereinafter referred to, and shall not directly or indirectly at
any time use such information for any competitive or other commercial
purpose; provided, however, that the Buyer and its affiliates shall be
permitted to retain and share with their regulators, examiners and
auditors (who need to know such information and are informed of the
confidential nature thereof and directed to treat such information
confidentially), and with no other persons, such materials, files and
information relating to or constituting the Buyer's or any of its
affiliates' or Representatives' work product, presentations or
evaluation materials as the Buyer deems reasonably necessary or
advisable in connection with auditing or examination purposes, and
Buyer shall not make use of any such materials, files or information
for any other purpose. The obligation to keep such information
confidential shall continue for two years from the date this Agreement
is terminated or as long as may be required by law. In the event that
either party or its affiliates or Representatives are requested or
required in the context of a litigation, governmental, judicial or
regulatory investigation or other similar proceeding (by oral
questions, interrogatories, requests for information or documents,
subpoenas, civil investigative demands or similar process) to disclose
any Confidential Information, the party or its affiliate or its
Representative so requested or required will directly or through the
party or such affiliate or Representative, if practicable and legally
permitted, prior to providing such information, and as promptly as
practicable after receiving such request, provide the other party with
notice of each such request or requirement so that the other party may
seek an appropriate protective order or other remedy or, if
appropriate, waive compliance with the provisions of this Agreement.
If, in the absence of a protective order or the receipt of a waiver
hereunder, the party or affiliate or Representative so requested or
required is, in the written opinion of its counsel, legally required to
disclose Confidential Information to any tribunal, governmental or
regulatory authority, or similar body, the party or affiliate or
Representative so required may disclose that portion of the
Confidential Information which it is advised in writing by such counsel
it is legally required to so disclose to such tribunal or authority or
similar body without liability to the other party hereto for such
disclosure. The parties and their affiliates and Representatives will
exercise reasonable efforts, at the expense of the party who disclosed
Confidential Information to the other party, to obtain assurance that
confidential treatment will be accorded the information so disclosed.
As used in this Section 5.02(b), "Confidential Information" means all
data, reports, interpretations, forecasts and records (whether in
written form, electronically stored or otherwise) containing or
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otherwise reflecting information concerning the disclosing party or its
affiliates which is not available to the general public and which the
disclosing party or any affiliate or any of their respective
Representatives provides or has previously provided to the receiving
party or to the receiving party's affiliates or Representatives at any
time in connection with the transactions contemplated by this
Agreement, including but not limited to any information obtained by
meeting with Representatives of the disclosing party or its affiliates,
together with summaries, analyses, extracts, compilations, studies,
personal notes or other documents or records, whether prepared by the
receiving party or others, which contain or otherwise reflect such
information. Notwithstanding the foregoing, the following information
will not constitute "Confidential Information": (i) information that is
or becomes generally available to the public other than as a result of
a disclosure by the receiving party or any affiliate or Representative
of the receiving party without the consent of the party providing such
information (including without limitation all information of Seller
disclosed or otherwise utilized by Buyer, with the knowledge of Seller,
in connection with presentations to securities analysts or other
investor relations-related activities), (ii) information that was
previously known to the receiving party or its affiliates or
Representatives on a nonconfidential basis prior to its disclosure by
the disclosing party, its affiliates or Representatives, (iii)
information that became or becomes available to the receiving party or
any affiliate or Representative thereof on a nonconfidential basis from
a source other than the disclosing party or any affiliate or
Representatives of the disclosing party, provided that such source is
not known by the disclosing party or its affiliates or Representatives
to be subject to any confidentiality agreement or other legal
restriction on disclosing such information and (iv) information that
has been independently acquired or developed by the receiving party or
its affiliates or Representatives without violating the obligations of
this Section 5.02(b).
5.03 No Solicitation. Neither the Seller nor any of its subsidiaries
shall (and the Seller and each of its subsidiaries shall use all reasonable
efforts to cause its officers, directors, employees, representatives and agents,
including, but not limited to, investment bankers, attorneys and accountants,
not to), directly or indirectly, encourage, solicit, initiate or, subject to the
fiduciary obligations of the Seller's Board of Directors (as advised in writing
by outside counsel), participate in any discussions or negotiations with, or
provide any information to, any corporation, partnership, person or other entity
or group (other than the Buyer and its affiliates or representatives) concerning
any merger, tender offer, sale of substantial assets, sale of shares of capital
stock or debt securities or similar transaction involving the Seller or any of
its subsidiaries (any of the foregoing being referred to herein as an
"Acquisition Transaction"). Notwithstanding the foregoing, nothing contained in
this Section 5.03 shall prohibit the Seller or its Board of Directors from
taking and disclosing to the Seller's stockholders a position with respect to a
tender offer by a third party pursuant to Rules 14d-9 and 14e-2(a) promulgated
under the Exchange Act or from making such disclosure to the Seller's
stockholders which, in the judgment of the Board of Directors, with the written
advice of outside counsel, may be required under applicable law. The Seller will
immediately communicate to the Buyer the terms of any proposal, discussion,
negotiation or inquiry relating to an Acquisition Transaction and the identity
of the party making such proposal or inquiry which it may receive in respect of
any such transaction (which shall mean that any such communication shall be
delivered no less promptly than by telephone within twenty-four (24) hours of
the Seller's receipt of any such proposal or inquiry) or its receipt of any
request for information from the Federal Reserve Board, DOJ or any other
governmental agency or authority with respect to a proposed Acquisition
Transaction.
5.04 Regulatory Matters; Consents.
(a) The parties will cooperate in connection with (i) the
preparation and filing by the Buyer with the SEC under the Securities
Act of a registration statement on Form S-4 and/or such other form as
may be necessary or appropriate relating to the shares of the Buyer
Common Stock to be issued in connection with the Acquisition Merger
(the "Buyer Registration Statement"), and (ii) the preparation and
filing by the Buyer and the Seller of a joint proxy statement (the
"Proxy Statement") as shall be necessary or desirable in order to
consummate the transactions contemplated by this Agreement, each to be
undertaken as promptly as practicable, and the Buyer and the Seller
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will use their respective best efforts to have the Buyer Registration
Statement declared effective by the SEC and to mail the Proxy Statement
to the Buyer's and the Seller's stockholders as promptly as
practicable. The parties shall also take any reasonable action required
to be taken under any state "Blue Sky" laws in connection with the
consummation of the transactions contemplated by this Agreement. In
addition to the foregoing, neither party shall take or permit any of
its subsidiaries to take any action that materially adversely affects
its ability to consummate the transactions contemplated under this
Agreement or the Bank Merger Agreement in a timely manner.
(b) Each of the Seller and the Buyer will cooperate with the
other and use its best efforts to prepare all documentation, to effect
all filings and to obtain all permits, consents, approvals and
authorizations of all third parties and governmental bodies necessary
or appropriate to consummate the transactions contemplated by this
Agreement and the Bank Merger Agreement as promptly as practicable,
including without limitation that Seller shall use its best efforts to
obtain all of the non-governmental third-party permits, consents,
approvals and authorizations disclosed in Sections 4.03(c) and 4.04 of
the Seller Disclosure Schedule. Each party hereto shall have the right
to review and approve in advance all descriptions of it and its
subsidiaries which appear in any filing made in connection with the
transactions contemplated by this Agreement, including without
limitation all filings contemplated by Section 5.04(a) above, with any
governmental body. In exercising the foregoing right, the parties
hereto shall act reasonably and as promptly as practicable.
(c) The Buyer shall take all actions necessary or appropriate
to ensure that all shares of Buyer Common Stock received in the
Acquisition Merger are fully registered on the appropriate form to
facilitate sale of such shares by the holders in accordance with the
Securities Act (including in accordance with any applicable exemption
from registration requirements) to the extent customary in transactions
of this nature.
5.05 Approval of Stockholders. Each of the Buyer and Seller will (a) as
promptly as practicable, take all steps necessary to duly call, give notice of,
convene and hold a meeting of its stockholders for the purpose of approving, in
the case of the Seller, this Agreement and the transactions contemplated hereby,
including without limitation the Acquisition Merger, and in the case of the
Buyer, the issuance of Buyer Common Stock as contemplated by this Agreement,
and, in each case, for such other purposes as may be necessary or desirable, (b)
subject to the fiduciary duties of its board of directors as advised in writing
by outside counsel, recommend to its stockholders the approval of such foregoing
matters to be submitted by it to its stockholders, and (c) cooperate and consult
with each other with respect to each of the foregoing matters. Subject to the
fiduciary duties of its board of directors as advised in writing by outside
counsel, each of the Buyer and the Seller will use all reasonable efforts to
obtain the necessary approvals of its stockholders of the proposals described
above to be submitted by it in connection with this Agreement. If the Board of
Directors of either party is required by applicable law to review or restate the
recommendation to its stockholders contemplated in clause (b) of the preceding
sentence, this Section 5.05 shall not prohibit accurate disclosure by a party
that is required in any release or regulatory filing (including the Proxy
Statement and the Buyer Registration Statement) or otherwise under applicable
law in the opinion of such party's Board of Directors, upon the written advice
of outside counsel, as of the date of such release or regulatory filing or such
other required disclosure as to the transactions contemplated hereby or, in the
case of the Seller, as to any Acquisition Transaction.
5.06 Agreements of Seller's Affiliates. The Seller shall identify in a
letter to the Buyer, after consultation with counsel, all persons who, at the
time of the meeting of its stockholders referred to in Section 5.05 hereof, it
believes may be deemed to be "affiliates" of the Seller, as that term is defined
for purposes of paragraphs (c) and (d) of Rule 145 under the Securities Act,
(the "Seller Affiliates"). The Seller shall use all reasonable efforts to cause
each person who is identified as a Seller Affiliate in the letter referred to
above to deliver to the Buyer at least forty (40) days prior to the Closing Date
an executed copy of the Seller Affiliates Agreement. Prior to the Closing Date,
the Seller shall amend and supplement such letter and use all reasonable efforts
to cause each additional person who is identified as a Seller Affiliate as of
the Closing Date to execute a copy of the Seller Affiliates Agreement.
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5.07 Further Assurances. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use all reasonable efforts to, as
promptly as practicable, take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement and the Bank Merger Agreement or to vest the
Savings Association upon and after the Bank Merger Effective Time with full
title to all properties, assets, rights, approvals, immunities and franchises of
the Bank. In case at any time after the Effective Time or the Bank Merger
Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement or the Bank Merger Agreement or to vest the Savings
Association with full title to all properties, assets, rights, approvals,
immunities and franchises of the Bank, the proper officers and directors of each
party to this Agreement and the Bank Merger Agreement, as applicable, shall take
all such necessary action.
5.08 Disclosure Supplements. From time to time prior to the Effective
Time, and in any event immediately prior to the Effective Time, Seller will
promptly supplement or amend the Seller Disclosure Schedule with respect to any
matter hereafter arising which, if existing, occurring or known at the date of
this Agreement, would have been required to be set forth or described in the
Seller Disclosure Schedule or which is necessary to correct any information in
the Seller Disclosure Schedule which has become inaccurate. No such supplement
or amendment to the Seller Disclosure Schedules pursuant to this Section 5.08
shall have any effect for the purpose of determining satisfaction of any of the
conditions set forth in Article VI hereof.
5.09 Public Announcements. Except as otherwise required by law or the
rules of the NASD, the Seller and the Buyer will cooperate with each other in
the development and distribution of all news releases and other public
information disclosures with respect to this Agreement or any of the
transactions contemplated hereby.
5.10 Tax-Free Reorganization Treatment. None of the parties hereto or
any of their respective subsidiaries or affiliates has taken, shall take or
cause to be taken any action, whether before or after the Effective Time, which
would disqualify the Acquisition Merger or the Bank Merger as a reorganization
within the meaning of Section 368(a) of the Code. Each of the parties hereto
shall use all reasonable efforts to cause the Acquisition Merger and the Bank
Merger to qualify as tax-free reorganizations under Section 368(a) of the Code
and to obtain the opinions of counsel referred to in Sections 6.02(d) and
6.03(d) hereof.
5.11 Stock Exchange Listing. The Buyer shall cause the shares of the
Buyer Common Stock to be issued in connection with the Acquisition Merger to be
approved for listing on the NASDAQ-NMS, subject to official notice of issuance,
as of or prior to the Effective Time.
5.12 Employment and Benefit Matters.
(a) Maintenance of Plans; Benefits Service Credit. Buyer
agrees to provide to those persons who are employees of Seller or any
subsidiary of Seller at the Effective Time and who are employed by
Buyer or a subsidiary of Buyer thereafter with the benefits maintained
by Buyer and its affiliates from time to time for the benefit of their
employees similarly situated. Notwithstanding the foregoing provisions
of this paragraph 5.12(a), Buyer shall not be required to provide any
benefits with respect to persons who at the Effective Time are former
employees or beneficiaries of former employees of Seller, except as
provided under the terms of the governing documents of the Buyer
Pension Plans and Buyer Benefit Plans or as may be otherwise required
under any health benefit continuation rights provisions of federal or
state law. Buyer shall provide all such Buyer benefits as soon as
practicable following the Effective Time. Until such time as Buyer is
able to provide such benefits to such persons (such time being referred
to as the "Transition Date"), Buyer agrees to provide such persons with
the employee benefits set forth in Section 4.11 of the Seller
Disclosure Schedule as maintained for their benefit immediately prior
to the Effective Time. Buyer shall cause each plan, program or
arrangement included among the benefits of Buyer to be provided after
the Effective Time, except for the Buyer's defined benefit pension plan
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provided through SBERA, to treat the prior service of each such
employee with the Seller or its affiliates, to the extent such prior
service is recognized under the comparable plan, program or arrangement
of the Seller, as service rendered to Buyer or its affiliate, as the
case may be, for purposes of eligibility to participate, vesting, and
eligibility for special benefits under each such plan, program or
arrangement of Buyer, but not in any case for benefit accrual
attributable to any period before the Effective Time. Without limiting
the foregoing, Buyer and its affiliates shall not treat any employee of
Seller or any of its affiliates as a "new" employee for purposes of any
exclusion under any health or similar plan of Buyer or any of its
affiliates for a preexisting medical condition. Nothing herein shall
impose any obligation upon Buyer and its subsidiaries to maintain,
continue or adopt any employee pension plans, employee benefit plans,
or other benefit arrangements after the Transition Date, nor prohibit
the Buyer or its subsidiaries from amending any such plan or plans
after the Transition Date, to the extent permitted by the terms of such
plans and applicable law.
(b) Employment Obligations. Following the Effective Time
and/or the Bank Merger Effective Time, as applicable, Buyer shall, or
shall cause the Savings Association to, honor in accordance with their
terms all employment, severance and other compensation contracts
(including maintaining the interest-free nature of certain loans
provided by the Bank to employees for the purchase of personal computer
equipment) disclosed to Buyer under this Agreement between Seller or
any subsidiary thereof and any director, officer or employee thereof,
and all provisions for benefits or other amounts earned or accrued
through the Effective Time under the Seller Pension Plans or the Seller
Benefit Plans. Notwithstanding the foregoing, however, the parties
understand and agree that the Savings Association shall enter into new
employment and severance arrangements with Messrs. Thompson and Goss on
the Closing Date, which shall be consistent with the terms set forth on
Schedule 5.12 hereto, and such arrangements shall take the place of and
supersede the employment and severance arrangements presently in effect
for Messrs. Thompson and Goss with Seller and the Bank. Any employee of
Seller or any subsidiary of Seller who becomes an employee of Buyer or
any subsidiary of Buyer immediately following the Effective Time and
whose employment is involuntarily terminated at any time during the
twelve-month period from and after the Closing Date shall be entitled
to salary continuation and benefits in accordance with the terms and
conditions of the Salary Continuation Policy and Bonus Plan. Buyer
shall not be obligated under any circumstances to employ any person who
is employed by Seller immediately prior to the Effective Time;
provided, however, that Buyer's intention is to offer employment to as
many such persons as is reasonably practicable.
5.13 Directors' and Officers' Indemnification and Insurance.
(a) In the event of any threatened or actual claim, action,
suit, proceeding or investigation, whether civil, criminal or
administrative, including, without limitation, any such claim, action,
suit, proceeding or investigation in which any person who is now, or
has been at any time prior to the date of this Agreement, or who
becomes prior to the Effective Time, a director or officer or employee
of the Seller or any of Seller's subsidiaries (the "Indemnified
Parties") is, or is threatened to be, made a party based in whole or in
part on, or arising in whole or in part out of, or pertaining to (i)
the fact that he or she is or was a director, officer or employee of
the Seller or any of Seller's subsidiaries or (ii) this Agreement or
any of the transactions contemplated hereby, whether in any case
asserted or arising before or after the Effective Time, the parties
hereto agree to cooperate and use all reasonable efforts to defend
against and respond thereto. It is understood and agreed that Seller
shall indemnify and hold harmless, and that after the Effective Time
Buyer shall indemnify and hold harmless, as and to the fullest extent
permitted by applicable law, each such Indemnified Party against any
losses, claims, damages, liabilities, costs, expenses (including
reasonable attorney's fees and expenses), judgments, fines and amounts
paid in settlement in connection with any such threatened or actual
claim, action, suit, proceeding or investigation, and in the event of
any such threatened or actual claim, action, suit, proceeding or
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investigation (whether asserted or arising before or after the
Effective Time), (i) Seller, and Buyer after the Effective Time, shall
promptly pay expenses in advance of the final disposition of any claim,
action, suit, proceeding or investigation to each Indemnified Party to
the full extent permitted by law, (ii) the Indemnified Parties may
retain counsel mutually satisfactory to them and Seller and, after the
Effective Time, Buyer, and Seller, and Buyer after the Effective Time,
shall pay all reasonable fees and expenses of such counsel for the
Indemnified Parties within thirty days after statements therefor are
received, and (iii) Seller, and Buyer after the Effective Time, will
use all reasonable efforts to assist in the vigorous defense of any
such matter; provided, however, that neither Seller nor Buyer shall be
liable for any settlement effected without its prior written consent
(which consent shall not be unreasonably withheld); and provided
further, however, that the Buyer shall have no obligation hereunder to
any Indemnified Party when and if a court of competent jurisdiction
shall ultimately determine, and such determination shall have become
final and non-appealable, that indemnification of such Indemnified
Party in the manner contemplated hereby is prohibited by applicable
law. Any Indemnified Party wishing to claim indemnification, upon
learning of any such claim, action, suit, proceeding or investigation,
shall notify Seller and, after the Effective Time, Buyer thereof,
provided that the failure to so notify shall not affect the obligations
of Seller or Buyer, except to the extent such failure to notify
materially prejudices such party.
(b) Buyer agrees that all rights to indemnification existing
in favor, and all limitations on the personal liability, of any
director, officer or other employee of Seller or any of its
subsidiaries provided for in Seller's articles of incorporation or
by-laws as in effect as of the date hereof with respect to matters
occurring prior to the Effective Time shall survive the Acquisition
Merger and shall continue in full force and effect for a period of not
less than six (6) years from the Closing Date; provided, however, that
all rights to indemnification in respect of any claim asserted or made
within such period shall continue until the disposition of such claim.
In the event Buyer or the Surviving Corporation or any of its
successors or assigns (i) consolidates with or merges into any other
person and shall not be the continuing or surviving corporation or
entity of such consolidation or merger, or (ii) transfers or conveys
all or substantially all of its properties and assets to any person,
then, and in each such case, to the extent necessary, proper provision
shall be made so that the successors and assigns of Buyer or the
Surviving Corporation, as the case may be, assume the obligations set
forth in this Section 5.13.
(c) Buyer shall use all reasonable efforts to cause the
persons serving as officers and directors of the Seller and any
subsidiary of Seller immediately prior to the Effective Time to be
covered for a period of three (3) years from the Closing Date by the
directors' and officers' liability insurance policy maintained as of
the date hereof by the Seller (provided that Buyer may substitute
therefor policies of at least the same coverage and amounts containing
terms and conditions which are not less advantageous than such policy)
with respect to acts or omissions occurring at or prior to the
Effective Time, which were committed by such officers and directors in
their capacity as such; provided, however, that in no event shall Buyer
be required to expend an amount more than 125% of the current amount
expended by the Seller to maintain or procure insurance coverage
pursuant hereto.
5.14 Accountants' Letters. Each of the parties shall cause to be
delivered to the other "comfort" letters from its independent public
accountants, dated the date on which the Buyer Registration Statement (or last
amendment thereto) shall become effective and dated the Closing Date, relating
to the information about such party included in the Buyer Registration
Statement, including the Proxy Statement, and addressed to the other party, in
form and substance which is reasonably satisfactory to the receiving party and
customary in transactions of the nature contemplated hereby.
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5.15 Maintenance of Records. Through the Effective Time, the Seller
will maintain the Records in the same manner and with the same care that the
Records have been maintained prior to the execution of this Agreement. The Buyer
may, at its own expense, make such copies of and excerpts from the Records as it
may deem desirable. All Records, whether held by the Buyer or the Seller, shall
be maintained for such periods as are required by law, unless the parties shall,
applicable law permitting, agree in writing to a different period. From and
after the Effective Time, the Buyer shall be solely responsible for continuing
maintenance of the Records.
5.16 Leases. Seller shall consult with Buyer before renewing or
extending any lease of Seller or any subsidiary of real property or any material
lease of Seller or any subsidiary relating to furniture, fixtures or equipment
or other personal property , in each case that is currently in effect but that
would otherwise expire on or prior to the Effective Time. Seller shall not
cancel, terminate or take any other action that is likely to result in any
cancellation or termination of any such lease without first consulting with
Buyer.
5.17 Bank Merger. The parties shall take, and cause the Bank and the
Savings Association, as applicable, to take, all necessary and appropriate
actions to effect the Bank Merger immediately after the Effective Time in
accordance with the requirements of all applicable laws and regulations and the
terms of the Bank Merger Agreement.
5.18 Certain Policies of Seller. At the request of the Buyer, after the
time at which all Requisite Regulatory Approvals have been received for the
Acquisition Merger and the Buyer has confirmed in writing that all other
conditions precedent to the Buyer's obligations under this Agreement have been
satisfied or waived and prior to the Effective Time, the Seller shall cooperate
with Buyer with the objective of modifying and changing its receivables, loan
accrual, charge-off, real estate valuation and loan loss reserve policies and
practices and other accounting policies and practices to reflect the Buyer's
plans with respect to the conduct of the Seller's business following the
Acquisition Merger and make adequate provision for the cost and expenses
relating thereto. The Seller's representations, warranties and covenants
contained in this Agreement shall not be deemed to be untrue or breached in any
respect for any purpose as a consequence of any modifications or changes
undertaken solely on account of this Section 5.18.
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ARTICLE VI
CLOSING CONDITIONS
6.01 Conditions to Each Party's Obligations Under This Agreement. The
respective obligations of each party under this Agreement shall be subject to
the fulfillment at or prior to the Effective Time of the following conditions,
none of which may be waived:
(a) Stockholders' Approvals. This Agreement and/or the
transactions contemplated hereby shall have been approved by such
requisite votes of the stockholders of Seller and Buyer as may be
required in accordance with applicable law, rules or regulations.
(b) Governmental Consents. All authorizations, consents,
orders or approvals of, or declarations or filings with, and all
expirations of waiting periods imposed by, any governmental or
regulatory authority or agency which are necessary for the consummation
of the transactions contemplated by this Agreement and the Bank Merger
Agreement, including without limitation the Acquisition Merger and the
Bank Merger, shall have been filed, occurred or been obtained (all such
authorizations, orders, declarations, approvals, filings and consents
and the lapse of all such waiting periods being referred to as the
"Requisite Regulatory Approvals") and all such Requisite Regulatory
Approvals shall be in full force and effect. In addition, the Buyer
shall have received all state securities or blue sky permits and other
authorizations necessary to issue the Buyer Common Stock in connection
with the Acquisition Merger in accordance with all applicable state
securities or blue sky laws.
(c) Buyer Registration Statement. The Buyer Registration
Statement shall have become effective under the Securities Act and
shall not be subject to a stop order or a threatened stop order.
(d) No Injunctions or Restraints. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal restraint or prohibition
(an "Injunction") preventing the consummation of the transactions
contemplated by this Agreement shall be in effect.
6.02 Conditions to the Obligations of Buyer Under This Agreement. The
obligations of the Buyer under this Agreement shall be further subject to the
satisfaction or waiver by the Buyer, at or prior to the Effective Time, of the
following conditions:
(a) Absence of Material Adverse Changes. There shall not have
occurred any change in the business, operations, results of operations,
assets, liabilities or condition (financial or otherwise) of the Seller
or any of its subsidiaries which has had, individually or in the
aggregate, a Material Adverse Effect on the Seller.
(b) Representations and Warranties; Performance of
Obligations. The obligations of the Seller required to be performed by
it at or prior to the Effective Time pursuant to the terms of this
Agreement shall have been duly performed and complied with in all
material respects and the representations and warranties of the Seller
contained in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and as of the Effective Time
as though made at and as of the Effective Time (except as otherwise
specifically contemplated by this Agreement and except as to any
representation or warranty which specifically relates to an earlier
date) and the Buyer shall have received a certificate to that effect
signed by the chairman or president and the chief financial officer or
chief accounting officer of the Seller.
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(c) Third-Party Approvals. Any and all permits, consents,
waivers, clearances, approvals and authorizations of or notices to all
non-governmental and non-regulatory third parties which are necessary
in connection with the consummation of the transactions contemplated by
this Agreement and are required to be received, made or obtained by the
Seller or the Bank, shall have been so received, made or obtained by
the Seller or the Bank, as applicable, other than permits, consents,
waivers, clearances, approvals, authorizations and notices the failure
of which to have received, made or obtained would neither make it
impossible to consummate the transactions contemplated by this
Agreement and the Bank Merger Agreement nor result in any Material
Adverse Effect on the Buyer after the Effective Time and the Bank
Merger Effective Time.
(d) Tax Opinion. The Buyer shall have received an opinion
dated the Closing Date from its counsel, Sullivan & Worcester LLP, or
other counsel selected by the Buyer and reasonably acceptable to the
Seller, substantially to the effect (i) with respect to the Acquisition
Merger, that (A) the Acquisition Merger should be treated for federal
income tax purposes as a reorganization within the meaning of Section
368(a) of the Code, (B) each of the Buyer and the Seller should be a
party to a reorganization within the meaning of Section 368(b) of the
Code, and (C) no gain or loss should be recognized by the Buyer or the
Seller as a result of the Acquisition Merger and (ii) with respect to
the Bank Merger, that (A) the Bank Merger should be treated for federal
income tax purposes as a reorganization within the meaning of Section
368(a) of the Code, (B) each of the Bank and the Savings Association
should be a party to a reorganization within the meaning of Section
368(b) of the Code, and (C) no gain or loss should be recognized by the
Bank, the Savings Association, the Buyer or the Seller as a result of
the Bank Merger. In rendering such opinion, Sullivan & Worcester LLP
shall be entitled to require delivery of, and to refer to and rely
upon, such facts and representations set forth in certificates received
from the Buyer, the Seller, the Bank and the Savings Association, their
respective officers, directors and affiliates, and from the
stockholders of the Seller, as Sullivan & Worcester LLP shall deem
necessary or appropriate to enable it to render such opinion, and the
parties hereto agree to use their respective best efforts to obtain
such representations and certificates.
(e) Seller Affiliates Agreements. Seller shall have delivered
to Buyer the letter pertaining to the Seller Affiliates, as
contemplated under Section 5.06 above, and each of the executed Seller
Affiliates Agreements that have been received by Seller as of the
Effective Time.
(f) Burdensome Condition. None of the Requisite Regulatory
Approvals shall impose any term, condition or restriction upon Buyer or
any Buyer subsidiary that Buyer in good faith reasonably determines
would so materially adversely impact the economic or business benefits
of the transactions contemplated by this Agreement and the Bank Merger
Agreement as to render inadvisable in the reasonable judgment of Buyer
the consummation of the Acquisition Merger or the Bank Merger.
(g) Legal Opinion. Buyer shall have received the opinion of
Edwards & Angell, counsel to Seller and the Bank, dated the Closing
Date, in a form that is customary for transactions of this type.
In addition to the foregoing, the Seller and the Bank will furnish the
Buyer with such additional certificates, instruments or other documents in the
name or on behalf of the Seller or the Bank, as the case may be, executed by
appropriate officers or others, including without limitation certificates or
correspondence of governmental agencies or authorities or nongovernmental third
parties, to evidence fulfillment of the conditions set forth in this Section
6.02 as the Buyer may reasonably request.
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6.03 Conditions to the Obligations of Seller and Bank Under This
Agreement. The obligations of the Seller and the Bank under this Agreement shall
be further subject to the satisfaction or waiver by the Seller, at or prior to
the Effective Time, of the following conditions:
(a) Absence of Material Adverse Changes. There shall not have
occurred any change in the business, operations, results of operations,
assets, liabilities or condition (financial or otherwise) of the Buyer
or any of its subsidiaries which has had, individually or in the
aggregate, a Material Adverse Effect on the Buyer.
(b) Representations and Warranties; Performance of
Obligations. The obligations of the Buyer required to be performed by
it at or prior to the Effective Time pursuant to the terms of this
Agreement shall have been duly performed and complied with in all
material respects and the representations and warranties of the Buyer
contained in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and as of the Effective Time
as though made at and as of the Effective Time (except as otherwise
specifically contemplated by this Agreement and except as to any
representation or warranty which specifically relates to an earlier
date) and the Seller and the Bank shall have received a certificate to
that effect signed by the executive vice president and the chief
financial officer (or other authorized officer(s) of the Buyer.
(c) Third-Party Approvals. Any and all permits, consents,
waivers, clearances, approvals and authorizations of or notices to all
non-governmental and non-regulatory third parties which are necessary
in connection with the consummation of the transactions contemplated by
this Agreement and are required to be received, made or obtained by the
Buyer, shall have been so received, made or obtained by the Buyer,
other than permits, consents, waivers, clearances, approvals,
authorizations and notices the failure of which to obtain would neither
make it impossible to consummate the transactions contemplated by this
Agreement nor result in a Material Adverse Effect on the Buyer after
the Effective Time.
(d) Tax Opinion. The Seller shall have received an opinion
dated the Closing Date from its counsel, Edwards & Angell, or other
counsel selected by the Seller and reasonably acceptable to the Buyer,
substantially to the effect that, with respect to the Acquisition
Merger, (A) the Acquisition Merger should be treated for federal income
tax purposes as a reorganization within the meaning of Section 368(a)
of the Code, (B) each of the Buyer and the Seller should be a party to
a reorganization within the meaning of Section 368(b) of the Code, and
(C) gain, if any, realized will be recognized by a stockholder of the
Seller as a result of the Acquisition Merger, but not in excess of the
amount of cash received by such stockholder. In rendering such opinion,
Edwards & Angell shall be entitled to require delivery of, and to refer
to and rely upon, such facts and representations set forth in
certificates received from the Buyer and the Seller, their respective
officers, directors and affiliates, and from the stockholders of the
Seller, as Edwards & Angell shall deem necessary or appropriate to
enable it to render such opinion, and the parties hereto agree to use
their respective best efforts to obtain such representations and
certificates.
(e) NASDAQ-NMS Listing. The shares of the Buyer Common Stock
issuable upon the Effective Time shall have been authorized for listing
on the NASDAQ-NMS upon official notice of issuance.
(f) Legal Opinion. Seller shall have received the opinion of
Sullivan & Worcester LLP, counsel to Buyer, dated the Closing Date, in
a form that is customary for transactions of this type.
In addition to the foregoing, the Buyer will furnish the Seller with
such additional certificates, instruments or other documents in the name or on
behalf of the Buyer, executed by appropriate officers or others, including
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<PAGE>
without limitation certificates or correspondence of governmental agencies or
authorities or nongovernmental third parties, to evidence fulfillment of the
conditions set forth in this Section 6.03 as the Seller may reasonably request.
ARTICLE VII
CLOSING
7.01 Time and Place. Subject to the provisions of Articles VI and VIII
hereof, the closing of the transactions contemplated by this Agreement shall
take place at the Boston, Massachusetts offices of Sullivan & Worcester LLP at
10:00 A.M., local time, on such date that is not later than the fifth business
day after the date on which all of the conditions contained in Article VI hereof
are satisfied or waived; or at such other place, at such other time, or on such
other date as Seller and Buyer may mutually agree upon for such closing to take
place.
7.02 Deliveries at the Closing. Subject to the provisions of Articles
VI and VIII hereof, at the closing contemplated by Section 7.01 above there
shall be delivered to Seller and Buyer and their respective subsidiaries as
applicable, the opinions, certificates, and other documents and instruments
required to be delivered under Article VI hereof.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.01 Termination. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval of this Agreement and the
transactions contemplated hereby by the parties' respective stockholders:
(a) by mutual written consent of the Seller and the Buyer
authorized by their respective Boards of Directors;
(b) If the Effective Time shall not have occurred on or prior
to July 31, 1997 (the "Termination Date") or such later date as shall
have been agreed to in writing by the Buyer and the Seller;
(c) by the Buyer or the Seller (i) thirty days after the date
on which any request or application for a Requisite Regulatory Approval
shall have been denied, unless within the thirty-day period following
such denial a petition for rehearing or an amended application has been
filed with such governmental regulatory authority or agency, except
that no party shall have the right to terminate this Agreement pursuant
to this clause (i) if such denial shall be due to the failure of the
party seeking to terminate this Agreement to perform or observe in any
material respects the covenants and agreements of such party set forth
herein, or (ii) if any governmental or regulatory authority or agency,
or court of competent jurisdiction, shall have issued a final permanent
order or Injunction enjoining or otherwise prohibiting the consummation
of the transactions contemplated by this Agreement and the time for
appeal or petition for reconsideration of such order or Injunction
shall have expired without such appeal or petition being granted or
such order or Injunction shall otherwise have become final and
non-appealable;
(d) by the Buyer or the Seller (provided that the terminating
party is not then in material breach of any representation, warranty,
covenant or other agreement contained herein), in the event of a
material breach by the other party of any representation, warranty,
covenant or other agreement contained herein, or in the Bank Merger
Agreement, which breach is not cured after thirty (30) days written
notice thereof is given to the party committing such breach;
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(e) by Buyer or Seller (provided that the terminating party is
not then in material breach of any representation, warranty or covenant
or other agreement contained herein), if the approval of either party's
stockholders specified in Section 5.05 above shall not have been
obtained by reason of such party's failure to have obtained the
requisite stockholder vote at a duly held meeting of such party's
stockholders or at any adjournment thereof;
(f) by Seller, by action of its Board of Directors, by giving
written notice of such election to Buyer within two business days after
the Valuation Period, in the event the Average Closing Price is less
than the Minimum Price; provided, however, that no right of termination
shall arise under this Section 8.01(f) if Buyer elects within two
business days of receipt of such written notice to increase the
Exchange Ratio by notifying Seller in writing that it has elected to
utilize the Adjusted Exchange Ratio in lieu of the Exchange Ratio that
would otherwise be required under Section 2.09(a) hereof; or
(g) by Buyer if Seller's Board of Directors does not publicly
recommend in the Proxy Statement that Seller's stockholders approve the
proposals submitted to them in accordance with this Agreement, or if
after recommending in the Proxy Statement that Seller's shareholders
approve such proposals, Seller's Board of Directors shall have
withdrawn, modified or amended such recommendation in any respect
materially adverse to Buyer.
8.02 Effect of Termination.
(a) In the event of termination of this Agreement by either
the Seller or the Buyer as provided above, this Agreement shall
forthwith become null and void (other than Sections 5.02(b), 8.02 (if
applicable) and 9.01 hereof, which shall remain in full force and
effect) and there shall be no further liability on the part of any of
the parties hereto or their respective officers or directors to the
others, except any liability of any party under said Sections 5.02(b),
8.02 (as may be applicable) and 9.01, and in the event of a party's
gross negligence or willful breach of any representation, warranty,
covenant or agreement contained in this Agreement, in which case, the
breaching party shall remain liable for any and all damages, costs and
expenses, including all reasonable attorneys' fees, sustained or
incurred by the non-breaching party as a result thereof or in
connection therewith or with the enforcement of its rights hereunder or
therein.
(b) As a condition of Buyer's willingness, and in order to
induce Buyer, to enter into this Agreement and to reimburse Buyer for
incurring the costs and expenses related to entering into this
Agreement and consummating the transactions contemplated by this
Agreement, the Seller will make a cash payment to Buyer of
$2,000,000.00 if and only if:
(i) either (x) Seller or Buyer has terminated this
Agreement because (A) the approval of Seller's stockholders
specified in Section 5.05 above shall not have been obtained
by reason of Seller's failure to have obtained the requisite
stockholder vote at a duly held meeting of Seller's
stockholders or at any adjournment thereof or (B) Seller's
Board of Directors does not publicly recommend in the Proxy
Statement that Seller's stockholders approve the proposals
submitted to them in accordance with this Agreement, or if
after recommending in the Proxy Statement that Seller's
stockholders approve such proposals, Seller's Board of
Directors shall have withdrawn, modified or amended such
recommendation in any respect materially adverse to Buyer or
(y) Buyer has terminated this Agreement pursuant to Section
8.01(d) and the breach of the representation, warranty,
covenant or agreement was caused by the willful conduct or
gross negligence of Seller; and
(ii) either (x) within twelve months of any such
termination, (A) Seller shall have entered into an agreement
to engage in an Alternative Transaction (as hereinafter
defined) with any person other than Buyer or any subsidiary or
other affiliate of Buyer or (B) the Board of Directors of
Seller shall have approved an Alternative Transaction or
recommended that shareholders of Seller
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<PAGE>
approve or accept any Alternative Transaction with any person
other than Buyer or any subsidiary or other affiliate of
Seller, or (y) in the case of Section 8.01(g), at the time of
such termination any person other than Buyer or any subsidiary
or affiliate of Buyer shall have made a bona fide proposal to
Seller or its shareholders to engage in an Alternative
Transaction by public announcement or written communication
that shall be or become the subject of public disclosure.
Any payment required under this Section 8.02(b) will be (i) payable by Seller to
Buyer (by wire transfer of immediately available funds to an account designated
by Buyer) within five business days after demand by Buyer and (ii) net of any
other payments made by Seller to Buyer pursuant to the provisions of Section
8.02(a) (but in no event shall the amount payable under this Section 8.02(b) be
less than zero).
For purposes of this Agreement, "Alternative Transaction" shall mean
(i) a merger, consolidation or other similar transaction involving Seller or the
Bank, (ii) any sale, lease or other disposition of 20% or more of the assets of
Seller and its subsidiaries, taken as a whole, in a single transaction or series
of transactions, (iii) any tender or exchange offer for 20% or more of the
outstanding shares of Seller Common Stock, or (iv) any person having acquired
beneficial ownership or the right to acquire beneficial ownership of, or any
"group" (as such term is defined under Section 13(d) of the Exchange Act and the
rules and regulations promulgated thereunder) having been formed which
beneficially owns or has the right to acquire beneficial ownership of 20% or
more of the then outstanding shares of capital stock of Seller.
8.03 Amendment, Extension and Waiver. Subject to applicable law and as
may be authorized by their respective Boards of Directors, at any time prior to
the consummation of the transactions contemplated by this Agreement or
termination of this Agreement in accordance with the provisions of Section 8.01
hereof, whether before or after the approvals of the parties' respective
stockholders contemplated by Section 5.05 above, the parties may, (a) amend this
Agreement, (b) extend the time for the performance of any of the obligations or
other acts of any other party hereto, (c) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto, or (d) waive compliance with any of the agreements or
conditions contained in Articles V and VI (other than Section 6.01) hereof;
provided, however, that there may not be, without further approval of the
parties' stockholders, to the extent required by law, any amendment, extension
or waiver of this Agreement which changes the amount or form of the
consideration to be delivered to Seller's stockholders hereunder other than as
may be expressly contemplated by this Agreement. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto. Any agreement on the part of a party hereto to any extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party, but such waiver or failure to insist on strict compliance
with such obligation, covenant, agreement or condition shall not operate as a
waiver of, or estoppel with respect to, any subsequent or other failure.
ARTICLE IX
MISCELLANEOUS
9.01 Expenses. Except as otherwise agreed to in Section 8.02 hereunder
or in other writing by the parties, all legal and other costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such costs and expenses.
9.02 Non-Survival. None of the representations, warranties, covenants
and agreements of the parties shall survive after the Effective Time, except for
the agreements and covenants contained or referred to in Article II, Section
5.02(b), the last sentence of Section 5.07 and Sections 5.10, 5.12, 5.13, 8.02,
9.01 and 9.02, which agreements and covenants shall survive the Effective Time.
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<PAGE>
9.03 Notices. All notices or other communications hereunder shall be in
writing and shall be deemed given if delivered personally or mailed by prepaid
registered or certified mail (return receipt requested) or by telecopy, cable,
telegram or telex addressed as follows:
(a) If to the Seller, to:
Finest Financial Corp.
Route 38, Bridge Street
Pelham Plaza
Pelham, New Hampshire 03076
Attention: Brian W. Thompson
President
Copy to:
Edwards & Angell
2700 Hospital Trust Tower
Providence, Rhode Island 02903
Attention: V. Duncan Johnson, Esq.
(b) If to the Buyer, to:
First Essex Bancorp, Inc.
71 Main Street
Andover, Massachusetts 01810
Attention: Leonard A. Wilson
President
Copy to:
Sullivan & Worcester LLP
One Post Office Square
Boston, Massachusetts 02109
Attention: Stephen J. Coukos, Esq.
or such other address as shall be furnished in writing by any party, and any
such notice or communication shall be deemed to have been given as of the date
delivered to the recipient party.
9.04 Parties in Interest. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns; provided, however, that neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any party hereto
without the prior written consent of the other parties, and that nothing in this
Agreement, except for Sections 5.12 and 5.13 above, is intended to confer,
expressly or by implication, upon any other person any rights or remedies under
or by reason of this Agreement.
9.05 Entire Agreement. This Agreement, including the documents and
other writing referred to herein or delivered pursuant hereto, including the
Seller Disclosure Schedule, the Seller Stockholders' Agreement and the Bank
Merger Agreement, is complete, and all promises, representations,
understandings, warranties and agreements with reference to the subject matter
hereof, and all inducements to the making of this Agreement relied upon by
either party hereto, have been expressed herein. This Agreement (including the
aforementioned documents and writings) supersedes any prior or contemporaneous
agreement or understanding between the parties hereto, oral or written,
pertaining to any such matters, including without limitation the Confidentiality
Agreement, which agreements or understandings shall be of no further force or
effect for any persons.
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<PAGE>
9.06 Counterparts. This Agreement may be executed in counterparts, all
of which shall be considered one and the same agreement and each of which shall
be deemed to be an original and shall become effective when a counterpart has
been signed by each of the parties and delivered to each of the other parties.
9.07 Governing Law. This Agreement shall be governed by the laws of the
Commonwealth of Massachusetts, without giving effect to the principles of
conflicts of laws thereof, and, to the extent applicable, by federal law.
9.08 Captions. The Article and Section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
9.09 Effect of Investigations. No investigation by the parties hereto
made heretofore or hereafter, whether pursuant to this Agreement or otherwise
shall affect the representations and warranties of the parties which are
contained herein and each such representation and warranty shall survive such
investigation, subject, however, to Section 9.02 hereof.
9.10 Severability. In the event that any one or more provisions of this
Agreement shall for any reason be held invalid, illegal or unenforceable in any
respect, by any court of competent jurisdiction, such invalidity, illegality or
unenforceability shall not affect any other provisions of this Agreement and the
parties shall use their best efforts to substitute a valid, legal and
enforceable provision which, insofar as practicable, implements the purposes and
intents of this Agreement.
9.11 Specific Enforceability. The parties recognize and hereby
acknowledge that it is impossible to measure in money the damages that would
result to a party by reason of the failure of either of the parties to perform
any of the obligations imposed on it by this Agreement. Accordingly, if any
party should institute an action or proceeding seeking specific enforcement of
the provisions hereof, each party against which such action or proceeding is
brought hereby waives the claim or defense that the party instituting such
action or proceeding has an adequate remedy at law and hereby agrees not to
assert in any such action or proceeding the claim or defense that such a remedy
at law exists.
9.12 Waiver of Jury Trial. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES ANY RIGHTS THAT THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT
OF ANY LITIGATION BASED UPON, OR ARISING OUT OF, THIS AGREEMENT OR ANY OF THE
RELATED AGREEMENTS OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS OR
ACTIONS OF ANY OF THEM RELATING THERETO.
9.13 Alternative Structure. Notwithstanding anything to the contrary
contained in this Agreement, at any time prior to the Effective Date, Buyer
shall be entitled, with the consent of Seller (which consent shall not be
unreasonably withheld), to revise the structure and/or timing of the Acquisition
Merger and/or the Bank Merger as contemplated by this Agreement and the Bank
Merger Agreement, so long as the transactions comprising such revised structure
and/or occurring within such revised timeframe shall (i) be capable of
consummation in as timely a manner as the structure contemplated herein and (ii)
not otherwise have a material adverse impact on the Seller or its stockholders,
including on the financial benefits reasonably expected to be derived by such
stockholders from the transactions provided for herein. This Agreement and the
Bank Merger Agreement and any related documents shall be appropriately amended
in order to reflect any such revised structure.
[Remainder of Page Intentionally Blank]
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement and Plan of
Reorganization to be executed as a sealed instrument by their duly authorized
officers as of the day and year first above written.
FIRST ESSEX BANCORP, INC.
By: /s/Leonard A. Wilson
Leonard A. Wilson
President
FINEST FINANCIAL CORP.
By: /s/Brian W. Thompson
Brian W. Thompson
President
PELHAM BANK AND TRUST COMPANY
By: /s/Brian W. Thompson
Brian W. Thompson
President
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<PAGE>
ARTICLE X
TABLE OF CONTENTS
ARTICLE I DEFINITIONS...................................................A-2
ARTICLE II THE ACQUISITION MERGER........................................A-7
2.01 Surviving Corporation................................A-7
2.02 Purposes and Authorized Capital Stock of
Surviving Corporation.............................A-7
2.03 Effect of the Acquisition Merger.....................A-7
2.04 Additional Actions...................................A-7
2.05 Certificate of Incorporation and By-laws.............A-8
2.06 Directors and Officers...............................A-8
2.07 Effective Time; Conditions...........................A-8
2.08 Dissenters' Appraisal Rights.........................A-8
2.09 Effect on Outstanding Shares.........................A-8
2.10 Anti-Dilution........................................A-9
2.11 Exchange Procedures..................................A-9
2.12 Treatment of Seller Stock Options...................A-11
2.13 Exchange Agent.....................A-11
2.14 Election Procedures.................................A-11
ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER......................A-13
3.01 Corporate Organization..............................A-13
3.02 Capitalization......................................A-14
3.03 Authority; No Violation.............................A-14
3.04 Consents and Approvals..............................A-15
3.05 Financial Statements................................A-15
3.06 Absence of Undisclosed Liabilities..................A-16
3.07 Broker's Fees.......................................A-16
3.08 Absence of Certain Changes or Events................A-16
3.09 Legal Proceedings..................................A-16
3.10 Agreements with Banking Authorities.................A-16
3.11 Reports.............................................A-16
3.12 Compliance with Applicable Law......................A-17
3.13 Buyer Common Stock..................................A-17
3.14 Ownership of Seller Common Stock....................A-17
3.15 Financing...........................................A-17
3.16 Buyer Benefit Plans.................................A-17
3.17 Buyer Information...................................A-17
3.18 Disclosure..........................................A-17
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER AND THE BANK........A-18
4.01 Corporate Organization..............................A-18
4.02 Capitalization......................................A-18
4.03 Authority; No Violation.............................A-19
4.04 Consents and Approvals..............................A-20
4.05 Financial Statements................................A-20
4.06 Absence of Undisclosed Liabilities..................A-21
4.07 Broker's Fees.......................................A-21
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4.08 Absence of Certain Changes or Events................A-21
4.09 Legal Proceedings...................................A-21
4.10 Taxes and Tax Returns...............................A-21
4.11 Employees...........................................A-23
4.12 Agreements with Banking Authorities.................A-24
4.13 Material Agreements.................................A-25
4.14 Ownership of Property...............................A-25
4.15 Reports.............................................A-25
4.16 Compliance with Applicable Law......................A-25
4.17 Environmental Matters...............................A-26
4.18 Antitakeover Statutes Not Applicable................A-26
4.19 Ownership of Buyer Common Stock.....................A-26
4.20 Insurance...........................................A-26
4.21 Labor...............................................A-26
4.22 Material Interests of Certain Persons...............A-26
4.23 Absence of Registration Obligations.................A-26
4.24 Loans...............................................A-27
4.25 Investment Securities...............................A-27
4.26 Derivative Transactions.............................A-27
4.27 Intellectual Property...............................A-27
4.28 Seller Information..................................A-27
4.29 Disclosure..........................................A-27
ARTICLE V COVENANTS OF THE PARTIES.....................................A-28
5.01 Conduct of the Business of Seller...................A-28
5.02 Access to Properties and Records; Confidentiality...A-31
5.03 No Solicitation....................................A-32
5.04 Regulatory Matters; Consents........................A-33
5.05 Approval of Stockholders............................A-33
5.06 Agreements of Seller's Affiliates...................A-34
5.07 Further Assurances..................................A-34
5.08 Disclosure Supplements..............................A-34
5.09 Public Announcements................................A-34
5.10 Tax-Free Reorganization Treatment...................A-34
5.11 Stock Exchange Listing..............................A-34
5.12 Employment and Benefit Matters......................A-34
5.13 Directors' and Officers' Indemnification
and Insurance.....................................A-35
5.14 Accountants' Letters................................A-36
5.15 Maintenance of Records..............................A-37
5.16 Leases..............................................A-37
5.17 Bank Merger.........................................A-37
5.18 Certain Policies of Seller..........................A-37
ARTICLE VI CLOSING CONDITIONS...........................................A-37
6.01 Conditions to Each Party's Obligations Under
This Agreement...................................A-37
6.02 Conditions to the Obligations of Buyer Under
This Agreement...................................A-38
6.03 Conditions to the Obligations of Seller and Bank
Under This Agreement.............................A-39
ARTICLE VII CLOSING......................................................A-40
7.01 Time and Place......................................A-40
7.02 Deliveries at the Closing...........................A-40
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ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER............................A-40
8.01 Termination.........................................A-40
8.02 Effect of Termination...............................A-41
8.03 Amendment, Extension and Waiver.....................A-42
ARTICLE IX MISCELLANEOUS................................................A-43
9.01 Expenses............................................A-43
9.02 Non-Survival........................................A-43
9.03 Notices.............................................A-43
9.04 Parties in Interest.................................A-44
9.05 Entire Agreement. ..................................A-44
9.06 Counterparts........................................A-44
9.07 Governing Law. .....................................A-44
9.08 Captions............................................A-44
9.09 Effect of Investigations............................A-44
9.10 Severability........................................A-44
9.11 Specific Enforceability.............................A-44
9.12 Waiver of Jury Trial................................A-45
9.13 Alternative Structure...............................A-45
LIST OF SCHEDULES AND EXHIBITS
SCHEDULES
Seller Disclosure Schedule
1.00 Principal Stockholders
4.02(b) Seller Subsidiaries
4.03(c) Non Contravention Exceptions
4.04 Consents and Approvals
4.06 Liabilities
4.08 Material Changes
4.09 Legal Proceedings
4.10 Taxes
4.11(a) Seller Plans
4.12 Agreements with Banking Authorities
4.13 Material Agreements
4.17 Environmental Matters
4.22 Material Interests of Certain Persons
4.24 Loans
4.25 Investment Securities
5.01 Conduct of the Business
5.12 Senior Executive Employment/Severance Arrangements
EXHIBITS
A. Form of Seller Stockholders' Agreement
B. Form of Seller Affiliates Agreement
C. Form of Bank Merger Agreement
D. Salary Continuation Policy and Bonus Plan
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AMENDMENT NO. 1 TO
AGREEMENT AND PLAN OF REORGANIZATION DATED AS OF AUGUST 5, 1996
This Amendment No. 1 (this "Amendment"), dated as of September ___,
1996, is entered into by and among First Essex Bancorp, Inc. ("Buyer"), Finest
Financial Corp. ("Seller") and Pelham Bank and Trust Company (the "Bank").
1. AGREEMENT AND PLAN OF REORGANIZATION
Reference is made to the Agreement and Plan of Reorganization dated as
of August 5, 1996 by and among Buyer, Seller and the Bank (the "Original
Agreement"). Capitalized terms used in this Amendment, which are defined in the
Original Agreement and are not otherwise defined herein, are used in this
Agreement with the meanings ascribed to them in the Original Agreement. The
Original Agreement as amended by this Amendment is and shall continue to be in
full force and effect and shall not be affected by this Amendment except and
only to the extent specified herein.
2. AMENDMENTS TO ORIGINAL AGREEMENT
2.1 Amendment to Article I - Definitions. The definition of "Savings
Association" set forth at page 5 of the Original Agreement shall be and hereby
is amended and restated in its entirety as follows:
"Savings Association" shall mean Buyer's wholly owned savings
association subsidiary, First Essex Bank, FSB.
2.2 Amendment to Article IV - Representations and Warranties of Seller
and the Bank.
Section 4.02(a) of the Original Agreement shall be and hereby
is amended in part by deleting the first sentence thereof in its entirety and
inserting in lieu thereof the following sentence: "The authorized capital stock
of the Seller consists of 5,000,000 shares of common stock, par value $.10 per
share (the "Seller Common Stock"), and no shares of preferred stock."
2.3 Amendments to Article V - Covenants of the Parties.
(a) Schedule 5.12, as referred to in and included as a part of Section
5.12(b) of the Original Agreement, shall be and hereby is amended and restated
in its entirety, and such amended and restated Schedule 5.12 is attached to and
made a part of this Amendment.
(b) Section 5.17 of the Original Agreement shall be and hereby is
amended and restated in its entirety as follows:
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5.17 Bank Merger. The parties shall take, and cause the Bank
and the Savings Association, as applicable, to take, all necessary and
appropriate actions to effect the Bank Merger immediately prior to the
Effective Time in accordance with the requirements of all applicable
laws and regulations and the terms of the Bank Merger Agreement. Both
the Bank Merger Effective Time and the Effective Time shall occur on
the Closing Date.
(c) Section 5.18 of the Original Agreement shall be and hereby is
amended in part by (i) inserting the words "the Bank Merger and" immediately
prior to the reference to "the Acquisition Merger" in the second and eighth
lines of said Section 5.18 and (ii) inserting the words "the Bank Merger
Effective Time and" immediately prior to the reference to "the Effective Time"
in the fourth line of said Section 5.18.
2.4 Amendments to Article VI - Closing Conditions.
(a) Sections 6.01, 6.02 and 6.03 of the Original Agreement shall be and
hereby are amended in part by deleting the phrase "at or prior to the Effective
Time" in the prefatory clause that begins each such section and inserting in
lieu thereof the phrase "on or prior to the Closing Date".
(b) Sections 6.02 and 6.03 of the Original Agreement shall be and
hereby are amended in part by adding an additional paragraph at the end of each
such section, which shall be designated by the heading "(h) Bank Merger." in the
case of Section 6.02 and shall be designated by the heading "(g) Bank Merger."
in the case of Section 6.03, and shall read in its entirely as follows: "The
Bank Merger shall have been consummated."
2.5 Amendment to Article VII - Closing. Section 7.01 of the Original
Agreement shall be and hereby is amended in part by deleting the phrase "Article
VI hereof are satisfied or waived" contained in the fourth and fifth lines of
said Section 7.01 and inserting in lieu thereof the phrase "Section 6.01 hereof
are satisfied".
2.6 Amendment to Article VIII - Termination, Amendment and Waiver.
Section 8.01 of the Original Agreement shall be and hereby is amended in part by
(i) deleting the reference to "the Effective Time" contained in the prefatory
clause that begins such section and inserting in lieu thereof a reference to
"the Bank Merger Effective Time" and (ii) inserting the words "the Bank Merger
Effective Time and" immediately prior to the reference to "the Effective Time"
contained in the first line of subsection 8.01(b).
3. MISCELLANEOUS
3.1 Governing Law. This Amendment shall be governed by the laws of the
Commonwealth of Massachusetts, without giving effect to the principles of
conflict of laws thereof.
3.2 Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall be an original, but all of which shall
constitute one and the same agreement.
3.3 Headings. The Section headings herein are for convenience only and
shall not affect the construction hereof.
3.4 Entire Agreement. The Original Agreement, as amended by this
Amendment, including the documents and other writings referred to therein or
herein or delivered pursuant thereto or hereto, including the Seller Disclosure
Schedule, the Seller Stockholders' Agreement and the Bank Merger Agreement, as
the latter has been amended as of the date hereof, contains the entire agreement
and understanding of the parties with respect to the transactions contemplated
thereby, including the Bank Merger and the Acquisition Merger. There are no
restrictions, agreements, promises, warranties, covenants or undertakings
pertaining to such matters between the parties other than those expressly set
forth herein or therein. The Original Agreement, as amended by this Agreement,
supersedes all prior agreements and understandings between the parties, both
written and oral, with respect to all such matters.
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IN WITNESS WHEREOF, the parties have caused this Amendment to be duly
executed as a sealed instrument as of the day and year first above written.
FIRST ESSEX BANCORP, INC.
By:
Leonard A. Wilson, President
FINEST FINANCIAL CORP.
By:
Brian W. Thompson, President
PELHAM BANK AND TRUST COMPANY
By:
Brian W. Thompson, President
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SCHEDULE 5.12
Senior Executive Employment/Severance Arrangements
Set forth below is a summary of the parties' understanding of the
employment and severance arrangements to be entered into by Buyer, the Savings
Association and Messrs. Thompson and Goss:
1. Brian W. Thompson
o Title: Executive Vice President of Buyer and the
Savings Association
o Responsibility: Corporate Banking Head
o Annual Salary: $150,000
o Bonus Per Year: Up to 30% of base salary
o Employment and Special Termination Agreements:
Providing for 2-year term of employment and change of
control provisions providing for a termination
payment of 3 years of salary and bonus (which bonus
will equal 30% of base salary if a termination
following a change of control occurs prior to any
such bonus having been determined for the first full
calendar year of Mr. Thompson's employment). Form of
agreements to be similar to the employment and
special termination agreements currently in place
with David W. Dailey.
o Automobile
o Country Club Membership
o Office Location: Andover
o Options: Mr. Thompson would be eligible to
participate in the ordinary course as a senior
executive officer in any future stock-based plans
that may be offered generally by Buyer to the senior
management of Buyer and the Savings Association.
o Relocation Expense Coverage: Buyer will reimburse Mr.
Thompson, in accordance with Buyer's established
practices and procedures for senior executive officer
relocation expense coverage, for costs and expenses
relating to the relocation of Mr. Thompson's primary
personal residence from Amherst, Massachusetts, to a
location within reasonable proximity for commuting
purposes to Buyer's executive offices in Andover,
Massachusetts.
o All Other Benefits Available to Other Employees and
Executives of the Company
o Voluntary Termination: For up to one (1) year
following the Effective Time, Mr. Thompson may
terminate his employment for any reason, in which
case he will be paid a lump sum severance payment of
$225,000 (which equals the expected change-of-control
payment that Mr. Thompson could receive under his
existing employment agreement).
2. Irving J. Goss
o Annual Salary: $100,000 as an employee of the Savings
Association.
o Benefits: During his employment with the Savings
Association, Mr. Goss will be entitled to all
benefits accorded similarly situated executives,
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including participation in any future stock-based
plans that may be offered generally by Buyer to the
senior management of Buyer and the Savings
Association and outplacement services.
o Voluntary Termination: For up to one (1) year
following the Effective Time, Mr. Goss may terminate
his employment for any reason, in which case he will
be paid a lump sum severance payment equal to (x) the
amount, if any, of the remaining balance of his full
year salary for such initial year of employment plus
(y) $125,000.
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APPENDIX B
KEEFE, BRUYETTE & WOODS, INC.
SPECIALISTS IN BANKING
TWO WORLD TRADE CENTER 85TH FLOOR NEW YORK, N.Y. 10048
TOLL FREE TELEPHONE
1-800-966-1559 212-323-8300
[Date]
Board of Directors
Finest Financial Corp.
Bridge Street, Route 38
Pelham, NH 03076
Board of Directors:
You have requested our opinion as investment bankers as to the fairness
from a financial point of view to the shareholders of Finest Financial Corp.
("Finest") of the consideration in the proposed merger (the "Merger") of Finest
with and into First Essex Bancorp, Inc. ("First Essex") pursuant to the
Agreement and Plan of Reorganization, dated as of August 1, 1996, between Finest
and First Essex, (the "Agreement"). Under the terms of the Agreement, each
outstanding share of common stock, $1.00 par value, of Finest will be converted
into the right to receive $20.25 either in cash (the "Cash Distribution") or in
shares (the "Stock Distribution") of common stock, $.10 par value, of First
Essex determined by dividing $20.25 by the average closing stock price of First
Essex common stock (the "Exchange Ratio") for the twenty consecutive trading
days ending on the fifth business day prior to the closing date (the "Average
Closing Price"); provided that (i) if the Average Closing Price is greater than
$11.50 the Exchange Ratio shall equal 1.761, (ii) if the average Closing Price
is less than $9.50 per share the Exchange Ratio shall equal 2.132, and (iii) if
the Average Closing Price is less than $8.75 per share, Finest shall have the
right, waivable by it, to terminate the Agreement unless First Essex elects, at
its option, to adopt the Exchange Ratio determined by dividing $18.65 by the
Average Closing Price.
Keefe, Bruyette & Woods, Inc., as part of its investment banking
business, is continually engaged in the valuation of banking businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes. As specialists in the securities of banking companies, we have
experience in, and knowledge of, the valuation of banking enterprises. In the
ordinary course of our business as a broker-dealer, we may, from time to time,
purchase securities from, and sell securities to, First Essex and as a market
maker in securities we may from time to time have a long or short position in,
and buy or sell, debt or equity securities of First Essex for our own account
and for the accounts of our customers. To the extent we have any such position
as of the date of this opinion it has been disclosed to Finest. We have acted
for the Board of Directors of Finest in rendering this fairness opinion and will
receive a fee from Finest for our services.
In connection with this opinion, we have reviewed, among other things,
the Agreement; the Registration Statement on Form S-4 including the Proxy
Statement--Prospectus relating to the Special Meeting of Finest Shareholders at
which holders of the Shares will be asked to approve the Merger; Audited
Consolidated Financial Statements of Finest and Annual Reports to Stockholders
and Annual Reports on Form 10-K of First Essex for the four years ended December
31, 1995; certain interim reports to stockholders and Quarterly Reports on Form
10-Q
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Board of Directors
[DATE]
Page 2
10-Q of First Essex, and certain internal financial analyses and forecasts for
Finest including the 1996 annual budget prepared by management. We have also
held discussions with members of the senior management of Finest and First Essex
regarding the past and current business operations, regulatory relationships,
financial condition and future prospects of their respective companies. In
addition, we have compared certain financial and stock market information for
Finest and First Essex with similar information for certain other companies the
securities of which are publicly traded, reviewed the financial terms of certain
recent business combinations in the banking industry and performed such other
studies and analyses as we considered appropriate.
In conducting our review and arriving at our opinion, we have relied
upon and assumed the accuracy and completeness of all of the financial and other
information provided to us or publicly available and we have not assumed any
responsibility for independently verifying any of such information. We have
relied upon the management of Finest and First Essex as to the reasonableness
and achievability of the financial and operating forecasts and projections (and
the assumptions and bases therefor) provided to us, and we have assumed that
such forecasts and projections reflect the best currently available estimates
and judgments of Finest and First Essex and that such forecasts and projections
will be realized in the amounts and in the time periods currently estimated by
such management. We have also assumed that the aggregate allowances for loan
losses for Finest and First Essex are adequate to cover such losses. In
rendering our opinion, we have not made or obtained any evaluations or
appraisals of the property of Finest or First Essex, nor have we examined any
individual credit files.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including among others the following: (i)
the historical and current financial position and results of operations of
Finest and First Essex; (ii) the assets and liabilities of Finest and First
Essex; and (iii) the nature and terms of certain other merger transactions
involving banks and bank holding companies. We have also taken into account our
assessment of general economic, market and financial conditions and our
experience in other transactions, as well as our experience in securities
valuation and our knowledge of the banking industry generally. Our opinion is
necessarily based upon conditions as they exist and can be evaluated on the date
hereof and the information made available to us through the date hereof.
Based upon and subject to the foregoing, it is our opinion that, as of
the date hereof, the Consideration in the Merger is fair, from financial point
of view, to the holders of Finest Common Stock.
Very truly yours,
KEEFE, BRUYETTE & WOODS, INC.
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Oppenheimer Tower
World Financial Center
New York, New York 10281
(212) 667-7000
Oppenheimer & Co., Inc.
Investment Banking Group
[Date]
Board of Directors
First Essex Bancorp, Inc.
71 Main Street
Andover, Massachusetts 01810
Directors:
You have requested our opinion as to the fairness, from a financial
point of view, to First Essex Bancorp, Inc. (the "Company") of the aggregate
consideration to be paid by the Company (the "Consideration") to the holders of
the outstanding shares of common stock (the "Finest Shares"), of Finest
Financial Corp. ("Finest") pursuant to the Agreement and Plan of Reorganization
dated July 31, 1996 by and between the Company and Finest, and Finest's sole
subsidiary Pelham Bank and Trust Company (the "Agreement").
Pursuant to the Agreement, Finest will merge into First Essex (the
"Merger") and Pelham Bank and Trust will merge into First Essex's subsidiary,
First Essex Bank, FSB (the "Merger").
In connection with this opinion we have reviewed, among other things:
(a) the Agreement; (b) the Seller Stockholders Agreement and the form of Seller
Affiliates Agreement (as such terms are defined in the Agreement); (c) audited
consolidated financial statements and management's discussion and analysis of
the financial condition and results of operation for each of Finest and the
Company for the three fiscal years ended December 31, 1995; (d) unaudited
consolidated financial statements for each of Finest and the Company for the six
months ended June 30, 1996; (e) certain other publicly available business and
financial information relating to the Company and Finest; (f) certain internal
financial analyses, budgets, projections and forecasts for Finest and the
Company, including estimates as to the future cost savings relating to the
Merger; prepared by and reviewed with the management of the Company; (g) certain
other summary materials and analyses with respect to Finest's loan portfolio and
deposits prepared by the Company; (h) the views of senior management of Finest
and the Company of the past and current business operations, results thereof,
financial condition and future prospects of their respective companies; (i) a
comparison of certain financial information for Finest with similar information
for certain other companies we considered comparable to Finest; (j) the
financial terms of certain recent business combinations in the banking industry;
(k) the pro forma effect of the transaction on the Company based on certain
assumptions provided by the Company; (1) the current market environment
generally and the banking environment in particular; and (m) such other
information, financial studies, analyses and investigations and financial,
economic and market criteria as we considered appropriate in the circumstances.
We have relied, without independent verification or investigation, on
all of the financial information, analyses and other information furnished to us
for purposes of this opinion, including information relating to assets and
liabilities, contingent or otherwise, as being complete and accurate. We have
also relied upon the managements of Finest and the Company as to the
reasonableness and achievability of the financial and operating forecasts and
projections, including estimates of future cost savings relating to the Merger
(and the assumptions and bases therefor) provided to us. In that regard, we have
assumed, with your consent, that such forecasts, projections and
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Board of Directors Page 2
First Essex
Bancorp, Inc.
[Date]
estimates have been reasonably prepared and reflect the best currently available
estimates and judgements of the managements of Finest and the Company as to the
future financial performance of the Company and Finest and that, for purposes of
our opinion, such forecasts and projections will be realized in the amounts and
in the time periods currently estimated by the managements of Finest and the
Company. We have not made an independent evaluation or appraisal of the assets
and liabilities of Finest or any of its respective subsidiaries and we have not
been furnished with any such evaluation or appraisal. Furthermore, this opinion
shall not constitute any such evaluation or appraisal. We are not experts in the
evaluation of allowances for loan losses or liabilities (contingent or
otherwise) and we have neither made an independent evaluation of the adequacy of
the allowance for loan losses of Finest nor reviewed any individual loan credit
files.
You have informed us and we have assumed that the Merger will be
accounted for as a purchase under generally accepted accounting principles.
We have acted as financial advisor to the Company in connection with
the Merger and will receive a fee for our services. In the ordinary course of
our business, we may actively trade the equity securities of the Company for our
own account and for the accounts of customers, and accordingly, may at any time
hold a long or short position in such securities.
It is understood that this opinion is for the information of the Board
of Directors in connection with its consideration of the Merger and may not be
quoted or referred to, in whole or in part, in any registration statement,
prospectus, or proxy statement, or in any other document used in connection with
the offering or sale of securities, nor shall this letter be used for any other
purposes, without our prior written consent or as otherwise agreed to in our
engagement letter.
Based upon and subject to the foregoing and based upon such other
matters as we consider relevant, it is our opinion that, as of the date hereof,
the Consideration to be paid by the Company in the Merger is fair, from a
financial point of view, to the Company.
Very truly yours,
Oppenheimer & Co., Inc.
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NEW HAMPSHIRE STATUTES ANNOTATED
TITLE XXVII. CORPORATIONS, ASSOCIATIONS, AND PROPRIETORS OF COMMON LANDS
CHAPTER 293-A. NEW HAMPSHIRE BUSINESS CORPORATION ACT
DISSENTERS' RIGHTS
Current through Chapter 309 of the 1995 Regular Session
A. RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
ss. 293-A:13.01 Definitions.
In this subdivision:
(1) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger
or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from corporate
action under RSA 293-A:13.02 and who exercises that right when and in the
manner required by RSA 293-A:13.20 through 293-A:13.28.
(3) "Fair value", with respect to a dissenter's shares, means the value of the
shares immediately before the effectuation of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action, unless exclusion would be
inequitable.
(4) "Interest" means interest from the effective date of the corporate action
until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is
fair and equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are registered
in the records of a corporation or the beneficial owner of shares to the
extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial shareholder.
Sec. 293-A:13.02 Right to Dissent.
(a) A shareholder is entitled to dissent from, and obtain payment of the fair
value of his shares in the event of, any of the following corporate
actions:
(1) Consummation of a plan of merger to which the corporation is a party:
(i) If shareholder approval is required for the merger by RSA
293-A:11.03 or the articles of incorporation and the shareholder
is entitled to vote on the merger; or
(ii) If the corporation is a subsidiary that is merged with its parent
under RSA 293-A:11.04.
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(2) Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan.
(3) Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than in the usual and regular
course of business, if the shareholder is entitled to vote on the sale
or exchange, including a sale in dissolution, but not including a sale
pursuant to court order or a sale for cash pursuant to a plan by which
all or substantially all of the net proceeds of the sale will be
distributed to the shareholders within one year after the date of
sale.
(4) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because
it:
(i) Alters or abolishes a preferential right of the shares.
(ii) Creates, alters, or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the
redemption or repurchase, of the shares.
(iii) Alters or abolishes a preemptive right of the holder of the
shares to acquire shares or other securities.
(iv) Excludes or limits the right of the shares to vote on any
matter, or to cumulate votes, other than a limitation by
dilution through issuance of shares or other securities with
similar voting rights.
(v) Reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is to be
acquired for cash under RSA 293-A:6.04.
(5) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the
board of directors provides that voting or nonvoting shareholders are
entitled to dissent and obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for his shares under
this subdivision shall not challenge the corporate action creating his
entitlement, unless the action is unlawful or fraudulent with respect to
the shareholder or the corporation.
Sec. 293-A:13.03 Dissent by Nominees and Beneficial Owners.
(a) A record shareholder may assert dissenters' rights as to fewer than all the
shares registered in his name only if he dissents with respect to all
shares beneficially owned by any one person and notifies the corporation in
writing of the name and address of each person on whose behalf he asserts
dissenters' rights. The rights of a partial dissenter under this subsection
are determined as if the shares as to which he dissents and his other
shares were registered in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares held on
his behalf only if:
(1) He submits to the corporation the record shareholder's written consent
to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
(2) He does so with respect to all shares of which he is the beneficial
shareholder or over which he has power to direct the vote.
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B. PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
Sec. 293-A:13.20 Notice of Dissenters' Rights.
(a) If proposed corporate action creating dissenters' rights under RSA
293-A:13.02 is submitted to a vote at a shareholders' meeting, the meeting
notice shall state that shareholders are or may be entitled to assert
dissenters' rights under this subdivision and be accompanied by a copy of
this subdivision.
(b) If corporate action creating dissenters' rights under RSA 293-A:13.02 is
taken without a vote of shareholders or by consent pursuant to RSA
293-A:7.04, the corporation shall notify in writing all shareholders
entitled to assert dissenters' rights that the action was taken and send
them the dissenters' notice described in RSA 293- A:13.22.
Sec. 293-A:13.21 Notice of Intent to Demand Payment.
(a) If proposed corporate action creating dissenters' rights under RSA
293-A:13.02 is submitted to a vote at a shareholders' meeting, a
shareholder who wishes to assert dissenters' rights:
(1) Shall deliver to the corporation before the vote is taken written
notice of his intent to demand payment for his shares if the proposed
action is effectuated; and
(2) Shall not vote his shares in favor of the proposed action.
(b) A shareholder who does not satisfy the requirements of subsection (a) is
not entitled to payment for his shares under this subdivision.
Sec. 293-A:13.22 Dissenters' Notice.
(a) If proposed corporate action creating dissenters' rights under RSA
293-A:13.02 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of RSA 293-A:13.21.
(b) The dissenters' notice shall be sent no later than 10 days after corporate
action was taken, and shall:
(1) State where the payment demand shall be sent and where and when
certificates for certificated shares shall be deposited.
(2) Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received.
(3) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of
the proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not he acquired beneficial
ownership of the shares before that date.
(4) Set a date by which the corporation shall receive the payment demand,
which date shall not be fewer than 30 nor more than 60 days after the
date the notice is delivered.
(5) Be accompanied by a copy of this subdivision.
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Sec. 293-A:13.23 Duty to Demand Payment.
(a) A shareholder sent a dissenters' notice described in RSA 293-A:13.22 shall
demand payment, certify whether he acquired beneficial ownership of the
shares before the date required to be set forth, in the dissenter's notice
pursuant to RSA 293-A:13.22(b)(3), and deposit his certificates in
accordance with the terms of the notice.
(b) The shareholder who demands payment and deposits his share certificates
under subsection (a) retains all other rights of a shareholder until these
rights are cancelled or modified by the taking of the proposed corporate
action.
(c) A shareholder who does not demand payment or deposit his share certificates
where required, each by the date set in the dissenters' notice, is not
entitled to payment for his shares under this subdivision.
Sec. 293-A:13.24 Share Restrictions.
(a) The corporation may restrict the transfer of uncertificated shares from the
date the demand for their payment is received until the proposed corporate
action is taken or the restrictions released under RSA 293-A:13.26.
(b) The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are
cancelled or modified by the taking of the proposed corporate action.
Sec. 293-A:13.25 Payment.
(a) Except as provided in RSA 293-A:13.27, as soon as the proposed corporate
action is taken, or upon receipt of a payment demand, the corporation shall
pay each dissenter who complied with RSA 293-A:13.23 the amount the
corporation estimates to be the fair value of his shares, plus accrued
interest.
(b) The payment shall be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal year ending
not more than 16 months before the date of payment, an income
statement for that year, a statement of changes in shareholders'
equity for that year, and the latest available interim financial
statements, if any;
(2) A statement of the corporation's estimate of the fair value of the
shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under RSA
293-A:13.28; and
(5) A copy of this subdivision.
Sec. 293-A:13.26 Failure to Take Action.
(a) If the corporation does not take the proposed action within 60 days after
the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the
transfer restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it shall send a
new dissenters' notice under RSA 293-A:13.22 and repeat the payment demand
procedure.
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Sec. 293-A:13.27 After-Acquired Shares.
(a) A corporation may elect to withhold payment required by RSA 293-A:13.25
from a dissenter, unless he was the beneficial owner of the shares before
the date set forth in the dissenters' notice as the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action.
(b) To the extent the corporation elects to withhold payment under subsection
(a), after taking the proposed corporate action, it shall estimate the fair
value of the shares, plus accrued interest, and shall pay this amount to
each dissenter who agrees to accept it in full satisfaction of his demand.
The corporation shall send with its offer a statement of its estimate of
the fair value of the shares, an explanation of how the interest was
calculated, and a statement of the dissenter's right to demand payment
under RSA 293-A:13.28.
Sec. 293-A:13.28 Procedure if Shareholder Dissatisfied With Payment or Offer.
(a) A dissenter may notify the corporation in writing of his own estimate of
the fair value of his shares and amount of interest due, and demand payment
of his estimate, less any payment under RSA 293-A:13.25, or reject the
corporation's offer under RSA 293-A:13.27 and demand payment of the fair
value of his shares and interest due, if:
(1) The dissenter believes that the amount paid under RSA 293-A:13.25 or
offered under RSA 293- A:13.27 is less than the fair value of his
shares or that the interest due is incorrectly calculated;
(2) The corporation fails to make payment under RSA 293-A:13.25 within 60
days after the date set for demanding payment; or
(3) The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within 60 days after the date set for
demanding payment.
(b) A dissenter waives his right to demand payment under this section unless he
notifies the corporation of his demand in writing under subsection (a)
within 30 days after the corporation made or offered payment for his
shares.
C. JUDICIAL APPRAISAL OF SHARES
Sec. 293-A:13.30 Court Action.
(a) If a demand for payment under RSA 293-A:13.28 remains unsettled, the
corporation shall commence a proceeding within 60 days after receiving the
payment demand and petition the court to determine the fair value of the
shares and accrued interest. If the corporation does not commence the
proceeding within the 60-day period, it shall pay each dissenter whose
demand remains unsettled the amount demanded.
(b) The corporation shall commence the proceeding in the superior court of the
county where a corporation's principal office, or, if none in this state,
its registered office, is located. If the corporation is a foreign
corporation without a registered office in this state, it shall commence
the proceeding in the county in this state where the registered office of
the domestic corporation merged with or whose shares were acquired by the
foreign corporation was located.
(c) The corporation shall make all dissenters, whether or not residents of this
state, whose demands remain unsettled parties to the proceeding as in an
action against their shares and all parties shall be served with a copy of
the petition. Nonresidents may be served by registered or certified mail or
by publication as provided by law.
D-5
<PAGE>
(d) The jurisdiction of the court in which the proceeding is commenced under
subsection (b) is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend decisions on the
question of their value. The appraisers have the powers described in the
order appointing them, or in any amendment to it. The dissenters are
entitled to the same discovery rights as parties in other civil
proceedings.
(e) Each dissenter made a party to the proceeding is entitled to judgment:
(1) For the amount, if any, by which the court finds the fair value of his
shares, plus interest, exceeds the amount paid by the corporation; or,
(2) For the fair value, plus accrued interest, of his after-acquired
shares for which the corporation elected to withhold payment under RSA
293-A:13.27.
Sec. 293-A:13.31 Court Costs and Counsel Fees.
(a) The court in an appraisal proceeding commenced under RSA 293-A:13.30 shall
determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court
shall assess the costs against the corporation, except that the court may
assess costs against all or some of the dissenters, in amounts the court
finds equitable, to the extent the court finds the dissenters acted
arbitrarily, vexatiously, or not in good faith in demanding payment under
RSA 293-A:13.28.
(b) The court may also assess the fees and expenses of counsel and experts for
the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the
requirements of RSA 293-A:13.20 through RSA 293-A:13.28.
(2) Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good
faith with respect to the rights provided by this subdivision.
(c) If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to these counsel reasonable fees to be paid out of the
amounts awarded the dissenters who were benefited.
D-6
EXHBIIT 2.3
CONFORMED COPY
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of August 5, 1996 (this "Plan of
Merger") by and among First Essex Bank, FSB, a federal savings bank in stock
form and the wholly owned subsidiary of First Essex Bancorp, Inc. ("Savings
Association"), and Pelham Bank and Trust Company, a trust company organized and
existing under the laws of New Hampshire and the wholly owned subsidiary of
Finest Financial Corp. ("Bank"). Savings Association and Bank are hereinafter
sometimes collectively referred to as the "Constituent Corporations".
This Plan of Merger is being entered into pursuant to an Agreement and
Plan of Reorganization dated as of the date hereof by and among First Essex
Bancorp, Inc., Finest Financial Corp. and the Bank (the "Agreement").
All capitalized terms used herein without definition are used with the
meanings ascribed thereto in the Agreement.
In consideration of the premises, and the mutual covenants and
agreements herein contained, the parties hereto agree as follows:
ARTICLE I
THE MERGER
1.01 Surviving Corporation. In accordance with the provisions of this
Plan of Merger and the laws of the United States and the State of New Hampshire,
at the Effective Time (as hereinafter defined), Bank shall be merged with and
into Savings Association (the "Merger") and the separate corporate existence of
Bank shall cease. Bank shall be the disappearing institution as such term is
defined in 12 C.F.R. ss. 552.13(b)(5). Savings Association shall be the
resulting institution in the Merger as such term is defined in 12 C.F.R. ss.
552.13(b)(8) (hereinafter sometimes referred to as the "Surviving Corporation")
and shall continue its corporate existence under the laws of the United States.
The name of the Surviving Corporation shall continue to be "First Essex Bank,
FSB". The locations of the home office and all other offices of the Surviving
Corporation, as shall be established and authorized immediately after the
Effective Time, shall be as set forth in Schedule 1.01 hereto.
1.02 Effect of the Merger.
(a) At the Effective Time, all of the estate, property,
rights, privileges, powers and franchises of the Constituent
Corporations and all of their property, real, personal and mixed, and
all the debts due on whatever account to any of them, as well as all
stock subscriptions and other choses in action belonging to any of
<PAGE>
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them, shall be transferred to and vested in the Surviving Corporation,
without further act or deed, and all claims, demands, property and
other interest shall be the property of the Surviving Corporation, and
the title to all real estate vested in any of the Constituent
Corporations shall not revert or be in any way impaired by reason of
the Merger, but shall be vested in the Surviving Corporation. All of
the deposit liabilities of the Surviving Corporation shall continue to
be insured up to the applicable limits under the Federal Deposit
Insurance Act through the Bank Insurance Fund of the Federal Deposit
Insurance Corporation.
(b) From and after the Effective Time, the rights of creditors
or any liens upon property of any Constituent Corporation shall not in
any manner be impaired, nor shall any liability or obligation,
including taxes due or to become due, or any claim or demand in any
cause existing against such corporation, or any stockholder, director,
or officer thereof, be released or impaired by the Merger, but the
Surviving Corporation shall be deemed to have assumed, and shall be
liable for, all liabilities and obligations of each of the Constituent
Corporations in the same manner and to the same extent as if the
Surviving Corporation had itself incurred such liabilities or
obligations. The stockholders, directors, and officers of the
Constituent Corporations shall continue to be subject to all
liabilities, claims and demands existing against them as such at or
before the Merger. No action or proceeding then pending before any
court or tribunal of the United States, the Commonwealth of
Massachusetts, the State of New Hampshire or otherwise in which any
Constituent Corporation is a party, or in which any such stockholder,
director, or officer is a party, shall abate or be discontinued by
reason of the Merger, but any such action or proceeding may be
prosecuted to final judgment as though no merger had taken place, or
the Surviving Corporation may be substituted as a party in place of any
Constituent Corporation by the court in which such action or proceeding
is pending. Any judgment rendered against any Constituent Corporation
may be enforced against the Surviving Corporation.
1.03 Additional Actions. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of Bank acquired or to be acquired by the Surviving
Corporation as a result of, or in connection with, the Merger or to otherwise
carry out this Plan of Merger, the officers and directors of the Surviving
Corporation shall and will be authorized to execute and deliver, in the name and
on behalf of the Constituent Corporations or otherwise, all such deeds, bills of
sale, assignments and assurances and to take and do, in the name and on behalf
of the Constituent Corporations or otherwise, all such other actions and things
as may be necessary or desirable to vest, perfect or confirm any and all right,
title and interest in, to and under such rights, properties or assets in the
Surviving Corporation or to otherwise carry out this Plan of Merger.
1.04 Charter and By-laws. The Charter and By-laws of Savings
Association, as in effect at the Effective Time, shall be the Charter and
By-laws of the Surviving Corporation and shall thereafter continue to be its
Charter and By-laws until amended as provided therein or by law.
1.05 Directors and Officers. The directors and officers of Savings
Association immediately prior to the Effective Time shall be the directors and
officers of the Surviving Corporation, each to hold office in accordance with
the Charter and By-laws of the Surviving Corporation and applicable
<PAGE>
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law. The number, names, residence addresses and terms of all such directors of
the Surviving Corporation are as set forth in Schedule 1.05 hereto.
1.06 Effective Time; Conditions. If all of the conditions precedent set
forth in Article VI of the Agreement have been satisfied or waived, and this
Plan of Merger is not terminated under Section 3.01 hereof, immediately
following the consummation of the Acquisition Merger, Articles of Combination
with respect to the Merger shall be prepared by Savings Association and Bank and
filed and recorded with the Executive Secretary of the Office of Thrift
Supervision pursuant to Section 12 C.F.R. ss. 552.13(j). The Merger shall become
effective at, and the Effective Time shall be, the date and time at which the
Articles of Combination are endorsed by the Executive Secretary of the Office of
Thrift Supervision (such date and time is herein referred to as the "Effective
Time").
ARTICLE II
CONVERSION OF SHARES
2.01 Effect on Outstanding Shares.
(a) Savings Association Common Stock. Each share of common
stock of Savings Association, par value $10.00 per share ("Savings
Association Common Stock"), issued and outstanding immediately prior to
the Effective Time shall remain issued and outstanding upon the
Effective Time and shall constitute such number of shares of common
stock of the Surviving Corporation ("Surviving Corporation Common
Stock"). Each certificate which immediately prior to the Effective Time
represented outstanding shares of Savings Association Common Stock
shall on and after the Effective Time be deemed for all purposes to
represent such like number of shares of Surviving Corporation Common
Stock issued and outstanding as of the Effective Time in accordance
with this Section 2.01(a).
(b) Bank Common Stock. By virtue of the Merger, automatically
and without any action on the part of the holder thereof, each share of
common stock of Bank, par value $2.50 per share ("Bank Common Stock"),
issued and outstanding immediately prior to the Effective Time shall
become and be converted into the appropriate number of issued and
outstanding shares of Surviving Corporation Common Stock based upon the
fair market value of the shares of Savings Association Common Stock as
compared to the fair market value of the shares of Bank Common Stock
immediately prior to the Effective Time. Each certificate which
immediately prior to the Effective Time represented outstanding shares
of Bank Common Stock shall on and after the Effective Time be deemed
for all purposes to represent the number of shares of Surviving
Corporation Common Stock into which the shares of Bank Common Stock
represented by such certificate shall have been converted pursuant to
this Section 2.01(b).
<PAGE>
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ARTICLE III
COVENANTS
3.01 Approvals. This Plan of Merger shall be submitted to the sole
stockholder of each of Savings Association and Bank for approval, ratification
and confirmation in accordance with the applicable provisions of law and the
respective charter and by-laws of Savings Association and Bank. Savings
Association and Bank shall proceed expeditiously and cooperate fully in the
procurement of any other consents and approvals and in the taking of any other
action, and the satisfaction of all other requirements prescribed by law or
otherwise, which may be necessary for consummation of the Merger on the terms
herein provided, including without limitation, the preparation, execution and
submission of applications, reports, forms, notices or petitions, as applicable,
to the New Hampshire Bank Commissioner and the Director of the Office of Thrift
Supervision pursuant to the requirements of applicable state and federal law.
3.02 Additional Assurances. Savings Association and Bank each agree to
use all reasonable efforts to take, or cause to be taken, all action and to do,
or cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Plan of Merger.
ARTICLE IV
CLOSING CONDITIONS
4.01 Conditions to Merger. Prior to the Effective Time, the respective
obligations of Savings Association and Bank under this Plan of Merger shall be
subject to the fulfillment of the following conditions:
(a) at a meeting of the sole stockholder of each of Savings
Association and Bank, or by written consent in lieu thereof, this Plan
of Merger, and the transactions contemplated hereby shall have been
duly approved and authorized in accordance with the applicable
provisions of law and the respective charter and by-laws of Savings
Association and Bank by the affirmative vote of such sole stockholder;
(b) the written approval of the Director of the Office of
Thrift Supervision with respect to the Merger pursuant to 12 C.F.R. ss.
563.22(a)(1) and any required notice to or approval of the New
Hampshire Bank Commissioner with respect to the Merger shall have been
obtained and/or made and all applicable statutory waiting periods shall
have expired;
(c) the consents, approvals and permits of any other
regulatory authorities or nongovernmental third parties which may be
necessary to consummate the Merger or which are advisable in the
judgment of Savings Association to be obtained prior to the
consummation of the Merger, or which Savings Association otherwise
determines to be necessary or appropriate to enable the Surviving Bank
to continue the banking businesses of Savings Association and Bank at
<PAGE>
-5-
the locations at which such businesses are now being carried on, and in
the manner such businesses are being presently conducted, shall have
been received and shall remain in effect;
(d) no action, suit, proceeding or claim shall have been
instituted, made or threatened, and no other event shall have occurred
which shall make consummation of the Merger inadvisable in the opinion
of the Board of Directors of Savings Association or the Board of
Directors of Bank;
(e) the Acquisition Merger shall have been consummated.
ARTICLE V
AMENDMENT AND TERMINATION
5.01 Termination. Notwithstanding the approval and adoption of this
Plan of Merger by the stockholders of Savings Association and Bank, this Plan of
Merger shall terminate forthwith in the event that the Agreement shall be
terminated as therein provided. In the event of the termination of this Plan of
Merger as provided above, this Plan of Merger shall forthwith become null and
void and there shall be no liability on the part of any of the parties hereto
except as otherwise provided in the Agreement.
5.02 Amendment. This Plan of Merger shall not be amended except by an
instrument in writing signed on behalf of each of the parties hereto pursuant to
an amendment to the Agreement approved in the manner therein provided. If any
such amendment to the Agreement is so approved, any amendment to this Plan of
Merger required by such amendment to the Agreement shall be effected by the
parties hereto by action taken by their respective Boards of Directors.
ARTICLE VI
MISCELLANEOUS
6.01 Counterparts. This Plan of Merger may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to each of the other parties.
6.02 Governing Law. This Plan of Merger shall be governed by and
construed in accordance with the laws of the Commonwealth of Massachusetts,
without giving effect to the principles of conflicts of laws thereof, and, to
the extent applicable, by federal law.
<PAGE>
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IN WITNESS WHEREOF, the parties hereto have caused this Plan of Merger
to be duly executed and delivered as a sealed instrument as of the date first
above written.
FIRST ESSEX BANK, FSB
By: /s/Leonard A. Wilson
Leonard A. Wilson
President
Attest:
/s/William F. Burke
William F. Burke
Secretary
PELHAM BANK AND TRUST COMPANY
By: /s/Brian W. Thompson
Brian W. Thompson
President
Attest:
/s/ Irving J. Goss
Irving J. Goss
Executive Vice President and
Chief Financial Officer
<PAGE>
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SCHEDULE 1.01
Office Locations of Surviving Corporation
Home Office of First Essex Bank, FSB
296 Essex Street
Lawrence, Massachusetts 01842
Additional Branch Offices of First Essex Bank, FSB
71 Main Street, P.O. Box 2070
Andover, Massachusetts 01810
211 North Main Street
Andover, Massachusetts 01810
555 Chickering Road
North Andover, MA 01845
750 Main Street
Haverhill, Massachusetts 01830
460 South Union Street - Plaza One Fourteen
Lawrence, Massachusetts 01842
555 Broadway
Lawrence, Massachusetts 01842
17 Burnham Road
Methuen, Massachusetts 01844
125 Merrimack Street
Methuen, Massachusetts 01844
24 Orchard View Drive, #1
Londenderry, New Hampshire 03053
Current Offices of Pelham Bank and Trust Company
(To Become Branch Offices of First Essex Bank, FSB)
Bridge Street, P.O. Box 298
Pelham, New Hampshire 03076
1 Wall Street, P.O. Box 32
Windham, New Hampshire 03087
539 South Broadway
Salem, New Hampshire 03079
<PAGE>
-8-
SCHEDULE 1.05
Directors of Surviving Corporation
1. Augustine J. Fabiani
17 Kathleen Drive
Andover, Massachusetts 01810
Term expires at 1998 Annual Meeting
2. Robert H. Watkinson
104 Wildwood Road
Andover, Massachusetts 01810
Term expires at 1999 Annual Meeting
3. Leonard A. Wilson
4 Eastman Road
Andover, Massachusetts 01810
Term expires at 1998 Annual Meeting
4. Robert H. Pangione
245 Brentwood Circle
North Andover, Massachusetts 01845
Term expires at 1997 Annual Meeting
5. Frank Leone, Jr.
87 Coachman's Lane
North Andover, Massachusetts 01845
Term expires at 1997 Annual Meeting
6. William L. Lane
154 High Plain Road
Andover, Massachusetts 01810
Term expires at 1999 Annual Meeting
7. Thomas S. Barenboim
14 Karlton Circle
Andover, Massachusetts 01810
Term expires at 1999 Annual Meeting
8. Walter W. Topham
20 Houston Avenue
Methuen, Massachusetts 01844
Term expires at 1998 Annual Meeting
EXHIBIT 2.4
AMENDMENT NO. 1 TO
AGREEMENT AND PLAN OF MERGER DATED AS OF AUGUST 5, 1996
This Amendment No. 1 (this "Amendment"), dated as of September ___,
1996, is entered into by and between First Essex Bank, FSB ("Savings
Association") and Pelham Bank and Trust Company ("Bank").
1. AGREEMENT AND PLAN OF MERGER
Reference is made to the Agreement and Plan of Merger dated as of
August 5, 1996 by and between Savings Association and Bank (the "Original
Agreement"). Capitalized terms used in this Amendment, which are defined in the
Original Agreement and are not otherwise defined herein, are used in this
Amendment with the meanings ascribed to them in the Original Agreement. The
Original Agreement as amended by this Amendment is and shall continue to be in
full force and effect and shall not be affected by this Amendment except and
only to the extent specified herein.
2. AMENDMENTS TO ORIGINAL AGREEMENT
2.1 Amendment to Section 1.06 - Effective Time; Conditions. Section
1.06 of the Original Agreement shall be and hereby is amended and restated in
its entirety to read as follows:
1.06 Effective Time; Conditions. If all of the conditions
precedent set forth in Article VI of the Agreement have been satisfied
or waived, with the exception of the consummation of the Merger, and
this Plan of Merger is not terminated under Section 3.01 hereof,
immediately prior to the consummation of the Acquisition Merger,
Articles of Combination with respect to the Merger shall be prepared by
Savings Association and Bank and filed and recorded with the Executive
Secretary of the Office of Thrift Supervision pursuant to Section 12
C.F.R. ss. 552.13(j). The Merger shall become effective at, and the
Effective Time shall be, the date and time at which the Articles of
Combination are endorsed by the Executive Secretary of the Office of
Thrift Supervision (such date and time is herein referred to as the
"Effective Time").
2.2 Amendment to Section 4.01 - Conditions to Merger. Section 4.01 of
the Original Agreement shall be and hereby is amended in part by deleting
subsection 4.01(e) in its entirety and substituting a period at the end of
subsection 4.01(d) in place of the semi-colon previously set forth thereat.
3. MISCELLANEOUS
3.1 Governing Law. This Amendment shall be governed by the laws of the
Commonwealth of Massachusetts, without giving effect to the principles of
conflict of laws thereof, and applicable federal law.
3.2 Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall be an original, but all of which shall
constitute one and the same agreement.
<PAGE>
-2-
3.3 Headings. The Section headings herein are for convenience only and
shall not affect the construction hereof.
3.4 Entire Agreement. The Original Agreement, as amended by this
Amendment, including the documents and other writings referred to therein or
herein or delivered pursuant thereto or hereto, contains the entire agreement
and understanding of the parties with respect to the Merger. There are no
restrictions, agreements, promises, warranties, covenants or undertakings
pertaining to the Merger between the parties other than those expressly set
forth herein or therein. The Original Agreement, as amended by this Amendment,
supersedes all prior agreements and understandings between the parties, both
written and oral, with respect to the Merger.
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly
executed as a sealed instrument as of the day and year first above written.
FIRST ESSEX BANK, FSB
By:
Leonard A. Wilson, President
Attest:
William F. Burke, Secretary
PELHAM BANK AND TRUST COMPANY
By:
Brian W. Thompson, President
Attest:
Irving J. Goss
Executive Vice President and
Chief Financial Officer
Exhibit 23.2
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to to the use of
our reports (and all references to our Firm) included in or made part of this
registration statement for First Essex Bancorp, Inc. on Form S-4.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
September 20, 1996
Exhibit 23.3
SHATSWELL, MacLEOD & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
83 Pine Street
West Peabody, Massachusetts 01960-3635
(508) 535-0206
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Finest Financial Corp.
Pelham, New Hampshire
We hereby consent to the reference to our firm under the caption
"Experts," under the captions "Selected Consolidated Financial Data Finest
Financial Corp. and Subsidiary Historical", "Selected Consolidated Financial
Data Finest Financial Corp., and Subsidiary" and to the use of our report dated
February 9, 1996 except for Note 15, as to which the date is August 2, 1996,
Note 20 as to which the date is August 5, 1996, and Note 17, as to which the
date is September 24, 1996 in the Registration Statement (Form S-4) of First
Essex Bancorp, Inc.
/s/ SHATSWELL, MacLEOD & COMPANY, P.C.
SHATSWELL, MacLEOD & COMPANY, P.C.
W. Peabody, Massachusetts
September 26, 1996
EXHIBIT 23.4
Consent of Independent Certified Public Accountants
We have issued our report dated February 18, 1994 (except for note 15
as to which the date is August 2, 1996) which was updated to remove an
explanatory paragraph resulting from the settlement of litigation discussed in
note 15 to the consolidated financial statements, accompanying the financial
statements for Finest Financial Corp. and Subsidiary contained in the
Registration Statement and Prospectus. We consent to the use of the
aforementioned report in the Registration Statement and Prospectus, and to the
use of our name as it appears under the captions "Selected Consolidated
Financial Data of Finest and Subsidiary" and "Experts".
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Boston, Massachusetts
September 24, 1996
