SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 28, 1994
SHAWMUT NATIONAL CORPORATION
(Exact Name of Registrant as Specified in Charter)
Delaware 1-10102 06-1212629
(State or Other (Commission File (IRS Employer
Jurisdiction of Number) Identification
Incorporation) No.)
777 Main Street, Hartford, Connecticut 06115
One Federal Street, Boston, Massachusetts 02211
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (203) 986-2000
(617) 292-2000
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Exhibit Index located on Page
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits.
The following exhibits are filed with this Current
Report on Form 8-K:
Exhibit
Number Description
23.1 Consent of Independent Accountants of New
Dartmouth Bank.
23.2 Consent of Independent Auditors of Peoples
Bancorp of Worcester, Inc. and Subsidiaries.
23.3 Consent of Independent Auditors of Gateway
Financial Corporation and Subsidiaries.
23.4 Consent of Independent Auditors of Gateway
Financial Corporation and Subsidiaries.
23.5 Consent of Independent Accountants of Cohasset
Savings Bank.
23.6 Consent of Independent Accountants of West
Newton Savings Bank and Subsidiaries.
99.1 Unaudited Financial Information of New
Dartmouth Bank as of December 31, 1993.
99.2 Financial Statements of New Dartmouth Bank as
of June 30, 1993.
99.3 Financial Statements of Peoples Bancorp of
Worcester, Inc. and Subsidiaries as of
December 31, 1993.
99.4 Financial Statements of Gateway Financial
Corporation and Subsidiaries as of December
31, 1993.
99.5 Financial Statements of Cohasset Savings Bank
as of December 31, 1993.
99.6 Financial Statements of West Newton Savings
Bank and Subsidiaries as of December 31, 1993.
99.7 Shawmut National Corporation and
Subsidiaries/New Dartmouth Bank; Peoples
Bancorp of Worcester, Inc. and Subsidiaries;
Gateway Financial Corporation and
Subsidiaries; Cohasset Savings Bank and West
Newton Savings Bank and Subsidiaries Unaudited
Pro Forma Condensed Financial Information.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned hereunto duly authorized.
SHAWMUT NATIONAL CORPORATION
By: /s/ Joel B. Alvord
Joel B. Alvord
Chairman and Chief
Executive Officer
Dated: March 28, 1994
EXHIBIT INDEX
Exhibit Page
Number Description Number
23.1 Consent of Independent Accountants
of New Dartmouth Bank.
23.2 Consent of Independent Auditors of
Peoples Bancorp of Worcester, Inc.
and Subsidiaries.
23.3 Consent of Independent Auditors of
Gateway Financial Corporation and
Subsidiaries.
23.4 Consent of Independent Auditors of
Gateway Financial Corporation and
Subsidiaries.
23.5 Consent of Independent Accountants
of Cohasset Savings Bank.
23.6 Consent of Independent Accountants
of West Newton Savings Bank and
Subsidiaries.
99.1 Unaudited Financial Information of
New Dartmouth Bank as of December 31, 1993.
99.2 Financial Statements of New Dartmouth Bank
as of June 30, 1993.
99.3 Financial Statements of Peoples Bancorp
of Worcester, Inc. and Subsidiaries as
of December 31, 1993.
99.4 Financial Statements of Gateway Financial
Corporation and Subsidiaries as of
December 31, 1993.
99.5 Financial Statements of Cohasset Savings
Bank as of December 31, 1993.
99.6 Financial Statements of West Newton Savings
Bank and Subsidiaries as of December 31, 1993.
99.7 Shawmut National Corporation and
Subsidiaries/New Dartmouth Bank; Peoples
Bancorp of Worcester, Inc. and Subsidiaries;
Gateway Financial Corporation and Subsidiaries;
Cohasset Savings Bank and West Newton
Savings Bank and Subsidiaries Unaudited Pro
Forma Condensed Financial Information.
Consent of Independent Accountants
We hereby consent to the incorporation by reference in
the Prospectuses constituting part of the Registration
Statements on Form S-8 (Nos. 33-17765-02 and 33-20387)
and Form S-3 (Nos. 33-50710, 33-50708 and 51311) of
Shawmut National Corporation of our report dated August
10, 1993 relating to the consolidated financial
statements of New Dartmouth Bank, which appears in the
Current Report on Form 8-K of Shawmut National
Corporation dated March 28, 1994.
/s/ Price Waterhouse
PRICE WATERHOUSE
Boston, Massachusetts
March 24, 1994
Consent of Independent Auditors
We consent to the incorporation by reference in the
Prospectus constituting part of the Registration
Statements on Form S-8 (Nos. 33-17765-02 and 33-20387),
Form S-3 (Nos. 33-50710, 33-51311 and 33-50708) and Form
S-4 (Nos. 33-61974 and 33-51943) of Shawmut National
Corporation of our report dated January 20, 1994, with
respect to the consolidated financial statements of
Peoples Bancorp of Worcester, Inc., included in the
Current Report on Form 8-K of Shawmut National
Corporation dated March 28, 1994.
/s/ Ernst & Young
Worcester, Massachusetts
March 28, 1994
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the
Prospectuses constituting part of the Registration
Statements on Form S-8 (Nos. 33-17765-02 and 33-20387),
Form S-3 (Nos. 33-51311, 33-50710 and 33-50708) and Form
S-4 (Nos. 33-61974 and 33-51943) of Shawmut National
Corporation of our report dated January 27, 1994 on our
audit of the consolidated financial statements of Gateway
Financial Corporation as of and for the year ended December
31, 1993 which report is included in this Current Report
on Form 8-K of Shawmut National Corporation.
/s/ Coopers & Lybrand
Hartford, Connecticut
March 25, 1994
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in
the Prospectuses constituting part of the Registration
Statement on Form S-8 (Nos. 33-17765-02 and 33-20387),
Form S-3 (Nos. 33-50710, 33-51311 and 33-50708) and Form
S-4 (Nos. 33-61974 and 33-51943) of Shawmut National
Corporation of our report dated February 11, 1993, except
for Note B, as to which the date is March 22, 1994
relating to the consolidated financial statements of
Gateway Financial Corporation, which appears in this
Current Report on Form 8-K of Shawmut National
Corporation.
/s/ Ernst & Young
Hartford, Connecticut
March 28, 1994
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in
the Prospectuses constituting part of the Registration
Statements on Form S-8 (Nos. 33-17765-02 and 33-20387),
Form S-3 (Nos. 33-50710, 33-51311 and 33-50708) and Form
S-4 (Nos. 33-61974 and 33-51943) of Shawmut National
Corporation of our independent auditors' report dated
January 21, 1994, except for Note 17, as to which the
date is March 2, 1994, relating to the consolidated
financial statements of Cohasset Savings Bank, which
appear in the Current Report on Form 8-K of Shawmut
National Corporation dated March 28, 1994.
/s/ Wolf & Company
WOLF & COMPANY, P.C.
Boston, Massachusetts
March 28, 1994
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in
the Prospectuses constituting part of the Registration
Statements on Form S-8 (Nos. 33-17765-02 and 33-20387),
Form S-3 (Nos. 33-50710, 33-51311 and 33-50708) and Form
S-4 (Nos. 33-61974 and 33-51943) of Shawmut National
Corporation of our independent auditors' report dated
January 24, 1994, except for Note 16, as to which the
date is March 7, 1994, relating to the consolidated
financial statements of West Newton Savings Bank, which
appears in the Current Report on Form 8-K of Shawmut
National Corporation dated March 28, 1994.
/s/ Wolf & Company, P.C.
WOLF & COMPANY, P.C.
Boston, Massachusetts
March 28, 1994
New Dartmouth Bank
Consolidated Financial Statements
For the Period Ended
December 31, 1993
(Unaudited)
New Dartmouth Bank December 31, June 30,
Consolidated Balance Sheets 1993 1993
(In thousands, except per share data) (Unaudited) (Audited)
Assets:
Cash and due from banks $ 51,142 $ 44,923
Interest bearing deposits in other banks 11 499
Federal funds sold 20,000 0
Securities held for sale 163,209 363,261
Securities held to maturity (market
value $573,305, and $333,766, respectively) 573,635 331,087
Due from Federal Deposit Insurance Corporation 6,442 6,893
Mortgage loans held for resale 25,837 15,163
Loans:
Subject to FDIC Small Loan protection 454,003 523,348
Subject to FDIC "put" protection 227,435 285,206
Other loans 216,517 146,169
Gross loans 897,955 954,723
Less: Discount on loans acquired from the FDIC 39,429 42,086
Gross loans net of discount on loans acquired
from the FDIC 858,526 912,637
Less: Allowance for possible loan losses 12,324 12,398
Net loans 846,202 900,239
Premises and equipment, net 5,682 5,833
Other real estate owned 2,349 1,729
Other assets 28,663 30,869
Total assets $ 1,723,172 $ 1,700,496
Liabilities and Stockholders' Equity:
Deposits:
Demand deposits $ 79,688 $ 70,780
N.O.W. accounts 160,714 146,443
Money market accounts 103,896 107,315
Regular savings 364,168 363,179
Time deposits 791,025 803,019
Total deposits 1,499,491 1,490,736
Securities sold under agreements to repurchase 42,845 31,808
Federal Home Loan Bank advances 52,500 50,000
Total borrowed funds 95,345 81,808
Other liabilities 29,762 33,443
Total liabilities 1,624,598 1,605,987
Commitments and contingent liabilities
Stockholders' Equity:
Preferred stock - $.01 par value, 193,000
and 370,000 shares authorized, 170,073 and
210,073 shares issued and outstanding 15,215 18,794
Common stock - $.01 par value, 960,000 shares
authorized, 424,200 shares issued
and outstanding 4 4
Common surplus 40,350 40,350
Retained earnings 42,970 33,788
Unrealized gain on securities held for sale 35 1,573
Total stockholders equity 98,574 94,509
Total liabilities and stockholders' equity $ 1,723,172 $ 1,700,496
See accompanying notes
Three Months Six Months
New Dartmouth Bank Ended Ended
Consolidated Statement of Operations December 31, December 31,
(In thousands, except per share data) 1993 1992 1993 1992
Interest and loan fee income:
Interest and fees on loans $21,469 $25,503 $41,978 $51,590
Interest on securities held for sale 2,294 0 5,086 0
Interest on securities held to maturity 5,486 7,157 10,113 13,178
Interest on interest bearing deposits
in other banks and federal funds sold 228 252 740 478
Interest on securities purchased under
agreement to resell 34 161 34 446
Dividends on Federal Home Loan Bank
stock 259 252 563 547
Total interest and loan fee income 29,770 33,325 58,514 66,239
Interest expense:
Interest on deposits 12,394 14,134 25,141 29,592
Interest on securities sold under
agreements to repurchase and other
short term borrowings 504 253 884 396
Interest on Federal Home Loan Bank
advances 723 690 1,417 822
Total interest expense 13,621 15,077 27,442 30,810
Net interest income 16,149 18,248 31,072 35,429
Provision for possible loan losses 4,477 2,757 8,583 5,320
Net interest income after provision for
possible loan losses 11,672 15,491 22,489 30,109
Noninterest income:
Fees for services to customers 1,940 1,953 3,759 3,813
FDIC Small Loan protection payments 2,177 1,494 5,683 2,794
Other income 988 903 1,871 1,643
Gain on sale of securities held for
sale 66 0 1,140 0
Total noninterest income 5,171 4,350 12,453 8,250
Noninterest expense:
Salaries and employee benefits 4,221 4,725 8,571 9,415
Occupancy and equipment expense 1,631 1,748 3,390 3,449
Data processing expense 863 809 1,715 1,667
FDIC assessment 847 875 1,670 1,749
Mailing services 383 563 784 964
Other operating expenses 870 2,946 3,198 5,214
Total noninterest expense 8,815 11,666 19,328 22,458
Income before income taxes 8,028 8,175 15,614 15,901
Income taxes 3,050 3,133 5,914 5,907
Net income $ 4,978 $ 5,042 $ 9,700 $ 9,994
Earnings per share:
Primary $ 11.14 $ 11.34 $ 21.72 $ 22.62
Fully diluted 7.54 5.73 14.36 11.39
Weighed average comon shares
outstanding:
Primary 446,756 444,717 446,624 441,884
Fully diluted 660,043 879,379 675,532 877,400
See accompanying notes
Six Months Six Months
New Dartmouth Bank Ended Ended
Consolidated Statements of Cash Flow December 31, December 31,
(In thousands) 1993 1993
Cash flows from operating activities:
Net income $ 9,700 $ 9,994
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Provision for possible loan losses 8,583 5,320
Amortization (accretion) on securities held
for sale, net (1,434) 0
Amortization (accretion) on securities held
to maturity, net 1,296 409
(Gain) on sale of securities held for sale (1,140) 0
Increase in mortgage loans held for sale (10,674) (3,346)
Accretion of FDIC discount on loans (2,657) 0
Loss (gain) on sale and disposal of premises
and equipment 19 (9)
Depreciation and amortization of premises and
equipment 593 407
Decrease in accrued interest payable (143) (940)
(Increase) decrease in accrued interest
receivable 1,180 681
Decrease (increase) in due from FDIC 451 7,640
(5,082) (358)
Other, net
Net cash provided by operating activities 692 19,798
Cash flows from investing activities:
Proceeds from maturities of securities held
for sale 320,434 0
Proceeds from maturities of securities held
to maturity 84,209 347,619
Proceeds from sales of securities held for
sale 870,969 0
Purchases of securities held for sale (988,777) 0
Purchases of securities held to maturity (327,021) (534,635)
Decrease (increase) in securities purchased
under agreements to resell 0 24,000
Decrease in loans, net 18,054 125,039
Proceeds from loans "put" to the FDIC 30,057 0
Purchases of premises and equipment (476) (2,122)
Proceeds from sales of premises and equipment 15 289
Net increase in other real estate owned (620) (296)
Net cash provided by (used in) investing
activities 6,844 (40,106)
Cash flows from financing activities:
Net increase in demand deposits, N.O.W.,
money market and savings accounts 20,749 48,772
Net decrease in time deposits (11,994) (106,137)
Net increase in short-term borrowed funds 11,037 32,887
Net increase in Federal Home Loan Bank
advances 2,500 50,000
(4,097) 0
Preferred stock redemption
18,195 25,522
Net cash provided by financing activities
Increase in cash and cash equivalents 25,731 5,214
Cash and cash equivalents at beginning of
period 45,422 50,244
Cash and cash equivalents at end of period $71,153 $55,458
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest expense $27,585 $31,750
Income taxes 4,987 2,905
See accompanying notes
<TABLE>
<CAPTION>
New Dartmouth Bank
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Preferred Stock Common Stock
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net
Unrealized
Gain On
(In thousands, Number Number Paid Securities Stock-
except per of Preferred of Common in Retained Held holders'
share data) Shares Stock Shares Stock Capital Earnings for Sale Equity
Balance at
July 1, 1992 347,073 $ 31,050 424,200 $ 4 $ 40,350 $ 15,491 $ 0 $86,895
Net Income 9,994 0 9,994
Preferred Stock
Redemption 0
Balance at
December 31, 1992 347,073 $ 31,050 424,200 $ 4 $ 40,350 $ 25,485 $ 0 $96,889
Balance at
July 1, 1993 210,073 $ 18,794 424,200 $ 4 $ 40,350 $ 33,788 $ 1,573 $94,509
Net Income 9,700 9,700
Preferred Stock
Redemption (40,000) (3,579) (518) (4,097)
Net unrealized loss
on securities
held for sale (1,538) (1,538)
Balance at
December 31, 1993 170,073 $ 15,215 424,200 $ 4 $ 40,350 $ 42,970 $ 35 $98,574
See accompanying notes
</TABLE>
New Dartmouth Bank
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MERGER
On November 15, 1993, the Federal Reserve Board, by a 3
to 3 vote, failed to approve Shawmut National Corporation's
("Shawmut") application to acquire New Dartmouth Bank ("New
Dartmouth"). Because Shawmut was unable to obtain by November
15, 1993 all regulatory approvals necessary to consummate the
proposed Merger, New Dartmouth was entitled to abandon the
transaction under the terms of the Merger Agreement.
On December 20, 1993, Shawmut and New Dartmouth agreed
to amend the Merger Agreement to extend the deadline for
completing the Merger to June 30, 1994. Pursuant to the terms of
the Merger Agreement, as amended, each share of New Dartmouth
common stock will be exchanged for shares of Shawmut common stock
having a value equal to $310.95 plus 177% of New Dartmouth's net
earnings per share (assuming the exercise of all outstanding
warrants and options) from October 1, 1993 through the closing
date, subject to certain adjustments. For purposes of
calculating the number of shares of Shawmut common stock to be
exchanged for each share of New Dartmouth common stock, if the
market price of Shawmut common stock prior to closing exceeds
$23.14, the exchange ratio will be calculated as if the market
price were $23.14. If the market price of Shawmut common stock
is less than $17.11, then the exchange ratio will be calculated
as if the market price were $17.11, unless Shawmut waives this
provision.
BASIS OF PRESENTATION
The unaudited consolidated financial statements of New
Dartmouth presented herein should be read in conjunction with New
Dartmouth's Consolidated Financial Statements in the Annual
Report for the period ended June 30, 1993. The accompanying
unaudited Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles but do
not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements.
The consolidated financial statements include the
accounts of New Dartmouth and its wholly-owned subsidiaries,
collectively referred to as "New Dartmouth." All material
intercompany balances and transactions have been eliminated. The
unaudited financial statements reflect all adjustments,
consisting of normal recurring adjustments, which are, in the
opinion of management, necessary to present fairly the financial
position at December 31, 1993 and the results of operations for
the six month periods ended December 31, 1993 and December 31,
1992. Interim results are not necessarily indicative of results
to be expected for the entire year.
EARNINGS PER SHARE
Primary earnings per share is determined on the basis
of the weighted average number of shares outstanding after giving
effect to dilutive stock options and warrants.
Fully diluted earnings per share reflects the dilutive
effect of conversion of each share of preferred stock into 1.25
shares of common stock.
CONTINGENCIES
New Dartmouth and its subsidiaries are involved in a
number of legal proceedings arising out of and incidental to,
their respective businesses. Management of New Dartmouth, based
on its review with its legal counsel of the merits of each of
these proceedings, does not anticipate that any losses that may
be incurred as a result of these proceedings would materially
affect New Dartmouth's consolidated financial position.
STOCKHOLDERS' EQUITY
On August 27, 1993, New Dartmouth redeemed 40,000
shares of Preferred Stock for $4.1 million, reflecting a
redemption price of $102.42 per share. Under the terms of the
Merger Agreement, New Dartmouth will redeem the remaining 170,073
shares of Preferred Stock outstanding prior to consummation of
the Merger.
REPORT OF INDEPENDENT ACCOUNTANTS
PRICE WATERHOUSE
160 Federal Street
Boston, MA 02110
To the Board of Directors and Stockholders of New Dartmouth Bank
In our opinion, the accompanying consolidated balance sheets and
related consolidated statements of operations, of changes in
stockholders' equity and of cash flows, appearing on pages 24
through 45 of this report, present fairly, in all material
respects, the financial position of New Dartmouth Bank and its
subsidiaries at June 30, 1993 and 1992, and the results of their
operations and their cash flows for the year ended June 30, 1993
and the period October 10, 1991 (date of commencement of
operations) to June 30, 1992, in conformity with generally
accepted accounting principles. These financial statements are
the responsibility of the management of New Dartmouth Bank; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
August 10, 1993.
New Dartmouth Bank
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data) June 30, June 30,
1993 1992
ASSETS
Cash and due from banks $ 44,923 $ 34,164
Interest bearing deposits in other banks 499 8,880
Federal funds sold 0 7,200
Securities purchased under agreements to
resell 0 34,000
Securities held for sale 363,261 0
Securities held to maturity
(market value $333,766 and $449,331
respectively) 331,087 445,728
Due from Federal Deposit Insurance
Corporation 6,893 33,334
Mortgage loans held for sale 15,163 4,466
Loans:
Subject to FDIC Small Loan protection 523,348 696,223
Subject to FDIC "put" protection 285,206 389,568
Other loans 146,169 70,261
Gross loans 954,723 1,156,052
Less: Discount on loans acquired
from FDIC 42,086 42,669
Gross loans net of discount on
loans acquired from the FDIC 912,637 1,113,383
Less: Allowance for possible loan
losses 12,398 13,151
Net loans 900,239 1,100,232
Premises and equipment, net 5,833 4,113
Other real estate owned 1,729 1,068
Other assets 30,869 30,123
Total assets $ 1,700,496 $ 1,703,308
(In thousands, except per share data) June 30, June 30,
1993 1992
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand deposits $ 70,780 $ 61,819
N.O.W. accounts 146,443 142,613
Money market accounts 107,315 138,486
Savings 363,179 301,974
Time deposits 803,019 920,035
Total deposits 1,490,736 1,564,927
Short-term borrowed funds:
Securities sold under agreements to
repurchase 31,808 10,940
Other short-term borrowed funds 0 234
Total short-term borrowed funds 31,808 11,174
Federal Home Loan Bank advances 50,000 0
Total borrowed funds 81,808 11,174
Other liabilities 33,443 40,312
Total liabilities 1,605,987 1,616,413
Commitments and contingent liabilities
Stockholders' Equity
Preferred stock - $.01 par value,
233,000 and 370,000 shares authorized
210,073 and 347,073 shares issued
and outstanding 18,794 31,050
Common stock - $.01 par value,
960,000 shares authorized
424,200 shares issued and
outstanding 4 4
Common surplus 40,350 40,350
Retained earnings 33,788 15,491
Unrealized gain on securities held for
sale 1,573 0
Total stockholders' equity 94,509 86,895
Total liabilities and stockholders' $ 1,700,496 $ 1,703,308
equity
See accompanying notes
New Dartmouth Bank
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period
July 1, 1992 October 10, 1991
to to
(In thousands, except per share data) June 30, 1993 June 30, 1992
Interest and loan fee income:
Interest and fees on loans $95,309 $ 89,418
Interest on securities held for sale 3,304 0
Interest on securities held to maturity 24,381 10,556
Interest on interest bearing deposits
in other banks and federal funds sold 1,241 2,678
Interest on securities purchased under
agreement to resell 581 442
Dividends on Federal Home Loan Bank
stock 1,098 863
Total interest and loan fee income 125,914 103,957
Interest expense:
Interest on deposits 55,588 54,278
Interest on securities sold under
agreements to repurchase and
other short-term borrowings 1,048 307
Interest on Federal Home Loan
Bank advances 2,178 0
Total interest expense 58,814 54,585
Net interest income 67,100 49,372
Provision for possible loan losses 16,101 3,216
Net interest income after provision for
possible loan losses 50,999 46,156
Noninterest income:
Fees for services to customers 7,392 5,614
FDIC Small Loan protection payments 10,903 2,216
FDIC loan administration 0 2,976
Gain on sales of securities, net 1,373 9
Other income 3,672 2,194
Total noninterest income 23,340 13,009
Noninterest expense:
Salaries and employee benefits 17,985 11,594
Occupancy and equipment expense 6,966 5,948
Data processing expense 3,408 2,071
FDIC insurance assessment 3,491 2,602
Printing and mailing 1,879 1,326
Other expenses 10,083 9,208
Total noninterest expense 43,812 32,749
Income before income taxes 30,527 26,416
Income tax expense 11,145 10,925
Net income $19,382 $ 15,491
Earnings per share:
Primary $ 43.63 $ 36.10
Fully diluted 23.85 17.77
Weighted average common shares outstanding
Primary 444,282 429,093
Fully diluted 812,496 871,655
See accompanying notes
<TABLE>
<CAPTION>
New Dartmouth Bank
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Preferred Stock Common Stock
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net
Unrealized
Gain on Total
(In thousands, Number Securities Stock-
except per share Number of of Paid in Retained Held holders
data) Shares Amount Shares Amount Capital Earnings for Sale Equity
Balance at 347,073 $31,050 424,200 $ 4 $40,350 $ 0 $ 0 $71,404
October 10, 1991
Net Income _______ _______ _______ ______ _______ 15,491 15,491
Balance at June 347,073 31,050 424,200 4 40,350 15,491 0 86,895
30, 1992
Net Income 19,382 19,382
Preferred Stock (137,000) (12,256) (1,085) (13,341)
redemption
Net unrealized
gain on
securities held
for sale, net of
income taxes of
$1,017 1,573 1,573
Balance at June 210,073 $18,794 424,200 $ 4 $40,350 $33,788 $1,573 $94,509
30, 1993
See accompanying notes
</TABLE>
New Dartmouth Bank
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period
July 1, 1992 October 10, 1991
to to
(In thousands, except per share date) June 30, 1993 June 30, 1992
Cash flows from operating activities:
Net income $ 19,382 $ 15,491
Adjustments to reconcile net income to
net cash provided by
(used in) operating activities:
Provision for possible loan losses 16,101 3,216
Amortization of premiums on
securities 3,207 745
(Gain) on sale of securities, net (1,373) (9)
(Increase) decrease in mortgage loans
held for sale (10,697) 3,725
Loss on sale and disposal of premises
and equipment 172 0
Depreciation and amortization of
premises and equipment 907 537
Deferred tax expense (benefit) (844) 1,492
Decrease in accrued interest payable (201) (3,271)
Decrease in accrued interest
receivable 2,154 294
Decrease (increase) in due from FDIC 26,441 (30,927)
Other, net (9,741) (6,531)
Net cash provided by (used in)
operating activities 45,508 (15,238)
Cash flows from investing activities:
Proceeds from maturities of securities 683,072 277,245
Proceeds from sales of securities 689,930 11,453
Purchases of securities (1,620,866) (518,535)
Decrease (increase) in securities
purchased under agreements to resell 34,000 (34,000)
Decrease in loans, net 127,185 157,817
Proceeds from loans "put" to FDIC 56,707 123,200
Purchases of premises and equipment (3,275) (4,108)
Proceeds from sales of premises and
equipment 476 0
Premium received from FDIC for
acquisition 0 4,500
Net cash received from banking
institution acquired 0 53,939
Net increase in other real estate owned (661) 0
Net cash provided by (used in )
investing activities (33,432) 71,511
Cash flows from financing activities:
Net increase in demand deposits,
N.O.W., money market and savings
accounts 42,825 65,340
Net decrease in time deposits (117,016) (672,463)
Increase in short-term borrowed funds 20,634 4,145
Increase in Federal Home Loan Bank
advances 50,000 0
Preferred stock redemptions (13,341) 0
Net cash used in financing
activities (16,898) (602,978)
Decrease in cash and cash
equivalents (4,822) (546,705)
Cash and cash equivalents at
beginning of period 50,244 596,949
Cash and cash equivalents at end
of period
$ 45,422 $ 50,244
Supplemental disclosure of cash flow
information
Cash paid during the period for:
Interest expense $ 59,015 $ 57,856
Income Taxes 9.736 7,618
On June 26, 1992, New Dartmouth acquired
certain assets and assumed certain
liabilities of the failed Somersworth
Bank from the FDIC as follows:
Assets acquired net of cash and cash
equivalents received $ 48,700
Cash and cash equivalents received (net
of premium received) 54,000
Premium paid by the FDIC to New
Dartmouth 4,500
Liabilities assumed 102,700
See accompanying notes
New Dartmouth Bank
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION OF NEW DARTMOUTH
New Dartmouth Bank ( New Dartmouth ) is a New Hampshire
chartered guaranty savings bank that was formed to acquire
certain assets and assume certain liabilities, as of the close of
business on October 10, 1991 (the Acquisition Date ), from the
Federal Deposit Insurance Corporation (the FDIC ), as Receiver
of the failed Dartmouth Bank, New Hampshire Savings Bank and
Numerica Savings Bank, FSB (collectively, the Failed Banks ).
New Dartmouth was initially capitalized through the sale of $40.4
million of common stock to accredited investors and $31.0 million
of non-voting, convertible, redeemable perpetual preferred stock
( Preferred Stock ) to the FDIC.
Simultaneous with New Dartmouth's capitalization and the
FDIC's appointment as Receiver, New Dartmouth entered into three
Purchase and Assumption Agreements (collectively, the 1991 P&A
Agreements ) with the FDIC as Receiver of the Failed Banks.
Under the terms of the Agreements, New Dartmouth acquired from
the FDIC $1.7 billion in certain assets and assumed $2.1 billion
in deposits of the Failed Banks (collectively, the 1991 P&A
Transaction ). The FDIC paid New Dartmouth $55.3 million to
complete the transaction in addition to a payment of $400.8
million to New Dartmouth for the assumption of net liabilities.
Included in the assets acquired were $1.4 billion of loans.
Pursuant to the Agreements, New Dartmouth acquired Consulting
Systems and Management Corporation ( CSM ), National Mortgage
Company, Inc. ( NMC ) and United Savers Acceptance Corporation
( USAC ), all non-bank subsidiaries of the Failed Banks. CSM, a
data processing subsidiary, ceased active operations in March
1992. USAC and NMC are currently engaged in servicing portfolios
of automobile and residential real estate loans, respectively,
that were sold into the secondary market.
In connection with the 1991 P&A Transaction, the FDIC provided
the following assistance:
(a) the FDIC transferred an allowance for possible loan
losses of 1.25% of the book value of all acquired loans to New
Dartmouth;
(b) the FDIC agreed to repurchase at book value, including up
to 90 days accrued interest, subject to certain limitations,
all loans, other than Small Loans, which become adversely
credit classified within three years after the Acquisition
Date ( Puts );
(c) the FDIC agreed to share losses on certain small
residential mortgage and consumer loans for the three-year
period following the Acquisition Date by assuming 90% of
amounts charged-off each quarter in excess of 0.0875% and
0.25% of the respective loan balances outstanding at the
beginning of each quarter, and to reimburse New Dartmouth for
up to 90 days accrued interest on such loans;
(d) the FDIC agreed to reacquire, during the 180-day period
following the Acquisition Date, certain assets with material
defects in title which may impair collectibility; and
(e) the FDIC agreed to indemnify New Dartmouth with respect
to certain other matters.
Putable loans are loans on the books of the Failed Banks as of
the Acquisition Date which are other than Small Loans (defined
below). Loans put to the FDIC during the period October 10,
1992 through October 9, 1993 are subject to a discount of 2% and
loans put to the FDIC during the period October 10, 1993
through October 10, 1994 are subject to a discount of 4%. Small
Loans are defined as consumer loans (including advances on home
equity lines of credit) and residential mortgage loans (i.e.,
loans secured by mortgages on one to four family residential
properties or by stock of cooperative housing associations)
having a book balance as of the Acquisition Date of not more than
$100,000 and $191,250, respectively. Amounts due from the FDIC
under the Small Loan loss protection and put provisions are
classified as Due from FDIC.
Under the 1991 P&A Agreements, on the Acquisition Date all
classified loans, charged-off loans and other real estate owned
of the Failed Banks were transferred to an FDIC-owned special
asset pool ( the Pool ). The Pool was serviced by New Dartmouth
until March 9, 1992, as required under the terms of the 1991 P&A
Agreements. Total fees received by New Dartmouth under this
arrangement were $3.0 million and are included in noninterest
income.
2. MERGER WITH SHAWMUT NATIONAL CORPORATION
On March 23, 1993, New Dartmouth entered into an Agreement and
Plan of Merger (the Merger Agreement ) with Shawmut National
Corporation ( SNC ) pursuant to which SNC will acquire New
Dartmouth through the merger (the Merger ) of New Dartmouth with
a wholly owned subsidiary of SNC. Upon consummation of the
Merger, New Dartmouth stockholders will become stockholders of
SNC and will receive a number of shares of SNC Common Stock in
exchange for each share of New Dartmouth Common Stock as shall be
equal to the exchange ratio.
Upon consummation of the Merger, each issued and outstanding
share of New Dartmouth Common Stock will be converted into the
right to receive a number of shares of SNC Common Stock equal to
the quotient obtained by dividing (i) $310 by (ii) the Average
Closing Price (the average of the daily closing price of SNC
Common Stock for the fifteen consecutive trading days prior to
the Merger), provided that if the Average Closing Price is (x)
less than $19.975, then the Average Closing Price will be deemed
to be $19.975 and the Exchange Ratio will be 15.519, unless
waived by SNC and (y) greater than $27.025, then the Average
Closing Price will be deemed to be $27.025 and the Exchange Ratio
will be 11.471, unless waived by New Dartmouth.
As a condition to SNC s merger proposal, New Dartmouth and SNC
entered into a Stock Option Agreement pursuant to which New
Dartmouth granted SNC an option to purchase up to 74.275 shares
of New Dartmouth Common Stock, or 14.9% of the issued and
outstanding shares of such common stock at March 31, 1993, at an
exercise price of $310 per share. The Stock Option Agreement is
intended to increase the likelihood that the Merger will be
consummated in accordance with the terms of the Merger Agreement.
Consequently, the Stock Option Agreement may discourage persons
who might now or prior to the Merger be interested in acquiring
New Dartmouth from considering such an acquisition, even if such
persons were prepared to pay a higher price per share for New
Dartmouth Common Stock than the price per share implicit in the
Exchange Ratio. The option is exercisable only upon the
occurrence of one of the following events: (a) a material breach
by New Dartmouth of any of its covenants and agreements contained
in the Merger Agreement; (b) New Dartmouth fails to publicly
oppose a tender offer or an exchange offer to purchase shares of
New Dartmouth Common Stock; (c) any person shall have acquired
beneficial ownership or any group shall have been formed which
beneficially owns, or has the right to acquire beneficial
ownership, of 10% of the outstanding shares of New Dartmouth
Common Stock; (d) any person who, as of March 23, 1993, owns or
controls 10% or more of the outstanding shares of New Dartmouth
Common Stock shall have acquired an additional 2% or more of the
New Dartmouth Common Stock; (e) New Dartmouth Stockholders shall
not have approved the Merger Agreement at the Special Meeting, or
the Special Meeting shall have been cancelled prior to the
abandonment of the Merger Agreement, in each case after it shall
have been publicly announced that another person shall have (i)
made, or disclosed an intention to make, a proposal to acquire
New Dartmouth or (ii) filed an application under the Bank Holding
Company Act or the Change in Bank Control Act of 1978, for
approval to acquire New Dartmouth; or (f) New Dartmouth s Board
of Directors shall not have recommended to New Dartmouth
Stockholders that such stockholders vote in favor of the Merger.
The Merger is expected to qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue
Service Code.
Holders of New Dartmouth Common Stock and Preferred Stock will
be asked to vote on the Merger at a Special Meeting of
Stockholders to be held on August 26, 1993. New Hampshire law
requires the affirmative approval of the holders of 66 2/3% of
all the outstanding shares of New Dartmouth Common Stock and
Preferred Stock, voting together as a single class, in order to
obtain the permission of the Bank Commissioner of the State of
New Hampshire to consummate the Merger. In addition, New
Dartmouth s Articles of Agreement separately require that the
Merger be approved by the holders of a majority of the
outstanding shares of New Dartmouth Common Stock.
The Merger is subject to prior approval by (i) the Federal
Reserve Board under Section 3 of the Bank Holding Company Act of
1956, (ii) the FDIC under the Bank Merger Act, (iii) the Board of
Trust Company Incorporation of the State of New Hampshire, (iv)
the Board of Bank Incorporation of the Commonwealth of
Massachusetts, and (v) the Bank Commissioner of the State of New
Hampshire. The Merger will not be consummated unless all of the
requisite regulatory approvals for such transactions are obtained
without the imposition of any condition or requirement that, in
the reasonable opinion of SNC, would so materially adversely
affect the economic or business benefits to SNC of the Merger as
New Dartmouth and SNC expect the Merger will occur prior to
December 31, 1993.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
New Dartmouth s consolidated financial statements have been
prepared in accordance with generally accepted accounting
principles and prevailing practices within the banking industry.
Certain amounts in the 1992 financial statements have been
reclassified to conform with the 1993 presentation.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of
New Dartmouth and its wholly-owned subsidiaries. Significant
intercompany balances and transactions have been eliminated. The
financial statements reflect all adjustments which are, in the
opinion of management, necessary to state fairly the results of
operations for the periods presented. The acquisition of The
Somersworth Bank on June 26, 1992 (the Somersworth Transaction )
has been accounted for as a purchase and the accompanying
consolidated financial statements include the results of
operations from the date of acquisition.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash
equivalents include cash and due from banks, interest bearing
deposits in other banks and federal funds sold.
SECURITIES
During 1993, as a result of changing industry practice and
management s evaluation of the investment securities portfolio,
New Dartmouth segregated its investment portfolio into securities
held to maturity and those held for sale. Securities held for
sale are to be held for an indefinite period of time and can be
used for asset/liability management and may be sold in response
to changes in interest rates, prepayment risk or other factors.
In May 1993, the Financial Accounting Standards Board issued
Statement No. 115, Accounting for Certain Investments in Debt
and Equity Securities ( FAS 115"). FAS 115 requires that debt
and equity securities be classified as trading, available for
sale or held to maturity. Securities classified as trading are
reported at fair value with unrealized gains and losses included
in income. Securities classified as held for sale are reported
at fair value with unrealized gains and losses included as a
separate component of stockholders equity. Securities
classified as held to maturity are reported at amortized cost.
In order to classify securities as held to maturity, management
must have the positive intent and ability to hold securities to
maturity.
New Dartmouth adopted FAS 115 effective June 30, 1993 and on
June 30, 1993 recorded a total unrealized gain of $2.6 million
($1.6 million, net of tax) as a separate component of
stockholders equity.
Gains or losses on sales of securities are computed on a
specific identification method.
LOANS
Loans are stated at principal outstanding net of unearned
income with the exception of mortgages held for sale which are
carried at the lower of aggregate cost or market. Interest
income on loans is recognized on an accrual basis based on the
principal amount outstanding. Unearned income on loans made or
purchased at a discount and loan related fees are recognized in
interest income over the lives of the loans using a method that
results in a level yield.
When a loan, other than a credit card or student loan, reaches
90 days past due for principal or interest, it is placed on non-
accrual status and interest accrued is reversed and charged
against current year interest income. Collections on non-accrual
loans which are not subject to the FDIC protection are applied as
either a reduction of principal or interest income depending upon
management s assessment of the ultimate collectibility of
principal. Loans are removed from non-accrual status when they
become current as to principal and interest and when, in the
opinion of management, the loans are estimated to be fully
collectible on a timely basis as to principal and interest.
In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 114, Accounting
by Creditors for Impairment of a Loan ( FAS 114"). Among other
things, FAS 114 requires that impairments of loans due to
uncollectibility of principal and interest be measured based upon
the present value of probable and estimable future cash flows.
Previously, measurement of such impairments was on an
undiscounted basis. FAS 114 is effective for fiscal years
beginning after December 15, 1994. Generally, the impact of
FAS 114 will be to increase loan losses and, because of the
effect of discounting, provide future interest income on impaired
loans. Had FAS 114 been adopted at June 30, 1993, management
believes that it would not have had a material effect on New
Dartmouth s financial position and results of operations.
On October 10, 1991, New Dartmouth allocated approximately
$39.0 million of the federal financial assistance it received
from the FDIC as part of the 1991 P&A Transaction as a discount
against the acquired loan portfolio representing New Dartmouth s
estimate of potential future losses in excess of the protection
provided by the FDIC. On June 26, 1992, New Dartmouth allocated
approximately $3.6 million of the federal financial assistance it
received from the FDIC as part of the Somersworth Transaction as
a discount against the acquired loan portfolio representing New
Dartmouth s estimate of potential future losses. These discounts
were not accreted into interest income in Fiscal 1993 or 1992.
An allowance for possible loan losses is established for the
absorption of potential losses on loans through charges to
current expense. Loan losses are charged against this allowance
for possible loan losses and subsequent recoveries are added to
it. Small Loan protection payments received from the FDIC are
recorded as noninterest income and offset by a corresponding
provision for possible loan losses.
The amount and adequacy of this allowance is determined by
management and is based on several factors, including, but not
limited to, a review and evaluation of specific loans, the
overall quality, growth and composition of the loan portfolio, an
evaluation of present and anticipated economic conditions and
other pertinent factors. While management considers the
allowance for possible loan losses to be adequate to provide for
losses inherent in the portfolios, it should be noted that it is
based on estimates and ultimate losses may vary from the
estimates if future conditions differ substantially from the
assumptions used in making the evaluation. It is possible that
future events may result in additional charge-offs and changes in
the level of the allowance for possible loan losses and the level
of non-performing loans. Further, various regulatory agencies,
as an integral part of their examination process, periodically
review New Dartmouth's allowance for possible loan losses. Such
agencies may require New Dartmouth to recognize additional
provisions to the allowance for possible loan losses based on
judgments different from those of management.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are
charged to expense using the straight-line method over the
estimated useful life of each asset. Expenditures for
maintenance and repairs are charged to expense as incurred. The
cost of major additions and improvements are capitalized,
Amortization of leasehold improvements on leased facilities is
charged to expense using the straight-line method over the
shorter of the useful life of the asset or the term of the lease.
Upon retirement or disposition, the cost and accumulated
depreciation are eliminated from the respective accounts and any
resulting gain or loss is credited to or charged against income.
OTHER REAL ESTATE OWNED
Other real estate owned is comprised of foreclosed properties
for which New Dartmouth has received title. The properties are
recorded at the lower of the remaining principal balance of the
foreclosed loan or estimated fair market value. Estimated fair
market value is determined on the basis of an appraisal at the
time of foreclosure. The difference between the principal
balance and the estimated fair value of the loan at the time of
foreclosure is charged against the allowance for possible loan
losses. Any subsequent write-down, related to loans that
originally qualified for Small Loan loss protection, resulting
from an excess of the carrying value over the fair market value
is subject to reimbursement by the FDIC under the Small Loan Loss
Protection provisions of the 1991 P&A Agreement. Any subsequent
write-down, related to loans originated or acquired after October
10, 1991, resulting from an excess of the carrying value over the
fair market value is charged to expense.
INCOME TAXES
Income taxes are provided at the statutory federal and state
income tax rates on income and unrealized gains or losses on
securities held for sale as reported in the accompanying
financial statements. Deferred taxes are provided as a result of
the recognition of certain income and expense items in different
time periods for financial and income tax purposes.
New Dartmouth adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("FAS 109"),
effective October 10, 1991. FAS 109 is an asset and liability
approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and tax basis of assets
and liabilities. In estimating future tax consequences, FAS 109
generally considers all expected future events other than
enactments of changes in the tax law or rates.
EARNINGS PER SHARE
Primary earnings per share is determined on the basis of the
weighted average number of shares of common stock outstanding
after giving effect to dilutive stock options and warrants.
Fully diluted earnings per share reflects both the effect of
dilutive stock options and warrants and the dilutive effect of
conversion of each share of preferred stock into 1.25 shares of
common stock (the maximum conversion ratio applicable for the
preferred stock).
FAIR VALUE OF FINANCIAL INSTRUMENTS
New Dartmouth implemented Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial
Instruments" ("FAS 107"), for the year ended June 30, 1993, which
requires New Dartmouth to disclose the fair value of its
financial instruments. A financial instrument is defined as
cash, evidence of an ownership interest in an entity or a
contract that conveys or imposes the contractual right or
obligation to either receive or deliver cash or another financial
instrument. Examples of financial instruments included in New
Dartmouth's balance sheet are cash, federal funds sold, debt and
equity securities, loans, demand, savings and other interest-
bearing deposits, securities sold under agreements to repurchase
and Federal Home Loan Bank advances. Examples of financial
instruments which are not included in New Dartmouth's balance
sheet are commitments to extend credit, standby letters of credit
and loans sold with recourse. Fair value is defined as the
amount at which a financial instrument could be exchanged in a
current transaction between willing parties, other than in forced
sale or liquidation and is best evidenced by a quoted market
price if one exists.
FAS 107 requires the fair value of deposit liabilities with no
stated maturity, such as demand deposits, N.O.W. and money market
accounts, to equal the carrying value of these financial
instruments and, therefore, does not allow for the recognition of
the inherent value of these core deposit relationships.
New Dartmouth has estimated fair value based on quoted market
prices, where available. In cases where quoted market prices
were not available, fair values were based on the quoted market
price of a financial instrument with similar characteristics, the
present value of expected future cash flows or other valuation
techniques. Each of these alternative valuation techniques
utilizes assumptions which are highly subjective and judgmental
in nature. Subjective factors include, among other things,
estimates of cash flows, the timing of cash flows, risk and
credit quality characteristics and interest rates. Accordingly,
the results may not be precise and modifying the assumptions may
significantly affect the values derived. In addition, fair
values established utilizing alternative valuation techniques may
or may not be substantiated by comparison with independent
markets. Further, fair value may or may not be realized if a
significant portion of the financial instruments were sold in a
bulk transaction. Therefore, any aggregate unrealized gains or
losses should not be interpreted as a forecast of future earnings
or cash flows. Furthermore, the fair value disclosed should not
be interpreted as the aggregate current value of New Dartmouth.
The methodology and assumptions utilized to estimate the fair
value of New Dartmouth's financial instruments, not previously
discussed in the policy statements above, are described below.
Financial instruments with fair value approximate to carrying
value - The carrying value of cash and due from banks, interest-
bearing deposits in other banks, federal funds sold and
securities sold under agreement to repurchase, demand deposits,
savings, N.O.W. and money market deposits, and accrued interest
income and expense approximate fair value due to the short-term
nature of these financial instruments.
Securities - The fair value of securities held for sale and
securities held to maturity was derived based on quoted market
prices.
Loans - The fair value of loans was estimated for groups of
similar loans based on the type of loan, interest rate
characteristics, credit risk and maturity. The carrying value of
loans maturing or repricing within 90 days was estimated to
approximate fair value due to the short-term characteristics of
these loans. The fair value of performing loans was estimated by
discounting expected future cash flows utilizing appropriate
discount rates. Prepayments were not anticipated for either
fixed-rate or variable-rate loans. The fair value of non-
accruing loans was estimated by discounting expected future cash
flows utilizing appropriate discount rates, commensurate with a
portfolio of non-accruing loans. As appropriate, the fair values
reflect the FDIC loss protection. The fair value of loans was
approximately $928.4 million at June 30, 1993 compared to a
carrying value of $900.2 million.
Deposits - The fair value of deposits with fixed maturities
was estimated by discounting expected future cash flows utilizing
interest rates currently being offered on deposits with similar
characteristics and maturities. The fair value of these deposits
was approximately $811.2 million at June 30, 1993 compared to a
carrying value of $803.0 million.
Federal Home Loan Bank Advances - The fair value of Federal
Home Loan Bank advances was estimated by discounting expected
future cash flows utilizing interest rates currently being
offered on advances with similar characteristics and maturities.
The fair value of these advances was approximately $50.7 million
at June 30, 1993 compared to a carrying value of $50.0 million.
Off-balance sheet financial instruments - The fair value of
commitments to extend credit and standby letters of credit was
determined based on the discounted value of fees currently
charged for similar agreements and was not significant. The fair
value of New Dartmouth's recourse obligations was not significant
due to FDIC credit protection.
4. SOMERSWORTH ACQUISITION
On June 26, 1992, New Dartmouth and the FDIC, as Receiver
for The Somersworth Bank, Somersworth, New Hampshire
("Somersworth"), entered into a Purchase and Assumption Agreement
(the "Somersworth Agreement"), whereby New Dartmouth assumed
Somersworth's deposits, totaling approximately $101.6 million
and purchased certain assets totaling approximately $54.0
million. New Dartmouth accounted for the Somersworth transaction
under the purchase method of accounting. New Dartmouth's June
30, 1992 financial statements include Somersworth's results of
operations since the date of acquisition.
Under the terms of the Somersworth Agreement, the FDIC
retained Somersworth's initial pool of classified assets and paid
New Dartmouth $4.5 million to complete the transaction in
addition to a payment of $48.7 million to New Dartmouth for the
assumption of net liabilities. The FDIC is not providing New
Dartmouth with loan loss protection with respect to the acquired
loans. New Dartmouth allocated approximately $3.6 million of the
federal financial assistance received from the FDIC as a discount
against the acquired loan portfolio.
In fiscal 1993, New Dartmouth returned to the FDIC
approximately $6.6 million, of the loans acquired as part of the
Somersworth Transaction ($6.0 million net of discount). These
loans should have been retained by the FDIC under the terms of
the Somersworth Agreement.
5. CASH AND DUE FROM BANKS
New Dartmouth is required by the Federal Reserve Bank of
Boston to maintain average balances in the form of cash or
noninterest bearing deposits. Reserve balances of $16.7 million
at June 30, 1993 were maintained in accordance with these
requirements compared to reserve balances of $11.0 million at
June 30, 1992.
6. SECURITIES
A summary of the amortized cost and market value of the
securities held for sale portfolio at June 30,1993 is as follows:
Gross Gross
June 30, 1993 Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
U.S. Government and federal
agency obligations $213,196 $ 10 $ 2 $213,204
Collateralized mortgage obligations 55,210 290 152 55,348
Mortgage-backed securities 92,265 2,453 9 94,709
Total securities held for sale $360,671 $ 2,753 $ 163 $363,261
Securities held for sale with a market value of $34.4
million were pledged to secure funds on deposit and Federal Home
Loan Bank advances.
A summary of the amortized cost and market value of
securities held to maturity at June 30, 1993 is as follows:
Gross Gross
June 30, 1993 Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
U.S. Government and federal
agency obligations $ 76,587 $ 1,334 $ 0 $ 77,921
Obligations of state and political
subdivisions 8,168 0 0 8,168
Collateralized mortgage obligations 201,381 1,309 308 202,382
Mortgage-backed securities 30,019 335 8 30,346
Other 55 17 0 72
Total debt securities 316,210 2,995 316 318,889
Federal Home Loan Bank stock 14,877 0 0 14,877
Total securities held
to maturity $331,087 $ 2,995 $ 316 $333,766
Securities held to maturity with an amortized cost of $102.4
million were pledged to secure funds on deposit, short-term
borrowings, and Federal Home Loan Bank advances.
Proceeds from sales of securities were $689.9 million for
the year ended June 30, 1993. Gross gains of $2.4 million and
gross losses of $1.0 million were realized on those sales.
A summary of the amortized cost and market value of
securities at June 30, 1992 is as follows:
Gross Gross
June 30, 1992 Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
U.S. Government and federal
agency obligations $211,441 $ 1,930 $ 38 $213,333
Obligations of state and political
subdivisions 2,938 0 0 2,938
Collateralized mortgage obligations 95,951 628 210 96,369
Mortgage-backed securities 108,090 1,301 23 109,368
Other 12,431 40 25 12,446
Total debt securities 430,851 3,899 296 434,454
Federal Home Loan Bank stock 14,877 0 0 14,877
Total securities held
to maturity $445,728 $ 3,899 $ 296 $449,331
Investment securities with an amortized cost of $39.2
million were pledged to secure funds on deposit and short-term
borrowings at June 30, 1992. Proceeds from the sales of
investments were $5.4 million during the period October 10, 1991
to June 30, 1992. Gross gains of $15,000 and gross losses of
$7,000 were realized on those sales. Proceeds from sales of
mortgage-backed securities were $6.0 million during the period
and gross gains of $1,000 were realized on those sales.
The amortized cost and market value of debt securities at
June 30, 1993, by contractual maturity, are summarized below.
Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
Securities held for sale Securities held to maturity
<S> <C> <C> <C> <C> <C> <C>
June 30, 1993 Amortized Market Amortized Market
(In thousands) Cost Value Yield Cost Value Yield
Due in one year or less $163,165 $163,175 3.22% $ 40,033 $ 40,547 6.38%
Due after one year
through five years 50,031 50,029 4.69 41,749 42,490 5.50
Due after five years
through ten years 0 0 0.00 1,636 1,732 8.70
Due after ten years 0 0 0.00 1,392 1,392 7.36
Total 213,196 213,204 3.56 84,810 86,161 6.01
Collateralized mortgage
obligations 55,210 55,348 5.39 201,381 202,382 5.39
Mortgage-backed
securities 92,265 94,709 5.44 30,019 30,346 5.34
Total $360,671 $363,261 4.33% $316,210 $318,889 5.55%
</TABLE>
7. LOANS AND LOAN COMMITMENTS
The following tables summarize New Dartmouth's outstanding
loan portfolio:
Loans subject to
FDIC protection
June 30, 1993 Small Other Total
(In thousands) Loan "Put" Loans Loans
Residential real estate $466,251 $ 33,339 $ 49,277 $ 548,867
Consumer 57,097 231 76,213 133,541
Commercial real estate 0 220,340 9,045 229,385
Commercial 0 26,220 11,360 37,580
Construction 0 5,076 274 5,350
Gross loans 523,348 285,206 146,169 954,723
Discount on loans 42,086 0 0 42,086
Gross loans, net of discount on
loans acquired from the FDIC $481,262 $285,206 $146,169 $ 912,637
Loans subject to
FDIC protection
June 30, 1992 Small Other Total
(In thousands) Loan "Put" Loans Loans
Residential real estate $566,674 $ 44,352 $ 47,357 $ 658,383
Consumer 129,549 307 14,114 143,970
Commercial real estate 0 300,449 6,955 307,404
Commercial 0 34,029 1,835 35,864
Construction 0 10,431 0 10,431
Gross loans 696,223 389,568 70,261 1,156,052
Discount on loans 42,669 0 0 42,669
Gross loans, net of discount on
loans acquired from the FDIC $653,554 $389,568 $ 70,261 $1,113,383
The foregoing tables do not include any allocation of the
$39.0 million discount on loans acquired from the FDIC pursuant
to the 1991 P&A Agreements or the $3.6 million discount on loans
acquired from the FDIC pursuant to the Somersworth Agreement.
There was no accretion of these discounts from October 10, 1991
to June 30, 1993. The discount was adjusted, however, in
connection with the return to the FDIC of certain loans acquired
in the Somersworth Transaction. See Note 4 above.
At June 30, 1993, New Dartmouth had $32.8 million of non-
accrual loans and $0.9 million in loans 90 days past due and
still accruing compared to $84.1 million and $1.2 million,
respectively, at June 30, 1992. Interest income for the year
ended June 30, 1993 relating to non-accrual loans would have been
$2.5 million had these loans performed according to their
original terms. Interest income actually recorded for the year
ended June 30, 1993 was approximately $0.8 million. The FDIC
will reimburse New Dartmouth up to 90 days of interest that would
have been earned had these loans performed in accordance with
their original terms. Amounts due from the FDIC at June 30,
1993, resulting from the Small Loan and "put" protection
processes, were $6.5 million and $0.00, respectively, compared to
$2.0 million and $28.5 million, respectively at June 30, 1992.
The following table summarizes the loans "put" to the FDIC
under the terms of the 1991 P&A Agreements for the periods
indicated below:
For the Period
July 1, 1992 October 10, 1991
to to
(In thousands) June 30, 1993 June 30, 1992
Loans "put" to the FDIC $ 57,808 $ 124,778
1.25% initial allowance and
2% discount for loans "put"
to the FDIC during the period 1,101 1,578
FDIC reimbursement $ 56,707 $ 123,200
The following table summarizes New Dartmouth's net charge-
offs and the payments received from the FDIC under the Small Loan
protection provisions of the 1991 P&A Agreements for the periods
indicated:
For the Period
July 1, 1992 October 10, 1991
to to
(In thousands) June 30, 1993 June 30, 1992
Small loan net charge-offs $ 16,090 $ 6,560
FDIC Small Loan protection payments 10,903 2,216
New Dartmouth considers its primary market area for lending
and deposit activities to be the State of New Hampshire.
Although New Dartmouth has a diversified loan portfolio, a
substantial portion of its debtors' ability to honor their
contracts is reliant upon the economic stability of the area.
In the normal course of business, New Dartmouth enters into
commitments to lend to customers. These commitments are not
recorded on the consolidated balance sheet. These off-balance
sheet items include commitments to extend credit and standby
letters of credit. Commitments to extend credit are contracts
made by New Dartmouth to lend to a customer under specified
conditions. Failure to satisfy these conditions by the customer
would terminate New Dartmouth's obligation to lend. Generally,
these commitments have fixed expiration dates and require the
payment of fees. Due to the fixed expiration dates or other
termination agreements, these commitments may not be drawn upon.
Therefore, total commitments outstanding do not necessarily
represent future cash outlays. The amount of collateral
necessary is determined on an individual basis.
Standby letters of credit are conditional commitments issued
by New Dartmouth as a financial or performance guarantee of a
customer to a third party. The credit risk involved in issuing
letters of credit is essentially the same as that involved in
commitments to extend credit.
The following table summarizes New Dartmouth's loan
commitments to extend credit at June 30, 1993:
(In thousands) June 30, 1993
Residential real estate $ 24,802
Commercial real estate 1,380
Construction 923
Commercial 7,353
Consumer 17,060
Total $ 51,518
Standby Letters of Credit $ 288
At June 30, 1993, New Dartmouth had commitments to sell
residential real estate loans totaling approximately $12.2
million. New Dartmouth and its subsidiary, NMC, also have
recourse obligations as a result of certain loan sales by the
Failed Banks or NMC prior to the Acquisition Date. These
recourse obligations are subject to the same Small Loan
protection provisions as loans held in the portfolio. At June
30, 1993, loans sold with recourse amounted to $144.1 million.
At June 30, 1993, New Dartmouth and NMC were servicing a
portfolio of $345.3 million of residential real estate loans
compared to $301.5 million at June 30, 1992.
8. ALLOWANCE FOR POSSIBLE LOAN LOSSES
The following table summarizes the change in the allowance
for possible loan losses for the periods indicated:
For the Period
July 1, 1992 October 10, 1991
to to
(In thousands) June 30, 1993 June 30, 1992
Balance at beginning of period $ 13,151 $ 17,507
Provision charged to operations 16,101 3,216
Allowance for possible loan
losses of acquired loans 0 566
29,252 21,289
Loans charged-off subject to
Small Loan protection (17,588) (6,866)
Other loans charged-off (189) 0
Recovery of loans subject to
Small Loan protection 1,498 306
Recovery of other loans 8 0
FDIC settlement adjustments 518 0
1.25% initial allowance and 2% discount
for loans "put" to the FDIC after
October 10, 1992 (1,101) (1,578)
Balance at end of period $ 12,398 $ 13,151
9. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
(In thousands) June 30, 1993 June 30, 1992
Furniture and equipment $ 3,710 $ 4,643
Buildings and improvements 1,938 7
Land 1,442 0
7,090 4,650
Less: accumulated depreciation
and amortization 1,257 537
Premises and equipment, net $ 5,833 $ 4,113
Total depreciation expense for the year ended June 30, 1993
amounted to $907,000 compared to $537,000 for the period October
10, 1991 to June 30, 1992.
The terms on operating leases range from one to ten years.
Total rent expense was approximately $3.7 million for the period
July 1, 1992 to June 30, 1993 compared to $3.3 million for the
period October 10, 1991 to June 30, 1992. The future minimum
lease payments under non-cancelable operating lease agreements
with initial or remaining terms in excess of one year are as
follows:
(In thousands) June 30, 1993
1994 $ 2,190
1995 2,143
1996 2,101
1997 2,042
1998 939
Thereafter 2,271
Total minimum obligations $ 11,686
10. DEPOSITS
Time deposits of $100,000 or more totaled $44.2 million at
June 30, 1993 compared to $49.5 million at June 30, 1992.
Interest expense incurred on these deposits was $2.0 million for
the year ended June 30, 1993 compared to $1.1 million for the
period October 10, 1991 to June 30, 1992.
11. SHORT-TERM BORROWED FUNDS
A summary of short-term borrowed funds at June 30, 1993
follows:
1993
Weighted Maximum
June 30, 1993 Average Average Month-end
(In thousands) Balance Rate Balance Rate Balance
Securities sold under
agreements to
repurchase $ 31,808 3.39% $ 30,469 3.44% $ 44,061
A summary of short-term borrowed funds at June 30, 1992
follows:
1993
Weighted Maximum
June 30, 1992 Average Average Month-end
(In thousands) Balance Rate Balance Rate Balance
Securities sold under
agreements to
repurchase $ 10,940 4.22% $ 8,597 4.95% $ 12,865
Treasury Tax &
Loan note 234 4.28 6 3.62 234
Total $ 11,174 4.22% $ 8,603 4.95% $ 13,099
At June 30, 1993, $40.3 million of U.S. Treasury securities
were pledged as collateral for securities sold under agreements
to repurchase. At June 30, 1992, approximately $15.5 million of
U.S. Treasury securities were pledged as collateral for
securities sold under agreements to repurchase, and approximately
$500,000 in other securities were pledged as collateral for the
Treasury Tax and Loan note.
12. FEDERAL HOME LOAN BANK ADVANCES
As of June 30, 1993, New Dartmouth has the ability to borrow
up to approximately $510.1 million, or 30% of its total assets,
from the Federal Home Loan Bank of Boston ("FHLBB") with no
restriction on the terms of maturity. At June 30, 1993, New
Dartmouth had outstanding borrowings of $50.0 million with a
weighted average interest rate of 5.38%. FHLBB advances are
scheduled to mature as follows:
(In thousands) Balance Rate
August 19, 1994 $25,000 4.12%
September 30, 2002 25,000 6.67%
At June 30, 1993, mortgage-backed securities and
collateralized mortgage obligations with a market value of $85.9
million were pledged as collateral for outstanding FHLBB advances
and New Dartmouth's overnight credit line. New Dartmouth has the
ability to repay its FHLBB advances prior to maturity. At June
30, 1993, the prepayment penalty on advances of $50.0 million
amounted to approximately $700,000.
13. INCOME TAXES
The components of the provision for income taxes are as
follows:
For the Period
July 1, 1992 October 10, 1991
to to
(In thousands) June 30, 1993 June 30, 1992
Current tax expense:
Federal $ 10,736 $ 8,560
State 1,253 873
11,989 9,433
Deferred tax expense:
Federal (672) 1,486
State (172) 6
(844) 1,492
Tax expense on income 11,145 10,925
Deferred tax expense on unrealized gain
included in stockholders' equity 1,017 0
Total tax expense $ 12,162 $ 10,925
Deferred tax liabilities (assets) are comprised of the following:
For the Period
July 1, 1992 October 10, 1991
to to
(In thousands) June 30, 1993 June 30, 1992
Excess of book over tax basis
of assets acquired $ 10,246 $ 15,908
Provision for possible loan losses 9,771 1,717
Unrealized gains included in
stockholders' equity 1,017 0
Other 164 0
Gross deferred tax liabilities 21,198 17,625
Federal financial assistance (7,390) (12,196)
Loan discount accretion (4,836) (3,343)
Other (1,319) (676)
Gross deferred tax assets (13,545) (16,215)
Deferred tax asset valuation
allowance 1,465 1,465
Net deferred tax liabilities $ 9,118 $ 2,875
The provision for income taxes differs from the amount of
income tax determined by applying the applicable U.S. statutory
federal income tax rate of 34% to pretax income from continuing
operations as a result of the following differences:
For the Period
October 10, 1991
For the Year Ended to
June 30, 1993 June 30, 1992
(In thousands) Amount Percent Amount Percent
Tax expense at statutory rate $ 10,379 34.0% $ 8,981 34.0%
Increase (decrease) in rates
resulting from:
State taxes, net of federal
income tax benefit 713 2.3 576 2.2
Valuation allowance 0 0.0 1,465 5.5
Other-net 53 0.2 (97) (0.3)
Tax expense on income $ 11,145 36.5% $10,925 41.4%
On August 10, 1993, the Omnibus Budget Reconciliation Act of
1993 (the "Act) was enacted. Among other things, the Act
increases the corporate tax rate from 34 percent to 35 percent
for corporations with taxable income in excess of $10 million.
Management believes that the Act will not have a material effect
on New Dartmouth.
14. COMMITMENTS AND CONTINGENCIES
New Dartmouth and its subsidiaries are involved in a number
of legal proceedings arising out of, and incidental to, their
respective businesses. Management of New Dartmouth, based on its
review with legal counsel of the merits of each of these
proceedings, does not anticipate that any losses that may be
incurred as a result of these legal proceedings would materially
affect New Dartmouth's consolidated financial position.
On October 31, 1991, New Dartmouth entered into a five year
non-cancelable facilities management contract with a third-party
vendor for its data and item processing services. Under the
contract, the vendor provides the hardware, software and staff
required to perform these services. New Dartmouth provides the
vendor with suitable facilities. The minimum annual commitment
under this contract is approximately $3.0 million. Items
processed in excess of monthly base volumes are charged on a per
item basis. Expenses under this contract for the twelve months
ended June 30, 1993 amounted to $3.4 million.
15. STOCKHOLDERS' EQUITY
New Dartmouth was initially capitalized through the issuance
of $31.0 million of Preferred Stock to the FDIC and the sale of
$40.4 million of common stock to private investors.
On October 10, 1991, New Dartmouth issued 347,073 shares of
non-voting, convertible, redeemable, preferred stock ("Preferred
Stock") to the FDIC at a price of $89.46 per share. The shares
of Preferred Stock are redeemable at New Dartmouth's option at a
price that increases by approximately 7.2% per year for the first
four years, by 22.1% in year five and by 12.6% per year
thereafter. The redemption price increases quarterly. At June
30, 1993, the redemption price was $101.01 per share. The
Preferred Stock is convertible into Common Stock beginning
October 10, 1994 if held by, or immediately on transfer to,
anyone other than the FDIC. The conversion ratio will be 1.00
share of Common Stock for 1.00 share of Preferred Stock in year
four and will increase to 1.10 shares of Common Stock for 1.00 of
Preferred Stock in year five and 1.25 shares of Common Stock for
1.00 share of Preferred Stock thereafter.
So long as the FDIC owns Preferred Stock that, assuming the
full conversion thereof into Common Stock, constitutes at least
10% of the then outstanding common stock, New Dartmouth may not
declare or pay dividends on any shares of its capital stock
without the FDIC's prior consent. A holder of the Preferred
Stock is entitled to receive dividends per share equal to
dividends per share paid on common stock. There were no
dividends declared or paid from October 10, 1991 to June 30,
1993.
On January 25, 1993, New Dartmouth redeemed 112,000 shares
of Preferred Stock having an aggregate value of $10.9 million at
a redemption price of $96.95 per share. On April 8, 1993, New
Dartmouth redeemed an additional 25,000 shares, for $2.5 million
at a redemption price of $99.28 per share. In May 1993, the New
Hampshire Bank Commissioner approved a petition of the Board of
Directors to redeem the remaining shares of Preferred Stock.
On August 9, 1993, New Dartmouth notified the FDIC of its
intention to redeem an additional 40,000 shares of its preferred
stock outstanding for $4.1 million in August 1993.
As a condition to SNC's merger proposal, New Dartmouth and
SNC entered into a Stock Option Agreement dated March 23, 1993
pursuant to which New Dartmouth granted Shawmut National
Corporation an option to purchase up to 74,275 shares of New
Dartmouth Common Stock, at an exercise price of $310 per share.
See Note 2 above.
16. WARRANTS AND STOCK OPTION PLAN
New Dartmouth has adopted a management warrant plan and a
stock option plan authorizing the granting of warrants and
options to issue 47,133 shares of common stock to senior
executives.
Warrants for 11,783 shares were granted on October 10, 1991
at an initial price of $100.00 per share which escalates by 1.75%
per quarter. These warrants vested in three installments over an
eighteen month period and can be exercised during the lifetime of
the employee. At June 30, 1993, the warrants for 11,783 shares
were fully exercisable and the warrants had an exercise price of
$112.91 per share.
Warrants for 17,675 shares were granted on October 10, 1991
for which the exercise price is $109.06 per share. These
warrants vest in three installments over a three year period and
can be exercised during the lifetime of the employee. At June
30, 1993, warrants for 5,892 shares were fully exercisable.
Options for 9,250 shares and 1,500 shares were granted on
September 10, 1992 and December 17, 1993, respectively, at
exercise prices of $129.82 and $149.83 per share, respectively.
These options vest in equal installments on June 30, 1995, June
30, 1996 and June 30, 1997. Options are exercisable for a period
of ten years from the date of the grant.
There were 6,925 shares available for future grants under
the stock option plan. The exercise price of the warrants and
options approximated fair market value at the date of the grant.
There were no warrants or options exercised for the year ended
June 30, 1993 or for the period October 10, 1991 to June 30,
1992.
17. EMPLOYEE BENEFIT PLANS
Defined Contribution Employee Savings and Retirement Plan.
New Dartmouth maintains a defined contribution, tax qualified,
employee savings and retirement plan (the "401(k) Plan") in which
all employees of New Dartmouth working more than 1,000 hours per
year are eligible to participate after completing 1,000 hours of
service to New Dartmouth and attaining the age of 21.
Participants are entitled to contribute between 1% and 15% of
their salaries per year up to the federally prescribed maximum,
which for 1992 is $8,728. Each year, New Dartmouth contributes
to each participant's account an amount equal to 25% of the
participant's contribution up to the first 4% of the
participant's base salary. Each participant is immediately
vested with respect to both the participant's respective
contribution and New Dartmouth's contribution. New Dartmouth's
contribution to the 401(k) plan for the period July 1, 1992 to
June 30, 1993 amounted to $67,303 compared to $32,600 for the
period October 10, 1991 to June 30, 1992.
Supplemental Retirement Arrangements. Effective October 10,
1991, New Dartmouth entered into a three-year Consulting
Agreement with its Chairman. Pursuant to the terms of the
Agreement, New Dartmouth is obligated to provide maximum annual
retirement benefits up to 12% of the Chairman's base
compensation. The supplemental retirement benefit accrues and
vests annually at the rate of 4% per year over the three-year
term of the Agreement. The supplemental retirement benefit will
be payable monthly for ten years commencing on the earliest of
(i) the termination of the Agreement, (ii) the Chairman's
attainment of age 65, and (iii) the Chairman's death. Any
retirement benefits remaining unpaid at the Chairman's death will
be paid to his designated beneficiary.
Pursuant to the terms of an Employment Agreement with its
President and Chief Executive Officer, New Dartmouth is obligated
to provide maximum annual retirement benefits through a non-
qualified, unfunded arrangement of up to 45% of his Average Base
Salary. The supplemental retirement benefit accrues and vests
annually at the rate of 4% per year. The supplemental retirement
benefit will be paid monthly for 10 years commencing upon (i) the
later of his retirement date or age 65 or (ii) his death, if
earlier. Any retirement benefits remaining unpaid at his death
will be paid to his designated beneficiary.
The expense incurred under the Supplemental Retirement
Arrangements was $96,000 for the period July 1, 1992 to June 30,
1993 compared to $71,000 for the period October 10, 1991 to June
30, 1992.
Senior Management Incentive Program. New Dartmouth has a
Senior Management Incentive Program for the benefit of eligible
participants who hold positions of Vice President or above.
Amounts eligible for distribution under the Senior Management
Incentive Program are determined by the Board of Directors, at
its sole discretion, based upon (i) a formula containing certain
financial targets for New Dartmouth and (ii) the exercise of
discretionary authority by New Dartmouth's President and Chief
Executive Officer, based upon a participant's attainment of
individual performance goals and objectives. New Dartmouth's
discretionary contribution to 23 eligible participants under the
Senior Management Incentive Program for the year ended June 30,
1993 amounted to $175,000 compared to $99,300 for the period
October 10, 1991 to June 30, 1992.
Profit Sharing Plan. New Dartmouth instituted a Profit
Sharing Plan in January 1992 for the benefit of all employees in
lieu of a pension plan. To be eligible to participate in the
plan, an individual must be a full-time employee with a minimum
of one year of service. New Dartmouth's annual contribution to
the Profit Sharing Plan is determined by the Board of Directors,
at its sole discretion, based on New Dartmouth's earning
performance for the year. The annual discretionary contribution
is made to eligible participants based on a percentage of each
participant's salary. New Dartmouth's contribution to the Profit
Sharing Plan is deposited into a separate trust on behalf of the
participants. The Profit Sharing Plan is intended to satisfy the
requirements of a qualified retirement plan. New Dartmouth's
discretionary contribution for the year ended June 30, 1993
amounted to $450,000, or 4% of eligible participants' base
salaries compared to $216,700 for the period October 10, 1991 to
June 30, 1992.
18. RELATED PARTIES
It is New Dartmouth's practice that loans, other than credit
card loans and overdraft protection, will not be granted to
executive officers and directors. At June 30, 1993, loans and
loan commitments to executive officers and directors aggregated
$143,802 compared to $158,583 at June 30, 1992.
On October 10, 1991, New Dartmouth entered into a Consulting
Agreement with the Chairman of its Board of Directors. Pursuant
to the terms of the agreement, he will serve as a non-exclusive
Chairman of the Board of Directors. In such capacity, he
performs such services for New Dartmouth as the Board of
Directors designates. The agreement expires on October 9, 1994
and provides for payments totaling $250,000 per year.
19. SUBSEQUENT EVENT (UNAUDITED)
On November 15, 1993, the Federal Reserve Board, by 3 to 3
vote, failed to approve SNC's application to acquire New
Dartmouth. Because SNC was unable to obtain by November 15, 1993
all regulatory approvals necessary to consummate the proposed
Merger, New Dartmouth was entitled to abandon the transaction
under the terms of the Merger Agreement.
On December 20, 1993, SNC and New Dartmouth agreed to amend
the Merger Agreement to extend the deadline for completing the
Merger to June 30, 1994. Pursuant to the terms of the Merger
Agreement, as amended, each share of New Dartmouth Common Stock
will be exchanged for shares of SNC Common Stock having a value
equal to $310.95 plus 177% of New Dartmouth's net earnings per
share (assuming the exercise of all outstanding options and
warrants) from October 1, 1993 through the closing date subject
to certain adjustments. For purposes of calculating the number
of shares of SNC Common Stock to be exchanged for each share of
New Dartmouth Common Stock, if the market price of SNC Common
Stock prior to closing exceeds $23.14, the Exchange Ratio will be
calculated as if the market price were $23.14. If the market
price of SNC Common Stock is less than $17.11, then the Exchange
Ratio will be calculated as if the market price were $17.11,
unless SNC waives this provision.
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
Peoples Bancorp of Worcester, Inc.
We have audited the accompanying consolidated balance sheets of Peoples
Bancorp of Worcester, Inc. as of December 31, 1993 and 1992, and the
related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the three years in the period 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Peoples Bancorp of Worcester, Inc. at December 31, 1993 and 1992, and
the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 1993, in conformity
with generally accepted accounting principles.
As discussed in Notes 1 and 13 to the consolidated financial
statements, the Company changed its method of accounting for investments
and income taxes in 1993 and 1992, respectively.
/s/ Ernst & Young
Worcester, Massachusetts
January 20, 1994
CONSOLIDATED BALANCE SHEETS
Dollars in Thousands
December 31, 1993 1992
Assets
Cash and due from banks $ 19,406 $ 19,008
Federal funds sold 4,000 16,000
Certificates of deposit 12,168 2,217
Mortgage-backed securities held for sale
(Market value $254,052) (Note 4) -- 247,384
Investment securities
(Market value $153,313) (Note 4) -- 152,249
Available-for-sale securities, at market
(Note 4) 298,289 --
Held-to-maturity securities
(Market value $70,144) (Note 4) 70,174 --
Investment in nonmarketable equity
securities (Note 4) 8,827 --
Loans (Note 5) 461,518 475,473
Unearned income (793) (1,399)
Reserve for possible loan losses (Note 15) (5,567) (5,106)
Total net loans 455,158 468,968
Premises and equipment (Note 3) 10,033 11,173
Accrued interest receivable 4,435 5,236
Other assets (Notes 2, 7 and 13) 8,649 9,971
$891,139 $932,206
Liabilities
Deposits (Note 6)
Noninterest-bearing $ 33,979 $ 31,292
Savings 482,276 498,569
Time 261,128 299,305
Total deposits 777,383 829,166
Escrow funds 850 865
Other liabilities (Note 11) 6,610 5,919
Total liabilities 784,843 835,950
Commitments and contingencies (Note 14) -- --
CONSOLIDATED BALANCE SHEETS (continued)
Dollars in Thousands
December 31, 1993 1992
Stockholders' Equity (Notes 2, 9 and 10)
Serial preferred stock, $0.10 par value
per share; 1,000,000 shares authorized,
none issued -- --
Common stock, $0.10 par value per share;
10,000,000 shares authorized, 3,338,698
and 3,300,000 issued 334 330
Additional paid-in capital 39,924 39,303
Unrealized gains (Note 1) 2,782 --
Retained earnings 63,256 56,880
Treasury stock, at cost (12,768 shares at
December 31, 1992) -- (257)
Total stockholders' equity 106,296 96,256
$891,139 $932,206
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME
Dollars in Thousands,
Except Per Share Data
Years Ended December 31, 1993 1992 1991
Interest income:
Loans, including fees $ 36,267 $ 40,442 $ 48,581
Due from FDIC -- -- 12
Investment securities 5,199 6,654 8,676
Certificates of deposit 132 90 1,123
Federal funds sold 436 442 711
Mortgage-backed securities 17,620 21,673 21,679
Total interest income 59,654 69,301 80,782
Interest expense:
Deposits 22,415 32,694 47,441
Other 7 9 14
Total interest expense 22,422 32,703 47,455
Net interest income 37,232 36,598 33,327
Provision for possible loan losses 1,000 2,100 1,920
Net interest income after provision
for possible loan losses 36,232 34,498 31,407
Noninterest income:
Net gains on sales of securities
(Note 4) 3,092 4,786 1,757
Net gains from sales of loans 585 271 181
Fee income from loan servicing 311 327 346
Deposit fees 1,966 2,077 2,199
Other 1,078 1,084 980
Total noninterest income 7,032 8,545 5,463
CONSOLIDATED STATEMENTS OF INCOME (continued)
Dollars in Thousands,
Except Per Share Data
Years Ended December 31, 1993 1992 1991
Noninterest expense:
Salaries and wages 9,551 9,214 9,310
Employee benefits (Note 11) 2,577 2,682 3,406
Occupancy (Note 3) 2,758 4,105 2,695
Furniture and equipment 1,263 1,286 1,718
FDIC insurance 1,857 1,915 1,744
General and administrative (Note 7) 6,510 7,297 7,344
Total noninterest expense 24,516 26,499 26,217
Income before income taxes 18,748 16,544 10,653
Income taxes (Note 13) 7,961 7,054 4,713
Income before extraordinary item and
cumulative effect of change in
accounting principle 10,787 9,490 5,940
Extraordinary item (Note 12) -- -- 1,287
Cumulative effect of change in
accounting principle (Note 13) -- 1,544 --
Net income $ 10,787 $ 11,034 $ 7,227
Primary and fully diluted earnings
per share:
Weighted-average shares
outstanding 3,387,622 3,046,978 2,740,597
Operating income $3.18 $3.11 $2.17
Extraordinary income -- -- 0.47
Cumulative effect of change in
accounting principle -- 0.51 --
Net income $3.18 $3.62 $2.64
See accompanying notes.
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C>
Dollars in Thousands Additional
Years Ended December 31, Common Paid-in Unrealized Retained Treasury
1993, 1992 and 1991 Stock Capital Gains Earnings Stock Total
Balance, January 1, 1991 $330 $38,102 $ -- $45,839 $(13,147) $ 71,124
Net income -- -- -- 7,227 -- 7,227
Cash dividends declared
($1.25 per share) -- -- -- (3,350) -- (3,350)
Stock options exercised,
56,554 shares -- (357) -- -- 1,075 718
Tax benefits of stock
options exercised -- 59 -- -- -- 59
Balance, December 31, 1991 330 37,804 -- 49,716 (12,072) 75,778
Net income -- -- -- 11,034 -- 11,034
Cash dividends declared
($1.29 per share) -- -- -- (3,870) -- (3,870)
Stock options exercised,
51,275 shares -- (324) -- -- 988 664
Tax benefits of stock
options exercised -- 126 -- -- -- 126
Stock issuance,
540,000 shares -- 1,697 -- -- 10,827 12,524
Balance, December 31, 1992 330 39,303 -- 56,880 (257) 96,256
Net income -- -- -- 10,787 -- 10,787
Cash dividends declared
($1.33 per share) -- -- -- (4,411) -- (4,411)
Stock options exercised,
51,466 shares 4 422 -- -- 257 683
Tax benefits of stock
options exercised -- 199 -- -- -- 199
Adjustment to ending
balance for change in
accounting principle,
net of income taxes of
$2,112 -- -- 2,782 -- -- 2,782
Balance, December 31, 1993 $334 $39,924 $2,782 $63,256 $ -- $106,296
See accompanying notes.
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
In Thousands
Years Ended December 31, 1993 1992 1991
Increase (decrease) in cash and
cash equivalents:
Cash flows from operating activities:
Interest received $ 59,794 $ 72,363 $ 81,442
Fees received 3,355 3,488 3,515
Interest paid (22,422) (32,703) (47,455)
Income taxes paid, net (9,545) (8,560) (5,559)
Cash paid to suppliers
and employees (21,770) (24,774) (21,672)
Net cash provided by
operating activities 9,412 9,814 10,271
Cash flows from investing activities:
Proceeds from sales of securities
(Note 4) 143,930 182,161 46,603
Purchases of investment securities (520,441) (477,451) (303,293)
Proceeds from maturities of
investment securities 323,906 236,577 170,692
Principal collected on investment
securities 73,007 56,916 28,351
Net (increase) decrease in federal
funds sold 12,000 (4,725) (2,275)
Purchases of premises and equipment (185) (1,182) (1,095)
New loans made to customers (183,361) (172,924) (99,596)
Payments and payoffs received
on loans 163,629 152,392 112,036
Decrease in due from FDIC -- -- 289
Proceeds from loans sold 33,977 29,967 5,614
Net cash provided by (used in)
investing activities 46,462 1,731 (42,674)
Cash flows from financing activities:
Net increase (decrease) in demand
deposits and savings accounts (13,606) 50,339 59,248
Net increase (decrease) in customer
escrow accounts (15) 25 (101)
Proceeds from new and maturing
time deposits 322,971 380,186 480,827
Payments for maturing and closed
time deposits (361,148) (448,856) (497,276)
Net payment on sale of branches -- -- (8,138)
Net proceeds from stock issuance -- 12,524 --
Stock options exercised 683 664 718
Cash dividends paid (4,361) (3,648) (3,305)
Net cash provided by (used in)
financing activities (55,476) (8,766) 31,973
Net increase (decrease) in cash
and cash equivalents 398 2,779 (430)
Cash and cash equivalents at
beginning of year 19,008 16,229 16,659
Cash and cash equivalents at
end of year $ 19,406 $ 19,008 $ 16,229
Reconciliation of net income to net cash
provided by operating activities:
Net income $10,787 $11,034 $7,227
Adjustments to reconcile net income
to net cash provided by operating
activities:
Extraordinary item (Note 12) -- -- (1,287)
Provision for possible loan losses 1,000 2,100 1,920
Depreciation and amortization 1,938 1,958 2,285
Write-downs of banking premises
and other assets (Note 3) 450 1,804 --
Cumulative effect of change in
accounting principle (Note 13) -- (1,544) --
Deferred income tax benefit (1,771) (344) (1,182)
Net gains on investments (Note 4) (3,092) (4,786) (1,757)
Net gains from sales of loans (585) (271) (181)
Amortization of premium on investment
securities, net of accretion (24) 618 694
Accretion of discount on loans,
net of premium (444) (323) (212)
Effect of FAS 91 (407) (474) (541)
Increase in dividends payable (50) (222) (45)
Decrease in accrued interest receivable 801 2,907 433
Decrease (increase) in other assets (81) 197 (725)
Increase (decrease) in other
liabilities 890 (2,840) 3,642
Total adjustments (1,375) (1,220) 3,044
Net cash provided by operating
activities $ 9,412 $ 9,814 $10,271
Supplemental information:
Foreclosure of loans $ 2,232 $ 2,057 $ 3,739
Loans made to facilitate the sale
of OREO $ 408 $ 800 $ 1,011
See accompanying notes.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of Peoples Bancorp of Worcester, Inc. ("Bancorp") and its
subsidiaries, including its principal subsidiary, Peoples Savings Bank (the
"Bank"). In the Parent Company Statements, the investment in subsidiary is
accounted for by the equity method (see Note 18). All material
intercompany transactions are eliminated in consolidation.
INVESTMENTS: In May of 1993, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("FAS
115"). This statement addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values
and for all investments in debt securities. Those investments are to be
classified in three categories and accounted for as follows:
Debt securities that Bancorp has the positive intent and ability to hold
to maturity will be classified as "held-to-maturity securities" and
reported at amortized cost.
Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term will be classified as "trading
securities" and reported at fair value, with unrealized gains and losses
included in earnings.
Debt and equity securities not classified as either held-to-maturity
securities or trading securities will be classified as "available-for-
sale securities" and reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a separate component of
stockholders' equity.
As permitted under FAS 115, Bancorp has elected to adopt the provisions
of the new standard as of December 31, 1993. In accordance with FAS 115,
prior period financial statements have not been restated to reflect the
change in accounting principle. Bancorp does not currently own any
securities that would be required to be classified as trading securities;
however, mortgage-backed securities with an amortized cost of $259,556,000
and a market value of $263,934,000, marketable equity securities with a
cost of $1,768,000 and a market value of $2,503,000, and certain
adjustable-rate federal agency obligations with an amortized cost of
$32,071,000 and a market value of $31,852,000, were reclassified at
December 31, 1993 as available-for-sale securities. Debt securities with a
book value of $70,174,000 and a market value of $70,144,000 were
reclassified at December 31, 1993 to held-to-maturity securities. The
$4,894,000 of net unrealized gains on available-for-sale securities, less a
$2,112,000 reduction in the deferred tax asset account, was added to
stockholders' equity and recorded as a change in accounting principle to
reflect the net unrealized holding gain on securities classified as
available-for-sale previously carried at amortized cost or the lower of
amortized cost or market.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion
of discounts to maturity, or in the case of mortgage-backed securities,
over the estimated life of the security. Such amortization is included in
interest income from investments. Interest and dividends are included in
interest income from investments. Realized gains and losses, and declines
in value judged to be other than temporary, are included in net securities
gains (losses). The cost of securities sold is based on the specific
identification method.
Prior to December 31, 1993, mortgage-backed securities were classified as
held-for-sale and were carried at the lower of cost, adjusted for the
amortization of premiums and accretion of discounts, or market, on an
aggregate basis. These securities represent mortgage-backed securities
that management may sell based upon an assessment of changes in economic or
financial market conditions, interest-rate risk and Bancorp's financial
position and liquidity. Mortgage-backed securities consist primarily of
instruments guaranteed by the Government National Mortgage Association
("GNMA") or insured by the Federal Home Loan Mortgage Corporation ("FHLMC")
and by the Federal National Mortgage Association ("FNMA").
Prior to December 31, 1993, investment securities included U.S. Treasury
and federal agency obligations, other debt securities and equity
securities. Investments, other than equity securities, were carried at
cost adjusted for the amortization of premium and accretion of discount.
Investments in marketable equity securities were carried at the lower of
aggregate cost or market value.
LOANS: Interest on undiscounted loans is recognized primarily utilizing
the simple interest method based upon the principal amount outstanding.
Interest on discounted loans is recognized utilizing the effective yield
method.
The net amount of loan origination and commitment fees and direct costs
incurred to underwrite and issue the loan are deferred and amortized as an
adjustment of the related loan's yield over the estimated life of the loan
in a manner which approximates the interest method.
When a loan is past due 90 days or more, or the ability of a borrower to
repay principal or interest is in doubt, Bancorp discontinues the accrual
of interest and reverses any unpaid accrued amounts. If there is doubt as
to collectibility, cash interest payments are applied to reduce principal.
A loan is not restored to accruing status until the borrower has brought
the loan current and demonstrated the ability to make payments of principal
and interest, and doubt as to the collectibility of the loan is not
present. Bancorp may continue to accrue interest on loans past due 90 days
or more which are well secured and in the process of collection.
Restructured loans are loans with original terms which have been modified
to below market rate terms as a result of a change in the borrower's
financial condition. Interest income on restructured loans is accrued at
the reduced rates.
In May of 1993, the FASB issued Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS
114"). Compliance with this statement is required for fiscal years
beginning after December 15, 1994, and will require that impaired loans be
measured based on the present value of expected future cash flows,
discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. Bancorp is accumulating
the necessary data to determine when to adopt FAS 114; however, adoption of
FAS 114 is not expected to have a material impact on Bancorp's financial
position.
RESERVE FOR POSSIBLE LOAN LOSSES: The reserve for possible loan losses is
the amount set aside to absorb future charge-offs of loans in the existing
portfolio. The reserve is increased by a loan loss provision charged to
expense. When a loan or portion thereof is considered uncollectible, it is
charged against the reserve for possible loan losses. Recoveries of
amounts previously charged off are credited to the reserve for possible
loan losses when collected.
The amount of the provision for possible loan losses is based on a
periodic review of loans and management's judgments concerning a variety of
factors including the risk characteristics of the portfolio, current
economic conditions, past loss experience and the balance of the reserve
for possible loan losses.
PREMISES AND EQUIPMENT: Premises, leasehold improvements and furniture and
equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on the straight-
line method over useful lives as follows:
Premises 18 to 40 years
Leasehold improvements 5 to 20 years
Furniture and equipment 3 to 10 years
INTANGIBLE ASSETS: Other assets include goodwill and core deposit
intangible, which are stated at cost less accumulated amortization.
Amortization of goodwill is computed on the straight-line method over 10
years, while amortization of the core deposit intangible is computed on an
accelerated method over 12 to 14 years.
INCOME TAXES: The Bank qualifies as a thrift institution for federal
income tax purposes. Accordingly, the Bank has special tax provisions
available such as the percentage of taxable income method for computing bad
debt expense. Prior to December 31, 1991, Bancorp had filed a consolidated
federal income tax return based upon a tax year ending October 31; however,
in 1991, Bancorp changed its tax year end to December 31.
In February of 1992, the FASB issued Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). FAS 109
requires a change from the deferred method of accounting for income taxes
of Accounting Principles Board ("APB") Opinion 11 to the asset and
liability method of accounting for income taxes. Under the asset and
liability method of FAS 109, 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. 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 FAS 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, 1992, Bancorp adopted FAS 109 and has reported the
cumulative effect of that change in the method of accounting for income
taxes in the 1992 consolidated statement of income.
Pursuant to the deferred method under APB Opinion 11, which was applied
to 1991 and prior years, deferred income taxes are 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
for the year of the calculation. Under the deferred method, deferred taxes
are not adjusted for subsequent changes in tax rates.
Deferred tax assets are reported in other assets.
OTHER REAL ESTATE OWNED ("OREO"): Real estate acquired in satisfaction of
a loan and in-substance foreclosures are reported in other assets.
Properties acquired by foreclosure or deed in lieu of foreclosure, and
properties classified as in-substance foreclosures, are transferred to OREO
and recorded at the lower of cost or market, net of disposal costs, based
on appraised value at the date actually or constructively received. If the
fair value of the asset minus the estimated costs to sell the asset is
subsequently less than the original amount recorded, the deficiency is
recognized by use of a valuation allowance. If the fair value of the asset
minus the estimated costs to sell the asset subsequently increases, the
valuation allowance is reduced, but not below zero. Increases or decreases
in the valuation allowance are charged or credited to income. At December
31, 1993 and 1992, OREO balances of $1,447,000 and $2,374,000,
respectively, were net of valuation allowances of $365,000 and $0,
respectively.
CASH AND CASH EQUIVALENTS: Bancorp has defined cash and cash equivalents
as those amounts included in the balance sheet caption "Cash and due from
banks." Included in cash and due from banks as of December 31, 1993 is
approximately $4.9 million, which is subject to withdrawal restrictions and
is on deposit with the Federal Reserve.
FAIR VALUES OF FINANCIAL INSTRUMENTS: In December of 1991, the FASB issued
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" ("FAS 107"). FAS 107 requires
disclosure of fair value information about financial instruments, whether
or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. FAS 107
excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of Bancorp. The
following methods and assumptions were used by Bancorp in estimating its
fair value disclosures for financial instruments:
CASH AND DUE FROM BANKS, FEDERAL FUNDS SOLD, CERTIFICATES OF DEPOSIT AND
ACCRUED INTEREST RECEIVABLE: The carrying amounts reported in the balance
sheet for cash and due from banks, federal funds sold, certificates of
deposit and accrued interest receivable approximate the fair values of
those assets.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES: Fair values, or
market values, for investment securities and mortgage-backed securities are
based upon quoted market prices, where available. If quoted market prices
are not available, fair values are based upon quoted market prices of
comparable instruments, except in the case of stock of the Federal Home
Loan Bank of Boston and stock of the Savings Bank Life Insurance Company of
Massachusetts. The fair values of the stock of these two entities
approximate book values.
LOANS: Fair values for loans are estimated using discounted cash flow
analyses, using interest rates currently being offered with similar terms
to borrowers of similar credit quality except in the case where quoted
market prices, adjusted for differences in loan characteristics, are
available for similar loans sold in conjunction with securitization
transactions.
DEPOSITS: The fair values disclosed for noninterest-bearing deposits,
regular savings accounts, money market accounts and NOW accounts are, by
definition, equal to the book values of those deposits, which are payable
on demand. The carrying amounts for variable-rate, fixed-term certificates
of deposit approximate their fair values. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on
time deposits. The fair values of deposits disclosed do not reflect the
value of Bancorp's core deposit accounts, which management of Bancorp
believes would be significant due to the low cost of its deposits and the
stable nature of its customer relationships.
ESCROW FUNDS: The carrying amount of escrow funds approximates fair
value.
COMMITMENTS: The fair values of the lending commitments reported in Note
14 are believed by management of Bancorp to be immaterial or have been
reflected in the estimation of fair values of the related loans.
RECLASSIFICATIONS: Certain consolidated financial statement amounts
previously recorded have been reclassified to conform to the 1993
presentation.
NOTE 2. AGREEMENT AND PLAN OF MERGER
On August 26, 1993, Peoples Bancorp of Worcester, Inc. ("Peoples") and
Shawmut National Corporation, a corporation organized and existing under
the laws of the State of Delaware ("Shawmut"), entered into an Agreement
and Plan of Merger (the "Agreement"), pursuant to which Peoples will merge
(the "Merger") with and into Shawmut Service Corporation, a wholly owned
subsidiary of Shawmut and a Delaware corporation ("SSC"). As a result of
the Merger, each share of the $0.10 par value common stock of Peoples
("Peoples Common Stock") outstanding immediately prior to the effective
time of the Merger (as described in the Agreement, the "Effective Time"),
other than shares held directly or indirectly by Bancorp or Shawmut (other
than in a fiduciary capacity in respect of debt previously contracted),
will be converted into a number of shares (the "Exchange Ratio") of $0.01
par value common stock of Shawmut ("Shawmut Common Stock"), such number of
shares of Shawmut Common Stock to be determined by dividing $52 by the
"Average Closing Price" (as defined in the Agreement) of Shawmut Common
Stock, provided, that (a) if the "Average Closing Price" is equal to or
greater than $27.744, the Exchange Ratio shall be 1.874 (the "Minimum
Exchange Ratio"); provided further, that Peoples may waive the Minimum
Exchange Ratio, and (b) if the "Average Closing Price" is equal to or less
than $20.506, the Exchange Ratio shall be 2.536 (the "Maximum Exchange
Ratio"), provided further, that Shawmut may waive the Maximum Exchange
Ratio.
The Merger is intended to constitute a tax-free transaction under the
Internal Revenue Code of 1986, as amended, and to be accounted for as a
pooling of interests.
Consummation of the Merger is subject to various conditions, including:
(i) receipt of the approval of the Agreement by the holders of at least a
majority of the outstanding shares of Peoples Common Stock; (ii) receipt of
the necessary approvals from the appropriate regulatory authorities; (iii)
receipt of opinions of counsel to Shawmut and counsel to Peoples as to the
tax-free nature of certain aspects of the Merger; (iv) receipt of a
satisfactory opinion from Shawmut's independent certified public
accountants to the effect that the Merger qualifies to be accounted for as
a pooling of interests; (v) listing, subject to notice of issuance, with
the New York Stock Exchange of the Shawmut Common Stock to be issued in the
Merger; (vi) the "Average Closing Price" of Shawmut Common Stock shall be
no less than $20.506, unless Shawmut consents to waive the Maximum Exchange
Ratio; (vii) the "Average Closing Price" of Shawmut Common Stock shall be
no greater than $27.744, unless Peoples consents to waive the Minimum
Exchange Ratio; and (viii) satisfaction of certain other conditions
customary in transactions of this nature.
At December 31, 1993, Peoples had incurred $649,000 of merger-related
expenses that were included in other assets pending the outcome of the
Merger.
NOTE 3. PREMISES AND EQUIPMENT
The composition of premises and equipment, net of accumulated depreciation
and amortization of $8,847,000 and $8,424,000 at December 31, 1993 and
1992, respectively, was as follows:
December 31, 1993 1992
In Thousands
Land $ 2,421 $ 2,467
Buildings 5,090 5,654
Leasehold improvements 607 808
Furniture and equipment 1,915 2,244
$10,033 $11,173
Depreciation and amortization expense was $1,322,000, $1,217,000 and
$1,345,000 for the years ended December 31, 1993, 1992 and 1991,
respectively. Included in occupancy expense for 1992 were write-downs of
bank premises totaling $1,440,000, including $1,300,000 pertaining to land
and buildings, which is still owned, but deemed by management to have been
permanently impaired.
NOTE 4. INVESTMENTS
The following is a summary of available-for-sale securities at December 31,
1993:
Gross Gross
Unrealized Unrealized Market
In Thousands Cost Gains Losses Value
U.S. Treasury and
federal agency
obligations $ 32,071 $ -- $219 $ 31,852
Mortgage-backed
securities 259,556 5,009 631 263,934
Total debt
securities 291,627 5,009 850 295,786
Marketable equity
securities 1,768 760 25 2,503
$293,395 $5,769 $875 $298,289
The following is a summary of held-to-maturity securities at December 31,
1993:
Gross Gross
Unrealized Unrealized Market
In Thousands Book Value Gains Losses Value
U.S. Treasury and
federal agency
obligations $70,011 $29 $112 $69,928
Other debt securities 163 53 -- 216
$70,174 $82 $112 $70,144
Nonmarketable equity securities at December 31, 1993 consisted of
$6,596,000 of stock of the Federal Home Loan Bank of Boston (the "FHLBB")
and $2,231,000 of stock of the Savings Bank Life Insurance Company of
Massachusetts.
The book values and approximate market values of investment securities at
December 31, 1992 are summarized as follows:
Gross Gross
Book Unrealized Unrealized Market
In Thousands Value Gains Losses Value
U.S. Treasury and
federal agency
obligations $141,683 $ 96 $32 $141,747
Marketable equity
securities 1,791 1,045 46 2,790
Other debt securities 24 1 -- 25
Stock of the Federal
Home Loan Bank of
Boston 6,520 -- -- 6,520
Stock of the Savings
Bank Life Insurance
Company of
Massachusetts 2,231 -- -- 2,231
$152,249 $1,142 $78 $153,313
The maturity distribution of U.S. Treasury and federal agency obligations
classified as available-for-sale securities at December 31, 1993 is
summarized as follows:
Dollars in
Thousands Cost Market Value Percent of Cost
4 to 5 years $11,024 $10,959 34.4%
5 to 7 years 21,047 20,893 65.6
$32,071 $31,852 100.0%
The maturity distribution of U.S. Treasury and federal agency obligations
and other debt securities classified as held-to-maturity securities at
December 31, 1993 is summarized as follows:
Dollars in Percent of
Thousands Book Value Market Value Book Value
Within 1 year $39,830 $39,832 56.7%
1 to 2 years 24 24 0.1
2 to 3 years 30,181 30,096 43.0
After 5 years 139 192 0.2
$70,174 $70,144 100.0%
The maturity distribution of U.S. Treasury and federal agency obligations
and other debt securities at December 31, 1992 is summarized as follows:
Dollars in Percent of
Thousands Book Value Market Value Book Value
Within 1 year $141,683 $141,747 99.9%
2 to 3 years 24 25 0.1
$141,707 $141,772 100.0%
Proceeds from the sales of investments and gross gains and losses
realized on these sales were as follows:
Years Ended
December 31, 1993 1992 1991
In Thousands
Proceeds from the
sales of
investments:
U.S. Treasury
and federal
agency
obligations
and other debt
securities $ 5,069 $ -- $20,320
Marketable
equity
securities 1,275 -- 984
Mortgage-backed
securities 137,586 182,161 25,299
$143,930 $182,161 $46,603
Gross gains
realized:
U.S. Treasury
and federal
agency
obligations
and other debt
securities $ 8 $ -- $ 412
Marketable
equity
securities 331 -- 429
Mortgage-backed
securities 3,124 5,436 1,081
$3,463 $5,436 $1,922
Gross losses
realized:
Marketable
equity
securities $ 51 $ -- $ 42
Mortgage-backed
securities 320 650 123
$371 $650 $165
The market value of mortgage-backed securities at December 31, 1992 was
approximately $254,052,000. Gross unrealized gains and gross unrealized
losses totaled $6,755,000 and $87,000, respectively, at December 31, 1992.
As a member of the FHLBB, the Bank is required to invest in $100 par
value stock of the FHLBB in an amount equal to 1% of its outstanding
residential mortgage loans or 5% of its outstanding advances from the
FHLBB, whichever is higher. As and when such stock is redeemed, the Bank
will receive an amount equal to the par value of the stock.
<TABLE>
<CAPTION>
NOTE 5. NET LOANS
The composition of net loans was as follows:
December 31, 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Percent Percent
Book Fair of Book Book Fair of Book
Dollars in Thousands Value Value Value Value Value Value
Mortgage loans:
Fixed-rate conventional $141,774 $147,290 30.7% $134,242 $141,103 28.2%
Adjustable-rate conventional 128,503 128,819 27.8 131,562 132,454 27.7
VA and FHA 5,912 6,134 1.3 8,461 8,603 1.8
Commercial real estate 61,606 61,491 13.4 62,673 59,311 13.2
Total mortgage loans 337,795 343,734 73.2 336,938 341,471 70.9
Commercial loans 12,792 12,892 2.8 14,073 13,993 3.0
Consumer loans:
Home equity loans 99,743 100,579 21.6 113,046 115,308 23.8
Other consumer loans 11,188 11,137 2.4 11,416 11,490 2.3
Total consumer loans 110,931 111,716 24.0 124,462 126,798 26.1
Total loans 461,518 $468,342 100.0% 475,473 $482,262 100.0%
Less:
Unearned income (793) (1,399)
Reserve for possible loan
losses (5,567) (5,106)
Net loans $455,158 $468,968
At December 31, 1993, Bancorp was servicing mortgage loans for others of approximately $75,126,000
(approximately $77,998,000 at December 31, 1992).
</TABLE>
<TABLE>
<CAPTION>
NOTE 6. DEPOSITS
A summary of deposit balances, by type, is as follows:
December 31, 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Percent Percent
Book Fair of Book Book Fair of Book
Dollars in Thousands Value Value Value Value Value Value
Noninterest-bearing $ 33,979 $ 33,979 4.4% $ 31,292 $ 31,292 3.8%
Savings:
Regular 237,526 237,526 30.6 232,240 232,240 28.0
Money market 162,089 162,089 20.8 183,406 183,406 22.2
NOW 82,661 82,661 10.6 82,923 82,923 10.0
Total savings 482,276 482,276 62.0 498,569 498,569 60.2
Time:
Money market certificates 91,205 91,238 11.7 103,455 103,508 12.5
Brokered deposits 100 119 -- 297 328 --
Other time deposits 169,823 170,601 21.9 195,553 196,786 23.5
Total time 261,128 261,958 33.6 299,305 300,622 36.0
Total deposits $777,383 $778,213 100.0% $829,166 $830,483 100.0%
</TABLE>
The maturity and weighted-average interest rates on time deposits were as
follows at December 31, 1993:
Weighted-
Amount average
in Thousands Interest Rate
Within 1 year $226,855 3.39%
1 to 2 years 19,439 4.45
2 to 3 years 12,289 4.57
3 to 4 years 743 4.69
4 to 5 years 1,802 4.39
$261,128 3.53
At December 31, 1993, Bancorp had approximately $25,203,000 of time
deposits with balances equal to or in excess of $100,000.
NOTE 7. INTANGIBLE ASSETS
A summary of intangible assets is as follows:
December 31, 1993 1992
In Thousands
Core deposit intangible $7,310 $7,310
Goodwill 100 100
Accumulated amortization (5,104) (4,492)
$2,306 $2,918
Amortization expense was $612,000, $713,000 and $913,000 for the years
ended December 31, 1993, 1992 and 1991, respectively.
NOTE 8. ADVANCES FROM THE FEDERAL HOME LOAN BANK OF BOSTON
Advances from the FHLBB are secured by unencumbered securities, mortgages
and other loans defined as eligible by the Federal Home Loan Bank Act and
Regulations. The Bank also has a $10,285,000 line of credit with the
FHLBB; however, during 1993 and 1992, there were no material borrowings
from the FHLBB.
The Bank is authorized to borrow up to 30% of its total assets, but not
more than 20 times its capital stock holdings in the FHLBB, from the FHLBB,
for any sound business purpose for which the Bank has legal authority.
NOTE 9. STOCKHOLDERS' EQUITY
Retained earnings of the Bank include approximately $12,713,000, which is
classified for federal income tax purposes as a reserve for possible loan
losses. If any portion thereof is used for purposes other than to absorb
the losses for which established, an amount up to approximately one and
one-half times the amount actually used must be included in gross income
for federal income tax purposes in the year in which it is used. As the
Bank does not intend to use the reserve for purposes other than to absorb
loan losses, deferred income taxes have been provided only on $1,197,000 of
such amount. Upon the Merger of Peoples Savings Bank into Shawmut Bank,
National Association, an indirect wholly owned subsidiary of Shawmut,
Peoples Savings Bank would lose its status as a savings bank and income
taxes not provided on the $12,713,000 tax reserve for possible loan losses
would become payable.
In accordance with Massachusetts law, when the Bank converted to stock
form in 1986, a liquidation account was established for the benefit of
eligible account holders who continued to maintain their accounts in the
Bank after the conversion. In the event of a complete liquidation, each
eligible account holder would be entitled to receive a distribution in an
amount equal to the current adjusted liquidation account balances to the
extent that funds are available. At December 31, 1993, the balance of the
liquidation account was approximately $3,992,000.
Federal and state banking regulations place certain restrictions on
dividends paid by the Bank to Bancorp. The total amount of dividends that
may be paid at any date is generally limited to the undivided profits of
the Bank, which were approximately $41 million at December 31, 1993.
At December 31, 1993, the capital ratios of both Bancorp and the Bank
significantly exceeded minimum applicable regulatory requirements.
NOTE 10. STOCK OPTION PLAN
Bancorp has a Stock Option Plan (the "Plan"), under which 330,000 shares
were reserved for issuance to directors and key employees at a price equal
to the fair market value at the date of grant. The options expire on the
tenth anniversary of the date of grant unless terminated earlier pursuant
to the provisions of the Plan. If, at any time before the fifth
anniversary of the date of grant, the optionee has been employed by the
Bank for five or more years, all of the optioned shares are exercisable.
Other optionees are subject to the vesting provisions of the Plan ranging
from 40% vesting on the second anniversary of the date of grant to 100%
vesting on the fifth anniversary of such date. The options may be
designated as incentive stock options or nonqualified stock options. Plan
activity is summarized as follows:
Years ended December 31, 1993 1992
Weighted- Weighted-
average average
Number of Option Number of Option
Shares Price Shares Price
Outstanding at beginning
of year 164,567 $13.76 217,693 $13.56
Exercised (51,466) 13.26 (51,275) 12.94
Cancelled -- -- (1,851) 12.61
Outstanding at end of year 113,101 13.97 164,567 13.76
Options available for future
grant 23,387 23,387
NOTE 11. EMPLOYEE BENEFITS
The Bank provides pension benefits for its employees through membership in
the Savings Banks Employees Retirement Association (the "Association").
The benefits provided at age 65 to any participant are based on the
average of the highest three consecutive years of cash compensation in the
last 10 years at the Bank for such participant. The Bank's funding policy
is to contribute annually the amount recommended by the Association's
actuary to keep the plan funded. Contributions are intended to provide not
only for benefits attributed to service to date, but also for those
expected to be earned in the future.
The following table sets forth the plan's funded status and amounts
recognized in Bancorp's consolidated balance sheet as of the plan's year
end:
October 31, 1993 1992
In Thousands
Actuarial present values of benefit
obligations:
Accumulated vested obligations $ 7,443 $ 6,753
Accumulated nonvested obligations 40 74
Total $ 7,483 $ 6,827
Projected benefit obligation for
service rendered to date $(11,052) $(9,765)
Plan assets at fair value 10,419 9,249
Projected benefit obligation in excess
of plan assets (633) (516)
Unrecognized net (gain) loss from past
experience different from that
assumed and effects of changes in
assumptions (583) 155
Unrecognized net obligation at
November 1, 1986 being recognized
over 23 years 46 49
Accrued pension cost included in
other liabilities $ (1,170) $ (312)
Net pension expense included the following components:
Years Ended December 31, 1993 1992 1991
In Thousands
Service cost benefits
earned during the period $ 813 $ 782 $ 608
Interest cost on projected
benefit obligation 684 604 603
Actual return on plan assets (1,332) (680) (1,385)
Amortization of net losses 690 183 897
Net amortization and deferral 3 3 3
Net periodic pension cost $ 858 $ 892 $ 726
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation at October 31, 1993, were 7.00% and 6.00%,
respectively (7.00% and 6.00%, respectively at October 31, 1992). The
expected long-term rates of return on assets for the plan years ended
October 31, 1993, 1992 and 1991, were 7.00%, 6.75% and 7.75%, respectively.
Plan assets are invested primarily in U.S. Treasury and federal agency
obligations and marketable equity securities.
Bancorp also provides for certain supplemental retirement benefits.
Supplemental pension expense was $94,000, $162,000 and $1,216,000 for the
years ended December 31, 1993, 1992 and 1991, respectively. The 1991
amount included $626,000 as a result of the early adoption of Statement of
Financial Accounting Standards No. 106 ("FAS 106"), which affects
accounting for deferred compensation contracts. In January of 1992, this
supplemental retirement benefit was fixed at $2,977,700 with interest on
the unpaid benefit accruing interest at 1/2% below the prime rate. After
paying out $1,500,000 in December of 1992, Bancorp has cumulatively accrued
$1,769,000 for supplemental retirement benefits at December 31, 1993, which
equals the accumulated vested obligation at that date.
NOTE 12. EXTRAORDINARY ITEM
Prior to December 31, 1991, the Bank issued and sold life insurance and
annuities through its Savings Bank Life Insurance Department ("SBLI") under
the regulation and supervision of the Trustees of the Massachusetts General
Insurance Guaranty Fund and the Massachusetts Commissioner of Insurance.
As required under Massachusetts law, the assets, reserves and earnings of
this department were held solely for policyholders and were segregated from
all other assets and liabilities of the Bank. Accordingly, the financial
results of this department are not reflected in the accompanying financial
statements.
On December 31, 1991, the SBLI departments of participating banks were
reorganized into one newly formed company, The Savings Bank Life Insurance
Company of Massachusetts, through the issuance of stock. The surplus funds
of the SBLI departments were distributed to policyholders and participating
banks, with the latter receiving distributions in the form of stock of the
newly formed company. As a result of this reorganization, Bancorp received
stock in the new company valued at $2,231,000 and recorded deferred income
tax expense of $944,000.
NOTE 13. INCOME TAXES
As discussed in Note 1, Bancorp adopted FAS 109 as of January 1, 1992. The
cumulative effect of this change in accounting for income taxes of
$1,544,000 was determined as of January 1, 1992 and is reported separately
in the consolidated statement of income for the year ended December 31,
1992. Prior years' financial statements have not been restated to apply
the provisions of FAS 109.
Total income tax expense for the years ended December 31, 1993 and 1992
was allocated as follows:
Years Ended December 31, 1993 1992
In Thousands
Income from continuing operations $7,961 $7,054
Stockholders' equity, for compensation
expense for tax purposes in excess
of amounts recognized for financial
reporting purposes (199) (126)
Stockholders' equity for tax effect of
net unrealized gains on held-for-sale
investments 2,112 --
$9,874 $6,928
Income tax expense attributable to income from continuing operations
consisted of the following:
Years Ended December 31, 1993 1992 1991
In Thousands
Current tax expense:
Federal $6,928 $5,175 $4,121
State 2,804 2,223 1,774
9,732 7,398 5,895
Deferred tax benefit:
Federal (1,270) (242) (845)
State (501) (102) (337)
(1,771) (344) (1,182)
$7,961 $7,054 $4,713
A reconciliation of Bancorp's tax provision to the U.S. federal income
tax rate (35% in 1993, 34% in 1992 and 1991) is shown below:
Years Ended December 31, 1993 1992 1991
In Thousands
Expected income tax expense $6,562 $5,625 $3,622
State income taxes, net of
federal income tax benefit 1,497 1,400 948
Effect of percentage of income
method for bad debt deduction -- -- 83
Adjustments to deferred tax assets
and liabilities for enacted
changes in tax laws and rates (40) -- --
Other, net (58) 29 60
Income tax expense attributable
to income from continuing
operations $7,961 $7,054 $4,713
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
December 31, 1993 1992
In Thousands
Deferred tax assets:
Reserve for possible loan losses $ 1,886 $ 2,159
Accrued expenses for financial
reporting purposes not yet
deductible 1,614 1,028
Write-downs of bank premises for
financial reporting purposes 561 609
Excess depreciation for financial
reporting purposes 98 82
Excess amortization of intangibles
for financial reporting purposes 965 --
OREO reserves for financial reporting
purposes 158 --
Excess taxable gain on mortgage loans
sold 140 80
Other 33 21
Total deferred tax assets 5,455 3,979
Deferred tax liabilities:
Net unrealized gains on available-
for-sale securities (2,112) --
Investment in SBLI stock (963) (944)
Partnership investments, principally
due to excess taxable deductions (437) (451)
Cumulative bond accretion for financial
reporting purposes (136) (322)
Tax treatment of nonrefundable loan
fees and costs (49) (136)
Accrued interest receivable for financial
reporting purposes not yet taxable (81) (102)
Other (26) (32)
Total deferred tax liabilities (3,804) (1,987)
Net deferred tax asset $ 1,651 $ 1,992
For the year ended December 31, 1991, the deferred tax benefit results
from timing differences in the recognition of income and expense for
financial reporting and income tax accounting. The sources of the
differences and the related tax effects attributable to income from
continuing operations for the year ended December 31, 1991 were as follows:
In Thousands
Provision for possible loan losses $ 26
Accrual basis adjustment (1,132)
Accretion of bond discount (111)
Depreciation (93)
Partnership income and losses 127
Other 1
$(1,182)
NOTE 14. COMMITMENTS AND CONTINGENCIES
Bancorp leases certain property and equipment under operating leases that
expire at various times over the next 10 years. Payments for property
taxes, insurance and other costs under certain lease arrangements are
considered basic rentals.
At December 31, 1993, minimum annual rental commitments for property
under noncancellable leases with an initial term greater than one year were
as follows:
In Thousands
1994 $ 556
1995 484
1996 300
1997 269
1998 244
1999 to 2003 581
$2,434
The above rental commitments do not include any provision for Bancorp's
main office lease, which expired in 1993 and is currently being
renegotiated. Rental expense for this lease in 1993 was $474,000.
Rent expense was $1,096,000, $1,003,000 and $1,260,000 for the years
ended December 31, 1993, 1992 and 1991, respectively.
At December 31, 1993, Bancorp had approximately $120,000 outstanding in
standby letters of credit. In addition, Bancorp had approximately $81.2
million of unused equity lines of credit in connection with home equity
lines and an additional $5.7 million of unused commercial lines of credit
and unadvanced funds on construction loans. Bancorp also had commitments
to fund approximately $4.6 million of new residential mortgages.
NOTE 15. SUMMARY OF RESERVE FOR POSSIBLE LOAN LOSSES
An analysis of the reserve for possible loan losses is as follows:
Years Ended December 31, 1993 1992 1991
In Thousands
Balance, beginning of year $5,106 $4,483 $4,899
Provision for possible loan
losses 1,000 2,100 1,920
Recoveries of amounts previously
written off 291 389 113
Amounts written off as
uncollectible (830) (1,866) (2,449)
Balance, end of year $5,567 $5,106 $4,483
NOTE 16. EARNINGS PER SHARE
Primary and fully diluted earnings per share were computed by dividing net
income by the weighted-average number of shares of common stock outstanding
and dilutive stock options outstanding for each period.
NOTE 17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Unaudited quarterly financial information for each quarter during 1993 and
1992 is presented below:
Three Months Ended Dec. 31, Sept. 30, June 30, March 31,
In Thousands, Except Per
Share Data
1993:
Interest income $14,435 $14,732 $15,164 $15,323
Interest expense 4,903 5,435 5,830 6,254
Net interest income 9,532 9,297 9,334 9,069
Provision for possible loan
losses 250 250 250 250
Noninterest income:
Net gains on sales of
securities 73 1,309 1,048 662
Net gains from sales of loans 48 198 193 146
Other 802 869 858 826
Total noninterest income 923 2,376 2,099 1,634
Noninterest expense 6,425 6,176 6,055 5,860
Income before income taxes 3,780 5,247 5,128 4,593
Income taxes 1,580 2,305 2,159 1,917
Net income $ 2,200 $ 2,942 $ 2,969 $ 2,676
Earnings per share:
Net income $0.65 $0.87 $0.88 $0.79
Three Months Ended Dec. 31, Sept. 30, June 30, March 31,
In Thousands, Except Per
Share Data
1992:
Interest income $16,094 $17,067 $17,737 $18,403
Interest expense 6,804 7,555 8,684 9,660
Net interest income 9,290 9,512 9,053 8,743
Provision for possible
loan losses 500 500 500 600
Noninterest income:
Net gains on sales of
securities 668 1,391 -- 2,727
Net gains from sales
of loans 5 95 128 43
Other 823 873 938 854
Total noninterest
income 1,496 2,359 1,066 3,624
Noninterest expense(1) 6,408 6,012 6,490 7,589
Income before income taxes 3,878 5,359 3,129 4,178
Income taxes 1,740 2,259 1,325 1,730
Net income before cumulative
effect of change in
accounting principle 2,138 3,100 1,804 2,448
Cumulative effect of change in
accounting principle -- -- -- 1,544
Net income $ 2,138 $ 3,100 $ 1,804 $ 3,992
Earnings per share:
Net income before cumulative
effect of change in
accounting principle $0.64 $0.96 $0.64 $0.88
Net income $0.64 $0.96 $0.64 $1.43
(1) Quarter ended March 31, 1992 includes $1,300,000 write-down to
bank premises.
NOTE 18. PARENT COMPANY FINANCIAL INFORMATION
The following are the financial statements for Peoples Bancorp of
Worcester, Inc. (the Parent Company only):
CONDENSED BALANCE SHEETS
December 31, 1993 1992
In Thousands
Assets
Cash $ 4 $ 9
Certificates of deposit 1,557 1,713
Investment securities 15,519 14,048
Investment in subsidiary, at equity 90,173 81,306
Other assets 175 220
Total assets $107,428 $97,296
Liabilities and Stockholders' Equity
Liabilities $ 1,132 $ 1,040
Total stockholders' equity 106,296 96,256
Total liabilities and stockholders'
equity $107,428 $97,296
STATEMENTS OF INCOME
Years Ended December 31, 1993 1992 1991
In Thousands
Operating income:
Interest income $ 558 $ 299 $ 22
Dividends from subsidiary bank 4,400 4,000 3,990
Total operating income 4,958 4,299 4,012
Operating expense 77 92 78
Income before income taxes and equity
in undistributed net income of
subsidiary 4,881 4,207 3,934
Income taxes (benefit) 179 80 (10)
Equity in undistributed net income
of subsidiary 6,085 6,907 3,283
Net income $10,787 $11,034 $7,227
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1993 1992 1991
In Thousands
Increase (decrease) in cash and cash
equivalents:
Cash flows from operating activities:
Interest and dividends received $ 5,094 $ 4,129 $4,012
Income taxes paid, net 47 71 (10)
Cash paid to suppliers (59) (67) (38)
Net cash provided by operating
activities 5,082 4,133 3,964
Cash flows from investing activities:
Purchases of investment securities (41,129) (22,564) (4,138)
Proceeds from maturities of invest-
ment securities 39,720 8,894 2,000
Net cash used by investing
activities (1,409) (13,670) (2,138)
Cash flows from financing activities:
Cash dividends paid (4,361) (3,648) (3,305)
Proceeds from stock issuance -- 12,524 --
Stock options exercised 683 664 718
Net cash provided (used) by
financing activities (3,678) 9,540 (2,587)
Net increase (decrease) in cash and
cash equivalents (5) 3 (761)
Cash and cash equivalents at
beginning of year 9 6 767
Cash and cash equivalents at
end of year $ 4 $ 9 $ 6
Reconciliation of net income to net
cash provided by operating activities:
Net income $10,787 $11,034 $7,227
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed net
income of subsidiary (6,085) (6,907) (3,283)
Other 380 6 20
Total adjustments (5,705) (6,901) (3,263)
Net cash provided by operating
activities $ 5,082 $ 4,133 $3,964
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Gateway Financial Corporation
We have audited the accompanying consolidated balance sheet
of Gateway Financial Corporation (the "Company") as of December
31, 1993, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the year then
ended. 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 that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Gateway Financial Corporation at December
31, 1993, and the consolidated results of their operations and
their cash flows for the year then ended in conformity with
generally accepted accounting principles.
As discussed in Notes F, N, and O to the financial
statements, the Company changed its methods of accounting for
investments, postretirement benefits other than pensions, and
income taxes in 1993.
/s/Coopers & Lybrand
Hartford, Connecticut
January 27, 1994
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Gateway Financial Corporation
We have audited the accompanying consolidated balance sheet
of Gateway Financial Corporation as of December 31, 1992, and the
related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the two years in
the period ended December 31, 1992. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Gateway Financial Corporation at December
31, 1992, and the consolidated results of their operations and
their cash flows for each of the two years in the period ended
December 31, 1992 in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG
Hartford, Connecticut
February 11, 1993, except for Note B, as to which the date is
March 22, 1994.
GATEWAY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
December 31
1993 1992
ASSETS
Cash Equivalents:
Cash and due from banks, non interest-bearing $ 44,570 $ 33,750
Federal funds sold 40,000 39,000
Securities purchased under agreements to resell 10,000
Total Cash Equivalents 84,570 82,750
Securities:
Available-for-sale (cost $110,094) 111,386
Held-to-maturity (fair value $125,925) 125,839
Held-for-investment (fair value $172,853) 172,354
Loans held for sale/putback 30,801 42,035
Loans 900,522 1,008,058
Unearned income (6,535) (13,579)
Allowance for loan losses (18,265) (27,376)
Net Loans 875,722 967,103
Accrued income receivable 7,173 9,081
Premises and equipment, net 10,212 9,923
Other real estate owned, net 12,745 18,070
Income taxes receivable 198 2,345
Net deferred tax asset 5,000
Other assets 12,193 14,253
TOTAL ASSETS $1,275,839 $1,317,914
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Interest-bearing $1,107,262 $1,185,052
Non interest-bearing 64,927 54,884
Total Deposits 1,172,189 1,239,936
Advances from Federal Home Loan Bank 10,000
Mortgagors' escrow accounts 5,445 6,901
Other liabilities 3,994 5,080
TOTAL LIABILITIES 1,181,628 1,261,917
Stockholders' Equity:
Preferred stock, no par value; authorized
1,000,000 shares; none issued
Common stock, $.01 par value; authorized 20,000,000
shares; 13,847,820 shares in 1993 and 8,011,619
shares in 1992 issued, including shares
in treasury 138 80
Paid-in capital 84,831 56,388
Retained earnings 10,926 2,505
Treasury stock, at cost; 584,000 shares (2,976) (2,976)
Unrealized holding gains on securities
available-for-sale,net 1,292
TOTAL STOCKHOLDERS' EQUITY 94,211 55,997
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,275,839 $1,317,914
See Notes to Consolidated Financial Statements.
GATEWAY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Amounts)
Year Ended December 31
1993 1992 1991
INTEREST AND DIVIDEND INCOME:
Loans, including fees $ 73,887 $ 93,534 $ 85,767
Mortgage-backed securities 7,871 6,036 3,404
Investment securities:
Taxable interest 2,272 4,499 5,912
Tax-exempt interest 18 18 85
Dividends 1,265 1,360 1,503
3,555 5,877 7,500
Other 1,636 1,707 831
TOTAL INTEREST AND DIVIDEND INCOME 86,949 107,154 97,502
INTEREST EXPENSE:
Deposits 39,147 52,536 55,369
Borrowed funds 844 3,143 12,193
TOTAL INTEREST EXPENSE 39,991 55,679 67,562
NET INTEREST INCOME 46,958 51,475 29,940
Provision for loan losses 6,394 42,328 17,730
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 40,564 9,147 12,210
OTHER INCOME:
Service charges and other 6,844 5,907 4,310
Interim servicing fees 2,588
Net securities gains 1,135 3,405 152
Net gain on sales of mortgages 2,027 4,377 1,340
10,006 16,277 5,802
OPERATING EXPENSES:
Salaries 13,157 11,678 9,787
Employee benefits 4,195 3,228 2,994
Occupancy 4,034 3,943 3,947
Equipment 2,605 2,532 1,841
Net other real estate owned expenses and
provision for losses 8,790 10,385 9,577
FDIC insurance assessment 3,573 2,743 1,851
Other 10,680 10,876 6,778
47,034 45,385 36,775
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY CHARGE 3,536 (19,961) (18,763)
INCOME TAX PROVISION (BENEFIT) (4,885) 70 (5,910)
INCOME (LOSS) BEFORE
EXTRAORDINARY CHARGE 8,421 (20,031) (12,853)
Extraordinary charge -
debt prepayment penalty (371) (2,250)
NET INCOME (LOSS) $ 8,421 $ (20,402) $ (15,103)
INCOME (LOSS) PER SHARE BEFORE
EXTRAORDINARY CHARGE $ .86 $ (2.70) $ (1.73)
EXTRAORDINARY CHARGE PER SHARE (.05) (.30)
NET INCOME (LOSS) PER SHARE $ .86 $ (2.75) $ (2.03)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 9,836,216 7,425,223 7,429,575
See Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
GATEWAY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands, Except Share Amounts)
Common Stock
<S> <C> <C> <C> <C> <C> <C> <C>
Unrealized Stock-
Common Stock Paid-in Retained Treasury Gains on holders
Shares Amount Capital Earnings Stock Securities Equity
BALANCE AT JANUARY 1,1991 7,532,119 $ 80 $56,379 $38,010 $(2,757) $91,712
Net loss for the year (15,103) (15,103)
Acquisition of treasury
stock (109,500) (219) (219)
BALANCE AT DECEMBER 31,1991 7,422,619 80 56,379 22,907 (2,976) 76,390
Net loss for the year (20,402) (20,402)
Proceeds from exercise
of stock options 5,000 9 9
BALANCE AT DECEMBER 31,1992 7,427,619 80 56,388 2,505 (2,976) 55,997
Net income for the year 8,421 8,421
Proceeds from issuance
of common stock 5,784,451 58 28,211 28,269
Proceeds from exercise
of stock options 51,750 232 232
Change in unrealized
gains on securities
carried at market, net $1,292 1,292
BALANCE AT DECEMBER 31,1993 13,263,820 $138 $84,831 $10,926 $(2,976) $1,292 $94,211
</TABLE>
See Notes to Consolidated Financial Statements.
GATEWAY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended December 31
1993 1992 1991
OPERATING ACTIVITIES:
Net income (loss) $ 8,421 $ (20,402) $(15,103)
Adjustments to reconcile net
income (loss) to net cash
equivalents provided by
operating activities:
Provision for loan losses 6,394 42,328 17,730
Provision for depreciation
and amortization 1,272 1,404 1,567
Net amortization of security discounts
and premiums 1,901 2,116 2,989
Amortization of deferred mortgage
origination fees (1,767) (453) (735)
Provision for other real estate owned
losses 8,048 6,107 4,314
Net securities gains (1,135) (3,405) (152)
Decrease in accrued income receivable 1,908 2,503 2,632
Decrease (increase) in income taxes
receivable 2,147 6,539 (1,505)
Loans originated for sale (46,717)
Proceeds from sales of loans held for
sale/putback 120,035
Realized gain on mortgage sales (2,027) (4,377) (1,340)
Other, net (4,149) (8,046) (180)
NET CASH EQUIVALENTS PROVIDED BY
OPERATING ACTIVITIES 94,331 24,314 10,217
INVESTING ACTIVITIES:
Proceeds from sales of securities 1,296 51,496 21,490
Proceeds from maturities of securities 62,829 45,589 29,322
Purchases of securities (128,470) (95,857) (64,026)
Purchase of residential mortgages (60,233) (19,740) (32,545)
Net decrease (increase) in loans 78,916 (13,948) (36,464)
Purchases of premises and equipment (1,728) (2,246) (484)
Proceeds from sale of premises
and equipment 290 2,413 344
Proceeds from loan sales 124,406 41,173
Capital expenditures for other real
estate owned (637) (5,248) (8,439)
Proceeds from sale of other real
estate owned 5,928 18,093 25,320
Net cash and cash equivalents provided
from acquisitions 213,844
NET CASH EQUIVALENTS (USED FOR) PROVIDED
BY INVESTING ACTIVITIES (41,809) 104,958 189,535
FINANCING ACTIVITIES:
Net decrease in deposits and
escrow accounts (69,203) (101,778) (3,191)
Proceeds from borrowings 10,000 476,863
Payments for borrowings (20,000) (50,000) (608,263)
Proceeds from issuance of common stock 28,269
Proceeds from exercise of stock options 232 9
Purchase of treasury stock (219)
NET CASH EQUIVALENTS USED FOR FINANCING
ACTIVITIES (50,702) (151,769) (134,810)
INCREASE (DECREASE) IN CASH EQUIVALENTS 1,820 (22,497) 64,942
CASH EQUIVALENTS AT JANUARY 1 82,750 105,247 40,305
CASH EQUIVALENTS AT DECEMBER 31 $ 84,570 $ 82,750 $ 105,247
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: Gateway Financial Corporation (the
"Company") was formed during 1989 under the laws of the State of
Delaware and became the holding company for Gateway Bank (the
"Bank"). The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary. All
significant intercompany balances and transactions have been
eliminated in consolidation.
The Company's financial statements are prepared in accordance
with generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and operations
for the period. Actual results could differ significantly from
those estimates. Estimates that are particularly susceptible to
significant change in the near term relate to the determination
of the allowance for loan losses and the valuation of real estate
acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances
for loan losses and other real estate owned, management
periodically obtains or internally updates independent appraisals
for significant properties.
While management uses available information to recognize losses
on loans and other real estate owned, future additions to the
allowances may be necessary, based on the changes in economic
conditions, particularly in Connecticut. In addition, various
regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowances for losses on
loans and other real estate owned. Such agencies may require the
Bank to recognize additions to the allowances, based on their
evaluation of information available to them at the time of their
examination.
Fair Values of Financial Instruments: The following methods and
assumptions were used by the Company in estimating its fair value
disclosures for financial instruments:
Cash and Cash Equivalents: The carrying value reported in
the Consolidated Balance Sheet approximates the 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 Held For Sale/Putback: The fair value for loans held
for sale are based on quoted market prices of similar loans
sold in conjunction with securitized transactions, adjusted
for differences in loan characteristics. The fair value of
loans held for putback approximates their carrying value.
Loans: 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 value of
other loans (e.g., commercial mortgage, commercial and
consumer 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. Management concluded it was not practical to
estimate the fair value of non-accruing loans and
insubstance foreclosed real estate, due to the soft and
uncertain real estate market. Management believes any
estimate of fair value for these loans and insubstance
foreclosed real estate would be very subjective and costly.
The carrying value of accrued interest approximates its fair
value.
Other Real Estate Owned: The carrying value reported in the
Consolidated Balance Sheets approximates the assets' fair
values. The carrying value is the lower of cost or fair
value, less estimated selling costs.
Deposits and Borrowings: The fair values disclosed for
demand deposits (e.g., interest and non-interest checking,
regular 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). The
carrying amounts for variable-rate, fixed-term money market
accounts and certificates of deposits approximate their fair
values at the reporting dates. 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 certificates of deposit.
The carrying value of the short-term advances from the
Federal Home Loan Bank approximates their fair value.
Off Balance Sheet Instruments. Fair values for the
Company's loan commitments and standby letters of credit are
estimated, based on fees currently charged to enter into
similar agreements, taking into account the remaining terms
of the agreements, and the counterparties' credit standing.
Securities: Effective December 31, 1993, the Company adopted, on
a prospective basis, Statement of Financial Accounting Standards
No. 115 "Accounting For Certain Investments in Debt and Equity
Securities" ("SFAS 115"), and revised its securities accounting
policies. Securities that may be sold due to changes in market
interest rates, needs for liquidity, changes in the availability
of and the yield on alternative investments, and changes in terms
are classified as available-for-sale and carried at fair market
value. Unrealized holding gains and losses on such securities
are reported net of related taxes as a separate component of
stockholders' equity. Securities that the Company has the
positive intent and ability to hold to maturity are classified as
held-to-maturity, and accounted for at amortized cost. Amounts
reported as realized gains and losses on securities are measured
by the difference between the proceeds of the sale and the basis
of the security sold, using the specific identification cost
method. The adoption of SFAS 115, which has not been applied
retroactively to prior years' financial statements, has had no
effect on the Company's retained earnings.
Prior to December 31, 1993, investments in debt securities, which
the Company has the ability to hold to maturity and the intent to
hold on a long-term basis or until maturity, are stated at cost,
adjusted for amortization of premiums, and accretion of discounts
using the level yield method. Events which may be reasonably
anticipated are considered when determining the Company's intent
to hold investment securities on a long-term basis or until
maturity. Marketable equity securities are stated at the lower
of aggregate cost or market. A valuation allowance is recorded
as a component of stockholders' equity when the aggregate cost
temporarily exceeds market value.
Loans Held For Sale/Putback: Fixed-rate, single-family
residential mortgages that the Company intends to sell in the
secondary mortgage market to reduce interest rate sensitivity are
classified as held-for-sale. The carrying value of these assets
is the lower of aggregate cost or fair value. Loans held for
putback to the Federal Deposit Insurance Corporation are carried
at face value, which is the same as the amount at which the loans
may be put back to the FDIC.
Loans: Interest on loans is recognized on the accrual basis as
earned, based on rates applied to principal amounts outstanding.
The accrual of interest income is generally discontinued when a
loan becomes 90 days past due as to principal or interest. When
interest accruals are discontinued, unpaid interest credited to
income in the current year is reversed, and interest accrued in
prior years is charged to the allowance for loan losses.
Management may elect to continue the accrual of interest when the
fair value of collateral is sufficient to cover principal balance
and accrued interest.
Non-refundable loan origination and commitment fees and the
direct costs associated with originating or acquiring loans are
deferred. The net deferred amount is amortized as an adjustment
to the related loan yield over the contractual life of the
related loan.
On June 10, 1993, federal banking regulators jointly issued a
regulatory credit initiative on insubstance foreclosed real
estate. In accordance with this initiative, insubstance
foreclosed real estate, previously reported as a component of
other real estate owned, was reclassified to loans as of December
31, 1993. In connection with this reclassification, all prior
periods presented have been reclassified, including the
reclassification of related provisions and write-downs as loans
charged-off against the allowance for loan losses. The
recognition and measurement accounting policies for identifying
insubstance foreclosed real estate were not changed as a result
of this reclassification.
Insubstance foreclosed assets are defined as loan situations
where: (i) the borrower has little or no equity in the property,
which is the primary source of repayment of the loan: (ii) the
borrower has relinquished control of the property to the Company:
and (iii) the borrower is unlikely to be able to rebuild equity
in the property. Insubstance foreclosed assets are carried at
the lower of historical cost, or fair value. Reductions to fair
value are made through a charge to the allowance for loan losses.
Allowance For Loan Losses: The allowance for loan losses is
maintained at a level believed adequate to absorb potential
losses in the loan portfolio. Management's determination of the
adequacy of the allowance is based on an evaluation of the
portfolio, past loan-loss experience, current economic
conditions, volume, growth, and composition of the loan
portfolio, and other relevant factors.
Premises and Equipment: Premises and equipment are stated at
cost less accumulated depreciation computed using the straight-
line method at rates based on estimated useful lives.
Expenditures for maintenance and repairs are charged to
operations, as incurred. Any gains or losses from the sale or
disposition of premises and equipment are included in other
income or expense.
Other Real Estate Owned: Other real estate owned includes
properties acquired through a foreclosure proceeding or
acceptance of a deed in lieu of foreclosure. These assets are
carried at the lower of cost or fair value, less estimated
selling costs. Reductions from cost to fair value upon
classification as other real estate owned are made through a
charge to the allowance for loan losses. Subsequent reductions
in value are charged to operations through a provision for other
real estate owned. An allowance is maintained for losses and for
future costs to complete and sell these assets.
Income Taxes: The Company files consolidated federal and
combined state income tax returns, using the accrual method of
accounting as required by current regulations. Deferred taxes
result from different methods of accounting for financial and tax
reporting purposes, and are included in the consolidated
financial statements.
Effective January 1, 1993, the Company adopted on a prospective
basis, Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109") which requires the use
of the asset/liability method of accounting for income taxes.
Deferred income taxes and tax benefits are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The Bank
provides deferred taxes for the estimated future tax effects
attributable to temporary differences and carryforwards when
realization is more likely than not. See Note O, "Income Taxes."
Income (Loss) Per Common Share: Income (loss) per common share
is computed, based upon the weighted average number of shares
outstanding during the year.
Reclassifications: Certain reclassifications have been made to
prior years' financial statements to conform to the 1993
presentation.
NOTE B:
REGULATORY MATTERS AND BALANCE SHEET RESTRUCTURING PLAN
In May 1993, the Bank entered into a Stipulation and Consent
to the Issuance of an Order to Cease and Desist ("Stipulation")
with the Bank regulators. Pursuant to the Stipulation, the Bank
regulators issued the Order which became effective on May 28,
1993. Under the terms of the Stipulation and the Order, the Bank
has agreed to take certain actions and to seek to achieve certain
goals, including (i) to achieve and maintain a leverage ratio of
at least 5.25% as of September 30, 1993 and 5.75% as of March 31,
1994, and to continue maintenance of its risk-based capital ratio
in compliance with standards set by the FDIC; (ii) to maintain
adequate loan loss reserves, and to evaluate such reserves on at
least a quarterly basis; (iii) to refrain from paying or
declaring cash dividends without the prior written approval of
the FDIC Regional Director and the Banking Commissioner of the
State of Connecticut; (iv) to have and retain qualified
management (including additional senior executive officers, at
least one of whom will be a senior executive officer whose
position will be junior in title, rank, and responsibility only
to that of the Chief Executive Officer), including at a minimum a
Chief Executive Officer and a Chief Operating Office; (v) to
conduct a written evaluation of the Bank's management and
staffing needs, including an evaluation of each officer, in
particular, the Chief Executive Officer; (vi) to not extend
credit to any borrower whose credit has been classified unless
certain findings are made by the Board of Directors; (vii) to not
accrue interest on any loan that is 90 days or more past due,
unless such loan is well secured and in the process of
collection; (viii) to not make payments to any affiliated
organization without prior written approval of the Bank
regulators; and (ix) to develop and/or revise its written plans
regarding lessening risk with respect to certain borrowers, loan
policy, profits, and funds management. At September 30 and
December 31, 1993, the Bank was in compliance with the
requirements of the Order regarding its minimum leverage ratio.
The Bank remains subject to the other requirements of the Order,
and has worked diligently to satisfactorily address all of the
other requirements. As a result of the Company's agreement with
Shawmut National Corporation discussed earlier, the Bank has
decided, however, to suspend its recruitment of a Chief Operating
Officer. The Bank feels it is in compliance with all of the
other requirements of the Order, and any additional Bank actions
necessary to satisfy the Order's requirements will not have an
adverse material impact on the Bank's financial condition.
The FDIC and the Connecticut Banking Department are
conducting a concurrent examination of the Bank as of December
31, 1993, the results of which are unknown to the Company.
However, the Company does not anticipate any adverse material
impact on the consolidated financial condition of the Company nor
any change in the consolidated financial statements as presented
herein.
In 1993, the Company implemented a restructuring plan which
consisted of a distribution to its stockholders of rights to
purchase stock, sales of certain of its non-performing assets,
and steps to solidify and strengthen its management. Through the
rights offering, which was completed August 4, 1993, Gateway
raised approximately $28.3 million, net of underwriting
discounts, commissions, and expenses, in new capital by
distributing transferable rights to stockholders of record on
June 28, 1993 to subscribe for and purchase up to 4,927,309
shares of Gateway's common stock for a price of $5.25 per share.
The total shares were subscribed for, and an additional 857,142
shares were issued and sold to standby purchasers. The
restructuring plan also included the sale or resolution of up to
$60 million in book value (carrying value of the assets before
specific reserves, if any) of non-performing assets. It was
originally the Company's intent that up to $10 million of capital
would be used to absorb losses on these sales of non-performing
assets after an appropriate allocation of the then existing
reserves. However, only $11.3 million in non-performing assets
were sold through bulk sales. These sales resulted in a loss of
$97,000 after the utilization of $3.2 million of unallocated
reserves. Since many of the non-performing assets that might
have been included in bulk sales were resolved without the
necessity of their being included in bulk sales, the losses
incurred and the mark-to-market writedowns with respect to them,
were significantly less. Principal collections, proceeds from
sales, and internal resolutions totalled $31.3 million. Non-
performing assets were reduced by a net of $17.1 million, due
principally to charge-offs and provision for further other real
estate owned losses. At December 31, 1993, non-performing assets
were $50.2 million, a decrease of $59.7 million since December
31, 1992. The ratio of non-performing assets to total assets was
3.93% at December 31, 1993, compared to 8.33% at December 31,
1992.
At December 31, 1993, the Company's and the Bank's capital
ratios and the required regulatory minimums were as follows:
Minimum Minimum
Gateway Financial Requlatory Gateway Regulatory
Corporation Requirements Bank Requirements
Leverage ratio 7.12% 4.00% 7.10% 5.25% *
Tier 1 risk-based ratio 11.66% 4.00% 11.63% 4.00%
Total risk-based ratio 12.95% 8.00% 12.90% 8.00%
* Order requirement at September 30, 1993. This
requirement increases to 5.75% at March 31, 1994 under the
existing Order. General regulatory requirement was 4.0% at
December 31, 1993.
Based upon the Bank's capital ratios at December 31, 1993,
as indicated above, the Bank is categorized as "adequately
capitalized" under the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). Under the regulations, a
bank will be "well capitalized" if it has a total risk-based
capital ratio of 10% or greater, a Tier 1 risk-based capital
ratio of 6% or greater, and a leverage ratio of 5% or greater and
is not subject to any order or written directive by the FDIC to
meet and maintain a specific capital level for any capital
measure, or "adequately capitalized" if it has a total risk-based
capital ratio of 8% or greater, a Tier 1 risk-based capital ratio
of 4% or greater, and a leverage ratio of 4% or greater and does
not meet the definition of a "well-capitalized" institution.
NOTE C:
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For purposes of the Consolidated Statements of Cash Flows,
cash equivalents include cash and due from banks, federal funds
sold, and securities purchased under agreements to resell. The
original maturities for cash equivalents is not greater than 30
days.
Year Ended December 31
(In Thousands) 1993 1992 1991
Cash paid during the year for:
Interest $39,883 $57,455 $68,951
Income taxes 85 2,189 299
Non-cash items affecting investing
activities:
Transfer of loans to loans held for
sale/putback 54,872 59,973
Transfer of loans to other real
estate owned 15,097 23,306 30,023
Transfer of other real estate
owned to other real estate
held for sale 5,185
Loans made to facilitate sale
of other real owned 1,898
Unrealized holding gains on
securities available-for-sale, net 1,292
NOTE D:
ACQUISITIONS
On December 13, 1991, the Bank purchased certain assets and
assumed certain liabilities of The BankMart ("BankMart") from the
Federal Deposit Insurance Corporation ("FDIC") as receiver of
BankMart.
Assets acquired of $350 million, which included $67.2
million in cash and due from banks and federal funds sold,
consisted primarily of performing residential, commercial, and
consumer loans, while liabilities assumed of $482 million
consisted primarily of deposits. In addition, the FDIC provided
$132 million in cash to the Bank to bring the value of the assets
equal to the value of the liabilities, along with $14.6 million
in cash as the negotiated discount. In 1991, the negotiated
discount was allocated to BankMart residential and consumer loans
($3 million), the allowance for loan losses ($8 million),
deposits ($2 million), and various liabilities incurred or to be
incurred by the Bank ($2 million) as a result of the acquisition
to adjust their carrying amounts to their estimated fair values.
During the quarter ended December 31, 1992, the Company
reclassified certain components of the 1991 allocation of the
negotiated discount in order to comply with an FDIC mandate.
This reclassification increased the discount allocated to
BankMart residential, commercial, commercial real estate, and
consumer loans, and decreased the allocation to allowance for
loan losses. This reclassification was retroactive to December
31, 1991, and resulted in an adjustment of certain amounts
previously reported for the quarters ended September 30, 1992,
March 31, 1992, and December 31, 1991. These adjustments caused
no changes in the previously-reported net income (loss) or net
income (loss) per share for any of these quarters. See Note G.
Under the terms of the acquisition of BankMart from the
FDIC, the FDIC agreed to repurchase from the Bank any commercial
loans and commercial mortgages that become delinquent, as
defined, prior to December 13, 1993. As of December 31, 1993,
intentions to put back approximately $58.1 million of loans had
been delivered to the FDIC, of which $21.1 million is classified
as loans held for sale/putback awaiting payment.
As a result of the BankMart acquisition, the Bank elected to
prepay $82 million of its high coupon Federal Home Loan Bank
advances, which resulted in a $2.3 million prepayment penalty in
1991. In 1992, the Bank prepaid an additional $20 million in
advances, which resulted in prepayment penalties of $371,000.
These penalties are reported as extraordinary charges in the
Consolidated Statements of Operations.
The acquisition of BankMart was accounted for as a purchase.
The results of its operations are included in the accompanying
Consolidated Statements of Operations for the period subsequent
to December 13, 1991. The Company acquired only certain assets
and assumed only certain liabilities of BankMart. The
composition of earning assets has been significantly affected by
the exercise of options the Company had to put back certain
assets to the FDIC. Also, deposit rates have been adjusted to
align with the Company's traditional deposit pricing.
Accordingly, pro forma financial information related to this
transaction would not be indicative of the continuing effect on
future operations and earnings.
NOTE E:
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The carrying value and fair value of the whole loans
purchased under agreements to resell was $10 million at December
31, 1992. The Company had no whole loan purchases under
agreement to resell at December 31, 1993.
Periodically, the Company enters into purchases of loans or
securities under agreements to resell. The amounts advanced
under these agreements represent short-term loans, and are
reflected as an asset in the Consolidated Balance Sheets. The
related collateral is held by either the Bank's custodian or in a
third-party custodian account under a written custodial agreement
that explicitly recognizes the Bank's interest in the collateral.
The agreements require the resale of substantially identical
collateral. At December 31, 1992, the repurchase agreement with
Goldman, Sachs & Co. had an interest rate of 4%, and matured
within 30 days. Securities purchased under agreements to resell
averaged $82,192 and $8,480,874 during 1993 and 1992,
respectively, and the maximum amounts outstanding at any month-
end during 1993 and 1992 were $0 and $25,000,000, respectively.
NOTE F:
SECURITIES
Effective December 31, 1993, the Company adopted SFAS 115,
which requires that securities be classified as either held-to-
maturity, available-for-sale, or trading (see Note 1 - Summary of
Significant Accounting Policies - Securities). As of December
31, 1993, securities have been classified as held-to-maturity or
available-for-sale. Prior to December 31, 1993, all investment
securities were classified as held-for-investment. The adoption
of SFAS 115, which has not been applied retroactively to prior
years' financial statements and which has had no effect on the
Company's retained earnings, has increased stockholders equity by
approximately $1.3 million as a result of the inclusion, as a
separate component of stockholders' equity, of unrealized holding
gains on securities available-for-sale. No tax effect has been
recorded against these unrealized gains because of net operating
loss tax carryforwards. Securities held-to-maturity (carried at
carrying value) and available-for-sale (carried at fair value) at
December 31, 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross Gross Gross Gross
Carrying Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Value Value Losses Value Cost Gains Losses Value
U.S. Treasury
Securities $22,508 $282 $22,790
FHLB stock $11,540 $11,540
Federal Agency
Obligations 3,000 3,000
Municipal
obligations 298 2 300
Other bonds and
short-terms
obligations
5,017 186 5,203
Marketable
equity
securities 1,064 $144 $21 1,187
Mutual
Investment Fund
of Connecticut 4,914 162 95 4,981
Asset-backed
securities 74,943 $334 $74,609
Mortgage-backed
securities 20,073 34 84 20,023 92,576 1,427 325 93,678
Total Securities $125,839 $504 $418 $125,925 $110,094 $1,733 $441 $111,386
</TABLE>
Securities held-for-investment (carried at amortized cost) at
December 31, 1992 are as follows (in thousands):
There were no sales of debt securities in 1993. Proceeds from sales
of debt securities, including mortgage-backed securities, were $44.0
million and $14.1 million in 1992 and 1991, respectively. Gross realized
gains on sales of debt securities were $3.3 million in 1992 and $1.0
million in 1991. Gross realized losses on sales of debt securities were
$.5 million in 1992 and $1.1 million in 1991.
Net realized gains from sales of marketable equity securities were $.2
million in 1993, $.6 million in 1992, and $.3 million in 1991.
At December 31, 1993, securities having a carrying value of $15.1
million were pledged to collateralize public deposits.
The maturities of securities at December 31, 1993 are summarized in
the following table. The maturities, including the mortgage-backed
securities, are reflective of the final maturity and not the term to
repricing. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties (in thousands):
Held-to-Maturity
Carrying Value Fair Value
Debt securities and mortgage-backed
securities:
Within one year $ 6,698 $ 6,779
After one but within five years 77,211 77,268
After five but within ten years 20,025 19,917
After ten years 21,905 21,961
$125,839 $125,925
Available-For-Sale
Amortized Cost Fair Value
Debt securities and mortgage-backed
securities:
After one but within five years $ 28 $ 30
After five but within ten years 19,835 20,066
After ten years 72,713 73,582
92,576 93,678
Marketable equity securities 1,064 1,187
Mutual Investment Fund of Connecticut 4,914 4,981
FHLB stock 11,540 11,540
$110,094 $111,386
NOTE G:
LOANS
Loans consist of the following (in thousands):
December 31
1993 1992
Residential $640,046 $ 634,875
Commercial and construction mortgage 111,630 178,026
Commercial 72,155 101,485
Consumer 76,691 93,672
$900,522 $1,008,058
The carrying and fair values of the loan portfolio at December
31, consist of the following (in thousands):
1993
Carrying
Value Fair Value
Residential $635,383 $643,288
Commercial and construction mortgage 98,142 94,424
Commercial 57,836 54,062
Consumer 71,745 72,084
863,106 $863,858
Non-accruing loans 26,093
Insubstance foreclosed real estate 11,323
$900,522
1992
Carrying
Value Fair Value
Residential $ 620,068 $622,308
Commercial and construction mortgage 119,686 120,191
Commercial 89,031 89,200
Consumer 87,513 87,513
916,298 $919,212
Non-accruing loans 52,398
Insubstance foreclosed real estate 39,362
$1,008,058
Loans held for sale/putback at December 31 consist of the
following (in thousands):
1993 1992
Carrying Value Fair Value Carrying Value Fair Value
Loans held for sale $ 5,534 $ 5,534 $32,154 $32,830
Loans held for putback 21,075 21,075 9,881 9,881
Other real estate owned
held for sale 4,192 4,192
$30,801 $30,801 $42,035 $42,711
Information concerning non-accruing loans, insubstance
foreclosed real estate, and restructured loans at December 31 is
as follows (in thousands):
1993 1992 1991
Non-accruing loans $26,093 $52,398 $53,751
Insubstance foreclosed real estate $11,323 $39,362 $42,984
Restructured loans (not included in non-
accruing loans) $ 6,379 $ 6,775 $ 6,905
Gross interest income which
would have been recorded during
the year on non-accruing and
restructured loans $ 3,639 $ 5,820 $ 5,767
Gross interest income recorded during
the year on non-accruing and
restructured loans $ 665 $ 1,408 $ 1,519
There were no commitments to extend additional funds on non-
accruing loans at December 31, 1993. Loans 90 days or more
delinquent and still accruing amounted to $8.5 million, $1
million, and $.8 million at December 31, 1993, 1992, and 1991,
respectively.
The Bank services residential mortgage loans for others that
amounted to $353 million and $405 million at December 31, 1993
and 1992, respectively. Substantially all loans sold into the
secondary market are sold without recourse to the Bank. Such
loans are not included in the Consolidated Balance Sheets.
Changes in the allowance for loan losses for each of the
three years ended December 31 are as follows (in thousands):
1993 1992 1991
Balance at January 1 $27,376 $21,558 $24,711
Charge-offs (17,241) (36,983) (23,054)
Recoveries 1,736 473 795
Net charge-offs (15,505) (36,510) (22,259)
Provision for loan losses 6,394 42,328 17,730
Allowance acquired in
acquisitions 1,376
Balance at December 31 $18,265 $27,376 $21,558
During the quarter ended December 31, 1992, the Company
complied with an FDIC mandate involving its 1991 accounting for
an acquired allowance. Consequently, during the quarter ended
December 31, 1992, and retroactive to December 31, 1991, a
significant portion of the amount previously reported as the
allowance acquired in the 1991 acquisition was reclassified. See
Note D.
During 1993, the Financial Accounting Standards Board issued
Statement No. 114, "Accounting by Creditors for Impairment of a
Loan" (SFAS 114). SFAS 114 addresses the accounting by creditors
for impairment of a loan by specifying how allowances for credit
losses related to certain loans should be determined, including
loans that are restructured in a troubled debt restructuring
involving a modification of terms of a receivable. Management
has not assessed the impact of the implementation of SFAS 114,
which is effective for fiscal years beginning after December 15,
1994, with initial application as of the beginning of the fiscal
year.
NOTE H:
ALLOWANCE FOR OTHER REAL ESTATE OWNED LOSSES
Allowance for other real estate owned losses is deducted from
other real estate owned. Changes in the allowance for each of
the three years ended December 31 are as follows (in thousands):
1993 1992 1991
Balance at January 1 $ 5,004 $ 495 $ 500
Charge-offs (4,794) (1,598) (4,319)
Provision for other real estate
owned losses 8,048 6,107 4,314
Balance at December 31 $ 8,258 $ 5,004 $ 495
The provisions for other real estate owned losses are included
in net other real estate owned expenses and provision for losses
in the Consolidated Statements of Operations.
NOTE I:
PREMISES AND EQUIPMENT
The components of premises and equipment at December 31 are as
follows (in thousands):
1993 1992
Land $ 3,142 $ 3,168
Buildings and improvements 8,543 8,899
Furniture and equipment 12,371 10,873
Less accumulated depreciation
and amortization (13,844) (13,017)
$10,212 $ 9,923
Depreciation and amortization on premises and equipment
included in operating expenses totaled $1.3 million, $1.2
million, and $1.4 million for the years ended December 31, 1993,
1992, and 1991, respectively.
NOTE J:
DEPOSITS AND BORROWINGS
The carrying value and fair values of deposits as of
December 31 consisted of the following (in thousands):
1993 1992
Carrying Value Fair Value Carrying Value Fair Value
Interest-bearing:
Regular Savings $ 198,381 $ 198,381 $ 212,099 $ 212,099
NOW 103,667 103,667 100,840 100,840
Money Market 252,535 252,535 237,224 237,224
Certificates of
Deposit 552,679 560,707 634,889 635,393
1,107,262 1,115,290 1,185,052 1,185,556
Non interest-bearing 64,927 64,927 54,884 54,884
$1,172,189 $1,180,217 $1,239,936 $1,240,440
As disclosed in Note A, the fair value of demand deposits
are, by definition, equal to the amount payable on demand. The
fair value disclosed has not been adjusted for any value derived
from retaining those deposits for an expected future period of
time. That component is commonly referred to as a deposit base
intangible. This intangible asset is neither considered in the
above fair value amounts, nor is it recorded as an intangible
asset in the Consolidated Balance Sheet. The Company has not
performed the calculations to estimate the amount of this
intangible asset due to the absence of certain information
required and the complexity of the computation.
Scheduled maturities of certificates of deposit in
denominations of $100,000 or more at December 31, 1993 are as
follows (in thousands):
3 months or less $10,934
Over 3 months through 6 months 6,846
Over 6 months through 12 months 13,385
Over 12 months 12,544
$43,709
Advances from the Federal Home Loan Bank at December 31 are
as follows (in thousands):
1992
Maturity Amount Rate
1993 $10,000 6.10%
As a member of the Federal Home Loan Bank of Boston (FHLBB)
and in accordance with an agreement with them, the Bank is
required to maintain qualified collateral, as defined in the
"FHLBB" Statement of Credit Policy, free and clear of liens,
pledges and encumbrances as collateral for the advances. Total
qualified collateral which includes fully disbursed whole first
mortgages, direct obligations of the United States Treasury, U.S.
agency-backed securities, securitized mortgage obligations and
deposits held at the FHLBB, totalled $739 million at December 31,
1993. The FHLBB allows members to borrow at various percentages
against this collateral to determine total borrowing capacity.
The Bank may borrow up to $564 million against the $739 million
of collateral.
NOTE K:
STOCKHOLDERS' EQUITY
On August 28, 1985, the Bank converted from mutual to stock
ownership in a public offering. Upon conversion, eligible
savings account holders as of December 31, 1984 were granted a
priority in the event of future liquidation for a period of ten
years by establishing a special reserve account in an amount
equal to the total net worth of $36.3 million at June 30, 1985.
The amount of the special reserve account is being decreased to
the extent that the balances of eligible account holders are
reduced at annual determination dates, which commenced December
31, 1985. No dividends may be paid to the Company if such
dividends reduce the net worth of the Bank below the amount
required for the special reserve account.
Dividends are paid by the Company from its assets which are
provided by dividends from the Bank. However, certain
restrictions exist regarding the ability of the Bank to transfer
funds to the Company in the form of cash dividends, loans, or
advances. Pursuant to the Connecticut General Statutes, the Bank
may not declare cash dividends, loans, or advances. Pursuant to
the Connecticut General Statutes, the Bank may not declare cash
dividends except from its net profits. The approval of the State
of Connecticut Banking Commissioner is required to pay cash
dividends in excess of the Bank's earnings retained in the
current year, plus retained net profits of the preceding two
years. Further, in December 1990, the Company entered into a
Memorandum of Understanding with the Federal Reserve Bank of New
York (the "Fed MOU"). Under the Fed MOU, the Company agreed,
among other things: (i) not to declare cash dividends or make any
significant expenditures not in the ordinary course of business
without the prior written approval of the Federal Reserve Bank of
New York; and (ii) not to significantly expand its activities or
acquire, or enter into any agreements to acquire, any bank or
non-bank entities or asset portfolios, without first consulting
the Federal Reserve Bank of New York, whether or not a formal
application is required.
In order to conserve its capital, the Company has not paid
any dividends since January 1990. Due to its recent results of
operations and regulatory restrictions on the payment of
dividends by the Bank (see Note B), which are the Company's
primary source of funds for the payment of dividends, management
of the Company currently does not anticipate the resumption of
dividend payments for the foreseeable future.
The Company has authorized to issue one million shares of
no-par-value preferred stock. No preferred stock was issued as
of December 31, 1993. In 1989, the Board of Directors of the
Company adopted a Shareholders Rights Plan. The rights become
exercisable ten days after a public announcement that a party or
group has acquired or obtained the right to acquire 20% or more
of the Company's common stock in a transaction not previously
approved by the Board of Directors, or after commencement of a
tender offer for 20% or more of the Company's common stock, or
after the Board of Directors declares any person or group to be
acting in other than the best interests of the Company after
becoming a beneficial owner of 10% or more of the Company's
common stock. If the rights become exercisable, they will
entitle holders of common stock to buy shares in the Company (or
a surviving company) at discounted prices, while the rights of
the unsolicited acquirer will become null and void. The rights
are designed to protect stockholders from unfair takeover
tactics, and expire in 1999.
NOTE L:
CONCENTRATIONS OF CREDIT AND OFF-BALANCE SHEET RISK
A substantial portion of the Company's loans are
collateralized by real estate in depressed markets in Fairfield
County, Connecticut. In addition, a substantial portion of the
real estate owned is located in those same depressed markets.
Accordingly, the ultimate collectibility of a substantial portion
of the Company's loan portfolio and the recovery of a substantial
portion of the carrying amount of other real estate owned are
particularly susceptible to changes in market conditions in
Fairfield County. At December 31, 1993, the Company's largest
credit concentration consisted of $10.5 million in outstanding
loans. None of these loans were non-accruing. Management has
considered credit concentrations in determining the level of the
allowance for loan losses believed adequate to absorb potential
losses in the loan portfolio.
Commitments to extend credit are agreements to lend to a
customer, and have fixed expiration dates or other termination
clauses. 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 credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by
the Company upon extension of credit, is based on a credit
evaluation of the customer. Collateral held generally includes
income-producing commercial properties, residential properties,
and property, plant, and equipment. The Company generally
requires an initial loan-to-value ratio of no greater than 80%
when real estate collateralizes a loan. Interest rates on
approved loan commitments are a combination of fixed and variable
interest rates. Interest rates on unadvanced portions of
construction loans are either fixed or variable. Construction
loan commitments generally mature within eighteen months.
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 expose the Company to
credit risk in excess of the amount recognized in the
Consolidated Balance Sheets.
The Company's exposure to credit loss in the event of non-
performance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual
amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments. Total credit exposure at
December 31, 1993 related to these items is summarized below (in
thousands):
Contract Amount Fair Value
Loan commitments:
Approved loan commitments $45,896 $574
Standby letters of credit 949 14
Unadvanced portion of
construction loans 1,255 25
Standby letters of credit are conditional commitments
issued by the Company to guarantee the performance of a customer
to a third party. These guarantees are primarily issued to
support private domestic borrowing arrangements. All guarantees
have stated expiration dates, generally one year or less. The
credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loans to customers, and
appropriate amounts of collateral, generally real estate, are
obtained when applicable.
NOTE M:
STOCK OPTIONS
The Company's Stock Option and Incentive Plan (the "Plan")
authorizes the granting of stock options and stock appreciation
rights to key personnel. The Plan provides for the granting of
options to purchase a maximum of 693,000 shares of Company common
stock for terms of up to ten years. The options are exercisable
one year after the date of grant, and are granted at the fair
market value on the date of grant, except for options granted in
1993 which become exercisable upon termination of any FDIC
supervisory agreement or, at any time after March 24, 1995, upon
waiver of such restriction by the Board of Directors of the Bank
or by the Salary and Benefits Committee thereof and options
granted in 1991 and 1992 which are exercisable over a four-year
period.
At December 31, 1993, options to purchase 184,650 shares are
exercisable, and an additional 262,275 shares are reserved for
issuance pursuant to options not yet granted under the Plan.
Changes in outstanding options were as follows:
Shares Price Range
Outstanding January 1, 1991 235,825 $2.00 - $14.83
Options granted 54,000 2.38 - 2.50
Options cancelled (34,000) 2.00 - 13.63
Outstanding December 31, 1991 255,825 2.00 - 14.83
Options granted 104,500 4.50
Options exercised (5,000) 2.00 - 2.38
Options cancelled (18,000) 2.00 - 14.83
Outstanding December 31, 1992 337,325 2.00 - 14.83
Options granted 95,000 7.13
Options exercised (21,750) 2.00 - 7.88
Options cancelled (45,800) 2.00 - 14.83
Outstanding December 31, 1993 364,775 $2.00 - $14.83
In 1991, non-qualified options to purchase up to 30,000
shares of Company common stock at prices ranging from $4.50 to
$6.00 per share were granted to a former officer of the Company.
The options replace previously-existing options to purchase a
like number of shares upon substantially the same terms as the
Plan. The options were exercised in 1993.
NOTE N:
BENEFIT PLANS
The Company has a non-contributory defined benefit pension
plan covering all eligible employees. The benefits are primarily
based on the employee's years of service and compensation during
the last five years of employment. The Company's funding policy
is to contribute annually the maximum amount that can be deducted
for federal income taxes. Contributions are intended to provide
not only for benefits attributed to service to date but also for
those expected to be earned in the future.
The following table sets forth the Plan's funded status and
amounts recognized in the Consolidated Balance Sheets (in
thousands):
December 31
1993 1992
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
including vested benefits of
$8,920 in 1993 and $7,402 in 1992 $10,121 $ 8,234
Projected benefit obligation
for service rendered to date $13,147 $10,623
Plan assets at fair value-listed
equity securities including the
Company's common stock ($925 in
1993 and $284 in 1992) and
insurance annuity investment 11,314 9,349
Projected benefit obligation
in excess of plan assets (1,833) (1,274)
Unrecognized net loss 2,522 2,204
Unrecognized prior service cost 291 419
Unrecognized net asset at transition (1,001) (1,144)
Prepaid (accrued) pension cost
included in other assets or
other liabilities $ (21) $ 205
Net pension cost included the following components (in
thousands):
Year Ended December 31
1993 1992 1991
Service cost-benefits earned during
the period $1,038 $808 $ 646
Interest cost on projected benefit
obligations 832 740 682
Actual return on Plan assets (1,797) (493)
(1,451)
Net amortization and deferral 989 (383) 573
Net Periodic Pension Cost $1,062 $672 $ 450
The weighted-average discount rate and rate of interest in
future compensation levels used in determining the actuarial
present value of the projected benefit obligation were 7.25% and
5.0%, respectively, in 1993 and 8.0% and 5.0%, respectively, in
1992. The expected long-term rate of return on Plan assets was
9.5% in 1993 and 10% in 1992 and 1991. The change in actuarial
assumptions and the effect of a bank acquisition increased net
periodic pension cost approximately $306,000 in 1993.
The Company has a 401(k) Savings Retirement Plan covering
all eligible employees. Participants may contribute up to 10% of
their compensation, subject to a maximum of $8,994 per year in
1993. The Company contributes amounts equal to 50% of annual
employee contributions up to 6% of participants' compensation.
Employees are fully vested in the Company's contributions after
five years of service. The Company contributed $215,000,
$169,000, and $166,000 to the Plan in 1993, 1992, and 1991.
In December 1990, the Financial Accounting Standards Board
issued Statement No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions ("SFAS 106"). The
Company adopted the provisions of SFAS 106 in its financial
statements for the year ended December 31, 1993. The effect of
adopting SFAS 106 was to decrease 1993 pretax income by $75,000.
As permitted by SFAS 106, prior year financial statements have
not been restated to reflect the change in accounting method.
Under SFAS 106, the Bank is required to accrue
postretirement benefits other than pensions during the years that
the employee renders the necessary service, of the expected cost
of providing those benefits to an employee, and the employee's
beneficiaries and covered dependents. Prior to SFAS 106, the
pay-as-you-go (cash) basis was the acceptable accounting
practice. In adopting SFAS 106, the Bank chose to recognize the
transition obligation on a delayed basis instead of choosing to
immediately recognize the transition obligation as a cumulative
effect of an accounting change.
The Company sponsors two defined benefit postretirement
plans covering all eligible employees. One plan provides health
(medical and dental) benefits, and the other provides life
insurance benefits. The postretirement health care plan is
shared by the Company and retiree, and benefits are based on
deductible and coinsurance provisions. The life insurance plan
is a non-contributory plan, and benefits are based on a
percentage of the base pay at retirement. The accounting for the
health care plan anticipates future cost-sharing changes that are
consistent with the current structure retiree contributions. The
Bank does not advance-fund its postretirement health care and
life insurance plans.
The following table sets forth the plans' combined funded
status reconciled with the amount shown in the Company's
statement of financial position at December 31, 1993 (in
thousands):
Accumulated postretirement benefit obligation:
Retired participants $ 761
Fully-eligible active plan participants 15
Other active participants 65
841
Plan assets at fair value
Accumulated postretirement benefit obligation in excess of
plan assets (841)
Unrecognized net loss from past experience different
from that assumed and from changes in assumptions 54
Prior service cost not yet recognized in net periodic
post-retirement benefit cost
Contributions 2
Unrecognized transition obligation 711
Accrued postretirement benefit cost $ (74)
The Company's postretirement health care plan is
underfunded, and the accumulated postretirement benefit
obligation equals $748,000 (there are no plan assets).
Net periodic postretirement benefit cost for 1993 included
the following components (in thousands):
Service cost - benefit attributable to service during
the period $ 14
Interest cost on accumulated postretirement benefit
obligation 59
Actual return on plan assets
Unrecognized transition obligation 37
Net amortization and deferral
Net periodic postretirement benefit cost $ 110
For measurement purposes, a 13% annual rate of increase in
the per-capita cost of covered health care benefits was assumed
for 1993; the rate was assumed to decrease gradually to 6% for
the year 2000 and remain at the level thereafter. The health
care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed health
care cost trend rates by a 1% point in each year would increase
the accumulated postretirement benefit obligation as of December
31, 1993 by $52,000.
The weighted-average discount rate and rate of increase in
future compensation levels used in determining the accumulated
postretirement benefit obligation were 7.25% and 5%.
NOTE O:
INCOME TAXES
Effective January 1, 1993, the Company adopted on a
prospective basis, Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109
requires the use of the asset/liability method of accounting for
income taxes. Deferred income taxes and tax benefits are
recognized for the future tax consequences of differences between
the financial statement carrying amounts of assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation
allowance is established when it is considered to be more likely
than not that some portion of a deferred tax asset will not be
realized. Prior to the adoption of SFAS 109, income tax expense
was based on items of income and expense that were reported in
different years in the financial state-ments and tax returns and
were measured at the tax rate in effect in the year the
difference originated.
The adoption of SFAS 109, which has not been applied
retroactively to prior years' financial statements, had no effect
on the Company's stockholders' equity as of January 1, 1993
because the deferred tax asset was fully reserved as of that
date.
The components of the income tax provision (benefit) for the
years ended December 31 are as follows (in thousands):
1993 1992 1991
Current Provision (Benefit):
Federal $(9,560)
State $ 115 $ 70 50
115 70 (9,510)
Deferred Provision (Benefit):
Federal (3,618) 3,600
State (1,382)
(5,000) 3,600
Income tax provision
(benefit) $(4,885) $ 70 $(5,910)
The following is a reconciliation of the expected federal
statutory tax to the income tax provision (benefit) for the years
ended December 31 (dollars in thousands):
1993 1992 1991
Income tax at statutory federal
tax rate $ 1,202 $(6,787) $(6,379)
Connecticut Corporation Tax,
net of federal tax benefit 76 60 38
Dividends received deduction (40) (38)
Non-taxable municipal income (19)
Bad debt deduction (2,608)
Other real estate owned expenses 2,870
Net operating loss carryforwards (1,175) 6,627
Change in valuation reserve (5,000)
Other - net 12 210 226
Income tax provision (benefit) $(4,885) $ 70 $(5,910)
1993 1992 1991
Income tax at statutory
federal tax rate 34.0% (34.0%) (34.0%)
Connecticut Corporation Tax,
net of federal tax benefit 2.1 .3 .2
Dividends received deduction (.2) (.2)
Non-taxable municipal income (.1)
Bad debt deduction (13.9)
Other real estate owned expenses 15.3
Net operating loss carryforwards (33.2) 33.2
Change in valuation reserve (141.4)
Other - net .3 1.1 1.2
Income tax provision (benefit) (138.2%) 0.4% (31.5%)
The components of the Company's net deferred tax assets at
December 31, 1993 are as follows (in thousands):
Federal State Total
Deferred tax assets:
Loan loss provision $ 6,525 $ 2,207 $ 8,732
OREO reserve 2,477 838 3,315
ISF reserve 1,087 368 1,455
Deferred compensation 65 22 87
Unrealized losses & writedowns -
stock 481 163 644
Charitable contribution
carryforward 93 31 124
Net operating loss
carryforward 6,726 7,994 14,720
Alternative minimum tax credit 1,010 1,010
Jobs credit 10 10
Other 492 166 658
Total deferred tax assets 18,966 11,789 30,755
Deferred tax liabilities:
Tax loan loss reserve in
excess of base year 2,614 884 3,498
Accrued dividends receivable -
FHLB 87 10 97
Bond discount accretion 78 27 105
Fixed assets 36 12 48
Accrued pension expense 65 22 87
Net origination fees 170 57 227
State deferred tax asset 470 470
Excess service fees 625 211 836
Other 55 18 73
Total deferred tax liabilities 4,200 1,241 5,441
Net deferred tax assets 14,766 10,548 25,314
Valuation allowance (11,148) (9,166) (20,314)
Net deferred tax assets after
valuation allowance $ 3,618 $ 1,382 $ 5,000
The Company will only recognize a deferred tax asset, when
based upon available evidence, realization is more likely than
not. The Company projected its estimated future taxable income
for the year ended December 31, 1994. These projections, which
the Company considers conservative, provided the support for
reducing the valuation allowance in 1993. Accordingly, at
December 31, 1993, the Company has recorded a valuation allowance
of approximately 80%, based on anticipated future earnings.
At December 31, 1993, the Company had federal and state net
operating loss carryforwards as follows (in thousands):
Year of Year of
Federal Expiration Connecticut Expiration
$18,510 2008 $18,510 1998
1,270 2007 4,030 1997
27,830 1996
19,150 1995
$19,780 $69,520
In addition, the Company has federal alternative minimum tax
credits available of approximately $1 million.
NOTE P:
CONTINGENCIES AND COMMITMENTS
The Company and certain of its Directors and officers were
named as defendants in two civil class actions commenced and
subsequently consolidated in 1990. Claims against non-officer
Directors were voluntarily dismissed in late 1990. The action
was filed on behalf of a class consisting of all persons who
purchased shares of the Company's common stock, par value $.01
per share, in the open market during the period from February 8,
1989 through July 20, 1990, or received the Company's common
stock in return for the Bank's common stock in the reorganization
of July 1, 1989, and who allegedly sustained damages. The action
claimed, among other things, alleged violations of federal
securities laws, and requested unspecified compensatory and
punitive damages. The Company disputed the allegations of the
action; however, the Company and its officers reached a
settlement with the class in late October 1991,which was approved
by the court on January 3, 1992, pursuant to which the Company
and its liability insurer (for claims against Directors and
officers) agreed to pay an aggregate of $2,350,000. The
Company's share of the settlement was approximately $825,000,
which is included in the Consolidated Statement of Operations for
the year ended December 31, 1991.
There are no pending legal proceedings, other than ordinary
routine litigation incidental to the business of the Company, to
which the Company is a party or to which any of its properties
are subject. In the opinion of management, these matters will
not have a material adverse effect on the Company's financial
position.
Rental expense of $2.1 million in 1993, $2.1 million in
1992, and $1.7 million in 1991 is included in operating expenses.
Future minimum payments, by year and in the aggregate, under non-
cancelable operating leases with initial or remaining terms of
one year or more, consist of the following at December 31, 1993
(in thousands):
1994 $2,113
1995 2,008
1996 1,690
1997 1,586
1998 871
Thereafter 626
$8,894
These leases include options to renew for periods ranging
from 1 to 25 years.
The Company is required to maintain average reserve balances
with the Federal Reserve Company. The average amount of these
reserve balances for the year ended December 31, 1993 was $4.5
million.
NOTE Q:
AGREEMENT WITH SHAWMUT NATIONAL CORPORATION
On November 5, 1993, Shawmut National Corporation
("Shawmut") and Gateway executed a definitive agreement pursuant
to which Shawmut agreed to acquire Gateway Financial Corporation
in a fixed stock-for-stock exchange of 0.559 of a share of
Shawmut common stock for each Gateway share of common stock.
The agreement allows Gateway to terminate in the event that
the average price of Shawmut stock during a ten-day period
preceding the receipt of all regulatory approvals falls below
$18.70 a share, and Shawmut elects not to preserve the
transaction's value by increasing the exchange ratio.
The transaction, which is subject to regulatory approvals,
approval by the stockholders of the Company, and certain other
conditions, is expected to close in the first half of 1994. Upon
completion of the transaction, Gateway Bank will be merged into
Shawmut Bank Connecticut, the state's largest bank.
In connection with the transaction, Gateway granted Shawmut
an option to acquire up to 19.9% of Gateway's outstanding shares
of stock at $10.75 per share upon the occurrence of certain
events.
Shawmut National Corporation had total assets of
approximately $27 billion on December 31, 1993, and over 300
branches in Massachusetts, Connecticut, and Rhode Island.
Shawmut is a leading provider of financial services to consumers
and small-to-medium-sized business in southern New England.
Shawmut maintains dual headquarters in Hartford and Boston.
NOTE R:
GATEWAY FINANCIAL CORPORATION (PARENT COMPANY ONLY) FINANCIAL STATEMENTS
The following presents the balance sheets of Gateway Financial Corporation
at December 31, and its statements of operations and cash flows for each of
the years ended December 31 (in thousands):
BALANCE SHEETS 1993 1992
Assets
Cash $ 253 $ 178
Investment in Gateway Bank 93,931 56,050
Other assets 32 65
TOTAL ASSETS $94,216 $56,293
Liabilities and stockholders' equity
Other liabilities $ 5 $ 34
Due to Gateway Bank 262
Stockholders' equity 94,211 55,997
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $94,216 $56,293
Statement of Operations 1993 1992 1991
Share in undistributed income
(losses) after extraordinary
charge of Gateway Bank $ 9,069 $(19,621) $(14,766)
Other income 22
9,091 (19,621) (14,766)
Expenses
Salaries and employee benefits 341 341 234
Occupancy and equipment 203 203 48
Other 126 237 228
Total expenses 670 781 510
Income (loss) before income tax
benefit 8,421 (20,402) (15,276)
Income tax benefit 173
Net income (loss) $ 8,421 $(20,402) $(15,103)
STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES:
Net income (loss) $ 8,421 $(20,402) $(15,103)
Equity in undistributed income (losses)
of Gateway Bank (9,069) 19,621 14,766
Other, net 40 472 89
TOTAL CASH USED FOR OPERATING
ACTIVITIES (608) (309) (248)
INVESTING ACTIVITIES:
Payments for investment in
Gateway Bank (27,519)
TOTAL CASH USED FOR INVESTING
ACTIVITIES (27,519)
FINANCING ACTIVITIES:
Proceeds from issuance of
common stock 28,269
Purchase of treasury stock (219)
Proceeds from exercise of stock options 232 9
Other, net (299) 21 (2)
TOTAL CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES 28,202 30 (221)
Increase (decrease) in cash 75 (279) (469)
Cash at January 1 178 457 926
CASH AT DECEMBER 31 $ 253 $ 178 $ 457
NOTE S:
QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for 1993 and 1992 as follows:
(In thousands, except per-share data)
Quarter Ended 1993
December 31 September 30 June 30 March 31
Interest and dividend income $20,556 $22,049 $22,040 $22,304
Interest expense 9,106 9,800 10,381 10,704
Net interest income 11,450 12,249 11,659 11,600
Provision for loan losses 458 1,879 1,336 2,721
Net securities gains 890 14 35 196
Net other real estate owned
expenses and provisions for
loan losses 1,183 2,785 1,957 2,865
Income (loss) before income
taxes 2,499 1,825 181 (969)
Income tax benefit (2,885) (2,000)
Net income (loss) 5,384 3,825 181 (969)
Net income (loss) per share .41 .34 .02 (.13)
Common stock prices:
High 12 5/8 10 7 3/4 8
Low 9 5 3/8 5 1/4 4 1/2
Quarter Ended 1992
December 31 September 30 June 30 March 31
Interest and dividend income $23,804 $25,843 $27,831 $29,676
Interest expense 11,638 13,145 14,447 16,449
Net interest income 12,166 12,698 13,384 13,227
Provision for loan losses 18,348 15,224 4,505 4,251
Net securities gains (losses) 1,657 2,161 (16) (397)
Net other real estate owned
expenses and provisions for
loan losses 2,112 4,055 2,802 1,416
Income (loss) before income taxes
and extraordinary credit
(charge) (12,615) (10,739) 1,083 2,310
Income tax provision
(benefit) * 70 (947) 117 830
Income (loss) before
extraordinary credit
(charge) (12,685) (9,792) 966 1,480
Extraordinary credit (charge) (1,201) 830
Net income (loss) (13,886) (9,792) 966 2,310
Income (loss) per share before
extraordinary credit
(charge) (1.71) (1.32) .13 .20
Extraordinary credit (charge)
per share (.16) .11
Net income (loss) per share (1.87) (1.32) .13 .31
Common stock prices:
High 6 1/4 7 9 7 1/2
Low 3 1/2 4 1/4 5 1/4 3 1/8
* Fluctuations in the effective tax rate result principally
from the timing of deductibility of provisions for loan
losses.
The Company's common stock is traded on the over-the-counter
market, and is quoted on NASDAQ National Market System.
The high and low common stock prices presented above are
based on closing prices for the periods show. At February 28,
1994, there were approximately 1,600 stockholders of record of
the common stock.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Cohasset Savings Bank:
We have audited the consolidated balance sheets of
Cohasset Savings Bank and Subsidiary as of December 31, 1993
and 1992, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1993. These
consolidated financial statements are the responsibility of
the Bank's management. Our responsibility is to express an
opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Cohasset Savings Bank and
Subsidiary as of December 31, 1993 and 1992, and the results
of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1993 in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial
statements, the Bank has elected to adopt Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes," effective January 1, 1992, and SFAS
No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," effective December 31, 1993.
As discussed in Note 17 to the consolidated
financial statements, the Bank entered into an Agreement and
Plan of Merger as of March 2, 1994.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
January 21, 1994, except for
Note 17 as to which the date
is March 2, 1994
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND 1992
ASSETS
1993 1992
Cash and due from banks . . . . . . . . . . . . . $ 1,251,146 $ 1,555,287
Short-term investments (Note 2) . . . . . . . . . 3,120,832 1,932,718
Cash and cash equivalents . . . . . . . . . . . 4,371,978 3,488,005
Trading account securities, at fair value . . . . 656,743 528,875
Investment securities available for sale,
at fair value (Note 3) . . . . . . . . . . . . 24,737,148 -
Investment securities, fair value $21,013,200 (Note 3) - 20,607,486
Loans, net (Note 4) . . . . . . . . . . . . . . 44,039,160 44,339,423
Foreclosed real estate, net (Note 5) . . . . . . 2,141,643 2,621,894
Banking premises and equipment, net (Note 6) . . 897,445 969,934
Real estate held for investment, net (Note 7). . 806,049 836,452
Accrued interest receivable . . . . . . . . . . 595,003 580,709
Deferred income taxes (Note 10). . . . . . . . . 98,000 169,000
Other assets . . . . . . . . . . . . . . . . . . 114,791 166,769
$ 78,457,960 $ 74,308,547
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 8) . . . . . . . . . . . . . . . . $ 63,772,293 $ 60,956,825
Borrowed funds (Notes 9 and 16) . . . . . . . . . - 84,500
Mortgagors' escrow accounts . . . . . . . . . . . 77,734 235,075
Accrued taxes and expenses . . . . . . . . . . . 1,015,397 455,768
Other liabilities . . . . . . . . . . . . . . . . 72,993 106,673
Total liabilities . . . . . . . . . . . . . . . 64,938,417 61,838,841
Commitments and contingencies (Note 11)
Stockholders' equity (Notes 12, 15 and 16):
Serial preferred stock, $0.10 par value per share;
200,000 shares authorized, none issued . . . . - -
Common stock, $0.10 par value per share;
2,000,000 shares authorized, 1,002,978 shares
issued and outstanding . . . . . . . . . . . 100,298 100,298
Additional paid-in capital . . . . . . . . . . . 7,895,363 7,895,363
Undivided profits . . . . . . . . . . . 5,285,742 4,547,845
13,281,403 12,543,506
Net unrealized gain on securities available for sale,
after tax effects (Notes 3 and 10) . . . . . . 238,140 -
Loan due from ESOP (Note 16) . . . . . . . . . . - (73,800)
Total stockholders' equity . . . . . . . . . . . 13,519,543 12,469,706
$ 78,457,960 $ 74,308,547
<TABLE>
<CAPTION>
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<S> <C> <C> <C>
1993 1992 1991
Interest and dividend income:
Interest and fees on loans . . . . . . . . $ 3,943,137 $ 4,387,907 $4,820,078
Interest and dividends on securities . . . 1,171,415 1,002,903 968,053
Interest on short-term investments . . . . 63,030 69,578 102,111
Interest on asset-backed investments . . . 298,199 288,459 104,942
Total interest and dividend income . . 5,475,781 5,748,847 5,995,184
Interest expense:
Interest on deposits . . . . . . . . . . . 2,232,721 2,811,210 3,575,022
Interest on borrowed funds . . . . . . . . 6,468 12,958 20,046
Total interest expense . . . . . . . . 2,239,189 2,824,168 3,595,068
Net interest income . . . . . . . . . . . . 3,236,592 2,924,679 2,400,116
Provision (credit) for loan losses (Note 4) (76,000) 555,000 800,000
Net interest income, after provision (credit)
for loan losses . . . . . . . . . . . . . 3,312,592 2,369,679 1,600,116
Other income:
Service fees on deposits . . . . . . . . . 103,002 97,611 102,132
Gain on investment securities, net . . . . 179,086 221,610 265,598
Write-down of marketable equity securities - - (152,713)
Gain (loss) on trading account securities . (4,436) 11,809 21,963
Miscellaneous (Note 7) . . . . . . . . . . 151,612 148,501 115,037
Total other income . . . . . . . . . . 429,264 479,531 352,017
Operating expenses:
Salaries and employee benefits
(Notes 13 and 16) . . . . . . . . . . 978,056 971,505 923,256
Occupancy and equipment expenses (Note 6) . 208,223 186,746 170,687
Data processing expenses . . . . . . . . . 180,949 183,020 174,541
Deposit insurance expense . . . . . . . . . 139,506 133,263 116,920
Foreclosed real estate losses and
expenses (Note 5) . . . . . . . . . . . . 273,644 312,128 67,587
Other general and administrative
expenses (Note 7) . . . . . . . . . . . . 604,165 470,586 546,329
Total operating expenses . . . . . . . 2,384,543 2,257,248 1,999,320
Income (loss) before income taxes and cumulative
effect of change in accounting principle . 1,357,313 591,962 (47,187)
Provision (benefit) for income taxes (Note 10) 479,000 233,000 (109,000)
Income before cumulative effect
of change in accounting principle . . . . 878,313 358,962 61,813
Cumulative effect of change in accounting for
income taxes (Note 1) . . . . . . . . . - 300,000 -
Net income . . . . . . . . . . . . . . . $ 878,313 $ 658,962 $ 61,813
Earnings per share (Based on 1,002,978 shares
outstanding):
Income before cumulative effect of change in
accounting principle . . . . . . . . . . . $ .88 $ .36 $ .06
Cumulative effect of change in accounting for
income taxes . . . . . . . . . . . . . . . - .30 -
$ .88 $ .66 $ .06
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<S> <C> <C> <C> <C> <C> <C> <C>
Net Unreal- Net Unreal-
ized Loss on ized Gain on
Additional Marketable Securities
Common Paid-in Undivided Equity Available Loan Due
Stock Capital Profits Securities For Sale From ESOP Total
Balance at
December
31, 1990 $100,298 $7,895,363 $3,887,249 $(206,309) $ - $(232,823) $11,443,778
Net income - - 61,813 - - - 61,813
Cash dividends
paid - $.06
per share - - (60,179) - - - (60,179)
Decrease in net
unrealized
loss on
marketable
equity
securities - - - 206,309 - - 206,309
Principal
reductions
on loan due
from ESOP - - - - - 64,286 64,286
Balance at
December
31, 1991 100,298 7,895,363 3,888,883 - - (168,537) 11,716,007
Net income - - 658,962 - - - 658,962
Principal
reductions
on loan due
from ESOP - - - - - 94,737 94,737
Balance at
December
31, 1992 100,298 7,895,363 4,547,845 - - (73,800) 12,469,706
Net income - - 878,313 - - - 878,313
Cash dividends
paid -
$.14 per share - - (140,416) - - - (140,416)
Change in method
of accounting
for investment
securites,
after tax
effects
(Note 1) - - - - 238,140 - 238,140
Principal
reductions on
loan due from
ESOP - - - - - 73,800 73,800
Balance at
December
31, 1993 $100,298 $7,895,363 $5,285,742 $ - $238,140 $ - $13,519,543
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<S> <C> <C> <S>
1993 1992 1991
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . $ 878,313 $ 658,962 $ 61,813
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision (credit) for loan losses . . . . . . . (76,000) 555,000 800,000
Amortization of investments, net of accretion . . 38,288 70,892 2,599
Amortization of deferred loan fees . . . . . . . (56,525) (45,390) (19,424)
Depreciation expense . . . . . . . . . . . . . . 141,943 134,507 116,771
Gain on investment securities, net . . . . . . . (179,086) (221,610) (265,598)
Write-down of marketable equity securities . . . - - 152,713
(Gain) loss on trading account securities . . . . 4,436 (11,809) (21,963)
Net gain, write-downs and provisions for foreclosed
real estate . . . . . . . . . . . . . . . . . . 158,708 58,693 -
Deferred tax provision (benefit) . . . . . . . . (103,000) 103,836 (94,000)
Cumulative effect of change in accounting principle - (300,000) -
Purchase of trading account securities . . . . . (1,004,260) (890,347) (509,734)
Proceeds from sales of trading account securities 871,956 569,883 335,095
Decrease in accrued interest receivable,
prepaid and deferred income taxes, and
other assets . . . . . . . . . . . . . . . . . 37,684 208,320 218,704
Increase in accrued taxes and expenses and
other liabilities . . . . . . . . . . . . . . . 525,949 39,782 273,759
Net cash provided by operating activities . . . . 1,238,406 930,719 1,050,735
Cash flows from investing activities:
Proceeds from sales of investment securities . . . . 5,866,643 10,597,525 11,308,016
Proceeds from maturities of investment securities . 2,250,000 - 2,500,000
Purchase of investment securities . . . . . . . . . (12,913,620) (14,089,360) (13,396,876)
Purchase of asset-backed investments . . . . . . . . (1,479,622) (5,042,469) (248,682)
Principal payments received on asset-backed
investments . . . . . . . . . . . . . . . . . . . 2,699,875 1,808,155 -
Loans (originated), net of amortization and payoffs 122,869 358,182 (2,072,195)
Disbursements for foreclosed real estate . . . . . . (24,790) (71,766) -
Proceeds from sales of foreclosed real estate . . . 656,252 863,101 470,885
Purchase of banking premises and equipment and real
estate held for investment . . . . . . . . . . . . (39,051) (129,560) (389,542)
Net cash used in investing activities . . . . . . (2,861,444) (5,706,192) (1,828,394)
Cash flows from financing activities:
Net increase in deposits . . . . . . . . . . . . . . 2,815,468 4,543,757 2,753,401
Repayment of borrowed funds, net . . . . . . . . . . (10,700) - -
Increase (decrease) in mortgagors' escrow accounts . (157,341) 6,769 62,583
Cash dividends paid on common stock . . . . . . . . (140,416) - (60,179)
Net cash provided by financing activities . . . . 2,507,011 4,550,526 2,755,805
Net increase (decrease) in cash and cash equivalents . 883,973 (224,947) 1,978,146
Cash and cash equivalents at beginning of year . . . . 3,488,005 3,712,952 1,734,806
Cash and cash equivalents at end of year . . . . . . . $ 4,371,978 $ 3,488,005 $ 3,712,952
Supplemental cash flow information:
Interest paid on deposits . . . . . . . . . . . . . $ 2,232,721 $ 2,811,210 $ 3,575,022
Interest paid on borrowed funds . . . . . . . . . . 6,468 12,958 20,046
Income taxes paid (refunded), net . . . . . . . . . 12,791 (32,770) (239,105)
Transfers from loans to foreclosed real estate . . . 309,919 1,140,877 2,801,930
See accompanying notes to consolidated financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and consolidation
The consolidated financial statements include the accounts of Cohasset
Savings Bank (the "Bank") and its wholly-owned subsidiary, North Scituate
Corporation, which engages in equipment leasing to the Bank and the rental
of real estate. All significant intercompany balances and transactions
have been eliminated in consolidation.
Accounting policy changes
Investment securities:
Effective December 31, 1993, the Bank adopted the provisions of SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." SFAS No. 115 establishes standards for all debt securities
and for equity securities that have readily determinable fair values. As
required under SFAS No. 115, prior year financial statements have not been
restated.
SFAS No. 115 requires that investments in debt securities that
management has the positive intent and ability to hold to maturity be
classified as "held to maturity" and reflected at amortized cost.
Investments that are purchased and held principally for the purpose of
selling them in the near term are classified as "trading securities" and
reflected on the balance sheet at fair value, with unrealized gains and
losses included in earnings. Investments not classified as either of the
above are classified as "available for sale" and reflected on the balance
sheet at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders' equity. The
cumulative effect of the change in accounting principle at December 31,
1993 is to increase stockholders' equity by $238,140, net of related income
tax effects. There was no effect on net income for the year ended December
31, 1993 relating to the adoption of SFAS No. 115.
Prior to December 31, 1993, debt securities that management had the
intent and ability to hold until maturity were reflected at amortized cost.
Marketable equity securities were stated at the lower of aggregate cost or
fair value with net unrealized losses reflected as a charge to
stockholders' equity.
For all years presented, equity securities other than marketable
equity securities are reflected at cost. Purchase premiums and discounts
are amortized to earnings by the straight-line method over the terms of the
investments, which income would not differ materially if accounted for on
the interest method. Declines in the value of investments that are deemed
to be other than temporary are reflected in earnings when identified.
Gains and losses on disposition of investments are computed by the specific
identification method.
Income taxes:
Effective January 1, 1992, the Bank adopted the provisions of SFAS No.
109, "Accounting for Income Taxes." As permitted under SFAS No. 109, prior
year financial statements were not restated.
SFAS No. 109 requires that deferred tax assets and liabilities be
reflected at currently enacted income tax rates applicable to the period in
which the deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax assets
and liabilities will be adjusted accordingly through the provision for
income taxes. The Bank's allowance for loan losses for tax purposes that
arose before 1987 will remain a permanent difference without recognition of
a deferred tax liability. However, the loan loss allowance maintained for
financial reporting purposes is now treated as a temporary difference with
allowable recognition of a related deferred tax asset, if it is deemed
realizable.
The cumulative effect of the change in accounting principle on years
prior to 1992 is reflected as an increase in the 1992 operating results and
amounted to $300,000. The effect of the accounting change for the year
ended December 31, 1992 was to decrease net income by $70,000.
For regulatory capital purposes, the recognition of deferred tax
assets, when realization of such is dependent on an institution's future
taxable income, is limited to the amount that can be realized within one
year or 10% of core capital, whichever is less.
Reclassifications
Certain amounts have been reclassified in the 1992 and 1991
consolidated financial statements to conform to the 1993 presentation.
Cash equivalents
Cash equivalents include amounts due from banks and short-term
investments with original maturities of three months or less.
Trading account securities
Trading account securities consist of marketable equity securities
which are carried at fair value. Realized and unrealized gains and losses
are recognized in the statement of income as they occur.
Loans
The Bank grants mortgage and other loans to customers. A substantial
portion of the loan portfolio consists of mortgage loans in Cohasset,
Massachusetts, and surrounding communities. The ability of the Bank's
debtors to honor their contracts is dependent upon the local real estate
market and economy.
Loans, as reported, have been adjusted for amounts due to borrowers on
incomplete loans, net deferred loan fees/costs and the allowance for loan
losses.
Interest on loans is recognized on a simple interest basis and is not
accrued for loans which are ninety days or more in arrears, or, when in the
judgement of management, collectability becomes doubtful. Net deferred
loan fees/costs are amortized over the contractual lives of the related
loans on the interest method.
Allowance for loan losses
The allowance for loan losses is established through a provision for
loan losses charged to operations and is maintained at a level considered
adequate by management to provide for reasonably foreseeable loan losses.
The provision and the level of the allowance are evaluated on a
regular basis by management and are based upon management's periodic review
of the collectability of the loans in light of known and inherent risks in
the nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any underlying
collateral and prevailing economic conditions.
The allowance is an estimate and ultimate losses may vary from current
estimates and future additions to the allowance may be necessary. As
adjustments become necessary, they are reported in the results of
operations for the periods in which they become known. Loan losses are
charged against the allowance when management believes the collectability
of the loan principal is unlikely.
Foreclosed real estate
Foreclosed real estate and in-substance foreclosures are held for sale
and carried at the lower of cost or fair value less estimated costs to
sell. Troubled loans are transferred to foreclosed real estate upon
completion of formal foreclosure proceedings, and to in-substance
foreclosure when it is determined that the borrower has little or no equity
in the underlying collateral and that loan payments can be expected only
from the sale or operation of the collateral.
Real estate properties acquired through foreclosure or classified as
in-substance foreclosures are initially recorded at fair value at the date
of foreclosure. Costs relating to development and improvement of property
are capitalized, whereas costs relating to holding property are expensed.
Valuations are periodically performed by management, and an allowance
for losses is established through a charge to operations if the carrying
value of a property exceeds its fair value less estimated costs to sell.
Prior to December 31, 1992, foreclosed and in-substance foreclosed
real estate was carried at the lower of cost or net realizable value.
Declines in value subsequent to foreclosure classification were reflected
as direct charges to operations and to the related properties without the
utilization of a valuation allowance. The change in accounting method had
no significant effect on the Bank's results of operations in 1992.
Banking premises and equipment and real estate held for investment
Land is carried at cost. Buildings and equipment are carried at cost,
less accumulated depreciation computed on the straight-line method over the
estimated useful lives of the assets.
It is general practice to charge the cost of maintenance and repairs
to earnings when incurred; major expenditures for betterments are
capitalized and depreciated.
Retirement plan
The Bank accounts for pension benefits on the net periodic pension
cost method for financial reporting purposes. This method recognizes the
compensation cost of an employee's pension benefit over the employee's
approximate service period. Pension costs are funded in the year of
accrual using the aggregate cost method.
Income taxes
The Bank and its subsidiary file state and consolidated federal income
tax returns based on an October 31 year end.
Earnings per share
Earnings per share is based on the number of shares outstanding as
shown on the statement of income. The dilutive effect of stock options
granted is not significant.
Recent accounting pronouncement
In May 1993, the Financial Accounting Standards Board issued SFAS No.
114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114
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 obtainable market price, or the fair
value of the collateral if the loan is collateral dependent.
SFAS No. 114 is applicable to all creditors and 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, and convertible or nonconvertible
debentures and bonds and other debt securities.
SFAS No. 114 applies to financial statements for fiscal years
beginning after December 15, 1994. Earlier adoption is permissible.
Management has not yet determined the financial statement impact of
adopting the provisions of this statement.
2. SHORT-TERM INVESTMENTS
A summary of short-term investments is as follows:
DECEMBER 31,
1993 1992
Federal funds sold . . . . . . . . . . . . . . . $ 2,753,303 $ 1,392,785
Interest-bearing deposits in banks . . . . . . . 348,557 526,580
Bank Investment Fund - liquidity fund . . . . . 18,972 13,353
$ 3,120,832 $ 1,932,718
<TABLE>
<CAPTION>
3. INVESTMENT SECURITIES
The amortized cost and fair value of investment securities available for sale (See Note 1),
with gross unrealized gains and losses, follows:
DECEMBER 31, 1993
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
Debt securities:
U.S. Government obligations . $ 9,035,285 $ 188,639 $ 62,294 $ 9,161,630
Federal agency obligations . . 6,642,780 163,353 2,536 6,803,597
Other bonds and obligations . 3,294,578 133,264 3,427,842
Mortgage-backed investments . 2,792,801 48,285 5,515 2,835,571
Credit-card backed investments 415,761 5,605 421,366
Total debt securities . . . 22,181,205 539,146 70,345 22,650,006
Equity securities:
Marketable equity securities . 1,584,303 30,696 87,357 1,527,642
Federal Home Loan Bank stock,
at cost . . . . . . . . . . 432,300 432,300
Savings Bank Life Insurance
Stock, at cost . . . . . . . 127,200 127,200
Total equity securities . . 2,143,803 30,696 87,357 2,087,142
Total investment securities
available for sale . . . . $24,325,008 $ 569,842 $ 157,702 $24,737,148
The amortized cost and fair value of debt securities available for sale by contractual maturity is
as follows:
</TABLE>
DECEMBER 31, 1993
AMORTIZED FAIR
COST VALUE
Within 1 year . . . . . . . . . . . . . . . . . . . $ 2,999,044 $ 3,068,910
Over 1 year to 5 years . . . . . . . . . . . . . . 12,208,739 12,486,591
Over 5 years to 10 years . . . . . . . . . . . . . 2,257,427 2,363,198
Over 10 years . . . . . . . . . . . . . . . . . . . 1,507,433 1,474,370
18,972,643 19,393,069
Mortgage-backed investments . . . . . . . . . . . . . 2,792,801 2,835,571
Credit card-backed investments . . . . . . . . . . . 415,761 421,366
$22,181,205 $22,650,006
The amortized cost and estimated fair value of investment securities (See
Note 1), with gross unrealized gains and losses, follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1992
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
U.S. Government obligations . . . . $ 6,540,332 $ 120,723 $ 31,055 $ 6,630,000
Federal agency obligations . . . . 5,253,919 177,950 9,869 5,422,000
Other bonds and obligations . . . . 3,064,556 110,907 37,463 3,138,000
Mortgage-backed investments . . . . 3,182,315 32,779 8,094 3,207,000
Credit card-backed investments . . 1,247,683 38,317 1,286,000
Total debt securities . . . . 19,288,805 480,676 86,481 19,683,000
Marketable equity securities . . . 935,481 32,643 21,124 947,000
Federal Home Loan Bank stock,
at cost . . . . . . . . . . . . . 383,200 383,200
Total investment securities . $20,607,486 $ 513,319 $ 107,605 $21,013,200
The amortized cost and estimated fair value of debt securities by contractual maturity follows:
</TABLE>
DECEMBER 31, 1992
AMORTIZED FAIR
COST VALUE
Within 1 year . . . . . . . . . . . . . . . . . . . $ 3,265,110 $ 3,285,000
Over 1 year to 5 years . . . . . . . . . . . . . . 9,334,930 9,559,000
Over 5 years to 10 years . . . . . . . . . . . . . 1,255,709 1,319,000
Over 20 years . . . . . . . . . . . . . . . . . . . . 1,003,058 1,027,000
14,858,807 15,190,000
Mortgage-backed investments . . . . . . . . . . . . . 3,182,315 3,207,000
Credit card-backed investments . . . . . . . . . . . 1,247,683 1,286,000
$19,288,805 $19,683,000
Proceeds from sales of debt securities during 1993, 1992 and 1991 were
$4,650,000, $9,334,000, and $7,816,000, respectively. Gross gains of $84,000,
$85,000, and $77,000, respectively, and gross losses of $-, $1,000, and $5,000,
respectively, were realized on those sales.
4. LOANS
A summary of the balances of loans follows:
DECEMBER 31,
1993 1992
Mortgage loans on real estate:
Conventional - fixed rate . . . . . . . . . . $27,805,021 $28,990,766
Conventional - adjustable rate . . . . . . . 13,899,120 12,891,073
Construction loans . . . . . . . . . . . . . 1,186,400 527,000
FHA and VA . . . . . . . . . . . . . . . . . 76,668 94,254
42,967,209 42,503,093
Less: Due to borrowers on incomplete loans . . (526,386) (154,571)
Net deferred loan fees . . . . . . . . . (183,348) (156,338)
42,257,475 42,192,184
Other loans:
Personal . . . . . . . . . . . . . . . . . . 1,259,522 1,506,108
Education . . . . . . . . . . . . . . . . . . 221,627 237,236
Passbook and stock secured . . . . . . . . . 285,762 348,761
Home improvement . . . . . . . . . . . . . . 485,726 689,551
Commercial . . . . . . . . . . . . . . . . . 60,000
2,312,637 2,781,656
Add deferred loan costs . . . . . . . . . . . 103 397
2,312,740 2,782,053
Total loans . . . . . . . . . . . . . . 44,570,215 44,974,237
Less allowance for loan losses . . . . . . . . . (531,055) (634,814)
Loans, net . . . . . . . . . . . . . . . . . $44,039,160 $44,339,423
At December 31, 1993 and 1992, non-accrual loans amounted to $691,000 and
$848,000, respectively. Interest accrued and unpaid on non-accrual loans at
December 31, 1993, 1992 and 1991 amounted to $31,000, $48,000, and $130,000,
respectively, which has been excluded from interest income.
Restructured loans totaled $480,000 and $341,000 at December 31, 1993 and 1992,
respectively, of which $336,000 was on non-accrual at December 31, 1993. The
interest income that would have been recorded under the original terms of such
loans and the interest income actually recognized is as follows:
YEARS ENDED DECEMBER 31,
1993 1992
Interest income that would have been recorded . . $ 44,884 $ 28,575
Interest income recognized . . . . . . . . . . . 23,339 12,559
Interest income foregone . . . . . . . . . . . . $ 21,545 $ 16,016
There were no restructured loans during the year ended December 31, 1991. The
Bank is not committed to lend additional funds to borrowers whose loans have
been modified in connection with troubled debt restructurings.
An analysis of the allowance for loan losses follows:
YEARS ENDED DECEMBER 31,
1993 1992 1991
Balance at beginning of year . . . . $ 634,814 $ 908,545 $1,129,469
Provision (credit) for loan losses . (76,000) 555,000 800,000
Recoveries . . . . . . . . . . . . . 8,942 63,764 86,455
567,756 1,527,309 2,015,924
Loans charged off . . . . . . . . . . (36,701) (892,495) (1,107,379)
Balance at end of year . . . . . . . $ 531,055 $ 634,814 $ 908,545
5. FORECLOSED REAL ESTATE
Foreclosed real estate consists of the following:
DECEMBER 31,
1993 1992
Real estate acquired in settlement of loans . . $ 1,840,369 $ 2,175,072
Loans considered in-substance foreclosures . . 516,822
Real estate sold, net of deposits received . . 446,748
2,287,117 2,691,894
Less allowance for losses . . . . . . . . . . . (145,474) (70,000)
$ 2,141,643 $ 2,621,894
An analysis of the allowance for losses on foreclosed real estate is as
follows:
YEARS ENDED DECEMBER 31,
1993 1992
Balance at beginning of year . . . . . . . $ 70,000 $
Provision for losses . . . . . . . . . . . 161,000 70,000
Charge-offs . . . . . . . . . . . . . . . . (85,526)
Balance at end of year . . . . . . . . . . $ 145,474 $ 70,000
Expenses and losses applicable to foreclosed real estate include the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
<S> <C> <C> <C>
1993 1992 1991
Net gain on sales of foreclosed real estate . . . $ (2,292) $ (91,307) $
Write-downs to net realizable value . . . . . . . 80,000
Provision for losses . . . . . . . . . . . . . . 161,000 70,000
Operating expenses, net of rental income . . . . 114,936 253,435 67,587
$ 273,644 $ 312,128 $ 67,587
</TABLE>
<TABLE>
<CAPTION>
6. BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation of banking premises and equipment and their
estimated useful lives follows:
DECEMBER 31,
<S> <C> <C> <C>
ESTIMATED
1993 1992 USEFUL LIVES
Banking premises:
Land . . . . . . . . . . . . . . . . . . . . $ 159,024 $ 159,024
Buildings . . . . . . . . . . . . . . . . . . 932,750 915,448 10 - 50 years
Equipment . . . . . . . . . . . . . . . . . . 779,603 763,098 3 - 14 years
1,871,377 1,837,570
Less accumulated depreciation . . . . . . . . . . (973,932) (867,636)
$ 897,445 $ 969,934
Depreciation expense for the years ended December 31, 1993, 1992 and 1991 amounted to $106,296,
$103,464 and $98,630, respectively.
</TABLE>
<TABLE>
<CAPTION>
7. REAL ESTATE HELD FOR INVESTMENT
Real estate held for investment represents property adjacent to the Bank's main office. A
summary of the cost and accumulated depreciation and estimated useful lives is as follows:
DECEMBER 31,
<S> <C> <C> <C>
ESTIMATED
1993 1992 USEFUL LIVES
Land . . . . . . . . . . . . . . . . . . . . . . $ 186,500 $ 186,500
Buildings . . . . . . . . . . . . . . . . . . . . 807,874 802,630 30 years
994,374 989,130
Less accumulated depreciation . . . . . . . . . . (188,325) (152,678)
$ 806,049 $ 836,452
Depreciation expense for the years ended December 31, 1993, 1992 and 1991 amounted to $35,647,
$31,043, and $18,141, respectively.
Rental income for the years ended December 31, 1993, 1992 and 1991 amounted to $82,823, $81,333
and $52,790, respectively. Rental income is received under leases and from tenants-at-will.
Pursuant to the terms of non-cancellable lease agreements in effect at December 31, 1993, minimum
future rental income is as follows:
</TABLE>
YEAR ENDING
DECEMBER 31,
1994 . . . . . . . . . . . . . . . . . . . $ 45,000
1995 . . . . . . . . . . . . . . . . . . . 41,000
1996 . . . . . . . . . . . . . . . . . . . 27,000
$ 113,000
8. DEPOSITS
A summary of deposit balances, by type, is as follows:
DECEMBER 31,
1993 1992
Demand deposits . . . . . . . . . . . . . . . . $ 1,627,060 $ 1,729,060
NOW . . . . . . . . . . . . . . . . . . . . . . 6,398,276 5,025,432
Regular passbook and other . . . . . . . . . . . 15,722,062 14,540,095
Money market deposits . . . . . . . . . . . . . 7,729,585 8,830,023
Total non-certificate accounts . . . . . . . . 31,476,983 30,124,610
Money market certificates . . . . . . . . . . . 5,739,719 5,099,098
Term certificates . . . . . . . . . . . . . . . 20,250,682 20,070,391
Negotiated rate certificates (greater than
$100,000). . . . . . . . . . . . . . . . . . . 6,304,909 5,662,726
Total certificate accounts . . . . . . . . . 32,295,310 30,832,215
Total deposits . . . . . . . . . . . . . . . $63,772,293 $60,956,825
A summary of certificate accounts by maturity is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
<S> <C> <C> <C> <C>
CARRYING WEIGHTED CARRYING WEIGHTED
VALUE AVERAGE RATE VALUE AVERAGE RATE
Within 1 year . . . . . $21,490,203 4.10% $23,050,161 4.96%
Over 1 year to 2 years . 9,256,949 4.75 6,030,042 5.19
Over 2 years to 3 years 814,083 4.85 1,752,012 5.01
Over 3 years to 5 years 734,075 5.00
$32,295,310 4.33% $30,832,215 5.01%
</TABLE>
9. BORROWED FUNDS
Borrowed funds consisted of a note payable secured by U.S. Government
obligations with a carrying value of $500,000 and was payable in annual
installments. During the year ended December 31, 1993, the Bank paid the
note in full. Interest was payable monthly based on the lender's adjusted
prime rate of 5.85% at December 31, 1992.
<TABLE>
<CAPTION>
10. INCOME TAXES
Allocation of the federal and state income tax provision (benefit) between current and deferred
portions, calculated using the liability method in 1993 and 1992 and the deferred method in 1991
(See Note 1) is as follows:
YEARS ENDED DECEMBER 31,
<S> <C> <C> <C>
1993 1992 1991
Current tax provision (benefit):
Federal . . . . . . . . . . . . . . . . . $ 399,000 $ 84,164 $ (25,000)
State . . . . . . . . . . . . . . . . . . 183,000 45,000 10,000
Total current . . . . . . . . . . . . . 582,000 129,164 (15,000)
Deferred tax provision (benefit):
Federal . . . . . . . . . . . . . . . . . (89,000) 89,836 (85,000)
State . . . . . . . . . . . . . . . . . . 38,000 14,000 (9,000)
Total deferred . . . . . . . . . . . . (51,000) 103,836 (94,000)
Effect of decrease in valuation reserve . (52,000)
Total provision (benefit) . . . . . . . $ 479,000 $ 233,000 $ (109,000)
The reasons for the differences between the statutory federal income tax rate and the effective
tax rates are summarized as follows:
</TABLE>
YEARS ENDED DECEMBER 31,
1993 1992 1991
Statutory rate (benefit) . . . . . . . . 34.0% 34.0% (34.0)%
Increase (decrease) resulting from
State taxes, net of federal
tax benefit . . . . . . . . . . . . 8.2 6.6 1.2
Additional bad debt deduction
allowed for tax purposes . . . . . (159.9)
Dividends received deduction . . . . (1.9) (2.9) (38.0)
Other, net . . . . . . . . . . . . . (5.0) 1.7 (.3)
Effective tax rate (benefit) . . . . . . 35.3% 39.4% (231.0)%
The components of the net deferred tax asset are as follows:
DECEMBER 31,
1993 1992
Deferred tax liability:
Federal . . . . . . . . . . . . . . . . . . $ (236,500) $ (123,000)
State . . . . . . . . . . . . . . . . . . . (87,500) (39,000)
(324,000) (162,000)
Deferred tax asset:
Federal . . . . . . . . . . . . . . . . . . 361,000 331,000
State . . . . . . . . . . . . . . . . . . . 160,000 151,000
521,000 482,000
Valuation reserve on deferred tax asset . . . . (99,000) (151,000)
Net deferred tax asset . . . . . . . . . . . . . $ 98,000 $ 169,000
The tax effects of each type of income and expense item that give rise to
deferred taxes are:
DECEMBER 31,
1993 1992
Allowance for loan losses . . . . . . . . . . . $ 286,000 $ 298,000
Cash basis of accounting . . . . . . . . . . . . (10,000) (6,000)
Investments . . . . . . . . . . . . . . . . . . 43,000 6,000
Net unrealized gain on securities available
for sale . . . . . . . . . . . .. . . . . . . (174,000)
Depreciation . . . . . . . . . . . . . . . . . . (136,000) (146,000)
Deferred loan fees . . . . . . . . . . . . . . . 77,000 66,000
Employee benefit plans . . . . . . . . . . . . . 105,000 98,000
Other . . . . . . . . . . . . . . . . . . . . . 6,000 4,000
197,000 320,000
Valuation reserve on deferred tax asset . . . . (99,000) (151,000)
Net deferred tax asset . . . . . . . . . . . . . $ 98,000 $ 169,000
A summary of the change in the net deferred tax asset (liability) is as
follows:
DECEMBER 31,
1993 1992
Deferred tax asset (liability) at beginning of year $ 169,000 $ (27,164)
Cumulative effect of change in accounting principle 300,000
Deferred tax (provision) benefit . . . . . . . . . 51,000 (103,836)
Decrease in valuation reserve . . . . . . . . . . 52,000
Deferred tax on net unrealized gain on
securities available for sale . . . . . . . . (174,000)
Deferred tax asset at end of year . . . . . . . . $ 98,000 $ 169,000
The change in the valuation reserve is as follows:
YEARS ENDED DECEMBER 31,
1993 1992
Balance at beginning of year . . . . . . . . . . $ 151,000 $
Adoption of SFAS No. 109 at January 1, 1992 . . 151,000
Change in assumptions due to current
year taxable income . . . . . . . . . . . . (52,000)
Balance at end of year . . . . . . . . . . . . . $ 99,000 $ 151,000
The tax effects of the changes in each type of income and expense item that
gives rise to deferred income taxes for the year ended December 31, 1991 are
as follows:
Cash basis for tax purposes . . . . . . . . . . . . $ (36,000)
Book versus tax depreciation on banking
premises and equipment . . . . . . . . . . . . . 5,000
Book versus tax basis of investment securities . . . (54,000)
Net deferred loan fees . . . . . . . . . . . . . . . (9,000)
Total deferred tax benefit . . . . . . . . . . . (94,000)
Deferred tax change applicable to net
unrealized loss on marketable equity securities . 108,000
Net change in deferred income taxes . . . . . . . . $ 14,000
11. COMMITMENTS AND CONTINGENCIES
General
The Bank 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 include commitments to extend
credit and standby letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets.
The Bank's exposure to credit loss is represented by the contractual
amount of these instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-
sheet instruments. A summary of financial instruments outstanding whose
contract amounts represent credit risk is as follows:
DECEMBER 31,
1993 1992
Commitments to grant
loans . . . . . . . . . . $ 382,000 $ 1,006,000
Standby letters of
credit . . . . . . . . . . 120,000 136,000
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. These financial
instruments are collateralized by real estate.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. These
letters of credit are primarily issued to support borrowing arrangements.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. At
December 31, 1993, letters of credit expire in 1994 and are unsecured
except for two letters of credit amounting to $20,000, which are fully
secured by certificates of deposit.
Employment Agreements
The Bank has entered into Employment Agreements with the President and
three executive officers. The Agreements provide for a specified minimum
compensation and the continuation of benefits in accordance with the Bank's
general policies at various terms. The Bank has also entered into Special
Termination Agreements with the President and three executive officers,
which provide for certain lump-sum severance payments and continuation of
benefits following a "change in control," as defined in the Agreements.
12. STOCKHOLDERS' EQUITY
Minimum regulatory requirements
Federal banking regulators require that the Bank meet certain Tier 1
leverage capital and risk-based capital ratio requirements. Generally, all
institutions are required to maintain a minimum Tier 1 leverage capital
ratio of not less than 4% and a risk-based capital ratio of not less than
8%. The Bank exceeded all minimum regulatory requirements at December 31,
1993 and 1992.
The Bank may not declare or pay dividends on its shares of common
stock if the effect thereof would cause its stockholders' equity to be
reduced below applicable capital maintenance requirements or if such
declaration and payments would otherwise violate regulatory requirements
including restriction of the liquidation account.
Tax reserve for loan losses
The total reserve for loan losses for federal income tax purposes at
the Bank's base year amounted to approximately $1,240,000. If any portion
of the reserve is used for purposes other than to absorb the losses for
which established, approximately 150% of the amount actually used (limited
to the amount of the reserve) must be included in gross income for federal
income tax purposes in the fiscal year in which used. As the Bank does not
intend to use the reserves for purposes other than to absorb loan losses, a
deferred income tax liability of approximately $525,000 has not been
provided. (See Note 1.)
Liquidation Account
At the time of the Bank's conversion from mutual to stock ownership,
it established a liquidation account in the amount of $4,005,827 for the
benefit of eligible account holders. The liquidation account is reduced
annually to the extent that eligible account holders reduce their
qualifying deposit. In the event of a complete liquidation, eligible
account holders will be entitled to receive a distribution from the
liquidation account to the extent that funds are available.
13. PENSION PLAN
The Bank provides basic and supplemental pension benefits for eligible
employees through the Savings Banks Employees Retirement Association
("SBERA") Pension Plan. Each employee reaching the age of 21 and having
completed at least one year of service automatically becomes a participant
in the retirement plan. All participants are fully vested after three
years of employment.
Pension expense for the plan years ended October 31, 1993, 1992 and 1991
consisted of the following:
1993 1992 1991
Service cost - benefits earned
during the year . . . . . . . . . . $ 45,582 $ 61,283 $ 44,644
Interest cost on projected benefits . 91,599 82,561 73,524
Actual return on plan assets . . . . . (132,673) (65,549) (132,966)
Net amortization and deferral . . . . 12,527 12,527 12,527
Net loss . . . . . . . . . . . . . . . 67,086 16,810 81,169
$ 84,121 $ 107,632 $ 78,898
Total pension expense for the years ended December 31, 1993, 1992 and 1991
amounted to $78,650, $115,500 and $76,500, respectively.
According to SBERA's actuary, a reconciliation of the funded status of the
plan at October 31, 1993 and 1992 is as follows:
1993 1992
Projected benefit obligation . . . . . . . . $ (1,464,746) $ (1,308,559)
Plan assets at fair value . . . . . . . . . 1,136,675 921,350
Excess of projected benefit obligation
over plan assets . . . . . . . . . . . . (328,071) (387,209)
Unamortized net obligation since adoption
of SFAS No. 87 . . . . . . . . . . . . . 187,924 200,451
Unrecognized net gain . . . . . . . . . . . (95,932) (25,141)
Accrued pension liability . . . . . . . . . $ (236,079) $ (211,899)
The accumulated benefit obligation (substantially all vested) at October 31,
1993 amounted to $760,161, which is less than the plan assets at fair value.
For the plan years ended October 31, 1993, 1992 and 1991, actuarial
assumptions include an assumed discount rate on benefit obligations of
7.00%, 7.00% and 6.75%, respectively, and an expected long-term rate of
return on plan assets of 7.00%, 6.75% and 7.75%, respectively. An annual
salary increase of 6% was utilized for all years.
14. RELATED PARTY TRANSACTIONS
In the normal course of business, the Bank has granted loans to
certain of its officers and Directors and their affiliates. The aggregate
amount of such loans which exceeded $60,000 in aggregate outstanding amount
to any related party amounted to $1,973,000 at December 31, 1993 and
$2,543,000 at December 31, 1992. During the year ended December 31, 1993,
total principal additions were $439,000 and principal payments were
$529,000. At December 31, 1992 loans to one Director and his affiliates
amounted to $480,000. This Director resigned in 1993 and those loans are
not included in the balance at December 31, 1993.
15. STOCK OPTION PLAN
The Bank has a stock option plan for the benefit of its officers and
other employees which became effective upon the Bank's conversion to stock
form. Shares of common stock up to 100,298 have been reserved for issuance
pursuant to options granted under the plan. Both "incentive stock options"
and "nonqualified stock options" may be granted under this plan with a
maximum option term of ten years.
Stock options may be granted as determined by the Board of Directors
of the Bank, and will have an exercise price equal to or in excess of the
fair market value of a share of common stock of the Bank on the date the
option is granted. The plan also permits the inclusion of stock
appreciation rights in any option granted. As of December 31, 1993 and
1992, there were 53,900 nonqualified stock options outstanding exercisable
at a price of $8.625 per share. No options have been cancelled or
exercised and no stock appreciation rights have been granted to date.
16. EMPLOYEES' STOCK OWNERSHIP PLAN
The Bank has an Employees' Stock Ownership Plan ("ESOP") which was
established as of November 1, 1986 for eligible employees. The ESOP will
be funded by the Bank's contributions made in cash (which generally will be
invested in common stock) or common stock. Benefits may be paid in shares
of common stock or in cash, subject to the employees' right to demand
shares.
In September, 1987, the ESOP purchased 10,000 shares of common stock
with a fair value of $91,250. The purchase was funded with a loan from the
Bank of $66,250 and the Bank's initial contribution of $25,000 to the ESOP.
In addition, the Bank borrowed $450,000 from a third party lender and
loaned the proceeds to the ESOP which purchased 40,000 additional shares
during 1988. The loan to the ESOP was repaid from contributions made by
the Bank. The Bank's ESOP expense for the years ended December 31, 1993,
1992 and 1991 amounted to $67,820, $94,240 and $95,502, respectively. The
balance of the loan due from the ESOP as of December 31, 1992 is shown as a
deduction from stockholders' equity in the consolidated balance sheets.
17. SUBSEQUENT EVENT
On March 2, 1994, the Bank and a subsidiary of Shawmut National
Corporation ("SNC") entered into an Agreement and Plan of Merger. In
accordance with the terms of the Agreement, each share of the Bank's issued
and outstanding common stock at the effective time of the Merger, other
than dissenting shares, shall be converted into the right to receive $16.00
per share.
The completion of the Merger is subject to certain conditions,
including (a) approval by the stockholders of the Bank, (b) approval of the
Federal Reserve Board, the Massachusetts Commissioner of Banks and other
requisite federal and state regulatory authorities and (c) other closing
conditions customary in transactions of this type.
Concurrently with the execution of the Merger Agreement, the Bank and
SNC entered into a Stock Option Agreement (the "Option Agreement"), dated
as of March 2, 1994, providing, among other things, for the grant by the
Bank to SNC of an option (the "Option") to purchase up to 19.9% of the
Bank's then outstanding common stock, before giving effect to the exercise
of the Option, at $14.00 per share. The Option is only exercisable upon
the occurrence of certain events as specified in the Option Agreement. The
Option was granted by the Bank as a condition of and is consideration for
SNC's entering into the Merger Agreement.
<TABLE>
<CAPTION>
18. QUARTERLY DATA (UNAUDITED)
Summaries of consolidated operating results on a quarterly basis are as follows:
YEARS ENDED DECEMBER 31,
1993 1992
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest and dividend
income . . . . . . . . $1,388 $1,384 $1,354 $1,350 $1,413 $1,437 $1,435 $1,464
Interest expense . . . . 554 575 551 559 618 681 740 785
Net interest income . . . 834 809 803 791 795 756 695 679
Provision (credit) for
loan losses . . . . . . (101) - - 25 75 140 200 140
Net interest income after
provision (credit) for
loan losses . . . . . . 935 809 803 766 720 616 495 539
Gain (loss) on trading
and investment securities,
net . . . . . . . . . . 28 98 15 33 65 70 114 (16)
Other income . . . . . . 56 55 63 81 57 60 62 68
Operating expenses . . . 654 570 565 596 520 574 593 571
Income before income taxes
and cumulative effect of
change in accounting
principle . . . . . . . 365 392 316 284 322 172 78 20
Provision for income
taxes . . . . . . . . . 131 140 108 100 120 71 34 8
Income before cumulative
effect of change in
accounting principle . 234 252 208 184 202 101 44 12
Cumulative effect of change
in accounting for income
taxes . . . . . . . . . - - - - - - - 300
Net income . . . . . . $ 234 $ 252 $ 208 $ 184 $ 202 $ 101 $ 44 $ 312
Earnings per share (Based on 1,002,978 shares outstanding):
Income before cumulative
effect of change in
accounting principle $ .23 $ .25 $ .21 $ .18 $ .20 $ .10 $ .04 $ .01
Cumulative effect of change
in accounting for income
taxes . . . . . . . . - - - - - - - .30
$ .23 $ .25 $ .21 $ .18 $ .20 $ .10 $ .04 $ .31
</TABLE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
of West Newton Savings Bank:
We have audited the accompanying consolidated balance sheets of West Newton
Savings Bank and Subsidiaries as of December 31, 1993 and 1992, and the
related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended
December 31, 1993. These consolidated financial statements are the
responsibility of the Bank's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 state-
ments. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of West
Newton Savings Bank and Subsidiaries as of December 31, 1993 and 1992, and
the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1993 in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Bank
has elected to adopt Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes," effective January 1, 1992 and SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securi-
ties," effective December 31, 1993.
As discussed in Note 16 to the consolidated financial statements, on March
7, 1994, the Bank entered into an Agreement and Plan of Merger.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
January 24, 1994, except for Note 16, as to
which the date is March 7, 1994
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1993 and 1992
ASSETS
1993 1992
(In Thousands)
Cash and due from banks $ 6,200 $ 6,461
Federal funds sold and
overnight deposits 6,075 15,640
Total cash and cash equivalents 12,275 22,101
Investment securities
(Notes 2 and 9) 92,353 74,278
Loans, net (Note 3) 146,299 146,737
Advances to joint venture, net (Note 4) - 325
Foreclosed real estate, net (Note 5) 618 1,138
Banking premises and equipment,
net (Note 6) 902 768
Accrued interest receivable 1,931 1,744
Other assets (Notes 7 and 10) 2,960 3,139
Total assets $ 257,338 $ 250,230
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 8) $ 229,138 $ 224,391
Federal Home Loan Bank advance (Note 9) 364 -
Mortgagors' escrow accounts 642 617
Accrued interest payable 478 594
Accrued expenses 1,896 1,575
Other liabilities 656 273
Total liabilities 233,174 227,450
Commitments and contingencies (Notes 11 and 12)
Stockholders' equity (Notes 13 and 14):
Serial preferred stock, $.10 par
value per share;
10,000,000 shares authorized, none issued - -
Common stock, $.10 par value per share;
20,000,000 shares authorized;
1,715,100 and 1,712,600 issued and
outstanding in 1993 and 1992,
respectively 172 171
Additional paid-in capital 11,734 11,720
Undivided profits 12,258 10,889
Total stockholders' equity 24,164 22,780
Total liabilities and
stockholders' equity $ 257,338 $ 250,230
See accompanying notes to consolidated financial statements.
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1993, 1992 and 1991
1993 1992 1991
(In Thousands, Except
Per Share Amounts)
Interest and dividend income:
Interest and fees on loans $ 11,374 $ 13,683 $ 16,747
Interest and dividends on
investment securities 4,231 3,891 3,508
Interest on federal funds sold
and overnight deposits 324 514 802
Total interest and
dividend income 15,929 18,088 21,057
Interest expense:
Interest on deposits 7,296 9,390 13,227
Interest on Federal Home
Loan Bank advance 17 - -
7,313 9,390 13,227
Net interest income 8,616 8,698 7,830
Provision for loan losses (Note 3) 400 1,775 1,340
Net interest income, after provision
for loan losses 8,216 6,923 6,490
Other income (charges):
Loss on subleased property (Note 6) - (1,004) -
Customer service fees 385 374 392
Recovery (provision for losses) on
joint venture advances (Note 4) 110 (232) (129)
Gain on security transactions, net
(Note 2) - - 10
Gains (losses) on foreclosed real estate,
net (Note 5) 37 (510) 19
Gains on loans sold 94 24 -
Miscellaneous 82 87 268
Total other income (charges) 708 (1,261) 560
Operating expenses:
Salaries and employee benefits
(Note 15) 3,044 2,685 2,547
Occupancy (Note 6 and 12) 448 510 533
Equipment (Note 6) 143 165 205
Data processing 258 252 282
Federal deposit insurance 511 499 456
Other operating expenses 1,268 1,235 1,140
Total operating expenses 5,672 5,346 5,163
(continued)
See accompanying notes to consolidated financial statements.
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Concluded)
Years Ended December 31, 1993, 1992 and 1991
1993 1992 1991
(In Thousands, Except
Per Share Amounts)
Income before income taxes and
cumulative effect of change in
accounting principle 3,252 316 1,887
Provision for income taxes (Note 10) 1,334 235 629
Income before cumulative effect of
change in accounting principle 1,918 81 1,258
Cumulative effect of change in
accounting for income taxes (Note 1) - 1,567 -
Net income $ 1,918 $ 1,648 $ 1,258
Earnings per common share:
Income before cumulative effect of
change in accounting principle $ 1.09 $ .05 $ .73
Cumulative effect of change in
accounting for income taxes - .91 -
Earnings per common share $ 1.09 $ .96 $ .73
Weighted average common shares
outstanding 1,767 1,735 1,714
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1993, 1992 and 1991
<S> <C> <C> <C> <C>
Additional
Common Paid-in Undivided
Stock Capital Profits Total
(In Thousands)
Balance at December 31, 1990 $ 171 $ 11,720 $ 8,566 $ 20,457
Net income - - 1,258 1,258
Dividends declared ($.16 per share) - - (274) (274)
Balance at December 31, 1991 171 11,720 9,550 21,441
Net income - - 1,648 1,648
Dividends declared ($.18 per share) - - (309) (309)
Balance at December 31, 1992 171 11,720 10,889 22,780
Exercise of stock options (Note 14) 1 14 - 15
Net income - - 1,918 1,918
Dividends declared ($.32 per share) - - (549) (549)
Balance at December 31, 1993 $ 172 $ 11,734 $ 12,258 $ 24,164
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1993, 1992 and 1991
<S> <C> <C> <C>
1993 1992 1991
(in Thousands)
Cash flows from operating activities:
Net income $ 1,918 $ 1,648 $ 1,258
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred loan fees and investment
securities, net of accretion (75) (228) (212)
Provisions for loan losses 400 1,775 1,340
Provision for losses on (recovery of) joint venture advances 110 255 129
Cumulative effect of change in accounting principle - (1,567) -
Loss on subleased property - 1,004 -
Gain on loans sold (94) (24) -
Gain on security transactions, net - - (10)
Losses (gains) from foreclosed real estate, net (29) 421 (119)
Income from joint ventures, net - (23) -
Loans originated for sale (11,298) (15,979) (5,941)
Proceeds from sales of loans 11,298 16,003 5,941
Depreciation and amortization expense 132 166 275
Provision (benefit) for deferred taxes (5) 13 (131)
(Increase) decrease in accrued interest receivable
and other assets (3) 437 656
Increase (decrease) in accrued interest payable, accrued
expenses and other liabilities 519 114 (33)
Net cash provided by operating activities 2,653 4,015 3,153
Cash flows from investing activities:
Decrease in interest-bearing deposits in banks, net - - 5,000
Proceeds from sales of investment securities - - 4,146
Proceeds from maturities of investment securities 32,771 24,039 16,660
Purchase of investment securities (50,910) (46,941) (34,241)
Proceeds from sale of foreclosed real estate 588 2,246 319
Disbursements for foreclosed real estate 8 (89) (100)
Loans originated, net of principal payments 224 12,695 6,232
Repayment of advances to joint ventures 435 - 199
Return of investment in joint ventures - 23 -
Expenditures for banking premises and equipment (266) (44) (20)
Net cash used by investing activities (17,150) (8,071) (1,805)
(continued)
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
Years Ended December 31, 1993, 1992 and 1991
<S> <C> <C> <C>
1993 1992 1991
(in Thousands)
Cash flows from financing activities:
Proceeds from exercise of stock options 15 - -
Dividends paid on common stock (480) (274) (274)
Proceeds from Federal Home Loan Bank advance 370 - -
Repayments of Federal Home Loan Bank advance (6) - -
Net increase in deposits, excluding certificates
of deposit 7,902 16,068 18,263
Net decrease in certificates of deposit (3,155) (7,111) (15,444)
Net increase (decrease) in mortgagors' escrow accounts 25 (15) (8)
Net cash provided by financing activities 4,671 8,668 2,537
Net increase (decrease) in cash and cash equivalents (9,826) 4,612 3,885
Cash and cash equivalents at beginning of year 22,101 17,489 13,604
Cash and cash equivalents at end of year $12,275 $22,101 $17,489
Supplementary information:
Transfers from loans to foreclosed real estate $ 47 $ 2,434 $ 1,100
Interest paid on deposit accounts 7,412 9,178 13,496
Interest paid on Federal Home Loan Bank advances 17 - -
Income taxes paid, net of refunds received 1,265 591 287
See accompanying notes to consolidated financial statements.
</TABLE>
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1993, 1992 and 1991
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and consolidation
The consolidated financial statements include the
accounts of the Bank and its wholly-owned subsidiar-
ies, Prolog Corporation, Prolog Two Corporation and,
in 1993, West Newton Securities Corp. Prolog Corpo-
ration leases equipment to the Bank and Prolog Two
Corporation has invested in real estate development
ventures and currently holds a minor investment in
real estate. West Newton Securities Corp. was
formed in 1993 to engage in the purchasing, selling
and holding of investment securities. All signifi-
cant intercompany balances and transactions have
been eliminated in consolidation.
Accounting policy changes
Investment securities:
Effective December 31, 1993, the Bank adopted the
provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The
Statement establishes standards for all debt securi-
ties and for equity securities that have readily
determinable fair values. As required under SFAS
No. 115, prior year financial statements have not
been restated.
SFAS No. 115 requires that investments in debt
securities that management has the positive intent
and ability to hold to maturity be classified as
"held to maturity" and reflected at amortized cost.
Investments that are purchased and held principally
for the purpose of selling them in the near term are
classified as "trading securities" and reflected on
the balance sheet at fair value, with unrealized
gains and losses included in earnings. Investments
not classified as either of the above are classified
as "available for sale" and reflected on the balance
sheet at fair value, with unrealized gains and
losses excluded from earnings and reported as a
separate component of stockholders' equity, net of
tax effects. There was no effect on net income for
the year ended December 31, 1993 relating to the
adoption of SFAS No. 115.
Prior to December 31, 1993, U.S. Government and
federal agency obligations were stated at cost,
adjusted for amortization of premium and accretion
of discounts. Gains and losses on disposition of
investment securities were computed by the average
cost method. The carrying basis of debt securities
reflected management's intention and ability to hold
the securities for the foreseeable future or to
maturity. For all years presented Federal Home Loan
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounting policy changes (continued)
Bank stock is stated at cost.
Income taxes:
Effective January 1, 1992, the Bank adopted the
provisions of SFAS No. 109, "Accounting for Income
Taxes". As permitted under SFAS No. 109, prior year
financial statements have not been restated. SFAS
No. 109 requires that deferred tax assets and lia-
bilities be reflected at currently enacted income
tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to
be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabili-
ties will be adjusted accordingly through the provi-
sion for income taxes. The Bank's allowance for
loan losses for tax purposes that arose before 1987
will remain a permanent difference without recogni-
tion of a deferred tax liability. However, the loan
loss allowance maintained for financial reporting
purposes will now be treated as a temporary differ-
ence with allowance recognition of a related de-
ferred tax asset, if it is deemed realizable. The
cumulative effect of the change in accounting prin-
ciple on years prior to 1992 is reflected as an
increase in the 1992 operating results and amounted
to $1,567,000. The effect of the accounting change
for the year ended December 31, 1992 was to decrease
net income by $230,000.
For regulatory capital purposes, the recognition of
deferred tax assets, when realization of such is
dependent on an institution's future taxable income,
is limited to the amount that can be realized within
one year or 10% of core capital, whichever is less.
Reclassification
Certain amounts have been reclassified in the 1992
and 1991 consolidated financial statements to con-
form to the 1993 presentation.
Cash and cash equivalents
Cash and cash equivalents include amounts due from
banks and federal funds sold on a daily basis.
Loans
The Bank grants mortgage and consumer loans to
customers. A substantial portion of the loan port-
folio consists of mortgage loans in the eastern New
England area. The ability of the Bank's debtors to
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounting policy changes (concluded)
honor their contracts is dependent on the real
estate and construction economic sectors and the New
England economy in general.
Loans, as reported, have been reduced by unadvanced
funds on construction loans, deferred loan origina-
tion fees and the allowance for loan losses.
Interest income on loans is recognized on a simple
interest basis and is not accrued on loans which are
ninety days or more past due. Interest income
previously accrued on such loans is reversed against
current period earnings.
Loan origination fees and certain related direct
loan costs are deferred and the net amount is amor-
tized as an adjustment of the yield on loans using
the level interest method over the contractual life
of the related loans.
Allowance for loan losses
This allowance for loan losses is established
through a provision for loan losses charged to
operations and is maintained at a level considered
by management as adequate to provide for reasonably
foreseeable loan losses.
The provision and the level of the allowance are
evaluated on a regular basis by management and are
based on management's periodic review of the
collectibility of the loans in light of known and
inherent risks in the nature and volume of the loan
portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic condi-
tions.
The allowance is an estimate and ultimate losses may
vary from current estimates and future additions to
the allowance may be necessary. As adjustments
become necessary, they are reported in the results
of operations for the periods in which they become
known. Loan losses are charged against the allow-
ance when management believes the collectibility of
the loan balance is unlikely.
Advances to joint venture
Prolog Two Corporation accounts for its advances to
a joint venture partnership at an amount that ap-
proximates fair value (See Note 4).
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreclosed real estate
Foreclosed real estate and in-substance foreclosures
are held for sale and carried at the lower of cost
or fair value less estimated costs to sell and an
allowance for losses. Troubled loans are trans-
ferred to foreclosed real estate upon completion of
formal foreclosure proceedings, and to in-substance
foreclosure when it is determined that the borrower
has little or no equity in the underlying collateral
and that loan payments can be expected only from the
sale or operation of the collateral.
Real estate properties acquired through foreclosure
or classified as in-substance foreclosures are
initially recorded at fair value at the date of
foreclosure. Costs relating to development and
improvement of property are capitalized, whereas
costs relating to holding property are expensed.
Valuations are periodically performed by management,
and an allowance for losses is established through a
charge to operations if the carrying value of a
property exceeds its fair value less estimated costs
to sell.
Prior to December 31, 1992, foreclosed and in-sub-
stance foreclosed real estate was carried at the
lower of cost or net realizable value. Declines in
value subsequent to foreclosure classification were
reflected as direct charges to operations and to the
related properties without the utilization of a
valuation allowance. The change in accounting
method had no significant effect on the Bank's
results of operations in 1992.
Banking premises and equipment
Land is carried at cost. Banking premises, lease-
hold improvements and equipment are stated at cost,
less accumulated depreciation and amortization,
computed primarily on the straight-line basis over
the estimated useful lives of the assets or the
terms of leases, if shorter.
It is general practice to charge the cost of mainte-
nance and repairs to earnings when incurred; major
expenditures for improvements and additions are
capitalized and depreciated.
Income taxes
Provisions for deferred income taxes are made as a
result of timing differences between financial and
income tax methods of accounting.
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Banking premises and equipment (concluded)
Pension plan
The Bank uses the "net periodic pension cost" method
of accounting for pensions for financial reporting
purposes. This method recognizes the compensation
cost of an employee's pension benefit over that
employee's approximate service period. The aggre-
gate cost method is used for funding purposes.
Earnings per share
The earnings per share computations for the years
ended December 31, 1993, 1992 and 1991 are based on
weighted average shares outstanding of 1,767,000,
1,735,000 and 1,714,000, respectively, and assume
that outstanding stock options, when the market
price exceeded the exercise price, were exercised
and the proceeds used to purchase common shares. In
each of the three years ended December 31, 1993,
primary and fully diluted earnings per share were
the same.
Fair value of financial instruments
Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instru-
ments" requires disclosure of estimated fair values
of all financial instruments where it is practicable
to estimate such values. In cases where quoted
market prices are not available, fair values are
based on estimates using present value or other
valuation techniques. Those techniques are signifi-
cantly affected by the assumptions used, including
the discount rate and estimates of future cash
flows. Accordingly, the derived fair value esti-
mates cannot be substantiated by comparison to
independent markets and, in many cases, could not be
realized in immediate settlement of the instrument.
SFAS No. 107 excludes certain financial instruments
and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value
amounts presented do not represent the underlying
value of the Bank.
The following methods and assumptions were used by
the Bank in estimating fair value disclosures for
financial instruments:
Cash and cash equivalents: The carrying amounts
of cash and short-term instruments approximate
fair values.
Investment securities: Fair values for invest-
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ment securities, excluding Federal Home Loan Bank
stock, are based on quoted market prices. The
carrying value of Federal Home Loan Bank stock
approximates fair value.
Loans: For variable-rate loans that reprice fre-
quently and with no significant change in credit
risk, fair values are based on carrying values.
Fair values for certain mortgage loans are esti-
mated using discounted cash flow analyses, using
interest rates currently being offered for loans
with similar terms to borrowers of similar credit
quality. Fair values for other loans (e.g., com-
mercial real estate, construction, installment
and passbook and stock loans) are estimated using
discounted cash flow analyses, using interest
rates currently being offered for loans with
similar terms to borrowers of similar credit
quality. Fair values for nonperforming loans are
estimated using discounted cash flow analyses or
underlying collateral values, where applicable.
Deposit liabilities: The fair values disclosed
for demand deposits (e.g., interest and non-in-
terest checking, passbook savings, and certain
types of money market accounts) are, by defini-
tion, equal to the amount payable on demand at
the reporting date (i.e., their carrying
amounts). Fair values of certificates of deposit
are estimated using a discounted cash flow calcu-
lation that applies interest rates currently
being offered on certificates to a schedule of
aggregated expected monthly maturities on time
deposits.
Federal Home Loan Bank advances: The fair values
of advances are estimated using discounted cash
flow analyses based on the Bank's current incre-
mental borrowing rates for similar types of bor-
rowing arrangements.
Accrued interest: The carrying amounts of ac-
crued interest approximate fair value.
Off-balance-sheet instruments: Fair values for
off-balance-sheet lending commitments are based
on fees currently charged to enter into similar
agreements, taking into account the remaining
terms of the agreements and the counterparties'
credit standings. The fair values of these in-
struments are not material.
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
Fair value of financial instruments (concluded)
Recent accounting pronouncement
In May 1993, the Financial Accounting Standards
Board issued SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan." 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 inter-
est rate, the loan's obtainable market price, or the
fair value of the collateral if the loan is collat-
eral dependent.
The Statement is applicable to all creditors and 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,
and convertible or nonconvertible debentures and
bonds and other debt securities.
The Statement applies to financial statements for
fiscal years beginning after December 15, 1994.
Earlier adoption is permissible. Management has not
yet determined the financial statement impact of
adopting the provisions of this statement.
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. INVESTMENT SECURITIES
Investment securities consist of the following at December 31, 1993 and
1992, and reflect the change in accounting principle as disclosed in
Note 1 to the consolidated financial statements:
1993 1992
(In Thousands)
Securities held to maturity, at
amortized cost $91,086 $ -
Securities held for investment, at
amortized cost - 72,940
Federal Home Loan Bank stock, at cost 1,267 1,338
$92,353 $74,278
The amortized cost and fair value of investment securities follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
December 31, 1993 (Held to
Maturity):
U.S. Government and federal
agency obligations $91,086 $617 $ 77 $91,626
December 31, 1992 (Held for
Investment):
U.S. Government and federal
agency obligations $72,940 $913 $ - $73,853
The amortized cost and fair value of debt securities by contractual
maturity follows:
December 31, 1993 December 31, 1992
(Held to Maturity) (Held for Investment)
Amortized Fair Percent Amortized Fair Percent
Cost Value of Total Cost Value of Total
(Dollars in Thousands)
Within 1 year $37,907 $38,158 41.6% $32,833 $32,125 45.0%
Over 1 year
to 5 years 53,179 53,468 58.4 40,107 41,728 55.0
$91,086 $91,626 100.0% $72,940 $73,853 100.0%
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INVESTMENT SECURITIES (concluded)
Proceeds from the sale of investment bonds and obligations during 1991 were
$4,148,000, no securities were sold during 1993 or 1992. Gross gains of
$10,000 were recognized during 1991.
3. LOANS
A summary of the balances of loans follows:
December 31,
1993 1992
(In Thousands)
Real estate mortgage loans:
Residential mortgage $109,070 $105,898
Commercial, participation and construction 28,516 30,030
Second mortgage including home equity 9,723 12,235
147,309 148,163
Less unadvanced funds on construction loans (536) (1,096)
Total real estate mortgage loans 146,773 147,067
Other Loans:
Installment 2,911 3,163
Passbook and stock 829 698
Total other loans 3,740 3,861
Total loans 150,513 150,928
Less: Allowance for loan losses (3,915) (3,753)
Deferred loan origination fees, net (299) (438)
Loans, net $146,299 $146,737
An analysis of the allowance for loan losses follows:
Years Ended December 31,
1993 1992 1991
(In Thousands)
Balance at beginning of year $3,753 $4,022 $3,642
Provision for loan losses 400 1,775 1,340
Recoveries 90 38 3
4,243 5,835 4,985
Loans charged-off (328) (2,082) (963)
Balance at end of year $3,915 $3,753 $4,022
At December 31, 1993 and 1992, the estimated fair value of loans was
$153,787,000 and $155,053,000, respectively.
LOANS (concluded)
The Bank is servicing mortgage loans which amounted to $26,165,000 and
$24,789,000 at December 31, 1993 and 1992, respectively.
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Non-accrual loans totaled $4,563,000 and $3,333,000 at December 31, 1993
and 1992, respectively. Interest earned but not accrued on such loans
amounted to $615,000 and $638,000 at December 31, 1993 and 1992, respec-
tively.
4. ADVANCES TO JOINT VENTURE
The Bank, through its wholly-owned subsidiary, Prolog Two Corporation,
has in the past made investments in and advances to real estate joint
ventures. As of December 31, 1992 the joint venture consisted of a
limited partnership formed to operate and lease a professional office
building. As of December 31, 1992, all equity contributions had been
written off and the advance had been written down to its estimated fair
value. The advance was secured by real estate and provided for interest
at market rates. However, interest had not been paid or accrued for
over three years on the advance. In 1993, the joint venture was termi-
nated and Prolog Two Corporation received $435,000 as a settlement of
the advance resulting in a recovery of $110,000.
Changes in advances to joint ventures outstanding are as follows:
Years Ended December 31,
1993 1992 1991
(In Thousands)
Gross balance at beginning of year $ 325 $900 $1,924
Advances charged-off - (575) (825)
Distribution received (435) (23) (199)
Recovery on advances 110 - -
Equity in net income of investment - 23 -
- 325 900
Less allowance for losses on advances - - 320
Balance at end of year $ - $325 $ 580
An analysis of the allowance for losses on advances follows:
Years Ended December 31,
1993 1992 1991
(In Thousands)
Balance at beginning of year $ - $320 $1,016
Provision for losses on joint
venture advances - 255 129
Advances charged-off - (575) (825)
Balance at end of year $ - $ - $ 320
5. FORECLOSED REAL ESTATE
Foreclosed real estate is comprised of:
December 31,
1993 1992
(In Thousands)
Real estate acquired in settlement of loans $ 525 $ 958
Loans considered in-substance foreclosures 158 180
683 1,138
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Less allowance for losses (65) -
$ 618 $1,138
Net gains (losses) applicable to foreclosed real estate include the
following:
Years Ended December 31,
1993 1992 1991
(In Thousands)
Net gain (loss) on sales of foreclosed
real estate $ 94 $(421) $119
Provision for loss (65) - -
Operating income (expenses), net 8 (89) (100)
$ 37 $(510) $ 19
6. BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation and amortization of
banking premises and equipment and their estimated useful lives follows:
December 31, Estimated
1993 1992 Useful Lives
(In Thousands)
Banking premises:
Land $ 141 $ 141 -
Buildings and improvements 1,259 1,170 5-50 years
Leasehold improvements 690 654 5-20 years
Furniture and equipment 1,897 1,756 3-25 years
3,987 3,721
Less accumulated depreciation
and amortization (3,085) (2,953)
$ 902 $ 768
Depreciation and amortization expense for the years ended December 31,
1993, 1992 and 1991 amounted to $132,000, $166,000 and $275,000, respec-
tively.
BANKING PREMISES AND EQUIPMENT (concluded)
In 1992, the Bank recorded a loss of $1,004,000 on subleased property
including the writeoff of leasehold improvements with a net book value
of $480,000. This decision resulted from the expiration of the sub-
lease, the subtenant's notice of intent to vacate and the Bank's inabil-
ity to find a new tenant.
7. OTHER ASSETS
Other assets consist of the following:
December 31,
1993 1992
(In Thousands)
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net deferred tax asset $2,383 $2,378
Refundable income taxes 229 332
Condominium unit acquired for investment, net 190 155
Other 158 274
Total other assets $2,960 $3,139
8. DEPOSITS
A summary of deposit balances, by type, is as follows:
December 31,
1993 1992
(In Thousands)
NOW and demand $ 35,815 $ 31,706
Money Market 35,618 37,896
Regular and other 48,949 42,878
Total non-certificate accounts 120,382 112,480
Term certificates greater than $100,000 19,272 16,497
Term certificates less than $100,000 89,484 95,414
Total certificate accounts 108,756 111,911
Total deposits $229,138 $224,391
At December 31, 1993 and 1992, the estimated fair value of total deposit
liabilities was $229,712,000 and $223,984,000, respectively.
DEPOSITS (concluded)
A summary of term certificate accounts by maturity is as follows:
December 31, 1993 December 31, 1992
Weighted Weighted
Average Average
Amount Rate Amount Rate
(Dollars in Thousands)
Within 1 year $ 88,650 3.98% $ 92,546 4.57%
Over 1 year to 2 years 15,388 4.63 14,415 5.66
Over 2 years to 3 years 4,213 4.40 4,938 5.32
Over 3 years 505 5.98 12 7.77
Total $108,756 4.10% $111,911 4.65%
9. FEDERAL HOME LOAN BANK ADVANCE
In 1993, the Bank obtained an advance from the Federal Home Loan Bank
in the amount of $370,000. The advance bears interest at 6.72% and is
due in monthly payments of $2,829 to April 2013. The advance is
secured by a blanket lien on certain qualified collateral, defined
principally as 90% of the fair value of U.S. Government and federal
agency obligations and 75% of the carrying value of first mortgage
loans on owner-occupied residential property. At December 31, 1993,
the estimated fair value of the Federal Home Loan Bank advance was
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$365,000.
10. INCOME TAXES
Allocation of the provision for federal and state income taxes between
current and deferred portions is as follows:
Years Ended December 31,
1993 1992 1991
(In Thousands)
Current tax provision:
Federal $1,027 $133 $572
State 312 89 188
1,339 222 760
Deferred tax provision (benefit):
Federal (21) (31) (74)
State 16 44 (57)
(5) 13 (131)
Total provision $1,334 $235 $629
INCOME TAXES (continued)
The reasons for the differences between the corporate federal income tax
rate and the effective tax rates are summarized as follows:
Years Ended December 31,
1993 1992 1991
Statutory rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State taxes, net of federal tax
benefit 6.7 27.9 7.3
Provision for losses on loans and
joint venture advances in excess
of (less than) the amount allowed
for tax purposes .5 12.3 (3.9)
Other, net (.2) .5 (4.1)
Effective tax rates 41.0% 74.7% 33.3%
The components of the net deferred tax asset included in other assets
are as follows:
December 31,
1993 1992
(In Thousands)
Deferred tax liability:
Federal $ (45) $ (45)
State (8) (7)
(53) (52)
Deferred tax asset:
Federal 1,986 1,965
State 871 886
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2,857 2,851
Valuation reserve on asset (421) (421)
2,436 2,430
Net deferred tax asset $2,383 $2,378
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCOME TAXES (continued)
The tax effect of each type of income and expense item
that give rise to deferred taxes are:
December 31,
1993 1992
(In Thousands)
Cash basis of accounting $ 479 $ 475
Investments 18 27
Depreciation and amortization 229 174
Deferred loan fees 131 187
Allowance for loan losses 1,742 1,723
Employee benefit plans 201 179
Other 4 14
2,804 2,799
Valuation reserve (421) (421)
Net deferred tax asset $2,383 $2,378
There was no change in the valuation reserve for the
years ended December 31, 1993 and 1992.
A summary of the change in the net deferred tax asset is
as follows:
Years Ended
December 31,
1993 1992
(In Thousands)
Balance at beginning of year $2,378 $ 824
Cumulative effect of change in
accounting principle - 1,567
Deferred tax benefit (provision) 5 (13)
Balance at end of year $2,383 $2,378
The tax effects of the changes in each type of income and
expense item that give rise to deferred taxes for the
year ended December 31, 1991 are as follows:
INCOME TAXES (concluded)
(In Thousands)
Cash basis accounting for tax purposes ($183)
Recognition of income of joint ventures 66
Deferral of net loan origination fees
for financial reporting purposes 32
Book versus tax basis of investment
securities and asset depreciation (46)
($131)
11. COMMITMENTS AND CONTINGENCIES
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Loan Commitments
The Bank 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 finan-
cial instruments include various commitments to extend
credit and involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount
recognized on the consolidated balance sheet.
The Bank's exposure to credit loss is represented by the
contractual amount of these instruments. The Bank uses
the same credit policies in making commitments as it does
for all balance sheet instruments.
At December 31, 1993 and 1992, the following financial
instruments were outstanding whose contract amounts
represent credit risk:
1993 1992
(In Thousands)
Commitments to grant loans $ 3,207 $ 2,644
Unadvanced funds on equity
lines-of-credit 13,624 12,888
Commitments to grant loans are agreements to lend to a
customer as long as there is no violation of any condi-
tion established in the contract. Commitments generally
have fixed expiration dates or other termination clauses
and may require payment of a fee. The commitments for
equity lines-of-credit may expire without being drawn
upon, therefore, the total commitment amounts do not
necessarily represent future cash requirements. The Bank
evaluates each customer's credit worthiness on a case-by-
case basis. These financial instruments are collateral-
ized by real estate.
Employment Agreements
The Bank has entered into severance agreements with five
principal officers, which provide for certain lump-sum
severance payments within a two-year period following a
"change in control" as defined in the agreements. In
addition, the agreements provide for the immediate vest-
ing of stock options and other similar benefits upon a
"change in control".
Other Contingencies
In the ordinary course of business, various legal claims
arise from time to time and, in the opinion of manage-
ment, these claims will have no material effect on the
Bank's consolidated financial position.
12. LEASE COMMITMENTS
Pursuant to the terms of noncancelable lease agreements
pertaining to banking premises, future minimum rental
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
COMMITMENTS AND CONTINGENCIES (concluded)
commitments at December 31, 1993 are as follows:
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
LEASE COMMITMENTS (concluded)
Years Ending
December 31, (In Thousands)
1994 $189
1995 127
1996 106
$422
The future minimum rental commitments shown above include
$319,000 which was accrued by the Bank as part of the
loss on subleased property as described in Note 6.
Net rent expense for the years ended December 31, 1993,
1992 and 1991 amounted to $108,000, $109,000 and
$127,000, respectively.
13. STOCKHOLDERS' EQUITY
Tax reserve for loan losses
At October 31, 1993, the close of the most recent year
for taxes, the total reserve for loan losses for federal
income tax purposes amounted to approximately $3,067,000.
If this amount, or any portion thereof, is used for
purposes other than to absorb the losses for which estab-
lished, an amount up to approximately 150% of the amount
actually used (limited to the amount of the reserve),
must be included in gross income for federal income tax
purposes in the fiscal year in which used and would
result in up to approximately $1,297,000 in additional
federal income tax liability. As the Bank does not
intend to use the reserves for purposes other than to
absorb loan losses, deferred income taxes have not been
provided on these amounts (See Note 1).
Liquidation account
At the time of the Bank's conversion from a Massachusetts
chartered savings bank in mutual form to a Massachusetts
chartered savings bank in stock form, the Bank estab-
lished a liquidation account in the amount of
$10,961,000. In accordance with Massachusetts law, 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 liquida-
tion account is reduced annually to the extent that
Eligible Account Holders have reduced their Qualifying
Deposit. Subsequent increases do not restore an Eligible
Account Holder's interest in the liquidation account. In
the event of a complete liquidation, Eligible Account
Holders will be entitled to receive a distribution equal
to their proportionate balance of the liquidation account
to the extent funds are available.
Dividend restrictions
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STOCKHOLDERS' EQUITY (concluded)
The Bank may not declare or pay cash dividends on its
shares of common stock if the effect thereof would cause
its stockholders' equity to be reduced below applicable
capital maintenance requirements, or below the balance of
the liquidation account, or if such declaration and
payments would otherwise violate regulatory requirements.
Minimum regulatory requirements
Federal banking regulators require that the Bank meet
certain Tier 1 leverage capital and risk-based capital
ratio requirements. The Bank exceeded all minimum regu-
latory requirements at December 31, 1993 and 1992.
14. STOCK OPTION AND OWNERSHIP PLANS
The Bank has a Stock Incentive Plan for the benefit of
its Directors, officers and other employees and has
reserved 240,000 shares of common stock for issuance
pursuant to options granted under the plan. Both "Incen-
tive Stock Options" and "Non-Statutory Stock Options" may
be granted under the plan. Incentive stock options
granted under the plan will have an exercise price equal
to or in excess of the fair market value of a share of
common stock at the date the option is granted and will
have a maximum option term of five years. Non-statutory
stock options granted under the plan will have an exer-
cise price of not less than 50% of the market value of a
share of common stock at the date the option is granted
and will have a maximum option term of ten years.
Stock option activity for the years ended December 31,
1993 and 1992 is as follows:
Years Ended December 31,
1993 1992
Shares Under Option:
Outstanding at beginning of year 144,400 120,400
Expired and cancelled - (5,000)
Exercised (2,500) -
Granted - 29,000
Outstanding at end of year 141,900 144,400
Exercisable at end of year 85,400 60,400
Option Price Per Share $5.25 to $9.00
The Bank has an Employee Stock Ownership Plan and Trust
Agreement (ESOP) for eligible employees. Although the
Bank has no current plans to fund the ESOP, it may be
funded by Bank contributions made in cash (which will be
invested primarily in common stock) or common stock.
Benefits may be paid in shares of common stock or in
cash, subject to the employees' right to demand shares.
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STOCK OPTION AND OWNERSHIP PLANS (concluded)
15. EMPLOYEE BENEFITS
The Bank provides basic and supplemental pension benefits
for eligible employees through the Savings Banks Employ-
ees Retirement Association Pension Plan ("SBERA"). Each
employee reaching the age of 21 and having completed at
least 1,000 hours of service in one consecutive twelve-
month period beginning with such employee's date of em-
ployment automatically becomes a participant in the
retirement plan. All participants are fully vested after
three years of such service.
Net periodic pension cost and pension expense consisted
of the following:
Years Ended December 31,
1993 1992 1991
(In Thousands)
Service cost-benefits earned
during year $247 $176 $137
Interest cost on projected
benefits 151 128 115
Actual return on plan assets (264) (132) (274)
Net amortization and deferral (12) (12) (12)
Net loss 152 49 188
Total $274 $209 $154
According to the Association's actuary, a reconciliation
of the funded status of the plan is as follows for the
plan years ended October 31, 1993 and 1992:
1993 1992
(In Thousands)
Plan assets at fair value $2,096 $1,835
Projected benefit obligation 2,613 2,154
Excess of projected benefit obligation
over plan assets (517) (319)
Unamortized net obligation since
adoption of SFAS No. 87 (200) (212)
Unrecognized net loss 240 327
Accrued pension liability $ (477) $ (204)
The accumulated benefit obligation (all vested) at Octo-
ber 31, 1993 amounted to $1,565,000 which was less than
the fair value of plan assets at that date.
For the plan years ended October 31, 1993, 1992 and 1991
actuarial assumptions include an assumed discount rate on
benefit obligations of 7%, 7% and 6.75%, respectively,
and an expected long-term rate of return on plan assets
of 7%, 6.75% and 7.75%, respectively. An annual salary
increase of 6% was utilized for these years.
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
EMPLOYEE BENEFITS (concluded)
In addition, pension expense related to an unfunded
supplemental pension benefit granted to the Bank's Chief
Executive Officer amounted to approximately $10,000,
$9,000 and $8,000 for the years ended December 31, 1993,
1992 and 1991, respectively.
16. SUBSEQUENT EVENT
On March 7, 1994, the Bank and Shawmut National Corpora-
tion ("SNC") entered into an Agreement and Plan of Merg-
er. In accordance with the terms of the Merger Agree-
ment, each share of the Bank's issued and outstanding
common stock at the effective time of the Merger, other
than dissenting shares, shall be converted into the right
to receive $25.00 per share. The consideration per share
of common stock is subject to upward adjustment in cer-
tain circumstances if the acquisition is not completed by
September 30, 1994.
The completion of the Merger is subject to certain condi-
tions, including (a) approval by the stockholders of the
Bank, (b) approval of the Federal Reserve Board, the
Massachusetts Commissioner of Banks and other requisite
federal and state regulatory authorities and (c) other
closing conditions customary in transactions of this
type.
Concurrently with the execution of and as a condition of,
and in consideration for SNC's entering into the Merger
Agreement, the Bank and SNC entered into a Stock Option
Agreement (the "Option Agreement"), dated as of March 7,
1994, providing, among other things, for the grant by the
Bank to SNC of an option (the "Option") to purchase up to
19.9% of the Bank's then outstanding common stock at
$21.00 per share, before giving effect to the exercise of
the Option. The Option is only exercisable upon the
occurrence of certain triggering events as specified in
the Option Agreement. Under certain circumstances, the
Bank would have a right of first refusal with respect to
any secondary sale, transfer or other disposition of
shares previously issued pursuant to the exercise of the
Option.
<TABLE>
<CAPTION>
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. QUARTERLY DATA (UNAUDITED)
Summaries of consolidated operating results on a quarterly basis for the years ended December 31, 1993 and 1992 are
as follows:
1993 Quarters 1992 Quarters
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fourth Third Second First Fourth Third Second First
(In Thousands, Except Per Share Amounts)
Interest and dividend income $3,793 $3,967 $4,056 $4,113 $4,382 $4,369 $4,546 $4,791
Interest expense 1,709 1,794 1,847 1,963 2,121 2,268 2,401 2,600
Net interest income 2,084 2,173 2,209 2,150 2,261 2,101 2,145 2,191
Provision for loan losses (1) 100 100 100 100 100 225 250 1,200
Net interest income, after
provision for loan losses 1,984 2,073 2,109 2,050 2,161 1,876 1,895 991
Other income (charges):
(Provision) credit for
losses on joint venture
advances - - 110 - (155) 23 - (100)
Other, net (2) 277 110 109 102 (59) 53 134 (1,157)
277 110 219 102 (214) 76 134 (1,257)
Operating expenses (1,441) (1,410) (1,431) (1,390) (1,365) (1,284) (1,379) (1,318)
Income (loss) before
income taxes and
cumulative effect of
accounting change 820 773 897 762 582 668 650 (1,584)
Provision (benefit) for
income taxes (3) 328 312 370 324 255 294 283 (597)
Income (loss) before
cumulative effect of
accounting change 492 461 527 438 327 374 367 (987)
Cumulative effect of change
in accounting for income
taxes - - - - - - - 1,567
Net Income $ 492 $ 461 $ 527 $ 438 $ 327 $ 374 $ 367 $ 580
Earnings per
common share (Note 1) $ .28 $ .26 $ .30 $ .25 $ .19 $ .22 $ .21 $ .34
</TABLE>
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
QUARTERLY DATA (UNAUDITED) (concluded)
(1) The increase in the provision for loan losses
in the first quarter of 1992 was made primarily
to reflect increases in classified loans and
declining property values.
(2) The Bank recorded a loss on subleased property
in the first quarter of 1992 as a result of the
expiration of a tenant sublease, the
subtenant's notice of intent to vacate, and the
Bank's inability to find a new tenant.
(3) Fluctuations in the provision for income taxes
provided for each quarter are the result of the
estimated annual effective income tax rates
utilized for the periods.
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
PEOPLES BANCORP OF WORCESTER, INC. AND SUBSIDIARIES
NEW DARTMOUTH BANK
GATEWAY FINANCIAL CORPORATION AND SUBSIDIARIES
COHASSET SAVINGS BANK
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
DECEMBER 31, 1993
The following Unaudited Pro Forma Condensed
Combining Balance Sheet presents the combined financial
position of Shawmut National Corporation ("Shawmut") and
Peoples Bancorp of Worcester, Inc. ("Peoples") as of
December 31, 1993, assuming the proposed merger had
occurred as of December 31, 1993. The Unaudited Pro
Forma Condensed Combining Balance Sheet also gives effect
to the pending acquisitions of New Dartmouth Bank ("New
Dartmouth"), Gateway Financial Corporation ("Gateway"),
Cohasset Savings Bank ("Cohasset") and West Newton
Savings Bank ("West Newton") (Pro Forma Pending
Acquisitions). Such pro forma information is based on
historical balance sheet data of Shawmut, Peoples, New
Dartmouth, Gateway, Cohasset and West Newton as of that
date, giving effect to the proposed mergers of Shawmut
and Peoples, New Dartmouth and Gateway under the pooling
of interests method of accounting and the proposed
acquisitions of Cohasset and West Newton accounted for
under the purchase method of accounting. This Unaudited
Pro Forma Condensed Combining Balance Sheet should be
read in conjunction with the Unaudited Pro Forma
Condensed Combined Statement of Income appearing
elsewhere in this Current Report on Form 8-K and the
historical financial statements and notes thereto of
Peoples, New Dartmouth, Gateway, Cohasset and West Newton
which are included in this Current Report on Form 8-K.
The Unaudited Pro Forma Condensed Combining Balance Sheet
is presented for informational purposes only and is not
necessarily indicative of the combined financial position
that would have occurred if the proposed mergers of
Shawmut and Peoples, New Dartmouth and Gateway and the
proposed acquisitions of Cohasset and West Newton had
been consummated on December 31, 1993 or at the beginning
of the periods indicated or which may be obtained in the
future.
<TABLE>
<CAPTION>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
PEOPLES BANCORP OF WORCESTER, INC. AND SUBSIDIARIES
NEW DARTMOUTH BANK
GATEWAY FINANCIAL CORPORATION AND SUBSIDIARIES
COHASSET SAVINGS BANK
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
DECEMBER 31, 1993
<S> <C> <C> <C> <C> <C> <C>
Pro Forma
Pro Forma PRO FORMA Pending Pro Forma
(in thousands) SHAWMUT Peoples Adjustments COMBINED Acquisitions Combined
ASSETS
Cash and due from banks $1,435,286 $ 19,406 $ (10,714) $ 1,443,978 $ 23,077 $ 1,467,055
Interest-bearing deposits
in other banks, federal
funds sold and securities
purchased under agreements
to resell 8,573 16,168 24,741 69,207 93,948
Trading account securities 19,625 19,625 657 20,282
Residential mortgages held
for sale/putback 415,812 415,812 56,638 472,450
Securities
Available for sale, at
fair value 2,596,382 298,289 2,894,671 299,332 3,194,003
Held to maturity 6,394,201 79,001 6,473,202 791,827 7,265,029
Loans, less reserve
for loan losses 14,751,450 455,158 15,206,608 1,912,262 17,118,870
Premises and equipment 307,033 10,033 317,066 17,693 334,759
Foreclosed properties 47,986 2,118 50,104 17,854 67,958
Customers' acceptance
liability 13,747 13,747 13,747
Other assets 1,254,647 10,966 1,265,613 90,791 1,356,404
Total assets $27,244,742 $ 891,139 $(10,714) $28,125,167 $ 3,279,338 $31,404,505
LIABILITIES
Deposits
Demand $ 4,587,156 $ 33,979 $ (10,714) $ 4,610,421 $ 182,057 $ 4,792,478
Savings, money market
and NOW accounts 7,304,708 482,276 7,786,984 1,303,118 9,090,102
Domestic and foreign time 3,405,371 261,128 3,666,499 1,479,415 5,145,914
Total deposits 15,297,235 777,383 (10,714) 16,063,904 2,964,590 19,028,494
Other borrowings 9,187,606 850 9,188,456 101,874 9,290,330
Acceptances outstanding 13,747 13,747 13,747
Accrued taxes and other
liabilities 183,923 6,610 5,000 195,533 37,875 233,408
Notes and debentures 758,941 758,941 758,941
Total liabilities 25,441,452 784,843 (5,714) 26,220,581 3,104,339 29,324,920
SHAREHOLDERS' EQUITY
Preferred stock
Shawmut 178,750 178,750 178,750
Common stock
Shawmut 955 63 to 1,018 to 131 to 1,149 to
85 1,040 151 1,191
Peoples 334 (334) 0 0
Surplus 1,074,793 39,924 271 to 1,114,988 to 122,216 to 1,237,204 to
249 1,114,966 122,196 1,237,162
Retained earnings 541,455 63,256 (5,000) 599,711 51,325 651,036
Net unrealized gain on
securities 9,680 2,782 12,462 1,327 13,789
Treasury stock, common
stock at cost (2,343) (2,343) (2,343)
Total shareholders'
equity 1,803,290 106,296 (5,000) 1,904,586 174,999 2,079,585
Total liabilities and
shareholders' equity $27,244,742 $891,139 $(10,714) $28,125,167 $3,279,338 $31,404,505
See accompanying notes to unaudited pro forma condensed financial information.
</TABLE>
<TABLE>
<CAPTION>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
PEOPLES BANCORP OF WORCESTER, INC. AND SUBSIDIARIES
NEW DARTMOUTH BANK
GATEWAY FINANCIAL CORPORATION AND SUBSIDIARIES
COHASSET SAVINGS BANK
WEST NEWTON SAVINGS BANK AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
DECEMBER 31, 1993
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pro Forma
New Pro Forma Pro Forma Pro Forma West Pro Forma Pending
(in thousands) Dartmouth Adjustments Gateway Adjustments Cohasset Adjustments Newton Adjustments Acquisitions
ASSETS
Cash and due from banks $ 51,142 $ (17,786) $ 44,570 $ $ 1,251 $ (16,900) $ (6,200) $(45,400) $ 23,077
Interest-bearing
deposits in other
banks, federal funds
sold and securities
purchased under
agreements to resell 20,011 40,000 3,121 6,075 69,207
Trading account
securities 657 657
Residential mortgages
held for sale/putback 25,837 30,801 56,638
Securities
Available for sale, at
fair value 163,209 111,386 24,737 299,332
Held to maturity 573,635 125,839 92,353 791,827
Loans, less reserve for
loan losses 846,202 875,722 44,039 146,299 1,912,262
Premises and equipment 5,682 10,212 897 902 17,693
Foreclosed properties 2,349 12,745 2,142 618 17,854
Other assets 35,105 24,564 1,614 3,381 4,891 21,236 90,791
Total assets $1,723,172 $(17,786) $1,275,839 $ $78,458 $(13,519) $257,338 $(24,164) $3,279,338
LIABILITIES
Deposits
Demand $ 79,688 $ 64,927 $ 1,627 $ 35,815 $ 182,057
Savings, money market
and NOW accounts 628,778 559,923 29,850 84,567 1,303,118
Domestic and foreign
time 791,025 547,339 32,295 108,756 1,479,415
Total deposits 1,499,491 1,172,189 63,772 229,138 2,964,590
Other borrowings 95,345 5,445 78 1,006 101,874
Accrued taxes and other
liabilities 29,762 3,994 1,089 3,030 37,875
Total liabilities 1,624,598 1,181,628 64,939 233,174 3,104,339
SHAREHOLDERS' EQUITY
Preferred stock
New Dartmouth 15,215 $ (15,215) 0
Common stock
Shawmut 57 $ 74 131
to 77 to 151
New Dartmouth 4 (4) 0
Gateway 138 (138) 0
Cohasset 100 $ (100) 0
West Newton 172 $ (172) 0
Surplus 40,350 (53) 84,831 (2,912) 7,895 (7,895) 11,734 (11,734) 122,216
to(73) to 122,196
Retained earnings 42,970 (2,571) 10,926 5,286 (5,286) 12,258 (12,258) 51,325
Net unrealized gain on
securities 35 1,292 238 (238) 1,327
Treasury stock, common
stock at cost (2,976) 2,976 0
Total shareholders'
equity 98,574 (17,786) 94,211 0 13,519 (13,519) 24,164 (24,164) 174,999
Total liabilities and
shareholders'
equity $1,723,172 $(17,786) $1,275,839 $ 0 $78,458 $(13,519) $257,338 $(24,164) $3,279,338
See accompanying notes to unaudited pro forma condensed financial information.
</TABLE>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
PEOPLES BANCORP OF WORCESTER, INC. AND SUBSIDIARIES
NEW DARTMOUTH BANK
GATEWAY FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT
OF INCOME
DECEMBER 31, 1993
The following Unaudited Pro Forma Condensed
Combined Statement of Income gives effect to the proposed
mergers of Shawmut, Peoples, New Dartmouth and Gateway by
combining the results of operations of Shawmut for the
three years ended December 31, 1993 (pro forma including
Cohasset and West Newton for 1993, as if the proposed
acquisitions of Cohasset and West Newton had occurred on
January 1, 1993) with the results of operations of
Peoples, New Dartmouth and Gateway for the three years
ended December 31, 1993 on a pooling of interests basis,
assuming the proposed mergers had occurred as of December
31, 1993 (with the exception of New Dartmouth which is
presented for the years ended December 31, 1993 and 1992
and the period from October 10, 1991 (the date operations
commenced) through December 31, 1991). Income before
extraordinary credit and cumulative effect of accounting
changes per common share and weighted average common
shares outstanding are based on the exchange ratios as
specified in the respective merger agreements. The
Unaudited Pro Forma Condensed Combined Statement of
Income should be read in conjunction with the Unaudited
Pro Forma Condensed Combining Balance Sheet appearing
elsewhere in this Current Report on Form 8-K and the
historical financial statements and notes thereto of
Peoples, New Dartmouth, Gateway, Cohasset and West Newton
which are included in this Current Report on Form 8-K.
The Unaudited Pro Forma Condensed Combined Statement of
Income is presented for informational purposes only and
is not necessarily indicative of the combined results of
operations that would have occurred if the proposed
mergers had been consummated on December 31, 1993 or at
the beginning of the periods indicated or which may be
obtained in the future.
<TABLE>
<CAPTION>
SHAWMUT NATIONAL CORPORATION AND SUBSIDIARIES
PEOPLES BANCORP OF WORCESTER, INC. AND SUBSIDIARIES
NEW DARTMOUTH BANK
GATEWAY FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
Year ended December 31,
<S> <C> <C> <C>
1993 1992 1991
(in thousands, except per share data)
INTEREST AND DIVIDEND INCOME
Loans $1,258,000 $1,301,564 $1,468,113
Securities
At lower of aggregate cost or market value 243,123 233,766 42,178
Held to maturity 308,243 270,654 454,705
Residential mortgages held for sale 29,636 27,312 19,243
Interest-bearing deposits in other banks, federal funds
sold and securities purchased under agreements to
resell 13,823 21,666 41,655
Trading account securities 1,562 1,564 2,176
Total 1,848,387 1,856,526 2,028,070
INTEREST EXPENSE
Interest on deposits
Savings, money market and NOW accounts 192,658 272,351 399,903
Domestic and foreign time deposits 237,679 349,771 533,146
Total 430,337 622,122 933,049
Other borrowings 262,594 192,554 218,355
Notes and debentures 72,040 59,321 60,436
Total 764,971 873,997 1,211,840
NET INTEREST INCOME 1,083,416 982,529 816,230
Provision for loan losses 56,268 242,128 486,441
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,027,148 740,401 329,789
NONINTEREST INCOME
Customer service fees 182,557 183,261 180,500
Trust and agency fees 116,845 115,103 112,030
Securities gains, net 12,647 94,103 80,063
Other 102,894 128,794 171,260
Total 414,943 521,261 543,853
NONINTEREST EXPENSES
Compensation and benefits 504,512 474,725 455,250
Occupancy and equipment 169,045 179,507 169,251
Foreclosed properties provision and expense 105,556 178,248 120,327
Other 368,893 321,730 297,074
Total 1,148,006 1,154,210 1,041,902
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY CREDIT
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES 294,085 107,452 (168,260)
Income taxes 8,441 40,898 4,076
INCOME (LOSS) BEFORE EXTRAORDINARY CREDIT AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGES $ 285,644 $ 66,554 $(172,336)
INCOME (LOSS) BEFORE EXTRAORDINARY CREDIT AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGES APPLICABLE TO COMMON
SHARES 270,175 $ 61,771 $(174,598)
INCOME (LOSS) BEFORE EXTRAORDINARY CREDIT AND CUMULATIVE $ 2.42 $ 0.60 $ (2.07)
EFFECT OF ACCOUNTING CHANGES PER COMMON SHARE $ 2.34 $ 0.58 $ (2.02)
WEIGHTED AVERAGE COMMON SHARES 111,441,799 102,126,150 84,301,315
OUTSTANDING to 115,693,415 to 106,152,261 to 86,573,198
See accompanying notes to unaudited pro forma condensed financial information.
</TABLE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED FINANCIAL INFORMATION
NOTE 1:
Certain reclassifications have been made to the
accounts of Peoples, New Dartmouth, Gateway, Cohasset and West
Newton in the accompanying Unaudited Pro Forma Condensed
Combining Balance Sheet and Unaudited Pro Forma Condensed
Combined Statement of Income to conform to Shawmut presentation.
Pro forma results of operations do not reflect nonrecurring items
of income and expense resulting directly from the proposed
mergers. In addition, the accompanying Unaudited Pro Forma
Condensed Combined Statement of Income does not reflect the
following: the cumulative effect of an accounting change due to
the adoption of Statement of Financial Accounting Standards (FAS)
No. 109 of $52,800,000 for Shawmut for the year ended December
31, 1993 and $1,544,000 for Peoples for the year ended December
31, 1992; the cumulative effect of an accounting change due to
the adaption of FAS No. 112 of $6,600,000 for Shawmut for the
year ended December 31, 1993; extraordinary credits from the
utilization of federal tax loss carry forwards of $18,378,000 for
Shawmut for the year ended December 31, 1992; extraordinary
charges relating to debt prepayment penalties of $371,000 and
$2,250,000 for Gateway for the year ended December 31, 1992 and
1991, respectively; and the extraordinary credit for a stock
distribution of $1,287,000 for Peoples for the year ended
December 31, 1991. Intercompany cash and due from bank balances
of $10,714,000 have been eliminated between Shawmut and Peoples.
NOTE 2:
PEOPLES
The pro forma shareholders' equity accounts of Shawmut
and Peoples have been adjusted in the accompanying Unaudited Pro
Forma Condensed Combining Balance Sheet to reflect the issuance
of shares of Shawmut Common Stock in exchange for all of the
outstanding shares of Peoples Common Stock. The number of shares
of Shawmut Common Stock to be issued pursuant to the acquisition
of Peoples (in the range between 6,256,720 and 8,466,938 shares)
is based upon the number of shares of Peoples Common Stock
outstanding as of December 31, 1993 and the exchange ratios
specified in the Peoples merger agreement. The difference
between the par value of the Shawmut Common Stock to be issued
over the par value of the Peoples Common Stock outstanding
($271,000 to $249,000 at December 31, 1993) has been credited to
surplus.
PRO FORMA PENDING ACQUISITIONS
The pro forma shareholders' equity accounts of Shawmut,
as adjusted for Peoples, have been further adjusted to reflect
the issuance of shares of Shawmut Common Stock in exchange for
all of the outstanding shares of New Dartmouth Common Stock and
Gateway Common Stock (Pro Forma Pending Acquisitions). The
number of shares of Shawmut Common Stock to be issued pursuant to
the acquisition of New Dartmouth (in the range between 5,700,400
and 7,709,411 shares) is based upon the number of shares of New
Dartmouth Common Stock outstanding as of December 31, 1993 and
assumes an exchange ratio of 13.438 to 18.174 shares of Shawmut
Common Stock for each share of New Dartmouth Common Stock,
assuming consideration of $310.95 per share. The New Dartmouth
merger agreement provides for additional per share consideration
based on 177 percent of New Darmouth's earnings from October 1,
1993 to the closing date of the merger, subject to certain
potential adjustments. Any additional shares of Shawmut Common
Stock to be issued pursuant to the New Dartmouth transaction will
have a de minimis effect on the unaudited pro forma financial
information for all periods presented. The excess of the par
value of the Shawmut Common Stock to be issued over the par value
of the New Dartmouth Common Stock outstanding ($53,000 to $73,000
at December 31, 1993) has been charged to surplus. The equity
accounts of New Dartmouth reflect the expected retirement of
outstanding New Dartmouth Preferred Stock prior to consummation
of the New Dartmouth merger at the December 31, 1993 redemption
price of $104.58 per share ($17,786,000). The excess
($2,571,000) of redemption price over the stated value of New
Dartmouth Preferred Stock ($15,215,000) has been charged to
retained earnings.
The number of shares of Shawmut Common Stock to be
issued pursuant to the acquisition of Gateway (7,414,475 shares)
is based upon the number of shares of Gateway Common Stock
outstanding as of December 31, 1993 and the exchange ratio
specified in the Gateway merger agreement. The difference
between the par value of the Shawmut Common Stock to be issued
over the par value of the Gateway Common Stock outstanding
($64,000 at December 31, 1993) has been credited to surplus. The
equity accounts of Gateway reflect the retirement of Gateway
Treasury Stock ($2,976,000) upon consummation of the Gateway
merger with a charge to surplus.
The shareholders' equity accounts of Cohasset and West
Newton have been eliminated and reflect the acquisition of
Cohasset and West Newton by Shawmut for an aggregate purchase
price of $16,900,000 and $45,400,000, respectively. The excess
of the purchase price over the recorded shareholders' equity
accounts at December 31, 1993 has been reflected as goodwill
(other assets) in the accompanying Unaudited Pro Forma Condensed
Combining Balance Sheet. No goodwill amortization has been
reflected in the accompanying Unaudited Pro Forma Condensed
Combined Statement of Income as the annual amount of amortization
is de minimis.
NOTE 3:
Pro forma earnings per share amounts in the
accompanying Unaudited Pro Forma Condensed Combined Statement of
Income are based on the weighted average number of common shares
of the constituent companies outstanding during each period, as
adjusted for the minimum and maximum exchange ratios as specified
in the respective merger agreements.
PEOPLES
Shares of Peoples Common Stock have been adjusted to
the equivalent shares of Shawmut Common Stock for each period
assuming an exchange ratio of 1.874 to 2.536 shares of Shawmut
Common Stock for each share of Peoples Common Stock.
PRO FORMA PENDING ACQUISITIONS
Shares of New Dartmouth Common Stock have been adjusted
to the equivalent shares of Shawmut Common Stock for each period
assuming an exchange ratio of 13.438 to 18.174 shares of Shawmut
Common Stock for each share of New Dartmouth Common Stock,
assuming consideration of $310.95 per share (see Note 2 for
further discussion). Shares of Gateway Common Stock have been
adjusted to the equivalent shares of Shawmut Common Stock for
each period assuming an exchange ratio of 0.559 shares of Shawmut
Common Stock for each share of Gateway Common Stock.
NOTE 4:
The expenses associated with the proposed acquisitions
are not reflected in the accompanying Unaudited Pro Forma
Condensed Combined Statement of Income. These expenses are not
reflected in the accompanying Unaudited Pro Forma Condensed
Combining Balance Sheet as such expenses are not considered
material.
NOTE 5:
Retained earnings of Peoples includes approximately
$11,500,000 which is classified for federal income tax purposes
as a reserve for loan losses. Deferred income taxes were not
provided on such amounts because Peoples Bank, a wholly owned
subsidiary of Peoples, is a savings bank. Upon the merger of
Peoples Bank with and into Shawmut Bank, National Association, an
indirect wholly owned subsidiary of Shawmut, Peoples Bank will
lose its status as a savings bank and income taxes previously not
provided will become payable. An adjustment of $5,000,000 has
been reflected in the accompanying Unaudited Pro Forma Condensed
Combining Balance Sheet to reflect this, which represents taxes
payable at a combined federal and state tax rate of 43 percent.
This adjustment is not reflected in the accompanying Unaudited
Pro Forma Condensed Combined Statement of Income.
