UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 34-0-25158
BANCORP CONNECTICUT, INC.
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(Exact name of registrant as specified in its charter)
Delaware 061394443
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
121 Main Street, Southington, CT 06489
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code 860-628-0351
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Not applicable Not applicable
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
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(Title of class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of Bancorp Connecticut, Inc. (2,364,552 shares) totalled $55,862,541 (based upon
the closing price of $23.625 per share as quoted on the Nasdaq National Market
tier of The Nasdaq Stock Market) on March 20, 1997.
2,557,865 shares of Bancorp Connecticut, Inc. Common Stock
were outstanding at March 19, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents and information are incorporated by reference
herein to the extent indicated under the appropriate item:
(1) The annual report to shareholders of Bancorp Connecticut,
Inc., for the fiscal year ended December 31, 1996 (hereinafter
referred to as the "1996 Annual Report"); and
(2) Management's definitive proxy statement in connection
with the 1997 annual meeting of the stockholders of
Bancorp Connecticut, Inc. expected to be filed by
April 9, 1997 under Regulation 14A of the SEC's General
Rules and Regulations under the Securities Exchange Act
of 1934 (hereinafter referred to as the "1997 Proxy
Statement").
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PART I
ITEM 1 - BUSINESS.
The main office of Bancorp Connecticut, Inc. (the "Company")
and of Southington Savings Bank (the "Bank") is located at 121
Main Street, Southington, Connecticut 06489. The telephone
number is 860-628-0351.
The Company was incorporated under the laws of the State of Delaware on
March 31, 1994, to operate principally as the bank holding company of the Bank.
The Company acquired all of the Bank's outstanding common stock on November 17,
1994, in a one-for-one exchange with the Bank's existing shareholders. The Bank
is the sole subsidiary of the Company and its principal asset.
General
The Bank is a Connecticut chartered capital stock savings bank. The
Bank was organized in 1860, and in 1986 it converted from a mutual to a capital
stock savings bank. The Bank is subject to supervision, examination and
regulation by the Connecticut Banking Commissioner. The Bank's deposits are
insured by the Federal Deposit Insurance Corporation (the "FDIC"), which also
has supervisory and regulatory authority over the Bank. The Bank is a member of
the Federal Home Loan Bank (the "FHLB") of Boston. The Company is subject to
regulation by the Federal Reserve Board as the registered bank holding company
of the Bank.
The Bank's primary market area consists of the Town of Southington,
Connecticut and, to a lesser extent, the contiguous Towns of Bristol, Cheshire
and Plainville. Southington is located approximately 18 miles from Hartford, 25
miles from New Haven and 9 miles from Waterbury.
The Bank's principal business consists of attracting and accepting
deposits from the general public and investing those deposits, together with
funds generated by fees and other income, in various types of loans and
investments, including residential loans, consumer loans, commercial loans and
securities.
The Bank's business strategy is to operate primarily as an innovative
full-service community financial institution, offering a wide range of consumer
and commercial services. These services include checking accounts, NOW accounts,
regular savings accounts, money market accounts, individual retirement accounts,
savings certificates, commercial demand deposit accounts, residential real
estate loans, home equity loans and lines of credit, consumer loans, secured and
unsecured commercial loans, letters of credit, credit card services and cash
management
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services. The Bank makes available Savings Bank Life Insurance ("SBLI"). The
Bank also has a trust department which provides trust services for families and
individuals, as well as corporate pension and employee benefits administration.
The Bank also provides investment brokerage services through Liberty Securities
Corporation, an independent broker-dealer, which sells non-deposit products,
such as mutual funds, tax exempt securities and annuities.
The main focus of the Bank's lending activities is the origination of
commercial and industrial loans, consumer loans and residential mortgage loans.
The Bank also makes auto loans and student loans. In recent years, the Bank has
concentrated its efforts on making variable rate loans or loans that reprice on
a regular basis. Within the last three years, the Bank's primary residential
mortgage product has been a loan with a rate fixed for an initial term of 3, 5,
7, or 10 years which adjusts annually thereafter. In the future, the Bank
expects to place a greater emphasis on the growth of its commercial loan
portfolio.
The Bank has procedures in place to sell selected fixed rate
residential mortgages into the secondary mortgage market. The sale of fixed rate
mortgages allows the Bank to generate both a higher volume of fixed rate
mortgages without impairing its asset/liability management and additional
service fee income. During 1996, the Bank continued to supplement its own loan
originations by purchasing automobile loans and the guaranteed portion of Small
Business Administration loans.
The principal sources of funds for the Bank's activities are deposit
accounts, amortization and prepayment of loans, borrowings from the FHLB of
Boston, repurchase and reverse repurchase agreements and funds provided from
operations. The Bank's principal sources of income are interest on loans and
interest and dividends on investment securities. In recent years, the Bank also
has realized income from the sale of loans and investment securities. To a
lesser extent, the Bank realizes other non-interest income, including income
from service charges on deposit accounts, income from trust and brokerage
services and income from SBLI sales.
The Bank conducts its banking operations through three full service
offices, one limited purpose branch, one drive-in center, and one mortgage
origination office, all of which are located in Southington. See Item 2 below.
As of February 28, 1997, the Bank had 80 full-time employees and 54 part-time
employees. The Company has no paid employees.
The Bank has not obtained a material portion of its deposits from a
single person or small group of persons. No material portion of the Bank's loans
is concentrated within a single industry or group of industries.
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The Bank primarily makes commercial, residential and consumer loans to
customers located within its primary market area in the State of Connecticut.
The majority of the Bank's loan portfolio is collateralized by residential real
estate.
The Bank has not engaged in material research activities relating to
the development of new services or the improvement of existing banking services
during the past two years. However, during that time, the Bank's officers and
employees continually have engaged in marketing activities, including evaluation
and development of new services. During the latter part of 1996, the Bank hired
a Chief Information Officer to review the Bank's current utilization of
available technology and implement a strategy to upgrade systems for greater
flexibility and effectiveness. Although the Bank had no material commitments for
capital expenditures at year end 1996, the results of the data processing
analysis may warrant systems enhancement in the future. The Bank has no present
plans regarding a new line of business that will require an investment of a
material amount of its total assets.
The Bank's business is not seasonal. Based upon the Bank's present
business activities, compliance with Federal, State and local provisions
regulating the discharge of materials into the environment will not materially
affect the Bank's or the Company's capital expenditures, earnings or competitive
position.
Competition
The banking business in Southington, and in Connecticut generally, is
highly competitive. Intense market demands, economic pressures, fluctuating
interest rates and increased customer awareness of product and service
differences among financial institutions have forced such institutions to
continue to diversify their services, increase returns on deposits and become
more cost effective.
The Bank experiences substantial competition in attracting and
retaining deposits and in making loans of all types. The Bank competes for
deposit accounts with other savings banks, commercial banks, savings and loan
associations, credit unions, insurance companies, securities brokerage houses
and money market mutual funds. Competition for deposits includes competition not
only from other deposit accounts, but also competition with various other
investment vehicles, such as corporate and governmental securities and mutual
funds, which may offer higher rates of return. Interest rates, convenience of
office locations, service and marketing are all significant factors in the
Bank's competition for deposits. From time to time, competing financial
institutions set rates higher than market rates to attract or retain deposits, a
fact which may cause
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upward pressure on the Bank's rate structure or a loss of deposits.
Competition for loans comes from other savings banks, commercial banks,
savings and loan associations, insurance companies, consumer finance companies,
mortgage companies, credit unions and other lending institutions located
throughout the United States. Recent proposed and completed banking combinations
in New England have increased and will increase the resources of several major
banks and other financial institutions that operate many offices over a wide
geographic area, including the Bank's primary market area. Because of their
greater capitalization, these other institutions have substantially higher
lending limits than the Bank. The Bank competes for loan originations through
the interest rates and loan fees it charges and the efficiency and quality of
services it provides. Competition is affected by the general availability of
lendable funds, general and local economic conditions, current interest rate
levels and other factors which are not readily predictable.
The Bank's market area is served by a significant number of financial
institutions, with eight offices (not including the Bank's three offices) of
banking institutions and credit unions in Southington alone. At December 31,
1996, there were approximately forty-one mortgage lenders operating in the towns
of Southington, Bristol, Cheshire and Plainville.
In addition, recent Federal and Connecticut legislation likely will
further increase competition for deposits and loans in the Bank's primary market
area. Effective June 1, 1997, unless a state prohibits all interstate mergers,
Federal law generally permits interstate mergers between banks without regard to
whether such mergers are prohibited under the law of any state. States also may
"opt in" and permit such mergers prior to June 1, 1997. Finally, Federal law
permits banks to branch into other states if a state "opts-in" to this
arrangement.
In 1995, Connecticut affirmatively "opted-in" to permit interstate
mergers and acquisitions, the establishment of Connecticut chartered banks by
foreign bank holding companies and interstate de novo branching, subject to
certain reciprocity requirements. As permitted by Federal law, Connecticut law
places a minimum permissible age of 5 years on the target bank and a 30% limit
on concentration of deposits in both interstate and intrastate acquisitions.
This legislation may result in increased competition.
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Regulation and Supervision
General
As a Connecticut-chartered capital stock savings bank, the deposits of
which are insured by the FDIC, the Bank is subject to extensive regulation and
supervision by both the Connecticut Banking Commissioner and the FDIC. The
Company also is subject to certain regulations of the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). This governmental
regulation is intended primarily to protect depositors and the FDIC's Bank
Insurance Fund, not the Company's shareholders.
Connecticut Regulation
The Connecticut Banking Commissioner regulates the Bank's internal
organization as well as its deposit, lending and investment activities. The
approval of the Connecticut Banking Commissioner is required, among other
things, for the establishment of branch offices and business combination
transactions. The Connecticut Banking Commissioner conducts periodic
examinations of the Bank. The FDIC also regulates many of the areas regulated by
the Connecticut Banking Commissioner.
Connecticut banking laws grant banks broad lending authority. Subject
to certain limited exceptions, however, total secured and unsecured loans made
to any one obligor pursuant to this statutory authority may not exceed 25% of
the Bank's equity capital and reserves for loan and lease losses.
Connecticut banking law prohibits the Bank from paying dividends in
certain situations. For a further description of this limitation, see Item 5
below.
Under Connecticut banking law, no person may acquire beneficial
ownership of more than 10% of any class of voting securities of a
Connecticut-chartered bank, or any bank holding company of such a bank, without
prior notification of, and lack of disapproval by, the Connecticut Banking
Commissioner. Similar restrictions apply to any person who holds in excess of
10% of any such class and desires to increase its holdings to 25% or more of
such class.
Any Connecticut-chartered bank meeting certain statutory requirements
may, with the Connecticut Banking Commissioner's approval, establish and operate
branches in any town or towns within the state. In 1996, legislation was enacted
which permits banks to establish mobile branches with the Banking Commissioner's
approval.
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Connecticut law presently permits Connecticut banks to engage in stock
acquisitions of, and mergers with, depository institutions in other states with
reciprocal legislation. Many other states have enacted reciprocal legislation.
Several interstate mergers and acquisitions have been completed which involve
Connecticut bank holding companies or banks with offices in the Bank's primary
market area and bank holding companies or banks headquartered in other states.
As noted above, in 1995, Connecticut affirmatively "opted-in" to permit
interstate mergers and acquisitions, the establishment of Connecticut chartered
banks by foreign bank holding companies and interstate de novo branching,
subject to certain reciprocity requirements. Connecticut law also places a
minimum permissible age of 5 years on the target bank and a 30% limit on
concentration of deposits in both interstate and intrastate acquisitions.
Legislation was enacted in 1996 which expressly permits an out-of-state bank to
merge or consolidate with or acquire a branch of another out-of-state bank which
has a branch in Connecticut. This legislation may result in further increased
competition.
In 1996, legislation was enacted which requires the board of directors
of each Connecticut bank to adopt annually and to frequently and periodically
review an investment policy governing investments by such bank, which policy
must establish standards for the making of prudent investments. In addition,
Connecticut law now permits Connecticut banks to sell fixed and variable rate
annuities if licensed to do so by the Connecticut Insurance Commissioner.
Further, legislation was enacted in 1996 which expands the ability of
Connecticut banks to invest in debt and equity securities. Prior to the
legislation, Connecticut banks could invest in debt securities without regard to
any other liability to the Connecticut bank of the maker or issuer of the debt
securities, if the securities were rated in the three highest rating categories
or otherwise deemed to be a prudent investment, and so long as the total amount
of such debt securities did not exceed 15% of the bank's total equity capital
and reserves for loan and lease losses and 15% of its assets. In 1996, these
percentages each were increased to 25%. In addition, prior to 1996, the
percentage limitation described above also applied to certain government and
agency obligations. As a result of the 1996 legislation, this limitation was
deleted for such obligations.
The 1996 legislation also expanded the ability of Connecticut banks to
invest in equity securities. Connecticut banks now may invest in such securities
without regard to any other liability to the Connecticut bank of the issuer of
such
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securities, so long as the total amount of equity securities of any one issuer
does not exceed 25% of the bank's total equity capital and reserves for loan and
lease losses and 25% of its assets. Prior to the enactment of this legislation,
Connecticut banks could invest up to 15% of their assets in the equity
securities of corporations incorporated and doing a major portion of their
business in the U.S., and only if the investment security was within the top
three rating categories or otherwise deemed to be a prudent investment by the
bank.
Proposed 1997 Connecticut legislation would permit Connecticut banks to
sell insurance, directly or indirectly. In addition, other proposed Connecticut
legislation would permit the organization of community banks with a minimum
equity capital of $3 million (as opposed to the current $5 million for other
Connecticut banks), and would clarify certain powers of Connecticut banks.
FDIC Regulation
The Bank's deposit accounts are insured by the FDIC, generally, to a
maximum of $100,000 for each insured depositor. As with all state-chartered,
FDIC insured banks, the Bank is subject to extensive supervision and examination
by the FDIC. FDIC insured banks also are subject to FDIC regulations governing
many aspects of their business and operations, including types of deposit
instruments offered and permissible methods of acquisition of funds.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), in September, 1992, the FDIC implemented a system of
risk-related deposit insurance assessments. Under this system, for the first six
months and the second six months of 1996, insurance premiums for all banks
varied between 0.0% and .27% of total deposits, depending upon the capital level
and supervisory rating of the institution. The FDIC has stated that it will
reevaluate the adequacy of its assessment schedule every six months, and the
FDIC may increase or decrease premium levels by up to 5 basis points each six
months. The FDIC has announced that the assessment schedule for the first six
months of 1997 will remain the same as in 1996. Also, as a result of the
enactment of the Deposit Insurance Funds Act of 1996 (the "Funds Act"), there is
no longer a minimum annual assessment amount of $2,000, and banks, such as the
Bank, which paid the minimum assessment of $500 for the fourth quarter of 1996
were issued a refund.
The Funds Act also authorizes the Financing Corporation ("FICO") to
levy assessments on Bank Insurance Fund ("BIF") -assessable deposits and
stipulates that, from 1997 to 1999, the rate must equal one-fifth the FICO
assessment rate that is applied to deposits assessable by the Savings
Association
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Insurance Fund. The FICO rate for the Bank is not tied to FDIC risk
classification. The FICO BIF 1997 annual rate for the Bank is 1.296 basis
points.
Under the FDIC's risk-based capital requirements, each FDIC-insured
bank is required to maintain minimum levels of "capital" based the institution's
total "risk-weighted assets." For purposes of these requirements, "capital" is
comprised of Tier 1 capital and Tier 2 capital. Tier 1 capital consists
primarily of common stock and limited amounts of perpetual preferred stock. Tier
2 capital consists primarily of the allowance for loan losses (subject to
certain limitations) and certain preferred stock, subordinated debt and
convertible securities. In determining total capital, the amount of Tier 2
capital may not exceed the amount of Tier 1 capital. A bank's total "risk
weighted assets" are determined by assigning the bank's assets and off-balance
sheet items (e.g., letters of credit) to one of four risk categories based upon
their relative credit risk. Under the FDIC regulations, the greater the risk
associated with an asset, the greater the amount of such assets that will be
subject to the capital requirements. Effective January 1, 1998, those banks
whose trading activities equal 10% or more of total assets or $1 billion or more
must incorporate capital charges for certain market risks into the risk-based
capital ratio. All FDIC-insured banks are required to maintain their capital at
or above certain minimum ratios. At December 31, 1996, the Bank's capital
exceeded these minimums. See "Management's Discussion and Analysis-Liquidity and
Capital Resources" in the Annual Report for a more detailed description of these
requirements and the Bank's capital position at December 31, 1996.
In addition, FDICIA categorizes banks based on five separate capital
levels and triggers certain mandatory and discretionary federal banking agency
responses for institutions that fall below certain capital levels. These
categories range from "well capitalized" for the most highly capitalized
institutions to "critically undercapitalized" for the least capitalized
institutions. Under regulatory definitions, an institution is considered "well
capitalized" (the highest rating) if its leverage capital ratio is 5% or higher,
its Tier 1 risk based capital ratio is 6% or higher, its total risk based
capital ratio is 10% or higher and it is not subject to certain regulatory
orders. On December 31, 1996, the Bank had a leverage capital ratio of 10.3%, a
Tier 1 risk based capital ratio of 15.2% and a total risk based capital ratio of
16.4%. At December 31, 1996, the Bank was not subject to any regulatory order.
FDICIA also limits the ability of FDIC-insured banks, such as the Bank,
to acquire and retain equity investments. Generally, state banks may hold equity
securities only to the extent permitted for national banks. However, FDICIA also
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permits certain state banks to acquire or retain equity investments in an amount
up to 100% of Tier 1 capital in either (1) common or preferred stock listed on a
national securities exchange, or (2) shares of a registered investment company.
The Bank applied for and was granted this exception.
Additionally, FDICIA generally prohibits a FDIC-insured bank from
making investments of more than 15% of its total capital in money market
preferred stocks and adjustable rate preferred stocks. On December 29, 1995, the
FDIC granted the Bank permission to make such investments in amounts up to 100%
of its Tier 1 leverage capital.
The FDIC regulations that implement FDICIA require an insured state
bank to obtain the FDIC's prior consent before directly, or indirectly through a
majority owned subsidiary, engaging "as principal" in any activity that is not
permissible for a national bank unless one of the exceptions contained in the
regulation applies. The Company does not believe that this regulation has had or
will have a material impact on the business of the Bank.
Pursuant to FDICIA, the federal bank regulatory agencies have issued
rules establishing standards for safety and soundness at FDIC-insured
institutions and their holding companies. These standards formalize in
regulation the fundamental standards used by the federal bank regulatory
agencies to assess the operational and managerial qualities of an institution.
The rules establish operational, managerial, asset quality and earnings
standards for FDIC-insured banks and their holding companies and standards that
prohibit as an unsafe and unsound practice the payment of compensation that is
excessive or could lead to material financial loss to such institutions. These
standards are designed to identify potential safety and soundness concerns and
ensure that action is taken to address those concerns before they pose a risk to
the deposit insurance funds.
The FDIC may terminate FDIC insurance of the Bank's deposits after
notice and a hearing upon a finding by the FDIC that the Bank has engaged in
unsafe or unsound practices or is in an unsafe and unsound condition to continue
operations or has violated any applicable law, regulation, rule or order of, or
conditions imposed by, the FDIC. The Bank is not aware of any practice,
condition or violation that might lead to termination of its deposit insurance.
Federal Reserve System Regulation
Under the regulations of the Federal Reserve System, depository
institutions such as the Bank are required to maintain reserves against their
transaction accounts. In 1996, these regulations generally required the
maintenance of reserves of
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3.0% against transaction accounts of $52.0 million or less and 10.0% of the
amount of such accounts in excess of such amount. In December, 1996, the Federal
Reserve Board decreased the amount of transaction accounts subject to the
reserve requirement ratio of 3% from $52 million to $49.3 million. These amounts
and percentages are subject to further adjustment by the Federal Reserve Board.
The Company is subject to regulation by the Federal Reserve Board as a
registered bank holding company. The Federal Bank Holding Company Act of 1956,
as amended (the "BHCA"), under which the Company registered, limits the types of
companies which the Company may acquire or organize and the activities in which
they may engage. In general, a bank holding company and its subsidiaries are
prohibited from engaging in or acquiring direct control of any company engaged
in non-banking activities unless such activities are so closely related to
banking or managing or controlling banks as to be a proper incident thereto. The
Company has not determined which, if any, of these or other permissible
non-banking activities it might seek to engage in.
The Federal Reserve Board has established capital adequacy guidelines
for bank holding companies that are similar to the FDIC's capital requirements
described above. As of December 31, 1996, the Company was in full compliance
with all applicable capital requirements, and management believes that the
Company will maintain such compliance.
The BHCA requires, with certain exceptions, a bank holding company to
obtain the Federal Reserve Board's approval prior to acquiring more than 5% of
the outstanding voting stock of any bank or bank holding company, acquiring all
or substantially all of the assets of a bank or merging or consolidating with
another bank holding company.
Effective April 21, 1997, the Federal Reserve Board adopted
comprehensive changes to certain banking regulations (the "1997 Amendments").
The 1997 Amendments include amendments to Regulation Y, which implements the
BHCA's prior approval requirements. The changes are intended to improve the
competitiveness of bank holding companies by eliminating unnecessary regulatory
burdens and operating restrictions and by streamlining the application/notice
process. Among other changes, the 1997 Amendments incorporate a streamlined and
expedited review process for bank acquisition proposals by well-run bank holding
companies; eliminate certain notice and approval requirements and streamline
others that involve non-banking proposals by well-run bank holding companies;
and reorganize and expand the list of permissible non-banking activities.
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As described above, Connecticut law specifically permits Connecticut
bank holding companies and banks to acquire or be acquired by banks or bank
holding companies in other states with reciprocal merger and acquisition laws.
As also described above, recent federal and Connecticut legislation is likely to
increase competition. Federal antitrust laws place limitations on the
acquisition of banks and other businesses.
Under the BHCA, the Company, the Bank and any other subsidiaries
generally are prohibited from engaging in certain reciprocal arrangements in
connection with any extension of credit or provision of any property or
services. The 1997 Amendments contain significant amendments to the Federal
Reserve Board's rules regarding tying arrangements. The 1997 Amendments remove
certain Federal Reserve Board-imposed tying restrictions on bank holding
companies and their non-bank subsidiaries and create exceptions from the
statutory restrictions on bank tying arrangements to allow banks greater
flexibility to package products with their affiliates. These changes contained
in the 1997 Amendments are designed to enhance competitiveness in banking and
nonbanking products.
The Bank is subject to certain restrictions imposed by the Federal
Reserve Act on making any investments in the stock or other securities of the
Company or any of the Company's subsidiaries, and the taking of such stock or
securities as collateral for loans to any borrower.
The Bank also is subject to certain restrictions imposed by the Federal
Reserve Act on the amount of loans it can make to the Company or its other
affiliates. Such loans must be collateralized as provided by the Federal Reserve
Act. The amount of such loans may not exceed (when aggregated with certain other
transactions between the Bank and the Company) 10% of the capital stock and
surplus of the Bank. Since formation of the Company, there have been no loans
made by the Bank to the Company.
The BHCA requires the Company to file reports of operations annually
with the Federal Reserve Board. The Company, the Bank and any other subsidiaries
of the Company also are subject to examination by the Federal Reserve Board. In
addition, the Company is registered as a bank holding company with the
Connecticut Banking Commissioner under the Connecticut Bank Holding Company and
Bank Acquisition Act.
Effect of Governmental Policy
Banking is a business that depends on interest rate differentials. One
of the most significant factors affecting the Company's and the Bank's earnings
is the difference between
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(1) the interest rates paid by the Bank on its deposits and its other borrowings
and (2) the interest rates received by the Bank on loans extended to its
customers and securities held in the Bank's investment portfolio. The value and
yields of the Bank's assets and the rate paid on its liabilities are sensitive
to changes in prevailing market rates of interest. Thus, the earnings and growth
of the Bank will be influenced by general economic conditions, the monetary and
fiscal policies of the Federal government and the policies of regulatory
agencies, particularly the Federal Reserve Board, that implement national
monetary policy. The nature and impact of any future changes in monetary
policies cannot be predicted.
Effective January 1, 1995, Connecticut's banking laws were recodified.
The recodification generally combined and made uniform numerous provisions
concerning the organization, administration and powers of the various types of
Connecticut-chartered banks. In so doing, it permitted, for the first time,
interstate mergers and asset acquisitions between state-chartered commercial
banks. It also liberalized the ability of out-of-state banks to make loans in
Connecticut. The recodification is likely to increase competition.
The present bank regulatory climate is undergoing significant change,
both as it affects the banking industry itself and as it affects competition
between banks and non-banking financial institutions. There has been significant
regulatory change in the regulation and operations of savings associations, in
the bank merger and acquisition area, in the products and services banks can
offer, and in the non-banking activities in which bank holding companies can
engage. Partly as a result of these changes, banks are competing actively with
other types of depository institutions and with non-bank financial institutions,
such as money market funds, brokerage firms, insurance companies and other
financial services enterprises. It is not possible at this time to assess what
impact these changes in the regulatory climate ultimately will have on the Bank
and/or the Company.
Moreover, certain legislative and regulatory proposals that could
affect the Bank and/or the Company and/or the banking business in general are
pending, or may be introduced, before the United States Congress, the
Connecticut General Assembly and various governmental agencies. These proposals
include measures that may alter further the structure, regulation and
competitive relationship of financial institutions and proposals that may
subject the Bank and/or the Company to increased regulation, disclosure and
reporting requirements. In addition, the various banking regulatory agencies
frequently propose rules and regulations to implement and enforce existing
legislation. It cannot be predicted whether or in what form any legislation or
regulations will be enacted or the extent to which the business
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of the Bank and/or the Company will be affected thereby.
Regional Economy
In 1996, the state of Connecticut experienced a relatively flat
regional economy. Although interest margins declined slightly, many banks were
able to increase profitability, however, problem real estate and commercial
loans continue to have a negative impact on the industry. The present business
climate remains uncertain as banking institutions struggle with tensions
resulting from the continued loss of jobs in their market area, continued strict
bank regulation and continued consolidation in the Connecticut banking market.
ITEM 2 - PROPERTIES.
The following table sets forth the location of the Bank's full service
offices and other related information:
Office Location Status
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Main Office ............ 121 Main St. Owned
Southington, CT
Queen Corner Office .... 900 Queen St. Owned
Southington, CT
South-End Office ....... 921 Meriden Waterbury Tpke. Owned
Southington, CT
Drive-In Center ........ 30 Berlin Ave. Owned
Southington, CT
Since January, 1995, the Bank has operated a limited purpose branch
banking facility at Southington High School, which is located at 720 Pleasant
Street, Southington, Connecticut. The High School Branch processes only deposits
and withdrawals and is open only during school hours. This branch is operated on
a cooperative basis: the Bank supplies management and equipment, the Town of
Southington provides the required space, and students staff the branch. The Bank
believes that the High School Branch is the only branch bank of its kind in the
State of Connecticut.
The Bank leases approximately 5,989 square feet at 98 Main Street in
Southington to house the administrative offices of its audit, human resources,
marketing, finance, managed assets, consumer banking and general services
divisions. The lease has an expiration date of December 31, 1997, with an option
to extend the lease for three (3) one year periods.
- 13 -
<PAGE>
The Bank leases approximately 1,200 square feet at 188 North Main
Street in Southington for its residential mortgage
origination function. The lease has an expiration date of October 31, 1998, with
an option to extend the lease for three (3) one year periods.
The Bank leases sufficient space at 55 Meriden Avenue in Southington
(Bradley Memorial Hospital) to support a free standing automatic teller machine.
The lease has an expiration date of July 31, 2000, with no option to extend the
lease.
The Bank owns an approximately 35,000 square foot lot located at 918
Meriden-Waterbury Turnpike, which is adjacent to the Bank's South-End office.
The lot is undeveloped except for a residential house which the Bank leases.
The Bank also owns and is holding for future expansion three separate
properties all located adjacent to its Main Office parking facilities. The
properties consist of a residential home on an approximately 10,500 square foot
lot located at 50 Berlin Avenue, a two-family residential home on an
approximately 11,600 square foot lot located at 43-45 Vermont Avenue and an
approximately 14,800 square foot undeveloped lot located at 31 Vermont Avenue.
The Bank uses the residential home at 50 Berlin Avenue as a storage facility for
office supplies. The two-family residence at 43-45 Vermont Avenue is leased.
ITEM 3 - LEGAL PROCEEDINGS.
On April 11, 1996, a lawsuit filed by certain borrowers and a related
company in 1994 against the directors and officers of the Bank was withdrawn,
and all of the related foreclosure actions were resolved. The consequences of
the resolution of the cases did not have a material effect on the Bank's
financial condition or results of operations.
Neither the Company nor the Bank is presently a party to any legal
proceedings the adverse outcome of which would likely have, in management's
belief, a material effect on the Company's or the Bank's financial condition or
results of operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of 1996, no matter was submitted to a vote of
stockholders of the Company.
- 14 -
<PAGE>
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been issued and outstanding since
November 17, 1994, when the Company acquired all of the Bank's outstanding
common stock in a one-for-one exchange with the Bank's existing shareholders. As
of March 19, 1997, 2,557,865 shares of Common Stock were issued and outstanding
and were held by approximately 1,880 shareholders of record.
The Company's Common Stock is traded in the over-the-counter market and
is quoted on the National Market tier of The National Association of Securities
Dealers Automated Quotation ("Nasdaq") Stock Market under the symbol "BKCT."
Quarterly high and low bid prices for 1995 and 1996 are included in the 1996
Annual Report under the heading "Market Price and Dividends" and are
incorporated herein by reference. Such bid prices reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
On February 1, 1996, the Company announced that its Board of Directors
had authorized the repurchase of up to fifteen percent (15%) of its currently
outstanding shares. The Company will make purchases from time to time in the
open market through the period ending July 31, 1997. The Company will make the
purchases with available corporate funds. The timing and amount of the Company's
purchases will depend on market conditions and corporate requirements. The
Company intends to hold the repurchased shares in treasury for general corporate
purposes. As of February 28, 1997, a total of 210,052 shares had been
repurchased since the repurchase program was authorized in 1996.
For the foreseeable future, the only substantial source of funds
available to the Company for the declaration of dividends will be dividends
declared and paid by the Bank on Bank common stock. As the holder of Bank common
stock, the Company is entitled to receive dividends when, as and if declared by
the Bank board of directors out of funds legally available therefor. The Bank
may pay cash dividends out of the Bank's net profits. For purposes of this
restriction, "net profits" means the remainder of all earnings from operations.
Further, the total of all dividends declared by the Bank in any calendar year
may not exceed the sum of the Bank's net profits for the year in question
combined with its retained net profits from the preceding two calendar years.
Additionally, earnings appropriated to reserves for loan losses and deducted for
federal income tax purposes are not available for cash dividends without the
payment of taxes at the then current income tax rates on the amount used. The
Connecticut Banking Commissioner and/or the FDIC may limit the Bank's ability to
pay dividends.
- 15 -
<PAGE>
The Bank has paid consecutive quarterly cash dividends since the
quarter ended December 31, 1992. The Company paid its first quarterly dividend
during the quarter ended March 31, 1995. No assurances can be given that further
dividends will be paid or approved. Dividend history for the Company from
January 1, 1995 through December 31, 1996 is included in the 1996 Annual Report
under the heading "Market Price and Dividends" and is incorporated herein by
reference. The Bank also paid a 20% stock dividend on June 1, 1993 and a 6-for-5
stock split effected in the form of a stock dividend on June 19, 1996.
ITEM 6 - SELECTED FINANCIAL DATA.
The required information is included in the 1996 Annual Report under
the heading "Selected Consolidated Financial Data," and is incorporated herein
by reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The required information is included in the 1996 Annual Report under
the heading "Management's Discussion and Analysis" and is incorporated herein by
reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The report of the Company's independent accountants and the Company's
Consolidated Statements of Condition at December 31, 1996 and 1995, and the
related Consolidated Statements of Income, Shareholders' Equity and Cash Flows
for each of the three years in the period ended December 31, 1996, and the Notes
to Financial Statements appear in the 1996 Annual Report and are incorporated
herein by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
- 16 -
<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The required information is included in the 1997 Proxy Statement under
the heading "Election of Directors" and is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION.
The required information is included in the 1997 Proxy Statement under
the heading "Election of Directors - Executive Compensation" and is incorporated
herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
As of February 28, 1997, there were no persons or groups (as that term
is used in Section 13(d)(3) of the Exchange Act) known to the Company who may be
deemed to own beneficially more than 5% of the Common Stock.
Certain other required information under this item is included in the
1997 Proxy Statement under the heading "Election of Directors - Stock Ownership
of Directors and Officers" and is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The required information is included in the 1997 Proxy Statement under
the headings "Election of Directors Transactions With Management", "- Certain
Business Relationships", "- Indebtedness of Management and Others" and "-
Compensation Committee Interlocks and Insider Participation" and is incorporated
herein by reference.
- 17 -
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report.
(1) Financial Statements
The following documents filed as part of this report are
incorporated herein by reference from the indicated pages of
the 1996 Annual Report.
Financial Statement Page or Pages
------------------- -------------
Report of Independent Accountants 17
Consolidated Statements of
Condition 18
Consolidated Statements of Income 19
Consolidated Statements of
Shareholders' Equity 20
Consolidated Statements of Cash Flows 21
Notes to Consolidated Financial
Statements 22-39
(2) Financial Statement Schedules
All schedules to the Company's Consolidated Financial
Statements required by Article 9 of Regulation S-X are
included in the 1996 Annual Report or are not required under
the related instructions or are inapplicable and therefore
have been omitted.
(3) Exhibits
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation of
Registrant (Incorporated by reference to
Exhibit 3.1 to the Registrant's
Registration Statement on Form S-4
(Registration No. 33-77696) (the
"Registration Statement"))
3.2 Bylaws of Registrant (Incorporated by
reference to Exhibit 3.2 to the
Registration Statement)
3.3 Certificate of Amendment of Certificate
of Incorporation dated May 20, 1996
(Incorporated by reference to Exhibit
3.3 to the Registrant's Quarterly Report
- 18 -
<PAGE>
on Form 10-Q for the quarterly period
ended June 30, 1996)
4.1 Instruments defining the rights of
security holders (Included in Exhibits
3.1 and 3.2)
4.2 Form of Stock Certificate (Incorporated
by reference to Exhibit 4.5 to the
Registrant's Registration Statement on
Form S-8 (Registration No. 33-333-2638))
10.1* Employment Agreement dated as of January
1, 1997, by and between the Bank and
Robert D. Morton (supersedes Employment
Agreement dated as of January 1, 1994,
by and between the Bank and Robert D.
Morton that previously was incorporated
by reference to Exhibit 10.1 to the
Registration Statement)
10.2* Southington Savings Bank 1986 Stock
Option Plan (Incorporated by reference
to Exhibit 10.2 to the Registration
Statement)
10.3* Southington Savings Bank 1993 Stock
Option Plan (Incorporated by reference
to Exhibit 10.3 to the Registration
Statement)
10.4* Pension Plan of Southington Savings
Bank, as amended (Incorporated by
reference to Exhibit 10.4 to the
Registration Statement)
10.5* Southington Savings Bank Supplemental
Retirement Plan (Incorporated by
reference to Exhibit 10.5 to the
Registrant's Quarterly Report on Form
10-Q for the quarterly period ended
September 30, 1996)
11.1 Statement re computation of per share
earnings
13.1 Annual Report to Security Holders
21 Subsidiaries of Registrant
23 Consent of Coopers & Lybrand L.L.P.
- 19 -
<PAGE>
24 Power of Attorney
27 Financial Data Schedule
- ------------------------
* Management contract or compensatory plan or arrangement.
THE COMPANY WILL PROVIDE A COPY OF ANY EXHIBIT LISTED ABOVE TO
ANY SHAREHOLDER UPON THE WRITTEN REQUEST OF SUCH SHAREHOLDER
AND UPON THE PAYMENT OF A REASONABLE FEE LIMITED TO THE
COMPANY'S EXPENSES INCURRED IN FURNISHING SUCH EXHIBIT.
REQUESTS SHOULD BE ADDRESSED TO LESLEY A. DEANGELO, BANCORP
CONNECTICUT, INC., 121 MAIN STREET, SOUTHINGTON, CONNECTICUT
06489.
(b) The Company did not file any Report on Form 8-K during the
last quarter of 1996.
(c) The exhibits required by Item 601 of Regulation S-K are
filed as a separate part of this report.
- 20 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Bancorp Connecticut, Inc.
-------------------------
(Registrant)
Date: March 31, 1997 By /s/ Robert D. Morton
-------------------------
Robert D. Morton
Its President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Robert D. Morton President, March 31, 1997
------------------------ Chief Executive
Robert D. Morton Officer and Director
(Principal Executive
Officer)
/s/ Anthony Priore, Jr. Treasurer and March 31, 1997
------------------------ Secretary
Anthony Priore, Jr. (Principal Financial
Officer and Principal
Accounting Officer)
Norbert H. Beauchemin* Director March 31, 1997
- ------------------------
Norbert H. Beauchemin
Walter J. Hushak* Director March 31, 1997
- ------------------------
Walter J. Hushak
Michael J. Karabin* Director March 31, 1997
- ------------------------
Michael J. Karabin
<PAGE>
David P. Kelley* Director March 31, 1997
- ------------------------
David P. Kelley
Frederick E. Kuhr* Director March 31, 1997
- ------------------------
Frederick E. Kuhr
Joseph J. LaPorte* Director March 31, 1997
- ------------------------
Joseph J. LaPorte
Ralph G. Mann* Director March 31, 1997
- ------------------------
Ralph G. Mann
Andrew J. Meade* Director March 31, 1997
- ------------------------
Andrew J. Meade
Frank R. Miller* Director March 31, 1997
- ------------------------
Frank R. Miller
Director
- ------------------------
Anthony S. Pizzitola
Dennis J. Stanek* Director March 31, 1997
- ------------------------
Dennis J. Stanek
*By /s/ Robert D. Morton
- -------------------------
Robert D. Morton
Attorney-in-fact
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description Page
- ------- ----------- ----
3.1 Certificate of Incorporation of Registrant
(Incorporated by reference to Exhibit 3.1
to the Registrant's Registration Statement
on Form S-4 (Registration No. 33-77696)
(the "Registration Statement"))
3.2 Bylaws of Registrant (Incorporated by
reference to Exhibit 3.2 to the
Registration Statement)
3.3 Certificate of Amendment of Certificate of
Incorporation dated May 20, 1996 (Incorporated by
reference to Exhibit 3.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1996)
4.1 Instruments defining the rights of security
holders (Included in Exhibits 3.1 and 3.2)
4.2 Form of Stock Certificate (Incorporated by
reference to Exhibit 4.5 to the Registrant's
Registration Statement on Form S-8
(Registration No. 33-333-2638))
10.1* Employment Agreement dated as of January 1, 1997,
by and between the Bank and Robert D. Morton
(supersedes Employment Agreement dated as of
January 1, 1994, by and between the Bank and
Robert D. Morton that previously was incorporated
by reference to Exhibit 10.1 to the Registration
Statement)
10.2* Southington Savings Bank 1986 Stock Option
Plan (Incorporated by reference to Exhibit
10.2 to the Registration Statement)
10.3* Southington Savings Bank 1993 Stock Option
Plan (Incorporated by reference to Exhibit
10.3 to the Registration Statement)
10.4* Pension Plan of Southington Savings Bank,
as amended (Incorporated by reference to
Exhibit 10.4 to the Registration Statement)
10.5* Southington Savings Bank Supplemental Retirement
Plan (Incorporated by reference to Exhibit 10.5 to
the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended September 30 1996)
11.1 Statement re computation of per share
earnings.
13.1 Annual Report to Security Holders
21 Subsidiaries of Registrant
23 Consent of Coopers & Lybrand L.L.P.
24 Power of Attorney
27 Financial Data Schedule
- ----------------------
* Management contract or compensatory plan or arrangement.
Exhibit 10.1
EMPLOYMENT AGREEMENT
AGREEMENT dated as of January 1, 1997, by and between SOUTHINGTON
SAVINGS BANK (the "Bank"), having a principal office in Southington, Connecticut
and ROBERT D. MORTON of Southington, Connecticut (the "Employee").
WHEREAS, the Employee is currently President and Chief Executive Officer
of the Bank; and
WHEREAS, the Board of Directors of the Bank (the "Board") has approved
and authorized the entry into this Agreement with the Employee for him to
continue to serve the Bank in such capacities; and
WHEREAS, the Employee wishes to continue said positions; and
WHEREAS, the parties desire to enter into this Agreement setting forth
the terms and conditions for the employment relationship of the Bank and the
Employee, which agreement shall in all respects supersede the prior Employment
Agreement between the parties.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the Bank and the Employee agree as follows:
1. Employment. The Employee is employed as President and Chief Executive
Officer of the Bank, with the same duties and responsibilities as the Employee
now has, unless the Bank and the Employee otherwise agree in writing. During
such tenures, he shall render executive, policy and other management services to
the Bank of the type customarily performed by persons serving in a similar
executive officer capacity, subject to the powers by law vested in the Board and
in the Bank's shareholders. The Employee shall perform such other related duties
as the Board may from time to time reasonably direct. During the term of this
Agreement, the Employee shall also be
<PAGE>
elected and serve as a member of the Board (for which he shall not receive
separate compensation).
The Employee shall perform his duties and responsibilities under this
Agreement faithfully, diligently and to the best of the Employee's ability,
consistent with the highest and best standards of the banking industry and in
compliance with all applicable laws and the Bank's Certificate of Incorporation
and Bylaws.
2. Term. The term of employment under this Agreement shall be for a
period of three years commencing on January 1, 1997 (the "Effective Date"). This
Agreement shall be extended automatically for one additional year on each
anniversary date of the Effective Date hereof, so that there shall be successive
three-year terms of employment under this Agreement as of each anniversary date
hereof, unless either the Bank or the Employee gives contrary written notice to
the other not less than three (3) months in advance of each anniversary date of
the Effective Date hereof on which this Agreement would otherwise be extended.
References herein to the term of this Agreement shall refer both to such initial
term and such successive terms.
3. Compensation. The Bank acknowledges that at present it compensates
the Employee based on an annual salary of One Hundred Fifty Six Thousand One
Hundred Eighty ($156,180.00) Dollars. Said salary shall remain in effect for the
quarter ending March 31, l997 and thereafter for the remaining quarters of 1997
the employee will be compensated on the basis of an annual salary of One Hundred
Sixty Five Thousand Five Hundred Fifty and 80/100 ($165,550.80) Dollars provided
by action of the Bank's Compensation Committee in December of 1996. The
employee's salary shall be reviewed by the Board and its Compensation Committee
at its December, 1997 meetings and at least annually thereafter during the term
of this Agreement and the Employee shall receive such salary increases, if any,
as the Board in its absolute discretion may determine, together
2
<PAGE>
with such performance or merit increases, if any, as the Board in its absolute
discretion may determine. Participation in discretionary bonuses, retirement and
other employee benefit plans and in fringe benefits shall not reduce the salary
payable to the Employee under this Section 3. Said compensation shall be payable
to the Employee in equal installments in conformity with the Bank's normal
payroll period.
4. Discretionary Bonuses. The Employee shall be entitled to participate
in an equitable manner with other executive employees of the Bank in bonuses
which the Board in its absolute discretion may authorize and declare to its
executive employees. No other compensation provided for in this Agreement shall
be deemed a substitute for the Employee's right to participate in such bonuses
when and as declared by the Board.
5. Withholding Obligation. The Bank shall have the ability to withhold
from the compensation otherwise due to Employee under this Agreement any federal
income tax, Federal Insurance Contribution Act tax, Federal Unemployment Act
tax, or other amounts required to be withheld from compensation from time to
time under the Internal Revenue Code of l954, as amended, or under any state or
municipal laws or regulations.
6. Fringe Benefits.
(a) Vacations and Leave. The Employee shall be entitled to an
annual paid vacation of five (5) weeks per year or such longer period as
the Board may approve at least two of said weeks shall be taken as a
unit. The timing of paid vacations shall be scheduled in a reasonable
manner by the Employee. The Employee shall not be entitled to vacation
pay in lieu of vacation, and the Employee shall not be entitled to
accumulate unused paid vacation time from one calendar year to the next.
3
<PAGE>
The Employee shall also be entitled to such other leave, with
or without compensation, as shall be mutually agreed upon by the Board
and the Employee.
(b) Participation in Retirement and Employee Benefit Plans.
The Employee shall be entitled to participate in any plan of the Bank
relating to stock options, 401K, stock appreciation, stock purchases,
pension, thrift, deferred compensation, profit sharing, group life
insurance, medical coverage, education or other retirement or employee
benefits that the Bank may adopt for the benefit of its executive
employees. In no case shall the employee receive stock options to
purchase less than 66,420 shares as an employee and 1,440 shares as a
director at the prices presently authorized.
(c) Disability. If the Employee shall become disabled or
incapacitated to the extent that he is unable to perform his duties and
responsibilities as President and Chief Executive Officer, he shall be
entitled to receive disability benefits of the type provided for other
executive employees of the Bank.
(d) Other Benefits. The Employee shall be entitled to
participate in any other fringe benefits which are or may become
applicable to the Bank's executive employees, including a travel
allowance of $150.00 per month, a reasonable expense account, the
payment of reasonable expenses for attending annual and periodic
meetings of trade associations, and any other benefits which are
commensurate with the duties and responsibilities to be performed by the
Employee under this Agreement.
7. Termination of Employment.
(a) Termination by Board. The Board may terminate the
Employee's employment at any time by written notice to the Employee
stating the date of such
4
<PAGE>
termination, but any termination by the Board other than termination for
cause shall not prejudice the Employee's right to compensation or other
benefits under this Agreement. The Employee shall have no right to
receive compensation or other benefits for any period after termination
for cause, except for vested rights of the Employee. Termination for
cause shall mean termination because of the Employee's personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, breach of a restrictive covenant against
competition, disclosure of confidential information, intentional failure
to perform stated duties, willful violation of any law, rule, or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order with appropriate governmental authority, material
breach of any provision of this Agreement, or termination under
paragraphs (c) or (d) of this Section 7. In determining incompetence,
the acts or omissions shall be measured against standards generally
prevailing in the thrift industry. Unless the termination is for cause,
the Bank shall be obligated concurrently with such termination to pay to
the Employee as liquidated damages a lump sum amount equal to the then
current salary of the Employee for the remaining term of this Agreement.
Such payment shall be discounted by one-half of one percent for each
month of the remaining term of this Agreement, unless the Employee
elects in lieu of a lump sum payment to receive payment monthly over the
remaining term of this Agreement. The liquidated damages amount shall
not be reduced by any compensation which the Employee may receive for
other employment with another employer after termination of his
employment with the Bank.
(b) Regulatory Suspension of Employment. If the Employee is
suspended and/or temporarily prohibited from participating in the
conduct of the Bank's affairs by a notice served by the Commissioner of
Banking of the State of Connecticut (the "Commissioner") or the Federal
Deposit Insurance Corporation ("FDIC"), the Bank's obligations under
this Agreement shall be suspended as of the date of service, unless
stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Bank will (i) pay the Employee all of the compensation
withheld while its contractual obligations were suspended and (ii)
reinstate in whole all of its obligations which were suspended.
(c) Regulatory Termination of Employment. If the Employee is
removed and/or permanently prohibited from participating in the conduct
of the Bank's affairs by an order issued by the Commissioner or the
FDIC, all obligations of the Bank under this Agreement shall terminate
as of the effective date of the order, but vested rights of the parties
shall not be affected.
(d) Termination of Employment Resulting from Financial
Assistance. All obligations under this Agreement may be terminated by
the FDIC at any time the FDIC enters into an agreement to provide
financial assistance to or on behalf of the Bank but such termination
shall not affect the vested rights of the parties.
(e) Termination by Employee. The Employee shall have no right
to terminate his employment under this Agreement prior to the end of the
term of this Agreement, unless such termination either is approved by
the Board or is within one year after a change in control (as defined in
Section 8(a) hereof) of the Bank has occurred.
5
<PAGE>
(f) Indemnification of Employee. In the event the employment
of the Employee is terminated by the Bank without cause under Section
7(a) hereof or his employment is terminated voluntarily or involuntarily
in accordance with Section 8 hereof and the Bank fails to make timely
payment of the amounts then owed to the Employee under this Agreement,
the Employee shall be entitled to indemnification for all reasonable
costs, including attorneys' fees and disbursements, incurred by the
Employee in taking action to collect such amounts or otherwise to
enforce this Agreement, plus interest on such amounts at the annual rate
of one percent above the prime rate (defined as the base rate on
corporate loans at large U.S. money center commercial banks as published
by the Wall Street Journal), compounded monthly, for the period from the
date of employment termination until payment is made to the Employee.
Such indemnification and interest shall be in addition to all rights to
which the Employee is otherwise entitled under this Agreement.
8. Severance Payment.
(a) Change in Control Defined. For purposes of this Agreement,
the term "change in control" shall be deemed to have taken place if (i)
a third person, including a "group" as defined in Section 13(d)(3) of
the Securities Exchange Act of l934, becomes the beneficial owner of
shares of the Bank having twenty percent (20%) or more or the total
number of votes that may be cast for the election of directors of the
Bank; or (ii) as the result of, or in connection with, any cash tender
or exchange offer, merger or other business combination, sale of assets
or contested election, or any combination of the foregoing transactions,
the persons who were directors of the Bank
6
<PAGE>
before such transaction shall cease to constitute a majority of the
Board of Directors of the Bank or any successor institution.
(b) Services During Certain Events. In the event a third
person begins a tender or exchange offer, circulates a proxy to
stockholders, or takes other steps seeking to effect a change of control
of the Bank, the Employee agrees that he will not voluntarily leave the
employ of the Bank, and will render the services provided for in this
Agreement, until the third person has abandoned or terminated that
person's efforts to effect a change of control or until after a change
of control has occurred.
(c) Termination After Change of Control. In the event the
Employee's employment with the Bank is terminated within one year after
a change of control of the Bank either (i) involuntarily by the Bank or
(ii) voluntarily by the Employee, then the Bank shall pay to the
Employee as compensation for services previously rendered to the Bank a
lump sum cash amount equal to three times the highest compensation
(including only base salary, bonuses and incentive compensation) paid or
payable to the Employee by the Bank with respect to any twelve (12)
consecutive month period during the three (3) years ending with the date
of the Employee's termination; provided, however, that such amount may
not equal or exceed three times the annualized includible compensation
which was included in the Employee's income with respect to the Bank's
five (5) taxable years ending prior to the change of control or any
other limitation contained in the Internal Revenue Code which would make
all or any portion of the payment an excess parachute payment. Such
payment shall be made on or before the Employee's last day of employment
with the Bank. Such payment shall not be reduced
7
<PAGE>
by any compensation which the Employee may receive for other employment
with another employer after termination of his employment with the Bank;
provided, however, that such payment shall be reduced by any amount paid
by the Bank to the Employee as liquidated damages pursuant to Section
7(a) hereof.
9. Covenants Not to Compete; Confidentiality.
(a) The Employee covenants that he shall not, during the term
of this Agreement, have any other paid employment except with the prior
written approval of the Board. The Employee further covenants that if he
voluntarily terminates his employment with the Bank prior to the end of
the term of this Agreement, unless such termination either is approved
by the Board or is within one year after a change in control (as defined
in Section 8(a) of the Bank has occurred, he shall not, for a period of
two years from the date of such termination accept employment as a
president, chief executive officer or other similar executive officer of
any bank that is a significant competitor of the Bank (as defined in
Section 9(d)).
(b) The Employee shall at no time either during or subsequent
to the term of this Agreement, directly or indirectly, disclose any
confidential information or knowledge concerning the Bank or the
internal operating procedures, business strategies, or other
confidential affairs of the Bank so long as such information is not
publicly disclosed.
(c) In the event that the Employee breaches or threatens to
breach any of the terms of this Section 9, the Employee acknowledges
that the Bank's remedy at law would be inadequate and that the Bank
shall be entitled to an injunction restraining the Employee from
committing or continuing such breach.
8
<PAGE>
(d) Significant Competitor Defined. For purposes of the
Agreement, the term "significant competitor" shall mean any bank, trust
company, savings bank or savings and loan association or holding company
affiliate thereof having one or more deposit offices in Connecticut with
an aggregate of $100 million or more in deposits at the date of its
employment of the Employee.
10. Payment Obligation Absolute. The Bank's obligation to pay the
Employee the compensation and other benefits provided herein shall be
absolute and unconditional and shall not be affected by any
circumstances, including, without limitation, any set-off, counterclaim,
recoupment, defense or other right which the Bank may have against the
Employee. All amounts payable by the Bank hereunder shall be paid
without notice or demand.
11. General Provisions.
(a) No Assignments. This Agreement is personal to each of the
parties hereto. Neither party may assign or delegate any of his or its
rights or obligations hereunder without first obtaining the written
consent of the other party.
(b) Entire Agreement; Amendments or Additions; Action by
Board. This Agreement contains the entire agreement between the parties
hereto with respect to the transactions contemplated hereby and
supersedes all prior oral and written agreements, memoranda,
understandings and undertakings between the parties hereto relating to
the subject matters hereof. No amendments or additions to this Agreement
shall be binding unless in writing and signed by both parties. The prior
approval by a two-thirds affirmative vote of the full Board shall be
required in order for the Bank to authorize
9
<PAGE>
any amendments or additions to this Agreement, to give any consents or
waivers of provisions of this Agreement, or to take any other action
under this Agreement including any termination of the employment of the
Employee with or without cause under Section 7(a) hereof.
(c) Section Headings. The section headings used in this
Agreement are included solely for convenience and shall not affect, or
be used in connection with, the interpretation of this Agreement.
(d) Severability. The provisions of this Agreement shall be
deemed severable and the invalidity or unenforceability of any provision
shall not affect the validity or enforceability of the other provisions
hereof.
(e) Governing Law. This Agreement shall be governed by the
laws of the State of Connecticut as to all matters, including, but not
limited to, matters of validity, construction, effect and practice.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first above written.
SOUTHINGTON SAVINGS BANK
By /s/ Walter J. Hushak
-------------------------------------
Chairman of the Board of Directors
ATTEST: /s/ Steven Nyren
------------------------
Corporate Secretary
/s/ Robert D. Morton
---------------------------------
ROBERT D. MORTON
10
Exhibit 11.1
EXHIBIT 11.1: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income - primary and fully diluted $5,024 $4,296 $3,748
Weighted Average Common Stock and Common
Equivalent Stock
Weighted average common stock outstanding 2,686 2,697 2,680
Assumed conversion (as of the beginning of each
period or upon issuance during a period) of
stock options outstanding at the end of each
period 150 90 69
------ ------ ------
Weighted average common stock outstanding -
primary 2,836 2,787 2,749
------ ------ ------
Weighted average common stock outstanding 2,686 2,697 2,680
Assumed conversion (as of the beginning of each
period or upon issuance during a period) of
stock options outstanding at the end of each
period 170 98 74
------ ------ ------
Weighted average common stock outstanding -
fully diluted 2,856 2,795 2,754
------ ------ ------
Earnings per Common and Common Equivalent Share
Primary $1.77 $1.54 $1.36
------ ------ ------
Fully Diluted $1.76 $1.54 $1.36
------ ------ ------
</TABLE>
Exhibit 13.1
Bancorp Connecticut, Inc.
Annual Report
1996
[Photo of Cupola with weathervane appearing above caption "Our Bright Future"]
<PAGE>
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
At or for the year ended December 31
(dollars in thousands, except for per share data) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Condition Data:
Assets $419,398 $383,978 $357,180 $327,793 $313,935
Securities 149,611 130,549 124,372 93,975 83,812
Loans, net 246,274 230,706 213,457 206,815 206,420
Deposits 309,827 294,835 279,392 268,294 263,426
FHLB of Boston advances 21,000 19,990 22,299 16,650 10,950
Federal funds purchased and securities sold
under agreements to repurchase 41,879 22,227 15,027 2,831 4,172
Shareholders' equity 42,731 43,210 37,357 36,965 32,089
Statement of Income Data:
Net interest income $ 14,754 $ 13,896 $ 12,975 $ 12,368 $ 12,212
Provision for loan losses 435 180 242 881 3,201
Net gain on sale of securities 344 150 46 790 480
Other income 1,341 1,093 737 954 937
Other expenses 8,599 8,625 7,879 8,068 6,871
Income taxes 2,381 2,038 1,889 1,670 1,369
----- ----- ----- ----- -----
Income before cumulative effect
of accounting change 5,024 4,296 3,748 3,493 2,188
Cumulative effect of
accounting change -- -- -- 2,140 --
----- ----- ----- ----- -----
Net income $ 5,024 $ 4,296 $ 3,748 $ 5,633 $ 2,188
======== ======== ======== ======== ========
Per Share Data:*
Earnings before cumulative effect of
accounting change - fully diluted $ 1.76 $ 1.54 $ 1.36 $ 1.31 $ .83
Cumulative effect of accounting change -- -- -- .81 --
Earnings - fully diluted 1.76 1.54 1.36 2.12 .83
Cash dividends .74 .59 .42 .34 .03
Book value 16.63 15.91 13.85 13.80 12.19
Selected Statistical Data:
Return on average assets 1.26% 1.17% 1.11% 1.77% .72%
Return on average equity 11.69 10.67 10.11 16.13 7.12
Average equity to average assets 10.71 10.95 10.99 10.67 10.14
Net interest spread (tax equivalent basis) 3.48 3.53 3.63 3.74 3.79
Net interest margin (tax equivalent basis) 4.10 4.15 4.14 4.20 4.32
Dividend payout ratio 39.63 37.01 30.15 16.02 4.18
</TABLE>
* Per share data has been restated to reflect a 20% stock dividend on June 1,
1993 and a 6-for-5 stock split effected in the form of a stock dividend on
June 19, 1996.
Table of Contents
-----------------
Selected Consolidated Financial Data ...................................... 1
Letter to Shareholders .................................................... 2
Our Bright Future ......................................................... 3
Business Description ...................................................... 4
Management's Discussion and Analysis ...................................... 5
Report of Independent Accountants ......................................... 17
Consolidated Statements of Condition ...................................... 18
Consolidated Statements of Income ......................................... 19
Consolidated Statements of Shareholders' Equity ........................... 20
Consolidated Statements of Cash Flows ..................................... 21
Notes to Consolidated Financial Statements ................................ 22
Bancorp Connecticut, Inc. Directors and Officers .......................... 40
Southington Savings Bank Directors and Officers ........................... 41
Shareholder Information ................................................... 42
1
<PAGE>
Letter To Shareholders
To Our Shareholders:
Bancorp Connecticut, Inc. and its subsidiary, Southington Savings Bank (SSB),
had another very good year. During 1996, the Company's net income increased
16.9% to $5,024,000, or $1.76 per share, compared to $4,296,000, or $1.54 per
share in 1995. A higher volume of earning assets and an increase in net interest
income, noninterest income from financial services and income from securities
transaction activities were principally responsible for these excellent
operating results.
As always, along with servicing our customers and the community to the best
of our ability, we continue to focus on improving shareholder value. Last year,
for instance, we pointed out that your Company was undervalued. Toward this end,
we took a number of actions to address this issue, starting with the February
announcement of a 15% share buy-back program to reduce our excessive capital
position. In addition, the Company effected a 20% stock split in the form of a
stock dividend at midyear and raised its cash dividend in excess of 25% during
1996. These actions, combined with speculative interest in publicly-owned
Northeast bank stocks which arose from assorted merger activity, favorably
influenced the value of Bancorp Connecticut, Inc. At the end of 1996, the
Company's market capitalization approached $62 million, an increase of
approximately $21 million since year-end 1995. In other words, our share price
rose 52.1% in the twelve months ending December 31, 1996. According to Keefe,
Bruyette and Woods (KBW), the nationally-known bank analysts, market
appreciation of 44 publicly-owned New England banks' stocks, including the major
super-regional banks as well as Bancorp Connecticut, averaged 32.3% in 1996.
Over the past five years, the compound growth rate of share appreciation of
BKCT's stock was 50.1% - so we have done well! Our stock, however, was still
selling at only an "average" 140% of book value and approximately 12 times
earnings at year-end. We still believe it is undervalued when related to the
Company's financial track record.
[Photo: Robert D. Morton]
Robert D. Morton, President and
Chief Executive Officer of Bancorp Connecticut, Inc.
As previously stated, our goal continues to be: to grow our corporate
"franchise" beyond Southington, either through SSB or the acquisition of other
banks and/or related companies into our holding company. In this regard we
continue to review appropriate acquisition opportunities but "price" continues
to be an impediment. Unfortunately, in the first half of last year, a spate of
banking acquisitions took place (primarily in the downstate area) at multiples
that exceed two times book value. This benchmark price now seems to be a
"hurdle" target for many smaller banks that are considering being acquired, even
though your Company with a superior track record is selling at 1.4 times book
value. It is interesting to note that the average acquisition price of banks in
Connecticut during 1995 and 1996 was 180% of book value. We also believe that
there are some fundamental truths that all banks, particularly smaller ones,
must face in the years ahead. Unbridled competition from bank and nonbank
competitors will make profitable growth more difficult. In addition,
technological innovation within the industry and the resources that will be
needed to address this issue pose difficult challenges for most community banks.
Finally, the potential buyers of banks in recent years, which have been
primarily area super-regional or out-of-state banks, are likely to remain on the
sidelines as they digest their acquisitions. Our Company, with its anchor jewel
of SSB, offers a great alternative for many smaller banks but not at an
unrealistic price. At the same time, we have not ruled out strategically located
branches beyond the borders of Southington if we can purchase or lease an
existing site that makes business sense for us.
As the central Connecticut economy continues to improve, we are optimistic
about the prospects for our banking company. SSB, as we have explained in the
past, is looking and acting more like a full-service commercial bank. Our
balance sheet structure is now, and has been, focused on generating more
commercial business loans, lower cost transaction balances, and noninterest
sources of revenue from money management services, brokerage activity and the
sale of insurance products. In this regard, we have made excellent progress over
the past few years. Whether it's business banking or a wide range of financial
services for the consumer, we continue to emphasize our strengths friendly
personalized service, the stability and continuity of our outstanding staff, and
a decision-making process that begins and ends right here in town.
In 1997, and beyond, technology will play an increasingly important role in
the banking industry and your Company. As we sort out the most efficient
delivery systems of the future and continue to bring more electronic-based
products and services on stream, our Bank has the resources and the staff in
place to make it happen. Our approach is twofold. First, we are placing
substantial emphasis on new product and services development and delivery
implementation. Our primary focus will be on increased support of our commercial
lending area where we will be introducing cash management and deposit products
to complement our existing comprehensive loan products. Secondly, we are
continuing to scrutinize developing technologies and systems that will be
critical to our future success. For example, we are keeping a close watch on
Internet banking to determine the best method and system to match this type of
technology with the needs of our customers.
In the meantime, SSB and the Company are committed to a very aggressive
business plan for 1997 and, indeed, the balance of this century. While in some
respects we plan to stick with the "basics," which for us include the highest
quality customer service and supporting our community, we are also mindful of
the need for the orderly growth of our Company. Banking and/or the delivery of
all financial services is becoming a much more competitive business, and a
"blurring" effect among brokerage firms, insurance companies, credit unions and
the like promises to make our future more interesting. As is usually the case,
however, people make the difference and we've got some of the very best.
We believe that SSB and your Company are extremely well positioned to take
advantage of various opportunities as they may arise, and we feel confident
about our future prospects in the rapidly changing financial services industry.
The directors, management and staff join me in thanking you for your confidence
and support.
Sincerely,
/s/ Robert D. Morton
Robert D. Morton
President and
Chief Executive Officer
2
<PAGE>
Our Bright Future...
...is based on our successful past. This graph charts the recent history of our
cash dividends. The stockholders have reaped the benefits of our success.
- --------------------------------------------------------------------------------
[Graph Data]
1992 1993 1994 1995 1996
Cash dividend per share $0.03 $0.34 $0.42 $0.59 $0.74
- --------------------------------------------------------------------------------
Per share data has been restated to reflect a 20% stock dividend on June 1, 1993
and a 6-for-5 stock split effected in the form of a stock dividend on June 19,
1996.
...grows due to the stability of our experienced staff. We are always willing to
help each customer determine their specific financial needs and match those to
our product and service offerings. SSB is a friendly place to conduct business,
both personal and professional.
[Photo: Staff and family members]
From the left: Alice Mathews, Customer Service Representative;
Diane Adams, Main Office Receptionist; Tiffany Gillis and son,
Zachary Gillis, customers.
...begins today as we prepare young people for careers in the financial services
industry. Our SSB Training Branch, located in the Southington High School
Atrium, is the only one of its kind in Connecticut. The SSB Training Branch
provides financial services to staff, students and visitors of SHS while
providing training to students in the business program.
[Photo: Staff members]
Left background: Dennis Kelly, SHS DECA Teacher. Left foreground: Joan E.
Morelli, SHS Training Branch Manager, with Benjamin Gonzales, student. In
foreground is Christine L. Stocker, student.
...is enhanced by our commitment to the technology necessary to support new
product and services development. We will focus on the needs of customers while
improving our delivery systems.
[Photo: Staff members]
Left to right: Barry J. Abramowitz, Chief Information Officer; Terry Kelly, AVP
Deposit Services Manager; Kurt M. Heinrich, Systems Administration Officer; and
Annette Petruzzi, Loan Operations Manager.
3
<PAGE>
Business Description
The primary asset of Bancorp Connecticut, Inc. (the Corporation) is
Southington Savings Bank (SSB), a full-service community bank founded in 1860.
SSB operates three banking offices and one mortgage center within the town of
Southington and services the financial needs of commercial business, families,
municipal government, and nonprofit organizations throughout the area -
including, but not limited to, greater Southington. The Bank also operates a
limited purpose branch bank and training facility at Southington High School.
Southington Savings Bank offers a comprehensive menu of products and
services to meet the financial needs of individuals, families and businesses,
including deposit accounts, loans, investment management services and related
accounts.
Deposit accounts include checking and related transaction accounts, regular
savings and money market savings, certificates of deposit, IRAs, and other
retirement vehicles.
Individuals and institutions can also take advantage of Southington Savings
Bank's depth of experience in trust services which include investment
management, estate settlement and small business benefit plans.
SSB serves the borrowing needs of individuals and families with residential
mortgages, consumer (personal) loans, auto loans and student loans. Central
Connecticut businesses rely on SSB for commercial business loans (including SBA
loans) and cash management services.
Investment brokerage services are provided at SSB through Liberty
Securities Corporation, an independent broker-dealer. They complement available
tax-deferred annuities and insurance policies through Savings Bank Life
Insurance.
Automated teller machines, safe deposit boxes and electronic tax filing
services are also available at Southington Savings Bank for the convenience of
the customers. You can visit SSB on the world wide web at www.s-s-b.com.
4
<PAGE>
Management's Discussion and Analysis
General
On November 17, 1994, Southington Savings Bank completed a change in its
corporate structure with the formation of its parent holding company, Bancorp
Connecticut, Inc. (the Corporation). The holding company structure provides the
Corporation with maximum flexibility in pursuing financial opportunities as they
present themselves. Since Southington Savings Bank (the Bank) is the sole
subsidiary of the Corporation, the Corporation's earnings and financial
condition are predicated almost entirely on the performance of the Bank.
The Bank's results of operations depend primarily upon the difference
between the interest, dividends and fees earned on its loan and investment
portfolios and the interest paid on its deposits and borrowings. In addition,
the Bank's income is significantly affected by the provision for loan losses,
the fees it charges for its services, security gains and losses, administrative
expenses, other real estate expenses, and income taxes.
Investments
On December 31, 1996, investment securities totaled $149,611,000 as
compared to $130,549,000 on December 31, 1995, an increase of 14.6%. A majority
of the increase was in the held-to-maturity category which rose by $20,436,000.
This increase was part of the Bank's overall asset and liability management
strategy. Funds from longer term borrowings and proceeds from sales of available
for sale securities were primarily invested in mortgage-backed securities and to
a lesser extent, United States Government agency obligations within the
held-to-maturity classification. The mix within the available-for-sale category
changed slightly from 1995 to 1996. Funds from reverse repurchase agreements
were invested in money market preferred stocks which are highly liquid and
subject to tax advantages of the federal and state dividends received deduction.
Approximately 67.6% of the marketable equity security portfolio is comprised of
money market preferred stocks as of December 31, 1996.
The following table sets forth the carrying amount of investment securities
at the dates indicated:
<TABLE>
<CAPTION>
(dollars in thousands) December 31,
- ------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Held-to-maturity (at cost):
United States Government
agency obligations $22,651 $ 17,947 $ 13,474
Municipal bonds 3,252 3,022 2,369
Mortgage-backed securities 18,194 2,691 --
-------- -------- --------
Total held-to-maturity $ 44,097 $ 23,660 $ 15,843
======== ======== ========
Available-for-sale (at market):
United States Government
agency obligations $ 15,067 $ 23,110 $ 31,276
Mortgage-backed securities 26,216 39,265 33,387
Marketable equity securities 56,531 36,839 36,330
Mutual funds 7,701 7,675 7,536
-------- -------- --------
Total available-for-sale $105,515 $106,889 $108,529
======== ======== ========
</TABLE>
The following table sets forth the maturities of investment securities at
December 31, 1996 and the weighted average yields of such securities (calculated
on the basis of book and effective yields weighted for the scheduled maturity of
each security).
<TABLE>
<CAPTION>
Maturing
-------------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
-------------------------------------------------------------------------
(dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity (at cost):
United States Government
and agency obligations $500 6.19% $14,945 6.64% $3,485 7.43% $3,721 7.58%
Municipal bonds -- --% 2,988 4.74% 264 5.80% -- --%
Mortgage-backed securities -- --% -- --% -- --% 18,194 7.43%
-------------------------------------------------------------------------
Total held-to-maturity $500 6.19% $17,933 6.32% $3,749 7.32% $21,915 7.46%
=========================================================================
</TABLE>
5
<PAGE>
Loans
On December 31, 1996, total loans amounted to $252,144,000 as compared to
$237,154,000 on December 31, 1995, an increase of 6.3%. The primary area of
increase was in the commercial loan portfolio which increased by $5,079,000 for
the year to $37,050,000 due to increased efforts in commercial loan
originations, specifically, adjustable rate loans that reprice at least
annually, and to the purchase of the guaranteed portion of SBA loans. In
addition, consumer loans increased by $3,833,000 or 10.8% primarily as a result
of purchased automobile loans. Finally, real estate construction loans increased
by $3,771,000 between year end 1996 and 1995. Approximately 47% of the balance
of these loans as of December 31, 1996 are for construction of residential homes
which convert to a permanent mortgage upon completion of the construction. On
December 31, 1996, $212,910,000 or 84.4% of total loans were collateralized by
real estate.
In December, 1996, the Bank sold approximately $3,657,000 of fixed rate
residential mortgages with servicing retained which resulted in the recognition
of capitalized mortgage servicing rights in the amount of $28,000. The servicing
rights were valued based on a valuation model that calculates the present value
of future cash flows utilizing certain assumptions such as estimates of the cost
of servicing per loan, discount rate and prepayment.
[BAR CHART SHOWING TOTAL LOANS FROM 1992 TO 1996]
(millions)
1992 $213,256
1993 $214,137
1994 $220,542
1995 $237,154
1996 $252,144
The following table shows the Bank's loan distribution at the end of the last
five years.
<TABLE>
<CAPTION>
December 31,
- ----------------------------------------------------------------------------------------
(in thousands) 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Residential real estate $134,000 $132,566 $125,833 $123,722 $121,579
Commercial real estate 35,472 34,598 33,660 33,397 32,420
Real estate construction 6,234 2,463 2,233 2,513 3,439
Commercial 37,050 31,971 25,753 29,561 29,008
Consumer 39,388 35,556 33,063 24,944 26,810
-------- -------- -------- -------- --------
Total Loans $252,144 $237,154 $220,542 $214,137 $213,256
======== ======== ======== ======== ========
</TABLE>
The following table shows the maturity and repricing of loans (excluding
real estate mortgage and consumer loans outstanding) as of December 31, 1996.
Also provided are the amounts due after one year classified according to the
sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
Maturing or Repricing:
--------------------------------------------------
Within After One But After
(in thousands) One Year Within Five Years Five Years Total
--------------------------------------------------
<S> <C> <C> <C> <C>
Real estate - construction $ 3,328 $ 1,025 $1,881 $ 6,234
Commercial 23,199 9,254 4,597 37,050
------- ------- ------ -------
Total $26,527 $10,279 $6,478 $43,284
======= ======= ====== =======
Loans maturing/repricing after one year with:
Fixed interest rates $ 5,178 $ 5,033
Variable interest rates 5,101 1,445
------- -------
Total $10,279 $ 6,478
======= =======
</TABLE>
6
<PAGE>
Nonperforming assets and allowance for loan losses
Nonperforming assets declined between year end 1996 and 1995 mainly as a
result of the settlement of litigation during 1996 which allowed the Corporation
to take possession of properties collateralizing certain loans that were
nonperforming in 1995. A large portion of these properties were disposed of
throughout 1996. Nonperforming loans decreased to $2,939,000 or 1.2% of total
loans on December 31, 1996 as compared to $6,256,000 or 2.6% on December 31,
1995. Foreclosed real estate as of year end 1996 increased to $1,367,000 from
$872,000 at year end 1995.
[BAR CHART SHOWING NONPERFORMING ASSETS FROM 1992 TO 1996]
1992 $14,240,000
1993 $9,424,000
1994 $6,868,000
1995 $7,128,000
1996 $4,306,000
Nonperforming Assets
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------------------
(dollars in thousands) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans
Residential real estate $2,060 $3,650 $3,392 $5,244 $ 6,945
Commercial real estate 337 1,134 1,465 1,646 1,508
Commercial 306 1,062 1,030 1,136 1,852
Consumer 236 410 340 396 575
------ ------ ------ ------ -------
Total nonaccrual loans 2,939 6,256 6,227 8,422 10,880
Accruing loans past due
90 days or more -- -- -- -- --
------ ------ ------ ------ -------
Total nonperforming loans 2,939 6,256 6,227 8,422 10,880
Foreclosed real estate 1,367 872 641 1,002 3,360
------ ------ ------ ------ -------
Total nonperforming assets $4,306 $7,128 $6,868 $9,424 $14,240
====== ====== ====== ====== =======
Nonperforming loans as a
percentage of total loans 1.17% 2.64% 2.82% 3.93% 5.10%
====== ====== ====== ====== =======
Nonperforming assets as a
percentage of total assets 1.03% 1.86% 1.92% 2.87% 4.54%
====== ====== ====== ====== =======
Restructured loans in
compliance with modified
terms not included above $-- $-- $-- $-- $ 136
====== ====== ====== ====== =======
</TABLE>
The Bank classifies loans as nonaccrual when they become 90 days or more
past due. Interest income is then reversed and not recognized until received.
Interest income that would have been recorded during 1996 on all nonaccrual
loans under the original loan terms was approximately $354,000. Actual income
collected on these loans was $228,000.
On January 1, 1995, the Bank adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS
114") and Statement of Financial Accounting Standards No. 118 "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosure". Under
the new standards, a loan is considered impaired if, based on current
information and events, it is probable that the Bank will be unable to collect
the scheduled payments of principal and interest when due, according to the
contractual terms of the loan agreement. Management reviews the loan portfolio
on a quarterly basis to identify loans as impaired. Generally, nonaccrual loans
as well as classified loans past due greater than 60 days are reviewed for
impairment as well as other loans that are monitored internally due to possible
credit risk. As permitted by the statement, smaller-balance homogeneous loans
which consist of residential mortgages and consumer loans are evaluated
collectively and reserves are established based on historical loss experience.
The measurement of impairment is based on the fair value of collateral for
collateral-dependent loans or the present value of future cash flows for other
loans.
7
<PAGE>
The following table illustrates the amount of loans identified as impaired
and the basis used for measuring impairment as of December 31, 1996:
Impaired Loans
<TABLE>
<CAPTION>
Basis of measurement
- -------------------------------------------------------------------------------
Fair value Present value of
(dollars in thousands) of collateral expected future cash flow Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Residential real estate
(non-owner occupied) $ 85 $ -- $85
Commercial real estate 1,402 -- 1,402
Commercial 835 109 944
------ ---- ------
Total Impaired Loans $2,322 $109 $2,431
====== ==== ======
</TABLE>
The adoption of FAS 114 resulted in a reclassification of $3,299,000 of
"in-substance foreclosures" from other real estate owned to loans as of January
1, 1995. Prior periods have been reclassified for comparative purposes,
including the balance sheet and income statement. The reclassification had no
impact on net income.
The Bank also has $5,681,000 in real estate loans and $824,000 in other
loans that are current or less than 90 days past due and not deemed impaired
which are considered potential problem loans. A loan is considered a potential
problem if the loan is risk rated "substandard", "doubtful" or "loss" in
accordance with regulatory definitions or has demonstrated a pattern of past due
payments and/or deterioration of collateral value. A decline in Connecticut's
economy and local real estate values as well as the impact of higher interest
rates on adjustable rate notes could hasten the movement of loans from potential
problems to nonperforming loans and negatively impact earnings. Management is
constantly monitoring the status of these loans and reviews their classification
quarterly.
The allowance for loan losses is maintained at a level that management
believes is prudent and adequate to absorb losses within the loan portfolio. As
of December 31, 1996, the allowance was $4,875,000 or 165.9% of nonperforming
loans as compared to $5,488,000 and 87.7% of nonperforming loans on December 31,
1995. The table on the following page illustrates the allocation of the
allowance for loan losses to each loan category for the last five years. Actual
losses from loans of any type, however, may be charged against the total amount
of the allowance regardless of the allocations.
Allowance For Loan Losses
<TABLE>
<CAPTION>
Year Ended December 31,
- -------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 5,488 $ 6,136 $ 6,447 $ 6,050 $ 5,400
Chargeoffs:
Residential real estate (264) (341) (238) (146) (416)
Commercial real estate (169) (161) (172) (60) (129)
Real estate - construction -- -- -- -- (570)
Commercial (446) (227) (225) (268) (1,545)
Consumer (334) (312) (141) (253) (307)
------- ------- ------- ------- -------
Total (1,213)(A) (1,041)(A) (776) (727) (2,967)
------- ------- ------- ------- -------
Recoveries:
Residential real estate 8 2 1 -- 45
Commercial real estate 20 -- 1 24 --
Commercial 51 98 89 104 266
Consumer 86 113 132 115 105
------- ------- ------- ------- -------
Total 165 213 223 243 416
------- ------- ------- ------- -------
Net chargeoffs (1,048) (828) (553) (484) (2,551)
Provision for loan losses 435 180 242 881 3,201
------- ------- ------- ------- -------
Balance at end of year $ 4,875 $ 5,488 $ 6,136 $ 6,447 $ 6,050
======= ======= ======= ======= =======
Ratio of net chargeoffs to
average loans outstanding .43% .36 .26% .23% 1.21%
======= ======= ======= ======= =======
</TABLE>
A) Of the total chargeoffs, $415,000 in 1996 and $352,000 in 1995 relates to the
reduction in fair value of the underlying collateral and past due taxes of
one group of loans which had been in litigation since 1992.
8
<PAGE>
Allocation of Allowance For Loan Losses
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995 December 31, 1994 December 31, 1993 December 31, 1992
----------------- ----------------- ----------------- ----------------- -----------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate $ 659 53% $ 367 56% $ 479 57% $ 665 57% $ 654 56%
Commercial real estate 752 14% 803 15% 1,129 15% 1,321 16% 1,471 15%
Real estate construction 83 2% 35 1% 33 1% 78 1% 108 2%
Commercial 1,162 15% 1,209 13% 1,069 12% 1,511 14% 1,787 14%
Consumer 620 16% 541 15% 565 15% 548 12% 524 13%
Unallocated 1,599 --% 2,533 --% 2,861 --% 2,324 --% 1,506 --%
------ --- ------ --- ------ --- ------ --- ------ ---
$4,875 100% $5,488 100% $6,136 100% $6,447 100% $6,050 100%
====== === ====== === ====== === ====== === ====== ===
</TABLE>
Deposits
Total deposits increased $14,992,000 or 5.1% during 1996 as compared to
1995. The Bank's deposit structure changed during the year as interest rates
remained somewhat stable after a slight rise in the first quarter of 1996.
Customers shifted funds into shorter term certificates of deposits and money
market accounts while regular savings accounts decreased. As a result of the
rate environment and the promotion of short term certificates, certificates of
deposit with maturities of one year or less increased $25,827,000 from the prior
year while the total balance increased by $14,420,000. Regular savings accounts
declined $2,634,000 and money market savings accounts declined $1,265,000. The
transfer of regular savings deposits and money market accounts into certificates
of deposits increased the Bank's overall cost of funds.
[BAR CHART SHOWING TOTAL DEPOSITS FROM 1992 TO 1996 IN MILLIONS]
1992 $263,426,000
1993 $268,294,000
1994 $279,392,000
1995 $294,835,000
1996 $309,827,000
Deposits
The average daily amount of deposits and rates paid on such deposits for the
past three years are summarized in the following table:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
(dollars in thousands) 1996 1995 1994
- ---------------------- ---------------- ---------------- ----------------
Amount Rate Amount Rate Amount Rate
-------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 19,662 0.00% $ 15,845 0.00% $ 14,173 0.00%
NOW accounts 14,495 1.76% 13,713 1.76% 14,033 1.75%
Regular savings 61,690 2.25% 69,289 2.25% 81,875 2.25%
Money market savings 35,952 3.36% 29,457 3.12% 29,459 2.70%
Certificates of deposit 167,399 5.54% 154,733 5.50% 135,839 4.61%
Club accounts 420 3.33% 397 3.27% 391 3.32%
-------- -------- --------
Total $299,618 $283,434 $275,770
======== ======== ========
</TABLE>
Maturities of time certificates of deposit in amounts of $100,000 or more
outstanding at December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
Time
Certificates
(in thousands) of deposit
------------
<C> <C>
3 months or less $ 6,290
Over 3 months through 6 months 3,024
Over 6 months through 12 months 2,703
Over 12 months 3,308
-------
Total $15,325
=======
</TABLE>
9
<PAGE>
Borrowings
Federal funds purchased and securities sold under agreements to repurchase
increased $19,651,000 or 88.4% during 1996 as compared to 1995. These funds were
primarily used to purchase investment securities, specifically, money market
preferred stocks and SBA loans and provide a positive spread between the yield
on the investment and the cost of the funds which contributes to the
Corporation's net interest margin.
Asset/Liability Management
Management is continuously fine-tuning the Bank's statement of condition to
maximize net interest income while maintaining a level of interest rate and
credit risk that is prudent and manageable. During 1996, the Bank's strategy for
maintaining its interest rate exposure at an acceptable level focused primarily
on increasing the amount of adjustable rate commercial loans. Also, a majority
of the increase in residential mortgages consisted of products with a fixed rate
for a term of 3, 5, 7, and 10 years which adjust on an annual basis thereafter.
In addition, the Bank modestly leveraged its strong capital position by
increasing its investments in highly liquid money market preferred stock which
reprice every 49 days to manage interest rate exposure at an acceptable level.
These investments were funded by short term certificates of deposit and
repurchase agreements. An additional leverage consisted of the purchase of
approximately $5 million of mortgage backed securities which were funded by
repurchase agreements.
Total assets increased $35,420,000 or 9.2% to $419,398,000 at year end 1996
compared to $383,978,000 at year end 1995. The growth was funded by a
$19,651,000 or 88.4% increase in repurchase and reverse repurchase agreements
and a $14,992,000 or 5.1% increase in deposits. Asset growth was primarily in
the Bank's investment portfolio as well as the loan portfolio.
1992 $314,000,000
1993 $328,000,000
1994 $357,000,000
1995 $384,000,000
1996 $419,000,000
The table following sets forth certain information regarding the Bank's
interest rate sensitivity.
<TABLE>
<CAPTION>
Interest Rate Sensitivity
- ----------------------------------------------------------------------------------------
(dollars in thousands) December 31, 1996
- ----------------------------------------------------------------------------------------
0-180 181-365
days days 1-2 years 2-3 years
-------------------------------------------------
<S> <C> <C> <C> <C>
Assets subject to interest rate adjustment:
Short term investments $ 3,130 $ -- $ -- $ --
Investment securities 51,971 8,768 9,840 11,607
Adjustable rate mortgages 36,533 35,126 14,978 13,811
Fixed rate mortgages 2,756 2,725 5,403 5,146
Consumer and
commercial loans 40,440 6,157 8,119 4,334
- ----------------------------------------------------------------------------------------
Total rate-sensitive assets $ 134,830 $ 52,776 $ 38,340 $ 34,898
========================================================================================
Liabilities subject to
interest rate adjustment:
NOW accounts $ -- $ -- $ -- $ --
Regular savings 2,370 2,370 4,740 4,736
Federal funds purchased and
repurchase agreements 33,819 -- 6,180 1,880
Money market deposits 36,255 -- -- --
Time certificates of deposit 94,449 35,246 24,974 9,757
Advances from FHLB 2,000 7,000 12,000 --
Mortgagors' escrow 1,687 -- -- --
- ----------------------------------------------------------------------------------------
Total rate-sensitive
liabilities $ 170,580 $ 44,616 $ 47,894 $ 16,373
========================================================================================
Excess (deficiency) of
rate-sensitive assets over
rate-sensitive liabilities $ (35,750) $ 8,160 $ (9,554) $ 18,525
- ----------------------------------------------------------------------------------------
Cumulative excess
(deficiency) $ (35,750) $(27,590) $(37,144) $(18,619)
========================================================================================
Cumulative rate-sensitive assets
as a percentage of
rate-sensitive liabilities 79.0% 87.2% 85.9% 93.3%
Cumulative excess
(deficiency) as a
percentage of total assets (8.5)% (6.6)% (8.9)% (4.4)%
========================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
- ---------------------------------------------------------------------------------------------
3-4 years 4-5 years 5+ years Total
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets subject to interest rate adjustment:
Short term investments $ -- $ -- $ -- $ 3,130
Investment securities 6,081 9,794 53,590 151,651
Adjustable rate mortgages 3,108 4,722 11,475 119,753
Fixed rate mortgages 4,803 4,388 31,036 56,257
Consumer and
commercial loans 4,174 5,149 8,336 76,709
- ---------------------------------------------------------------------------------------------
Total rate-sensitive assets $ 18,166 $24,053 $ 104,437 $ 407,500
=============================================================================================
Liabilities subject to
interest rate adjustment:
NOW accounts $ -- $ -- $ 14,965 $ 14,965
Regular savings 4,737 4,737 36,121 59,811
Federal funds purchased and
repurchase agreements -- -- -- 41,879
Money market deposits -- -- -- 36,255
Time certificates of deposit 5,832 5,027 87 175,372
Advances from FHLB -- -- -- 21,000
Mortgagors' escrow -- -- -- 1,687
- ---------------------------------------------------------------------------------------------
Total rate-sensitive
liabilities $ 10,569 $ 9,764 $ 51,173 $ 350,969
=============================================================================================
Excess (deficiency) of
rate-sensitive assets over
rate-sensitive liabilities $ 7,597 $14,289 $ 53,264 $ 56,531
- ---------------------------------------------------------------------------------------------
Cumulative excess
(deficiency) $(11,022) $ 3,267 $ 56,531
=============================================================================================
Cumulative rate-sensitive assets
as a percentage of
rate-sensitive liabilities 96.2% 101.1% 116.1%
Cumulative excess
(deficiency) as a
percentage of total assets (2.6)% 0.8% 13.5%
=============================================================================================
</TABLE>
10
<PAGE>
To limit its exposure to fluctuating interest rates, it is the policy of
the Bank that the cumulative excess or deficiency of the one year gap position
be maintained within a range of 85% - 115% of total assets. The one year gap
position as measured by the Bank was 87% as of December 31, 1996. The table
assumes that regular savings account balances will transfer to higher yielding
deposits at an annual decay rate of 8% based on historical trends. In addition
to evaluation of the Bank's GAP position, a "rate-shock" simulation is utilized
to measure potential earnings at risk due to an immediate increase or decrease
in market interest rates of up to 200 basis points. Utilizing a 200 basis point
immediate rate shock simulation as of December 31, 1996, the simulation model
projects net interest income for the next twelve months to decrease by
approximately 4.7%, which is within the Bank's policy limit of 10%. An immediate
200 basis point rise in interest rates is a hypothetical rate scenario used to
measure risk, and does not necessarily represent management's expectation
relative to actual market developments.
Liquidity and Capital Resources
Liquidity is the ability of the Bank to meet customer loan demands,
depositor requests for withdrawals and pay operating expenses. The Bank's
sources of funding are from deposit growth, loan repayments, borrowings,
reduction of its securities and income generated from operations.
The Bank also has the capacity to borrow funds from the Federal Home Loan
Bank of Boston (FHLB), of which it is a member. The Bank is eligible to borrow
against its assets an amount not to exceed collateral as defined by the FHLB. As
of December 31, 1996, qualified collateral totaled $122,184,000. The Bank's
actual borrowings on that date were $21,000,000.
As of December 31, 1996, the Corporation had liquid assets consisting of
cash, federal funds sold, money market preferred stock and unpledged U.S.
Government and agency obligations of $71,699,000 or 17.1% of total assets which
is within an acceptable level as established in the Corporation's policy . The
Corporation also had additional equity securities with a market value of
$23,300,000 that could be converted to cash if necessary. On December 31, 1996,
commitments to extend credit totaled $29,610,000.
During the latter part of 1996, the Bank hired a Chief Information Officer
to review the Bank's current utilization of available technology and implement a
strategy to upgrade systems for greater flexibility and effectiveness. Although
the Bank had no material commitments for capital expenditures at year end, the
results of the data processing analysis may warrant system enhancements in the
future.
The Corporation's improvement in earnings during 1996 led to an increase in
dividend payments to shareholders. Dividends paid in 1996 totaled $1,991,000 or
$.74 per share as compared to $1,590,000 or $.59 per share in 1995 which
reflects an adjustment per share for a six-for-five stock split effected in the
form of a stock dividend on June 19, 1996. See Note 10 to the Corporation's
Consolidated Financial Statements for a description of the applicable
restrictions on the Corporation's ability to pay dividends.
Shareholders' equity at year end decreased to $42,731,000 as compared to
$43,210,000 as of the prior year end. This decline was the result of a stock
repurchase plan announced in February of 1996 whereby the Corporation authorized
the repurchase of up to 15% of the Corporation's outstanding common stock over
an eighteen month time period. As of December 31, 1996, a total of 197,552
shares had been repurchased for a total cost of $4,339,000. Under regulatory
definitions, an institution is considered "well capitalized" (the highest
rating) if its leverage capital ratio is 5% or higher, its tier one risk based
capital ratio is 6% or higher and its total risk based capital ratio is 10% or
higher. On December 31, 1996, the Corporation had a leverage capital ratio of
10.3%, a tier one risk based capital ratio of 15.2% and a total risk based
capital ratio of 16.4% as compared to 11.2%, 17.5% and 18.8% respectively, for
1995.
Comparisons of Years Ended December 31, 1996 and 1995
Overall
For 1996, the Corporation had net income of $5,024,000 as compared to
$4,296,000 for 1995. Higher net interest income, higher noninterest income and
to a lesser extent, an increase in net securities gains contributed to the
improved results. 1996 net income represents an annualized return on average
assets of 1.26% as compared to 1.17% for 1995. Return on average equity for 1996
rose to 11.7% from 10.7% for 1995.
Interest Income
Interest income increased $2,407,000 or 8.7% to $29,927,000 in 1996 as
compared to $27,520,000 earned in 1995. The increase can be attributed to an
8.0% increase in average earning assets as well as an increase in the tax
equivalent yield on earning assets from 7.92% in 1995 to 7.99% 1996. The
increase in the yield is primarily due to the repricing of adjustable rate
mortgages at higher rates during 1996 as compared to 1995.
Interest Expense
Interest expense increased $1,549,000 or 11.4% to $15,173,000 in 1996 as
compared to $13,624,000 in 1995. The primary reason for the rise in interest
expense was an 8.3% increase in average interest bearing liabilities. In
addition, a slight rise in interest rates during the early part of 1996 caused
the cost of funds to increase to 4.51% in 1996 from 4.39% in 1995. Interest
expense also increased as deposits shifted from savings accounts to higher
yielding money market accounts and time certificates of deposit and the level of
borrowed funds increased from year to year.
Net Interest Income
Net interest income increased $858,000 or 6.2% in 1996 as compared to 1995.
The tax equivalent net interest margin for 1996 was 4.10%, a slight decline from
4.15% in 1995.
11
<PAGE>
Provision for Loan Losses
The provision for loan losses for 1996 was $435,000 as compared to $180,000
in 1995, an increase of 142%. Management determines the provision based upon an
evaluation of the credit risk associated with the portfolio and current market
conditions as well as the level of the allowance for loan losses compared to
nonperforming loans. Net chargeoffs for 1996 increased to $1,047,000 compared to
$829,000 for 1995. Of the total chargeoffs in 1996 and 1995, $415,000 and
$352,000, respectively, relates to the reduction in fair value of the underlying
collateral and past due taxes of one group of loans which had been in litigation
since 1992. This is the principle reason for the increase in the provision for
loan losses over 1995.
Other Income
Noninterest income increased $441,000 to $1,685,000 for 1996 as compared to
$1,244,000 for 1995. The increase was primarily the result of a $194,000
increase in securities gains as well as a $105,000 increase in trust fees due
primarily to a higher volume of assets under management during 1996 as compared
to 1995. In addition, net trading account gains of $21,000 in 1996 compared
favorably to losses of $14,000 in 1995. Other contributions to the increase in
other income include a higher volume of sales of Savings Bank Life Insurance
("SBLI") and increased brokerage activity.
Other Expenses
Noninterest expenses decreased $27,000 or 0.3% for 1996 as compared to
1995. The primary reason for the decrease was a reduction in premiums assessed
by the Federal Deposit Insurance Corporation ("FDIC") which resulted in a
decrease in expense of $326,000 when comparing 1996 to 1995. In addition, the
Corporation adopted Financial Accounting Standard No. 121 "Accounting for the
Impairment of Long Lived Assets" in 1995 which resulted in a $281,000 writedown
of the carrying amount of certain Corporation premises to fair value. A partial
offset to these expense reductions was a rise in salaries and benefits of
$353,000 or 8.3% for 1996 as compared to the prior year due to normal
compensation adjustments of approximately 4%, additional full time exempt
employees and an increase in incentive compensation in relation to the
Corporation's improved performance.
Income Taxes
The provision for income taxes increased to $2,381,000 for 1996 as compared
to $2,038,000 for 1995. The increase was primarily due to the generation of
income before taxes of $7,405,000 in 1996 as compared to $6,334,000 earned in
1995. The effective income tax rate for 1996 and 1995 was 32.2% and is lower
than the expected statutory rate due to the Federal and State dividends received
deduction.
As of December 31, 1996, the Corporation had a total deferred tax asset of
$2,196,000 which was comprised of two separate components. A deferred tax
liability based on the tax effect of the net unrealized holding gains in the
Corporation's available for sale investment portfolio totaled $352,000. The
change in this component directly impacts shareholders' equity. In addition, a
deferred asset representing the net effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
those for income tax purposes amounted to $2,548,000. The change in this
component directly impacts earnings. As of year end, the Corporation has
recorded no valuation allowance against deferred tax assets. A valuation
allowance is not considered necessary for Federal purposes based on sufficient
available Federal taxable income in the carryback period and sufficient future
earnings during the carryforward period. For state income tax purposes, the
carryback of net losses to prior years is not allowed and the basis for
recording no valuation allowance is anticipated sufficient future taxable income
during the carryforward period. The Corporation is confident that future taxable
income will be sufficient to use the deferred tax assets based upon its budget
projections for future periods.
Comparisons of Years Ended December 31, 1995 and 1994
Overall
For 1995, the Corporation had net income of $4,296,000 as compared to
$3,748,000 for 1994. Higher net interest income, higher noninterest income and
to a lesser extent, an increase in net securities gains contributed to the
improved results. 1995 net income represents an annualized return on average
assets of 1.17% as compared to 1.11% for 1994. Return on average equity for 1995
rose to 10.7% from 10.1% for 1994.
Interest Income
Interest income increased $4,108,000 or 17.5% to $27,520,000 in 1995 as
compared to $23,412,000 earned in 1994. The increase can be attributed to an
8.8% increase in average earning assets as well as an increase in the tax
equivalent yield on earning assets from 7.28% in 1994 to 7.92% in 1995. The
increase in the yield is primarily due to the repricing of adjustable rate
mortgages and investment securities at higher rates during 1995 as compared to
1994.
Interest Expense
Interest expense increased $3,187,000 or 30.5% to $13,624,000 in 1995 as
compared to $10,437,000 in 1994. The primary reason for the rise in interest
expense was an 8.2% increase in average interest bearing liabilities. In
addition, rising interest rates during the latter part of 1994 and early 1995
caused the cost of funds to increase to 4.39% in 1995 from 3.64% in 1994.
Interest expense also increased as deposits shifted from savings accounts to
higher yielding money market accounts and time certificates of deposit.
12
<PAGE>
Net Interest Income
Net interest income increased $921,000 or 7.1% in 1995 as compared to 1994.
The net interest margin on a tax equivalent basis for 1995 was 4.15%, a slight
increase from the 4.14% of 1994.
Provision for Loan Losses
The provision for loan losses for 1995 was $180,000 as compared to $242,000
in 1994, a decrease of 25.7%. Management determines the provision based upon an
evaluation of the credit risk associated with the portfolio and current market
conditions. Net chargeoffs during 1995 increased to $828,000, an increase of
49.7% as compared to $553,000 for 1994. Nonperforming loans increased a modest
$29,000 to $6,256,000 from $6,227,000 in 1994. As of December 31, 1995, the
allowance for loan losses was 87.7% of nonperforming loans as compared to 98.5%
on December 31, 1994.
Other Income
Noninterest income increased $461,000 to $1,244,000 for 1995 as compared to
$783,000 for 1994. The increase was primarily the result of a $105,000 increase
in securities gains and a $277,000 decrease in net trading account losses.
Service charges on deposit accounts increased $67,000 or 15.0% over 1994 due to
an increase in fees collected for ATM and checking account activity.
Other Expenses
Noninterest expenses increased $747,000 or 9.5% for 1995 as compared to
1994. The primary reason for the increase was a rise in salaries and benefits of
$390,000 or 10.1% due to normal compensation adjustments as well as additional
staffing. During the fourth quarter of 1995, the Bank also increased the number
of hours its branches were open for customer service.
As of December 31, 1995, the Corporation elected to early adopt Financial
Accounting Standard No. 121 "Accounting for the Impairment of Long Lived
Assets". The adoption of this new accounting standard resulted in a $281,000
writedown of the carrying amount of certain Corporation premises to fair value.
Additionally, the Holding Company, which was formed in November of 1994,
had incremental expenses relating to its first full year of operation in the
amount of $130,000. The increase in noninterest expenses in 1995 was partially
offset by a $288,000 reduction in premiums assessed by the Federal Deposit
Insurance Corporation.
Finally, data processing expense increased $69,000 primarily due to the
implementation of a new accounting system in the Trust Department during 1995,
as well as normal increases in account volume. Foreclosed real estate expenses
decreased by $69,000 due to a reduction in the provision for OREO losses and
property management expenses as the volume of properties held during 1995 was
lower than 1994.
Income Taxes
The provision for income taxes increased to $2,038,000 for 1995 as compared
to $1,889,000 for 1994. The increase was primarily due to the generation of
income before taxes of $6,334,000 in 1995 as compared to $5,637,000 earned in
1994. The effective income tax rate for 1995 decreased slightly to 32.2% as
compared to 33.5% for 1994, and is lower than the expected statutory rate due to
the Federal and State dividends received deduction.
As of December 31, 1995, the Corporation had a total deferred tax asset of
$2,425,000 which was comprised of two separate components. A deferred tax
liability based on the tax effect of the net unrealized holding gains in the
Company's available for sale investment portfolio totaled $355,000. In addition,
a deferred asset representing the net effect of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and those for income tax purposes amounted to $2,070,000. As of year end, the
Company has recorded no valuation allowance against deferred tax assets.
Impact of Inflation
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurements of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time and due to inflation. Virtually, all assets and liabilities
of a financial institution are monetary in nature. As a result, interest rates
typically have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Inflation, however,
may impact a creditor's ability to service debt if the loan is variable in
nature or if the creditor's income stream were to be adversely affected due to
inflationary cycles. In addition, the effects of deflation on real estate values
in Connecticut has a negative impact on a creditor's ability to recover the
principal amount loaned on properties subsequently foreclosed upon. The impact
of inflationary/deflationary pressures are considered in the Bank's allowance
for loan losses. See "Nonperforming Assets and Allowance for Loan Losses".
Accounting Pronouncements
and Other
In June, 1996, the FASB issued Statement of Financial Accounting Standards
No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("SFAS 125"). SFAS 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. The Corporation will be required to adopt SFAS
125 for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, on a prospective basis. The
adoption of this standard is not expected to have a material impact on the
Corporation's financial condition or results of operations.
13
<PAGE>
In February, 1997, the FASB issued Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" ("SFAS 128"). SFAS 128 provides
accounting and reporting standards for the calculation of earnings per share
intended to simplify the computation by replacing the presentation of primary
earnings per share with a presentation of basic earnings per share. The
Corporation will be required to adopt SFAS 128 in the fourth quarter of 1997.
The adoption of this standard is not expected to have a material impact on the
Corporation's financial condition or results of operations.
As the year 2000 approaches, an issue impacting all companies has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. In brief, many existing application software
products in the marketplace were designed to only accommodate a two digit date
position which represents the year (e.g., "95" is stored on the system and
represents the year 1995). As a result, the year 1999 (i.e., "99") could be the
maximum date value systems will be able to accurately process. Management is in
the process of working with its software vendors to assure that the Bank is
prepared for the year 2000. Management does not anticipate that the Corporation
will incur operating expenses or be required to invest heavily in computer
system improvements to be year 2000 compliant.
14
<PAGE>
Distribution of Assets, Liabilities and Shareholders' Equity:
Interest Rates and Interest Differential
<TABLE>
<CAPTION>
Year ended December 31
- --------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate(c) Balance Interest Rate(c)
------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans (a) (b) $ 244,298 $ 21,123 8.65% $226,335 $ 19,238 8.50%
Taxable investment securities (at cost) (c) 135,457 9,461 6.98% 126,188 8,814 6.98%
Municipal bonds (c) 3,150 226 7.17% 2,882 209 7.25%
Federal funds sold 4,616 240 5.20% 3,421 199 5.82%
Other interest-earning assets 2,648 131 4.95% 2,364 139 5.88%
--------- --------- --------- ------
Total interest-earning assets 390,169 31,181 7.99% 361,190 28,599 7.92%
--------- ------
Noninterest-earning assets 9,697 6,385
--------- ---------
Total Assets $ 399,866 $ 367,575
========= =========
Liabilities and Equity
Interest-bearing liabilities:
NOW and savings deposits $ 112,137 2,850 2.54% $112,459 2,716 2.42%
Time deposits 167,819 9,293 5.54% 155,130 8,518 5.49%
Mortgagors' escrow 1,078 32 2.97% 1,054 27 2.56%
FHLB of Boston advances
and other borrowings 19,636 1,112 5.66% 15,154 813 5.36%
Securities sold under agreements
to repurchase 35,585 1,886 5.30% 26,819 1,550 5.78%
-------- -------- -------- ------
Total interest-bearing liabilities 336,255 15,173 4.51% 310,616 13,624 4.39%
-------- ------
Noninterest-bearing liabilities:
Demand deposits 19,662 15,845
Other 1,109 870
Shareholders' equity 42,840 40,244
-------- --------
Total Liabilities and
Shareholders' Equity $ 399,866 $ 367,575
========= =========
Net interest income before
tax equivalent adjustment 16,008 14,975
Tax equivalent adjustment (1,254) (1,079)
-------- --------
Net interest income $ 14,754 $ 13,896
========= =========
Net interest spread (tax equivalent basis) 3.48% 3.53%
===== =====
Net interest margin (tax equivalent basis) 4.10% 4.15%
===== =====
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31
- ------------------------------------------------------------------------------------
(dollars in thousands) 1994
- ------------------------------------------------------------------------------------
Average Yield/
Balance Interest Rate(c)
------- -------- -------
<S> <C> <C> <C>
Assets
Interest-earning assets:
Loans (a) (b) $214,336 $ 17,060 7.96%
Taxable investment securities (at cost) (c) 107,710 6,714 6.23%
Municipal bonds (c) 1,447 87 6.01%
Federal funds sold 5,557 205 3.69%
Other interest-earning assets 3,601 154 4.28%
-------- --------
Total interest-earning assets 332,651 24,220 7.28%
--------
Noninterest-earning assets 6,459
--------
Total Assets $339,110
========
Liabilities and Equity
Interest-bearing liabilities:
NOW and savings deposits $125,367 2,888 2.30%
Time deposits 136,230 6,272 4.60%
Mortgagors' escrow 917 22 2.40%
FHLB of Boston advances
and other borrowings 15,056 830 5.51%
Securities sold under agreements
to repurchase 9,460 425 4.49%
-------- ------
Total interest-bearing liabilities 287,030 10,437 3.64%
------
Noninterest-bearing liabilities:
Demand deposits 14,174
Other 829
Shareholders' equity 37,077
--------
Total Liabilities and
Shareholders' Equity $339,110
========
Net interest income before
tax equivalent adjustment 13,783
Tax equivalent adjustment (808)
--------
Net interest income $ 12,975
========
Net interest spread (tax equivalent basis) 3.63%
=====
Net interest margin (tax equivalent basis) 4.14%
=====
</TABLE>
(a) Nonaccruing loans are included in the average loans balance outstanding.
(b) Included in interest income are loan fees of $379,218, $302,769, and
$354,009, for the years ended December 31, 1996, 1995 and 1994,
respectively.
(c) Yields/Rates are calculated on a tax equivalent basis using statutory
federal and state tax rates. The tax equivalent adjustment (increase) to
net interest income was $1,254,000, $1,079,000 and $808,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
15
<PAGE>
Net Interest Income; Rate/Volume Analysis
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1996 Compared to 1995 1995 Compared to 1994
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------ ------------------------------
(in thousands) Volume Rate Net(1) Volume Rate Net(1)
------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans $ 1,548 $ 337 $ 1,885 $ 984 $ 1,194 $ 2,178
Taxable investment securities 647 -- 647 1,233 867 2,100
Municipal bonds 19 (2) 17 101 21 122
Federal funds sold 64 (23) 41 (97) 91 (6)
Other interest-earning assets 16 (24) (8) (62) 47 (15)
------------------------------ ------------------------------
2,294 288 2,582 2,159 2,220 4,379
------------------------------ ------------------------------
Interest paid on:
NOW and savings deposits (8) 142 134 (307) 135 (172)
Time deposits 702 73 775 940 1,306 2,246
Mortgagors' escrow 1 4 5 3 2 5
FHLB of Boston advances
and other borrowings 252 47 299 5 (22) (17)
Securities sold under agreements
to repurchase 473 (137) 336 973 152 1,125
------------------------------ ------------------------------
1,420 129 1,549 1,614 1,573 3,187
------------------------------ ------------------------------
Change in net interest income $ 874 $ 159 $ 1,033 $ 545 $ 647 $ 1,192
============================== ==============================
</TABLE>
(1) The change in interest income due to both tax equivalent rate and volume
has been allocated to volume and tax equivalent rate changes in proportion
to the relationship of the absolute dollar amounts of the change in each.
16
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Bancorp Connecticut, Inc.:
We have audited the accompanying consolidated statements of condition of
Bancorp Connecticut, Inc. and subsidiary as of December 31, 1996 and 1995, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Corporation'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 consolidated financial position of
Bancorp Connecticut, Inc. and subsidiary as of December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Corporation changed its methods of accounting for long-lived assets and the
allowance for loan losses in 1995.
/s/ Coopers & Lybrand L.L.P.
Hartford, Connecticut
January 15, 1997
17
<PAGE>
Consolidated Statements of Condition
Bancorp Connecticut, Inc.
<TABLE>
<CAPTION>
December 31
-------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Assets:
Cash and due from banks $ 8,454,570 $ 6,571,706
Federal funds sold 700,000 4,100,000
----------- -----------
Cash and cash equivalents 9,154,570 10,671,706
----------- -----------
Securities available for sale (at market value) 105,514,806 106,889,015
Securities held to maturity
(market value: 1996 - $43,973,649
and 1995 - $24,021,725) 44,096,667 23,660,434
Trading account securities 2,429,765 390,476
Federal Home Loan Bank stock 2,039,700 1,978,300
Loans 252,144,314 237,153,691
Less:
Deferred loan fees (995,049) (959,540)
Allowance for loan losses (4,875,308) (5,487,801)
----------- -----------
Net loans 246,273,957 230,706,350
----------- -----------
Premises and equipment 3,083,859 3,387,793
Accrued income receivable 2,716,624 2,520,205
Foreclosed real estate, net 1,367,303 872,351
Deferred taxes 2,196,226 2,425,108
Other assets 524,555 475,883
----------- -----------
Total assets $419,398,032 $ 383,977,621
============= =============
Liabilities and Shareholders' Equity
Liabilities:
Deposits $ 309,826,725 $ 294,835,090
Advances from Federal Home Loan Bank of Boston 21,000,000 19,990,000
Federal funds purchased and securities sold
under agreements to repurchase 41,878,710 22,227,488
Mortgagors' escrow accounts 1,687,087 1,653,465
Accrued taxes, expenses and other
liabilities 2,274,390 2,062,009
----------- -----------
376,666,912 340,768,052
----------- -----------
Commitments and contingencies (Notes 15 and 19)
Shareholders' Equity:
Preferred Stock, no par value: authorized
1,000,000 shares; none issued and outstanding -- --
Common Stock, $1.00 par value: authorized
7,000,000 shares; issued and outstanding
2,768,149 shares at December 31, 1996 and
2,263,313 shares at December 31, 1995 2,768,149 2,263,313
Additional paid-in capital 19,189,194 18,861,973
Retained earnings 24,608,695 21,575,723
Unrealized gain on securities available-for-sale,
net of tax 503,880 508,560
Treasury stock at cost; 197,552 shares at
December 31, 1996 and -0- shares at
December 31, 1995 (4,338,798) --
----------- -----------
42,731,120 43,209,569
----------- -----------
Total liabilities and shareholders' equity $ 419,398,032 $ 383,977,621
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
18
<PAGE>
Consolidated Statements of Income
Bancorp Connecticut, Inc.
<TABLE>
<CAPTION>
For the Years Ended December 31
--------------------------------------------
1996 1995 1994
----------- ----------- -------------
<S> <C> <C> <C>
Interest income:
Interest on loans, including fees $21,123,152 $ 19,238,504 $ 17,060,016
----------- ------------ ------------
Interest and dividends on investment securities:
Interest income 5,627,447 5,515,895 3,979,693
Dividend income 2,779,739 2,415,212 1,919,917
Interest on trading account 25,824 12,579 93,751
----------- ------------ ------------
8,433,010 7,943,686 5,993,361
----------- ------------ ------------
Interest on federal funds sold 240,231 199,100 204,508
Other interest and dividends 130,697 138,883 154,217
----------- ------------ ------------
Total interest income 29,927,090 27,520,173 23,412,102
----------- ------------ ------------
Interest expense:
Savings deposits 2,628,068 2,502,088 2,663,909
Time deposits 9,292,756 8,518,244 6,271,903
NOW accounts 254,754 240,806 246,296
----------- ------------ ------------
12,175,578 11,261,138 9,182,108
Interest on borrowed money 2,997,846 2,363,220 1,254,773
----------- ------------ ------------
Total interest expense 15,173,424 13,624,358 10,436,881
----------- ------------ ------------
Net interest income 14,753,666 13,895,815 12,975,221
Provision for loan losses 435,000 180,000 242,452
----------- ------------ ------------
Net interest income after
provision for loan losses 14,318,666 13,715,815 12,732,769
----------- ------------ ------------
Other income:
Net securities gains 343,730 150,226 45,644
Net trading account gains (losses) 20,754 (14,005) (291,120)
Trust fees 457,732 352,969 386,051
Service charges on deposit accounts 534,005 515,901 448,473
Other 329,025 238,513 193,819
----------- ------------ ------------
1,685,246 1,243,604 782,867
----------- ------------ ------------
Other expenses:
Salaries and employee benefits 4,601,019 4,247,720 3,857,892
Occupancy expense, net 518,026 497,887 476,743
Furniture and equipment expense 349,178 319,148 274,912
Data processing expense 631,744 590,040 520,889
FDIC assessments 2,000 328,346 615,953
Legal expense 272,331 232,090 236,006
Foreclosed real estate provision and expense, net 185,320 189,863 258,689
Advertising expense 318,646 297,803 275,996
Other 1,720,444 1,922,815 1,361,621
----------- ------------ ------------
8,598,708 8,625,712 7,878,701
----------- ------------ ------------
Income before income taxes 7,405,204 6,333,707 5,636,935
Provision for income taxes 2,380,841 2,038,080 1,888,638
----------- ------------ ------------
Net income $ 5,024,363 $ 4,295,627 $ 3,748,297
=========== ============ ============
Per share data:
Primary earnings per share $1.77 $ 1.54 $ 1.36
=========== ============ ============
Fully diluted earnings per share $1.76 $ 1.54 $ 1.36
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
19
<PAGE>
Consolidated Statements of Shareholders' Equity
Bancorp Connecticut, Inc.
For the years ended December 31, 1996, 1995, and 1994.
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss)
Additional on Securities Total
Common Paid-In Retained Available- Treasury Shareholders'
Stock Capital Earnings for-Sale Stock Equity
---------- ------------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of
December 31, 1993 $2,232,063 $ 18,588,616 $ 16,251,842 $ (107,179) $ -- $ 36,965,342
Net income -- -- 3,748,297 -- 3,748,297
Stock options exercised 15,810 115,282 -- -- -- 131,092
Cash dividends declared -
$.42 per share -- -- (1,130,206) -- -- (1,130,206)
Increase in net unrealized loss on
securities available-for-sale -- -- -- (2,357,754) -- (2,357,754)
---------- ------------ ------------ ----------- ----------- ------------
Balance as of
December 31, 1994 2,247,873 18,703,898 18,869,933 (2,464,933) 37,356,771
Net income -- -- 4,295,627 -- -- 4,295,627
Stock options exercised 15,440 118,575 -- -- -- 134,015
Cash dividends declared -
$.59 per share -- -- (1,589,837) -- -- (1,589,837)
Decrease in net unrealized
loss on securities
available-for-sale -- -- -- 2,973,493 -- 2,973,493
Tax benefits related to
common stock option
exercises and restricted
stock -- 39,500 -- -- -- 39,500
---------- ------------ ------------ ----------- ----------- ------------
Balance as of
December 31, 1995 2,263,313 18,861,973 21,575,723 508,560 -- 43,209,569
Net income -- -- 5,024,363 -- -- 5,024,363
Stock options exercised 63,046 503,748 -- -- -- 566,794
Cash dividends declared -
$.74 per share -- -- (1,991,391) -- -- (1,991,391)
6-for-5 stock split
effected in the form
of a stock dividend 441,790 (441,790) -- -- -- --
Treasury stock purchased -- -- -- -- (4,338,798) (4,338,798)
Decrease in net unrealized
gain on marketable equity
securities -- -- -- (4,680) -- (4,680)
Tax benefits related to
common stock option
exercises and restricted
stock -- 265,263 -- -- -- 265,263
---------- ------------ ------------ ----------- ----------- ------------
Balance as of
December 31, 1996 $2,768,149 $ 19,189,194 $ 24,608,695 $ 503,880 $(4,338,798) $ 42,731,120
========== ============ ============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE>
Consolidated Statements of Cash Flows
Bancorp Connecticut, Inc.
<TABLE>
<CAPTION>
For the years ended December 31
-------------------------------------------
1996 1995 1994
----------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income 5,024,363 $ 4,295,627 $ 3,748,297
------------ ------------ ------------
Adjustments to reconcile net income
to net cash provided by operating activities:
Deferred income tax provision (credit) 232,147 (105,848) 525,994
Write-down of premises and equipment -- 281,417 --
Net accretion and amortization of
bond premiums and discounts 123,801 (385,536) (417,597)
Provision for loan losses 435,000 180,000 242,296
Provision for foreclosed real estate losses 201,730 120,404 147,974
Gain on sale of foreclosed real estate (175,323) (45,922) --
Gain on sale of loans (15,762) -- --
Amortization of deferred loan points (177,448) (127,177) (159,302)
Realized investment security (gains) losses (364,485) (136,221) 245,476
Depreciation expense 457,818 392,963 321,979
Increase in trading account (2,018,535) (390,476) --
Increase in accrued income receivable (196,419) (311,626) (554,030)
Increase in other assets (60,645) (103,542) (102,049)
Addition of mortgage servicing rights (27,783) -- --
Increase in accrued expenses payable
and other liabilities 477,644 461,697 37,391
------------ ------------ ------------
Total adjustments (1,108,260) (169,867) 288,288
------------ ------------ ------------
Net cash provided by operating activities 3,916,103 4,125,760 4,036,585
------------ ------------ ------------
Cash flows from investing activities:
Purchases of securities held-to-maturity (26,496,387) (15,402,231) (10,860,920)
Purchases of securities available-for-sale (45,396,922) (34,872,521) (59,230,222)
Proceeds from sales of securities available-for-sale 24,642,498 22,221,950 20,476,350
Proceeds from maturities of securities 18,000,000 21,500,000 7,638,563
Paydowns on mortgage-backed securities 10,400,772 5,980,517 7,638,395
Purchases of Federal Home Loan Bank stock (61,400) -- --
Proceeds from sale of loans 3,620,834 -- --
Net increase in loans (22,067,707) (18,699,522) (7,401,650)
Purchases of premises and equipment, net (114,128) (390,400) (521,508)
Proceeds from sales of foreclosed real estate, net 2,116,117 1,091,741 889,305
------------ ------------ ------------
Net cash used in investing activities (35,356,323) (18,570,466) (41,371,687)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in time deposits 14,671,325 19,688,059 11,207,965
Net increase (decrease) in other deposits 320,310 (4,244,684) (110,468)
Net increase in mortgagors' escrow 33,622 187,566 15,894
Proceeds from borrowings 42,028,000 14,602,000 14,298,000
Repayment of borrowings (41,018,000) (16,911,000) (8,649,000)
Net increase in Federal funds purchased
and repurchase agreements 19,651,222 7,200,385 12,196,207
Proceeds from exercise of stock options 566,794 134,015 131,092
Repurchase of common stock (4,338,798) -- --
Cash dividends paid (1,991,391) (1,589,837) (1,130,206)
------------ ------------ ------------
Net cash provided by financing activities 29,923,084 19,066,504 27,959,484
------------ ------------ ------------
Net increase (decrease) in
cash and cash equivalents (1,517,136) 4,621,798 (9,375,618)
Cash and cash equivalents at beginning of year 10,671,706 6,049,908 15,425,526
------------ ------------ ------------
Cash and cash equivalents at end of year $ 9,154,570 $ 10,671,706 $ 6,049,908
============ ============ ============
Noncash investing and financing activities:
Change in net unrealized loss on securities
available-for-sale, net of $3,266,
$2,019,915 and $1,755,120 of deferred
taxes in 1996, 1995 and 1994, respectively $ (4,680) $ 2,973,493 $ (2,357,754)
Transfer of loans to foreclosed real estate 3,259,676 1,397,575 1,847,446
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
21
<PAGE>
Notes To Consolidated Financial Statements
Bancorp Connecticut, Inc.
Note 1 - Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements of Bancorp Connecticut, Inc. (the
"Corporation") include the accounts of its wholly-owned subsidiary, Southington
Savings Bank (the "Bank"). The Bank operates three branches in Southington,
Connecticut. The Bank's primary source of revenue is providing loans to
customers, who are either small and middle-market businesses or individuals. All
significant intercompany balances and transactions have been eliminated in
consolidation.
On November 17, 1994, Southington Savings Bank completed the formation of
Bancorp Connecticut, Inc., a holding company for the Bank. On that date, each
outstanding share of the Bank's common stock was automatically converted into
one share of the Corporation's common stock. The acquisition of the Bank was
accounted for in a manner similar to a pooling of interests in that the book
value of assets, liabilities and shareholders' equity of the Bank and its
operations are combined with those of the newly formed company.
The formation of the Corporation and subsequent name change of the reporting
entity had no impact on the comparability of financial information with that of
prior periods.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. In preparing the financial statements,
management is required to make extensive use of estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the
statement of condition and revenues and expenses for the period. Actual results
could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses and
valuation of real estate acquired in connection with foreclosures. In connection
with the determination of the allowance for loan losses and valuation of
foreclosed real estate, management obtains independent appraisals for
significant properties. A substantial portion of the Bank's loans are
collateralized by real estate in Connecticut. Accordingly, the ultimate
collectibility of a substantial portion of the Bank's loan portfolio is
particularly susceptible to changes in market conditions in Connecticut.
Management believes that the allowance for loan losses and valuation of
foreclosed real estate are adequate. While management uses available information
to recognize losses on loans and foreclosed real estate, future additions to the
allowance or writedowns may be necessary based on 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 allowance for loan losses and valuation of foreclosed real estate.
Such agencies may require the Bank to recognize additions to the allowance or
additional writedowns on foreclosed real estate based on their judgments of
information available to them at the time of their examination.
Investments
Securities that the Corporation has the ability and positive intent to hold
to maturity are classified as held-to-maturity and carried at amortized cost.
Securities that may be sold as part of the Corporation's asset/liability or
liquidity management or in response to or in anticipation of changes in interest
rates and resulting prepayment risk, or for other similar factors, are
classified as available-for-sale and carried at fair market value. Unrealized
gains and losses on such securities are reported, net of tax, as a separate
component of shareholders' equity. From time to time, the Corporation may
classify a security as a trading security when the intent is to sell the
security in the near future to generate profits. Any unrealized gains or losses
in trading securities are included in income. Realized gains and losses on the
sales of all securities are reported in earnings and computed using the specific
identification cost basis.
Interest and Fees on Loans
Interest on loans is included in income monthly as earned based on rates
applied to principal amounts outstanding, except that interest on loans 90 or
more days past due is not recognized as income until received. Loan origination
fees and certain direct loan origination costs are deferred and the net amount
amortized as an adjustment to the related loan's yield over the life of the loan
or taken into income when the related loan is sold.
Loans and Allowance for Loan Losses
Loans are stated at principal balance and are net of unearned interest
income.
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. The allowance is increased by provisions for loan losses
charged against income. When a loan, including an impaired loan, or portion of a
loan is determined to be uncollectible, the portion deemed uncollectible is
charged against the allowance and subsequent recoveries, if any, are credited to
the allowance.
On January 1, 1995, the Corporation adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS
114") and Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosure". Under
the new standards, a loan is considered impaired if, based on current
information and events, it is probable that the Corporation will be unable to
collect the scheduled payments of principal and interest when due, according to
the contractual terms of the loan agreement. The measurement of impaired loans
and the related allowance for loan losses is generally based on the present
value of
22
<PAGE>
expected future cash flows discounted at the historical effective interest rate,
except that all collateral-dependent loans are measured for impairment based on
the fair value of the collateral. As permitted by the statement, smaller-balance
homogeneous loans consisting of residential mortgages and consumer loans are
evaluated for reserves collectively based on historical loss experience. Prior
to 1995, the allowance for credit losses related to all loans was based on
undiscounted cash flows or the fair value of the collateral for collateral
dependent loans. The adoption of SFAS 114 also resulted in a reclassification of
$3,299,212 of "in-substance foreclosures" from other real estate owned to loans
as of January 1, 1995. Prior periods have been reclassified for comparative
purposes. The adoption of SFAS 114 had no impact on the overall level of the
allowance for loan losses.
In May 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights - an amendment of FASB Statement No. 65" ("FAS 122"), which the
Corporation adopted on January 1, 1996. FAS 122 amends FASB Statement No. 65,
"Accounting for Certain Mortgage Banking Activities" to provide that a mortgage
banking enterprise recognize, as separate assets, rights to service mortgage
loans for others, however those servicing rights are acquired. It also requires
the Corporation to assess its capitalized mortgage servicing rights for
impairment, based on the fair value of those rights.
FAS 122 requires that a portion of the cost of originating a mortgage loan
that is sold with servicing rights retained be allocated to the mortgage
servicing right, based on its fair value relative to the loan as a whole. To
determine the fair value of the servicing rights, the Corporation uses a
valuation model that calculates the present value of future cash flows. Certain
assumptions, such as estimates of the cost of servicing per loan, discount rate,
and prepayment were used in the calculation which was done on an aggregate loan
basis.
Mortgage servicing rights are amortized in proportion to, and over the period
of, estimated net servicing income.
FAS 122 also requires a periodic assessment of the fair value of mortgage
servicing rights. In determining fair value, the servicing rights are
disaggregated into the predominant risk characteristics, which are currently
loan type and interest rate. These segments are then valued using the same model
used to originally determine the fair value at origination, using current
assumptions. The new value is then compared to the book value to determine if a
reserve for impairment is required.
The impact of adopting FAS 122 was capitalization of $27,783 in mortgage
servicing rights.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation,
computed on the straight-line and declining-balance methods at rates based on
estimated useful lives of the assets.
Effective December 31, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed. As a result of adoption, an impairment writedown of $281,417 was
included in noninterest expense as of December 31, 1995. The impairment amount
was determined by comparing the carrying value of certain buildings and land
owned by the Corporation to the estimates of current fair value based on
appraisals or assessment information. The impairment was a result of a decline
in market value since the date of acquisition of such premises that management
has deemed to be other than temporary.
Foreclosed Real Estate
Foreclosed real estate consists principally of properties acquired through
mortgage loan foreclosure proceedings. These properties are recorded at the
lower of the carrying value of the related loans, including costs of
foreclosure, or estimated fair value, less estimated costs to sell, of the real
estate acquired or repossessed. An allowance for losses on foreclosed real
estate is maintained for subsequent valuation adjustments on a specific-property
basis.
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
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The Corporation provides
deferred taxes for the estimated future tax effects attributable to temporary
differences and carryforwards when realization is more likely than not.
Deferred tax expense is based on items of income and expense that are
reported in different years in the consolidated financial statements and tax
returns and are measured at the tax rate in effect the year the difference
originated.
Earnings Per Share
Primary earnings per share are computed using the weighted-average common
shares outstanding during the year, including common stock equivalents, when
dilutive. The computation of fully diluted earnings per share is calculated in
the same way as primary earnings per share, except that the higher of the ending
market price or average market price is used to determine the dilutive effect of
common stock equivalents. The shares used in the computations for the three
years ended December 31, 1996 were as follows:
1996 1995 1994
--------- --------- ---------
Primary 2,835,863 2,786,686 2,748,957
Fully diluted 2,855,928 2,795,051 2,753,697
23
<PAGE>
The number of common shares used in the calculation have been restated for
all periods presented to reflect a 6-for-5 stock split effected in the form of a
stock dividend on June 19, 1996.
Cash Flows
Cash and cash equivalents include cash, interest and noninterest bearing
deposits due from banks and federal funds sold. The Bank paid interest of
$15,018,515, $13,346,669, and $10,348,936 on deposits, mortgagors' escrow
accounts and borrowings in 1996, 1995 and 1994, respectively.
Reclassification
Certain 1995 and 1994 amounts have been reclassified to conform with the 1996
presentation. These reclassifications had no impact on net income.
Note 2 -- Restriction on Cash and Due from Banks:
The Bank is required to maintain reserves against certain deposit transaction
accounts. At December 31, 1996, the Bank was required to have cash and liquid
assets of approximately $952,000 to meet these requirements.
Note 3 -- Investment Securities:
The amortized cost, gross unrealized gains and losses, and estimated market
values as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Held-To-Maturity
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
United States Government
agency obligations $22,651,085 $ 152,030 $(122,493) $22,680,622
Municipal bonds 3,251,878 87,903 (5,710) 3,334,071
Mortgage-backed securities 18,193,704 6,553 (241,301) 17,958,956
----------- ----------- ----------- -----------
$44,096,667 $ 246,486 $(369,504) $43,973,649
=========== ========= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Available-For-Sale
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
United States Government
obligations $ 14,977,409 $ 91,799 $ (2,333) $ 15,066,875
Mortgage-backed
securities 26,062,538 297,752 (144,108) 26,216,182
Marketable equity
securities 55,848,223 944,026 (261,632) 56,530,617
Mutual funds 7,771,227 9,776 (79,871) 7,701,132
------------ ---------- --------- ------------
$104,659,397 $1,343,353 $(487,944) $105,514,806
============ ========== ========= ============
</TABLE>
The amortized cost, gross unrealized gains and losses, and estimated market
values as of December 31, 1995 were as follows:
<TABLE>
<CAPTION>
Held-To-Maturity
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
United States
Government agency
obligations $17,947,094 $ 251,111 $(23,970) $18,174,235
Municipal bonds 3,022,202 112,228 (5,870) 3,128,560
Mortgage-backed
securities 2,691,138 27,792 -- 2,718,930
----------- --------- -------- -----------
$23,660,434 $ 391,131 $(29,840) $24,021,725
=========== ========= ======== ===========
</TABLE>
24
<PAGE>
Available-For-Sale
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ----------- ----------- -----------
United States Government
obligations $ 22,916,769 $ 204,693 $ (11,637) $ 23,109,825
Mortgage-backed
securities 38,887,526 497,366 (119,763) 39,265,129
Marketable equity
securities 36,375,134 665,006 (200,737) 36,839,403
Mutual funds 7,846,227 -- (171,569) 7,674,658
------------ ---------- --------- ------------
$106,025,656 $1,367,065 $(503,706) $106,889,015
============ ========== ========= ============
The amortized cost and estimated market value of debt securities at December
31, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
repay obligations with or without call or prepayment penalties:
<TABLE>
<CAPTION>
1996
-----------------------------------------------------
Held-To-Maturity Available-For-Sale
------------------------- -------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ 499,964 $ 500,155 $ 8,997,892 $ 9,035,313
Due after one year
through five years 17,932,461 18,063,880 5,979,517 6,031,562
Due after five years
through ten years 3,749,837 3,799,756 -- --
Due after ten years 3,720,701 3,650,902 -- --
----------- ----------- ----------- -----------
25,902,963 26,014,693 14,977,409 15,066,875
Mortgage-backed
securities 18,193,704 17,958,956 26,062,538 26,216,182
----------- ----------- ----------- -----------
$44,096,667 $43,973,649 $41,039,947 $41,283,057
=========== =========== =========== ===========
</TABLE>
Proceeds from sales of securities available-for-sale were $24,642,498,
$22,221,950 and $20,476,350 in 1996, 1995 and 1994, respectively. There were no
sales of securities held-to-maturity in 1996, 1995 or 1994. Gross gains of
$634,399, $745,433 and $234,442 and gross losses of $290,669, $595,207 and
$188,798 were realized on sales of securities available-for-sale in 1996, 1995
and 1994, respectively.
At December 31, 1996, investment securities with a carrying amount of
$50,765,852 were pledged as collateral to secure public deposits and for other
purposes.
Note 4 - Loans and the Allowance for Loan Losses:
Loans consisted of the following as of December 31:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Residential real estate $ 134,000,216 $ 132,565,700
Commercial real estate 35,471,892 34,598,367
Real estate construction 6,233,776 2,463,033
Commercial 37,049,994 31,971,024
Consumer 39,388,436 35,555,567
------------- -------------
252,144,314 237,153,691
Less: Deferred loan fee (995,049) (959,540)
Allowance for loan losses (4,875,308) (5,487,801)
------------- -------------
$ 246,273,957 $ 230,706,350
============= =============
</TABLE>
25
<PAGE>
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $ 5,487,801 $ 6,136,422 $ 6,447,483
Provision for loan losses 435,000 180,000 242,452
Chargeoffs (1,212,490) (1,041,851) (776,464)
Recoveries 164,997 213,230 222,951
----------- ----------- -----------
Balance at end of year $ 4,875,308 $ 5,487,801 $ 6,136,422
=========== =========== ===========
</TABLE>
Information with respect to impaired loans, in accordance with SFAS 114,
consisting primarily of commercial real estate and commercial loans, was as
follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Investment in impaired loans $2,431,559 $4,992,518
Impaired loans with
no valuation allowance 2,304,586 4,791,857
Impaired loans with
a valuation allowance 126,973 200,661
Valuation allowance 42,803 3,661
Average recorded investment
in impaired loans 2,482,867 4,702,103
Commitments to lend additional
funds for loans considered
impaired -- --
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1996 1995
---------- ------------
<S> <C> <C>
Interest income, recognized
on a cash basis $ 258,740 $ 253,867
Information with respect to
nonaccrual loans is as follows:
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995
----------------- -----------
<S> <C> <C>
Nonaccrual loans $2,939,000 $6,256,499
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Interest income that
would have been recorded
under original terms $353,572 $443,052 $278,519
Interest income recorded
during the period 228,389 268,461 161,872
</TABLE>
Information regarding capitalized originated loan servicing assets is as
follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1995 $ --
Additions 27,783
-------
Balance at December 31, 1996 $27,783
=======
</TABLE>
In 1996, there was no amortization or impairment of the loan servicing asset
reflected in the results of operations, as the loan sale transaction took place
in the month of December. As of December 31, 1996, the fair value of the
capitalized loan servicing asset approximated cost.
26
<PAGE>
Note 5 - Foreclosed Real Estate:
Changes in the allowance for foreclosed real estate losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year $ 35,000 $ 94,502 $ 469,981
Provision for losses 201,730 120,404 147,974
Chargeoffs, net (236,730) (179,906) (523,453)
-------- -------- --------
Balance at end of year $ -- $ 35,000 $ 94,502
======== ======== ========
</TABLE>
Note 6 - Premises and Equipment:
Cost and accumulated depreciation of the various categories of premises and
equipment consisted of the following:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------------- ------------------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Land $ 594,725 $ -- $ 735,798 $ --
Buildings 3,049,361 1,571,065 3,112,751 1,453,294
Furniture and equipment 2,147,435 1,136,597 1,985,431 992,893
---------- ---------- ---------- ----------
$5,791,521 $2,707,662 $5,833,980 $2,446,187
========== ========== ========== ==========
</TABLE>
The Company leases office space under a noncancelable operating lease with a
renewal option for three consecutive one-year terms. Future minimum lease
payments at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C> <C>
1997 $14,400
1998 12,000
-------
Total minimum lease payments $26,400
=======
</TABLE>
Total net rental expense amounted to $75,768, $67,405 and $55,550 in 1996,
1995 and 1994, respectively.
Note 7 - Deposits:
Deposits consisted of the following as of December 31:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Noninterest-bearing
demand deposits $ 23,419,607 $ 19,007,639
NOW accounts 14,965,344 14,916,062
Regular savings 59,814,277 62,447,763
Money market savings 36,255,460 37,519,543
Certificates of deposit 175,120,731 160,700,712
Club accounts 251,306 243,371
------------ ------------
$309,826,725 $294,835,090
============ ============
</TABLE>
The amount of individual certificates of deposit in excess of $100,000
included in certificates of deposit at December 31, 1996 and 1995 was
$15,324,749 and $12,413,775, respectively.
27
<PAGE>
Note 8 - Advances from Federal Home Loan Bank of Boston:
Advances from Federal Home Loan Bank of Boston consisted of the following as
of December 31:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<C> <C> <C>
6.40% due January 2, 1996 $ -- $2,990,000
5.96% due March 20, 1996 -- 1,000,000
4.82% due March 29, 1996 -- 1,000,000
4.80% due July 9, 1996 -- 2,000,000
5.94% due July 22, 1996 -- 1,000,000
4.71% due July 30, 1996 -- 1,000,000
6.01% due August 23, 1996 -- 1,000,000
4.49% due September 9, 1996 -- 2,000,000
5.45% due September 16, 1996 -- 1,000,000
5.41% due January 2, 1997 1,000,000 --
5.66% due March 21, 1997 1,000,000 --
6.19% due September 5, 1997 1,000,000 --
6.14% due September 16, 1997 1,000,000 --
5.87% due September 22, 1997 1,000,000 --
5.79% due October 17, 1997 1,000,000 1,000,000
4.89% due October 21, 1997 1,000,000 1,000,000
5.65% due November 17, 1997 2,000,000 --
6.05% due January 26, 1998 2,000,000 2,000,000
5.93% due March 20, 1998 1,000,000 --
6.31% due July 20, 1998 2,000,000 --
6.42% due September 8, 1998 1,000,000 --
6.43% due September 30, 1998 1,000,000 --
5.99% due October 8, 1998 2,000,000 --
5.87% due October 19, 1998 2,000,000 2,000,000
5.07% due October 21, 1998 1,000,000 1,000,000
----------- -----------
$21,000,000 $19,990,000
=========== ===========
</TABLE>
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. The
Bank maintains qualified collateral as defined by the FHLBB in excess of the
amount required to collateralize the outstanding advances at December 31, 1996.
The Bank also participates in the IDEAL Way Line of Credit Program with the
FHLBB. These advances are one-day variable rate loans with automatic rollover.
The Bank has a pre-approved line up to 2% of total assets.
Note 9 - Short-Term Borrowings:
The following table summarizes average outstandings, maximum month-end
outstandings, daily average interest rates and average interest rates on
year-end balances. Average interest rates during the year were computed by
dividing total interest expense by the average amount outstanding.
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Securities sold under
agreements to repurchase:
Average outstanding $35,585 $26,819 $ 9,460
Maximum outstanding at
any month-end 47,008 31,194 21,058
Average interest rate
during the year 5.30% 5.78% 4.49%
Interest rate at year-end 5.35% 5.48% 5.42%
</TABLE>
28
<PAGE>
Note 10 - Shareholders' Equity:
The Corporation's ability to pay dividends is dependent on the Bank's ability
to pay dividends to the Corporation. There are certain restrictions on the
payment of dividends and other payments by the Bank to the Corporation. Under
Connecticut law, the Bank is prohibited from declaring a cash dividend on its
common stock except from its net earnings for the current year and retained net
profits for the preceding two years. In some instances, further restrictions on
dividends may be imposed on the Bank by the Federal Reserve Bank.
In February 1996, the Corporation announced that it planned to repurchase up
to 15% (approximately 394,000 shares) of its outstanding common shares. As of
December 31, 1996, 197,552 shares have been repurchased.
Note 11 - Employee Benefit Plans:
The Corporation has a noncontributory defined benefit retirement plan under
an immediate participation guarantee contract covering all employees eligible as
to age and length of service. Benefits are based on a covered employee's final
average compensation, primary Social Security benefit and credited service. The
Corporation's funding policy is to contribute amounts to the plan sufficient to
meet the Employee Retirement Income Security Act's minimum funding requirements.
The Corporation also offers a nonqualified supplemental employee retirement
plan to certain executives for lost benefits due to the Internal Revenue Service
(IRS) limitation under the Corporation's qualified defined benefit retirement
plan.
The following table sets forth the plans' funded status and amounts
recognized in the financial statements at December 31:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation,
of $2,439,643 in 1996 and
$2,345,208 in 1995 $(2,495,130) $(2,401,755)
=========== ===========
Projected benefit obligation for
service rendered to date $(3,201,593) $(3,075,674)
Plan assets at fair value,
primarily cash and cash
equivalents, U.S. and
other bonds and listed stocks 3,929,650 3,424,610
----------- -----------
Plan assets in excess of
projected benefit obligation 728,057 348,936
Unrecognized net gain from
past experience different
from that assumed and
effects of changes in
assumptions (1,088,373) (750,401)
Unrecognized prior service cost 187,492 211,152
Unrecognized net obligation
at January 1 28,404 32,175
Contribution -- 100,000
----------- -----------
Accrued pension cost $ (144,420) $ (58,138)
=========== ===========
</TABLE>
The components of net pension expense are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Service cost - benefits earned
during the year $ 208,308 $ 186,748 $ 168,114
Interest cost of projected
benefits 224,362 201,368 188,858
Actual return on plan
assets (449,628) (452,635) (15,695)
Net amortization and
deferral 199,921 230,221 (186,330)
--------- --------- ---------
$ 182,963 $ 165,702 $ 154,947
========= ========= =========
</TABLE>
Weighted-Average Annualized Actuarial Assumptions:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.5% 7.5% 7.5%
Expected long-term rate of return on plan assets 8.5 8.0 8.0
Rate of increase in future compensation levels 5.0 5.0 5.0
</TABLE>
29
<PAGE>
Employees who have completed one year of service and have attained the age of
21 are eligible to participate in the Corporation's defined contribution savings
plan (401k plan). Eligible employees may contribute up to 15% of their
compensation. The Corporation may make a matching contribution of up to 6% of
the participant's compensation. Contributions by the Corporation for the years
ended December 31, 1996, 1995 and 1994 were $76,062, $65,783, and $53,315,
respectively.
The Corporation does not offer any postretirement or postemployment benefits
other than pensions.
Note 12 - Federal and State Taxes on Income:
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $1,588,727 $1,575,793 $1,058,998
State 559,967 568,135 303,646
---------- ----------- ----------
Total current 2,148,694 2,143,928 1,362,644
---------- ----------- ----------
Deferred:
Federal 158,308 (105,327) 369,418
State 73,839 (521) 156,576
---------- ----------- ----------
Total deferred 232,147 (105,848) 525,994
---------- ----------- ----------
$2,380,841 $ 2,038,080 $1,888,638
========== =========== ==========
</TABLE>
Following is a reconcilement of the statutory Federal income tax rate applied
to pre-tax accounting income with the income tax provisions in the statements of
operations:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Income tax at statutory rate $ 2,517,769 $ 2,153,460 $ 1,916,557
Increase (decrease) resulting from:
Dividends received deduction (550,719) (479,466) (349,281)
Connecticut corporation tax,
net of Federal tax benefit 418,312 374,625 303,747
Impact of State tax rate change 16,461 22,437 --
Other items, net (20,982) (32,976) 17,615
----------- ----------- -----------
Provision for income taxes $ 2,380,841 $ 2,038,080 $ 1,888,638
=========== =========== ===========
</TABLE>
30
<PAGE>
The components of the Corporation net deferred tax assets at December 31 are
as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
Federal State Federal State
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Deferred tax assets:
Loan loss provision $1,483,556 $511,907 $1,665,273 $589,939
Reserve - other real
estate owned -- -- 10,621 3,763
Basis difference on other
real estate owned 31,175 10,757 -- --
Net mortgage origination
fees 200,348 69,131 248,406 88,000
Accrued interest payable 317,538 109,568 300,023 106,286
Other 183,391 63,280 152,637 54,073
---------- -------- ---------- --------
Total deferred tax assets 2,216,008 764,643 2,376,960 842,061
---------- -------- ---------- --------
Deferred tax liabilities:
Tax loan loss reserve in
excess of base year 174,423 60,185 243,151 86,139
SFAS 115 mark-to-market 259,574 91,957 261,986 92,811
Other 150,886 47,400 84,801 25,025
---------- -------- ---------- --------
Total deferred tax
liabilities 584,883 199,542 589,938 203,975
---------- -------- ---------- --------
Deferred tax assets 1,631,125 565,101 1,787,022 638,086
Valuation allowance -- -- -- --
---------- -------- ---------- --------
Net deferred tax assets $1,631,125 $565,101 $1,787,022 $638,086
========== ======== ========== ========
</TABLE>
The allocation of deferred tax expense (benefit) involving items charged to
current year income and items charged directly to shareholders' equity for the
year ended December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- ------------------------
Federal State Federal State
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Deferred tax expense
(benefit) allocated to
shareholders' equity $ (2,411) $ (854) $ 1,543,943 $ 565,974
Deferred tax expense
(benefit) allocated
to income 158,308 73,839 (105,327) (521)
--------- -------- ----------- ---------
Total deferred
tax expense $ 155,897 $ 72,985 $ 1,438,616 $ 565,453
========= ======== =========== =========
</TABLE>
The Corporation will only recognize a deferred tax asset when, based upon
available evidence, realization is more likely than not. Accordingly, at
December 31, 1996, the Corporation has recorded no valuation allowance against
deferred tax assets based on sufficient available Federal taxable income in the
carryback period and anticipated future earnings.
The Corporation made income tax payments of $1,729,533, $2,077,494, and
$1,611,795 in 1996, 1995 and 1994, respectively.
Pursuant to the Small Business Job Protection Act of 1996, the Corporation is
required to change its method of accounting with respect to its tax bad debt
reserves. The change results in taxable income of approximately $100,000 which
will be recognized ratably over a six-year period. A deferred tax liability has
been established for this required change.
The Corporation has not provided deferred taxes for the tax reserve for bad
debts, of approximately $1.2 million, that arose in tax years beginning before
1988 because it is expected that the requirements of Section 593 as amended by
the Small Business Protection Act of 1996, will be met in the foreseeable
future.
31
<PAGE>
Note 13 - Loans to Related Parties:
Certain directors and executive officers of the Corporation, including their
immediate families and companies in which they are principal owners, were loan
customers of the Bank during 1996 and 1995. Loans to such parties were made in
the ordinary course of business at the Bank's normal credit terms, including
interest rate and collateralization, and did not represent more than a normal
risk of collection. Such loans at December 31, 1996 and 1995 amounted to
$5,690,404 and $5,950,562, respectively. New loans of $449,095 were made, and
repayments totaled $709,253 during 1996. In addition, unused lines of credit to
related parties as of December 31, 1996 were $907,089.
Note 14 - Stock Option Plan:
The Corporation has a stock option plan offered to employees and directors of
the Bank (the "Plan"). A total of 582,414 shares can be issued to participants
at an exercise price equal to the market price of the Corporation's stock on the
date of grant with a maximum term of ten years. Options are granted upon the
approval of the Board and vest 100% in one year. As of December 31, 1996, a
total of 19,560 shares are remaining for issuance.
On January 1, 1996, the Corporation adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"). As
permitted by SFAS 123, the Corporation has chosen to apply APB Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its Plan. Accordingly, no compensation cost has been
recognized for options granted under the Plan. Had compensation cost for the
Corporation's Plan been determined based on the fair value at the grant dates
for awards under the Plan consistent with the method of SFAS 123, the
Corporation's net income and net income per share would have been reduced to the
pro forma amounts indicated below.
<TABLE>
<CAPTION>
1996 1995
------------------------- -----------------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net Income $5,024,363 $4,588,413 $4,295,627 $4,221,820
Net Income Per Share -
Fully Diluted 1.76 1.61 1.54 1.51
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Dividend Yield 3.75% 3.75%
Expected Volatility 34.84% 34.84%
Risk-free interest rate 6.16% 5.68%
Expected lives 7 years 7 years
</TABLE>
A summary of the status of the Corporation's Plan as of December 31, 1996 and
1995 and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1996 1995
----------------------- ------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 390,454 $10.58 284,594 $ 8.70
Granted 118,500 22.35 121,300 14.75
Exercised (63,046) 8.94 (15,440) 8.54
Forfeited (600) 14.79 -- --
------- ----- ------- -----
Outstanding at
end of year 445,308 13.94 390,454 10.58
======= ===== ======= =====
Options exercisable
at year-end 366,808 288,354
Weighted-average
fair value of
options granted
during the year $ 7.05 $ 4.53
32
</TABLE>
<PAGE>
The following table summarizes information about the Plans' stock options at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- -------------------------------
Number Weighted-Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.952 - $ 7.986 100,904 5.3 $ 6.42 100,904 $ 6.42
10.208 - 15.417 225,904 8.4 12.89 225,904 12.89
22.320 - 22.880 118,500 9.9 22.35 40,000 22.32
--------- ---------
445,308 366,808
========= =========
</TABLE>
Note 15 - Financial Instruments with Off-Balance-Sheet Risk:
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
instruments expose the Bank to credit risk in excess of the amount recognized in
the statement of condition.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Bank uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
Total credit exposure related to those items is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Loan commitments:
Approved mortgage loan commitments $ 1,153,340 $ 1,331,800
Unadvanced portion of construction loans 1,665,389 579,967
Unused home equity lines of credit 11,152,058 10,404,574
Unused commercial lines of credit 13,427,265 9,425,659
Standby letters of credit 2,212,132 1,928,619
----------- -----------
$29,610,184 $23,670,619
=========== ===========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Bank upon extension of credit is based on management's
credit evaluation of the counterparty. Collateral held is primarily residential
property. Interest rates on home equity lines of credit are variable and are
available for terms of 10 or 15 years. All other commitments are a combination
of fixed and variable with maturities of one year or more.
Note 16 - Significant Group Concentrations of Credit Risk:
The Bank primarily grants residential, commercial and consumer loans to
customers located within its primary market area in the State of Connecticut.
The majority of the Bank's loan portfolio is collateralized by residential real
estate.
33
<PAGE>
Note 17 - Fair Value of Financial Instruments:
FASB Statement No. 107, "Disclosure about Fair Value of Financial
Instruments", requires disclosure of fair value information about financial
instruments, whether or not recognized in the statement of condition, 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. Statement 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 Corporation.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents
The carrying amounts reported in the statement of condition for cash and
short-term instruments approximate those assets' fair values.
Trading Account Assets
Fair values for the Bank's trading account assets, which also are the amounts
recognized in the consolidated statement of condition, are based on quoted
market prices where available.
Securities Available-for-Sale and Held-to-Maturity
Fair values for securities available-for-sale and held-to-maturity are based
on quoted market prices, where available.
Federal Home Loan Bank Stock
The carrying value of Federal Home Loan Bank stock approximates its fair
value.
Loans Receivable
The fair values for loans (excluding nonaccrual 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. The Bank does
not believe an estimate of the fair value of nonaccrual loans can be made
without incurring excessive cost. The carrying amount of accrued interest
approximates its fair value.
Off-Balance-Sheet Instruments
Fair values for the Bank's off-balance-sheet instruments (primarily 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 standing (guarantees, loan commitments).
Deposit Liabilities
The fair values disclosed for demand deposits (e.g., interest and noninterest
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, money market
accounts and certificates of deposit approximate their fair values at the
reporting date. 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.
Statement No. 107 defines the fair value of demand deposits as the amount
payable on demand, and prohibits adjusting fair value 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 fair value amounts nor is it recorded as an intangible
asset in the statement of condition. The Corporation 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.
Advances from Federal Home Loan Bank of Boston
The fair values of the Bank's borrowings from the Federal Home Loan Bank of
Boston are estimated using discounted cash flow analyses, based on the Bank's
current incremental borrowing rates for similar types of borrowing arrangements.
Securities Sold Under Agreements to Repurchase
The carrying amount reported in the consolidated statement of condition for
securities sold under agreements to repurchase is estimated to approximate its
fair value due to the fact that they are short-term instruments that mature
within 89 days.
34
<PAGE>
The following table presents a comparison of the carrying value and estimated
fair value of the Corporation's financial instruments at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 8,454,570 $ 8,454,570 $ 6,571,706 $ 6,571,706
Federal funds sold 700,000 700,000 4,100,000 4,100,000
Trading account 2,429,765 2,429,765 390,476 390,476
Securities available-for-sale 105,514,806 105,514,806 106,889,015 106,889,015
Securities held-to-maturity 44,096,667 43,973,649 23,660,434 24,021,725
Federal Home Loan
Bank Stock 2,039,700 2,039,700 1,978,300 1,978,300
Loans (excluding nonaccrual loans) 249,205,314 247,961,115 230,897,192 230,721,301
Accrued income receivable 2,716,624 2,716,624 2,520,205 2,520,205
Financial liabilities:
Deposits:
Noninterest-bearing
demand deposits $ 23,419,607 $ 23,419,607 $ 19,007,639 $ 19,007,639
Regular savings 59,814,277 59,814,277 62,447,763 62,447,763
Money market savings 36,255,460 36,255,460 37,519,543 37,519,543
Certificates of deposit 175,120,731 175,631,030 160,700,712 161,606,609
NOW accounts 14,965,344 14,965,344 14,916,062 14,916,062
Club accounts 251,306 251,306 243,371 243,371
Advances from the Federal
Home Loan Bank of Boston 21,000,000 20,991,116 19,990,000 19,978,440
Securities sold under
agreements to repurchase 41,878,710 41,878,710 21,552,488 21,552,488
Unrecognized financial instruments:
Commitments to extend credit -- 273,981 -- 217,420
Letters of credit -- 22,121 -- 19,286
</TABLE>
Note 18 - Recent Accounting Pronouncements:
In June 1996, the FASB issued Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("SFAS 125"). SFAS 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. The Bank will be required to adopt SFAS 125 for
transfers and servicing of financial assets and extinguishment of liabilities
occurring after December 31, 1996, on a prospective basis. The adoption of this
standard is not expected to have a material impact on the Bank's financial
condition or its results of operations.
In February, 1997, the FASB issued Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" ("SFAS 128"). SFAS 128 provides
accounting and reporting standards for the calculation of earnings per share
intended to simplify the computation by replacing the presentation of primary
earnings per share with a presentation of basic earnings per share. The
Corporation will be required to adopt SFAS 128 in the fourth quarter of 1997.
The adoption of this standard is not expected to have a material impact on the
Corporation's financial condition or results of operations.
35
<PAGE>
Note 19 - Contingencies:
On April 11, 1996, the lawsuit filed in prior years by certain borrowers, and
a related company, against the officers and directors of Southington Savings
Bank (the "Bank") was withdrawn, and all of the related foreclosure actions were
resolved. The consequences of the resolution of these cases did not have a
material impact on the Bank's financial condition or results of operations.
Note 20 - Regulatory Matters:
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgements by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt Corrective
Actual Action Provisions
---------------- ----------------------------------
(dollars in thousands) Amount Ratio Amount Ratio
------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital [Greater than [Greater than
(to Risk Weighted Assets) $45,561 16.44% or equal to] $27,721 or equal to] 10.0%
Tier I Capital [Greater than [Greater than
(to Risk Weighted Assets) $42,078 15.18% or equal to] $16,632 or equal to] 6.0%
Tier I Capital [Greater than [Greater than
(to Average Assets) $42,078 10.33% or equal to] $20,368 or equal to] 5.0%
As of December 31, 1995:
Total Capital [Greater than [Greater than
(to Risk Weighted Assets) $46,034 18.78% or equal to] $24,506 or equal to] 10.0%
Tier I Capital [Greater than [Greater than
(to Risk Weighted Assets) $42,971 17.53% or equal to] $14,704 or equal to] 6.0%
Tier I Capital [Greater than [Greater than
(to Average Assets) $42,971 11.19% or equal to] $19,199 or equal to] 5.0%
</TABLE>
36
<PAGE>
Note 21 - Parent Company Only Financial Statements:
The financial statements of Bancorp Connecticut, Inc. are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
----------- -----------
Statement of condition:
<S> <C> <C>
Assets:
Marketable equity securities $ 300,000 $ 300,000
Investment in Southington
Savings Bank 41,777,105 42,642,948
Repurchase agreement 425,000 --
Organization costs 115,957 155,714
Due from Southington Savings Bank 113,967 151,976
Other assets 9,696 8,970
----------- -----------
Total assets $42,741,725 $43,259,608
=========== ===========
Liabilities and stockholder's equity:
Accrued expenses $ 10,605 $ 50,039
Stockholders' equity 42,731,120 43,209,569
----------- -----------
Total liabilities and
stockholders' equity $42,741,725 $43,259,608
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Statement of income:
Dividends from subsidiary $ 6,334,433 $ 1,684,690 $ 539,101
Other income 34,940 -- --
----------- ----------- -----------
Total income 6,369,373 1,684,690 539,101
Operating expenses 318,693 354,293 5,883
Income tax (credit) (100,108) (146,766) (2,447)
----------- ----------- -----------
Income before equity in
undistributed net income
of subsidiary 6,150,788 1,477,163 535,665
Equity in undistributed
net income of subsidiary (1,126,425) 2,818,464 3,212,632
----------- ----------- -----------
Net income $ 5,024,363 $ 4,295,627 $ 3,748,297
=========== =========== ===========
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
---------- ---------- -----
<S> <C> <C> <C>
Statement of cash flows:
Operating activities:
Net income $ 5,024,363 $ 4,295,627 $ 3,748,297
----------- ----------- -----------
Adjustments to reconcile net income
to net cash provided by operating activities:
Equity in undistributed net income of subsidiary 1,126,425 (2,818,464) (3,212,632)
Amortization of organization costs 39,757 12,364 --
Increase in other assets (725) (8,970) (168,077)
(Decrease) increase in accrued expenses (39,434) 50,039 --
----------- ----------- -----------
Net cash provided by operating activities 1,126,023 1,530,596 367,588
----------- ----------- -----------
Investing activities:
Purchase of securities available-for-sale -- -- (300,000)
Decrease (increase) in advances to subsidiaries 38,009 (74,774) (77,202)
----------- ----------- -----------
Net cash provided by (used in) investing activities 38,009 (74,774) (377,202)
----------- ----------- -----------
Financing activities:
Dividends paid (1,991,391) (1,589,837) --
Net increase in repurchase agreements (425,000) -- --
Repurchase of common stock (4,338,798) -- --
Issuance of common stock 566,794 134,015 9,614
----------- ----------- -----------
Net cash (used in) provided by financing activities (6,188,395) (1,455,822) 9,614
----------- ----------- -----------
Net decrease in cash -- -- --
Cash at beginning of year -- -- --
----------- ----------- -----------
Cash at end of year $ -- $ -- $ --
=========== =========== ===========
</TABLE>
38
<PAGE>
Note 22 - Quarterly Financial Data (Unaudited):
(dollars in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Fiscal 1996:
Interest income $7,287 $ 7,358 $ 7,579 $7,703
Interest expense 3,702 3,723 3,832 3,916
------ ------- ------- ------
Net interest income 3,585 3,635 3,747 3,787
Provision for loan losses 75 100 125 135
Net securities gains 201 41 65 37
Other income 329 350 320 342
Other expenses 2,118 2,171 2,114 2,196
Income taxes 638 565 610 568
------ ------- ------- ------
Net income $1,284 $ 1,190 $ 1,283 $1,267
====== ======= ======= ======
Net income per common and
common equivalent share $ .45 $ .42 $ .45 $ .45
====== ======= ======= ======
Fiscal 1995:
Interest income $6,481 $ 6,775 $ 7,023 $7,243
Interest expense 3,021 3,322 3,558 3,724
------ ------- ------- ------
Net interest income 3,460 3,453 3,465 3,519
Provision for loan losses 30 30 70 50
Net securities gains 36 30 8 76
Other income 278 252 277 286
Other expenses 2,081 2,054 1,990 2,501
Income taxes 547 525 529 438
------ ------- ------- ------
Net income $1,116 $ 1,126 $ 1,161 $ 892
====== ======= ======= ======
Net income per common
and common equivalent
share $ .40 $ .40 $ .42 $ .32
====== ======= ======= ======
</TABLE>
Income per share calculations for each of the quarters is based on the
weighted average number of shares outstanding, including common stock
equivalents for each period and the sum of the quarters may not necessarily be
equal to the full year income per share amount. Net income per common and common
equivalent share has been restated for all periods presented to reflect a
6-for-5 stock split effected in the form of a stock dividend on June 19, 1996.
39
<PAGE>
Bancorp Connecticut, Inc. Directors
Walter J. Hushak
Chairman of the Board,
Southington Savings Bank
Senior Vice President,
Janazzo Services, Inc.
Andrew J. Meade
Vice Chairman,
Southington Savings Bank
President,
International Security Products, Inc.
(Manufacturer of Security Products)
Norbert H. Beauchemin
Vice President,
Dudzik & Beauchemin, P.C.
(Certified Public Accountants)
Michael J. Karabin
President,
Acme-Monaco Spring Corporation
(Manufacturer of springs, stampings, forms,
orthodontic hardware and medical assemblies)
David P. Kelley
Counsel, Southington Savings Bank
Partner, Kelley, Crispino & Kania (Attorneys at Law)
Frederick E. Kuhr
President and controlling
shareholder,
Evergreen Nursery, Inc.
Joseph J. LaPorte
Retired Manufacturers
Representative, B.C.S. Company
(Distributor of industrial metal finishing chemicals and equipment)
Ralph G. Mann
Retired President,
Southington Savings Bank
Frank R. Miller
Managing Partner,
Miller, Moriarty and Company, L.L.C.
(Certified Public Accountants)
Robert D. Morton
President and
Chief Executive Officer,
BancorpConnecticut, Inc.
Anthony S. Pizzitola
Retired President and Treasurer,
Pizzitola Electric Co., Inc.
Dennis J. Stanek
Senior Vice President - Investments
Tucker Anthony Incorporated
(Investment Banking Firm)
Officers
Robert D. Morton
President and Chief Executive Officer
Anthony Priore, Jr.
Treasurer/Secretary
Steven F. Nyren
Assistant Secretary
40
<PAGE>
Southington Savings Bank Directors and Officers
BOARD OF DIRECTORS
Walter J. Hushak
Chairman of the Board
Andrew J. Meade
Vice Chairman
Norbert H. Beauchemin
Michael J. Karabin
David P. Kelley
Frederick E. Kuhr
Joseph J. LaPorte
Ralph G. Mann
Frank R. Miller
Robert D. Morton
Anthony S. Pizzitola
Dennis J. Stanek
EXECUTIVE OFFICERS
Robert D. Morton
President and Chief Executive Officer
William R. DellaVecchia
Senior Vice President,
Commercial Loan Division
Richard A. Fracasso
Senior Vice President,
Consumer Banking Division
Anthony Priore, Jr.
Senior Vice President,
Treasurer & Chief Financial Officer
OFFICERS
ACCOUNTING:
Kim S. Just
Planning Officer
Carl H. Schmidt
Controller
AUDIT:
Maryanne E. Scarfo
CRA & Compliance Officer
Stephen M. Settino
Chief Auditor
COMMERCIAL LOAN:
Daniel R. DeRosa
Vice President
Commercial Loan Officer
Anthony Palmieri, Jr.
Vice President
Commercial Loan Officer
Vincent L. Ruggiero
Vice President
Commercial Loan Officer
Duane L. Beale
Assistant Vice President
Commercial Loan Officer
CONSUMER BANKING:
Paul E. MacDonald
Vice President
Richard P. Dextraze
Assistant Vice President
Consumer Loan Manager
Susan M. Dobratz
Assistant Vice President &
Branch Manager
South End Office
Donna M. Glatz
Assistant Vice President
Retail Operations Officer
Sue A. Kasek
Assistant Vice President
Consumer Loan Officer
Kenneth G. Penfield, Jr.
Assistant Vice President
Mortgage Loan Officer
Claudia A. Crooker
Assistant Treasurer &
Branch Manager
Main Office
Carol M. Vreeland
Assistant Treasurer &
Branch Manager
Queen Corner Office
CREDIT ADMINISTRATION:
Charles J. DeSimone, Jr.
Chief Credit Officer
Raymond D. Jannelli
Vice President
Managed Assets Manager
Diane L. Hoadley
Credit & Loan Review Officer
Diane L. McCoy
Commercial Loan
Documentation Officer
HUMAN RESOURCES:
Donna M. Schaefer
Vice President
INFORMATION SYSTEMS:
Barry J. Abramowitz
Chief Information Officer
Therese G. Kelly
Assistant Vice President
Deposit Services Manager
Kurt M. Heinrich
Systems Administration Officer
INVESTMENT SERVICES:
Robert P. Vocelli
Investment Services Manager
Rita H. Beaulieu
Vice President
Trust Services Manager
Steven F. Nyren
Corporate Secretary &
Trust Officer
MARKETING:
Pauline B. Levesque
Vice President
41
<PAGE>
Shareholder Information
Annual Meeting
The Annual Meeting of Shareholders will be held at
2:00 p.m. on Wednesday, May 14, 1997 at The Elks Club
of Southington, 114 Main Street, Southington, CT.
Form 10-K Report
A copy of the Corporation's 1996 Annual Report to the Securities and Exchange
Commission on Form 10-K may be obtained without charge by any shareholder upon
written request to:
Lesley DeAngelo
Bancorp Connecticut, Inc.
121 Main Street
Southington, Connecticut 06489-2533
Stock Transfer Agent:
American Stock Transfer & Trust Company
40 Wall Street - 46th Floor
New York, New York 10005
1-800-937-5449
Independent Auditors:
Coopers & Lybrand, L.L.P.
100 Pearl Street
Hartford, CT 06103
Market Makers
The following companies have generally been market makers for Bancorp
Connecticut, Inc. as of December 31, 1996:
Advest, Inc. Sandler O'Neill & Partners
Herzog, Heine, Geduld, Inc. Tucker Anthony Incorporated
Keefe, Bruyette & Woods, Inc.
Market Price and Dividends
The Corporation's common stock trades on the Nasdaq National Market tier of
the Nasdaq Stock Market under the symbol BKCT. There were approximately 1,878
shareholders of record on February 28, 1997. The high and low bid prices and
cash dividends per share for each quarter during the last two calendar years
were as follows:
<TABLE>
<CAPTION>
Dividend
Quarter Ended High Low per Share
<S> <C> <C> <C>
3/31/95 (a) $11.67 $10.83 $.133
6/30/95 (a) 13.96 10.83 .146
9/30/95 (a) 16.88 13.70 .150
12/31/95 (a) 15.83 13.96 .158
3/31/96 (a) 17.71 14.79 .171
6/30/96 22.63 16.67 .180
9/30/96 23.75 19.50 .190
12/31/96 23.75 21.25 .200
</TABLE>
(a) Data has been restated to reflect a 6-for-5 stock split effected in the form
of a stock dividend on June 19, 1996.
BancorpConnecticut, Inc. Internet Address:
www.bkct.com
Dividend Reinvestment and
Stock Purchase Plan
For more information contact:
American Stock Transfer & Trust Company
Dividend Reinvestment Dept.
40 Wall Street - 46th Floor
New York, New York 10005
1-800-278-4353
Southington Savings Bank Office Locations
- -----------------------------------------
Main Office
121 Main Street
Main Office Drive-In Center
Berlin Avenue behind Main Office
Queen Corner Office
900 Queen Street
South End Office
921 Meriden-Waterbury Turnpike
Southington High School Training Branch
720 Pleasant Street
SSB Mortgage Center
188 North Main Street
Internet Address:
www.s-s-b.com
42
Exhibit 21
EXHIBIT 21: SUBSIDIARIES OF REGISTRANT
Subsidiary of Registrant State of Incorporation D/B/A's
- ------------------------------------------------- -------
Southington Savings Bank Connecticut None
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Bancorp Connecticut, Inc. on Form S-8 of our report dated January 15, 1997 on
our audits of the consolidated financial statements of Bancorp Connecticut, Inc.
as of December 31, 1996 and 1995, and for the years ended December 31, 1996,
1995, and 1994 which report is incorporated by reference in this Annual Report
on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
----------------------------
Coopers & Lybrand L.L.P.
Hartford, Connecticut
March 26, 1997
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned directors and
officers of Bancorp Connecticut, Inc., a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"), hereby constitute
and appoint Robert D. Morton and Anthony Priore, Jr., their true and lawful
attorneys and agents to do any and all acts and things and execute any and all
instruments and documents which said attorneys and agents, or any of them, may
deem necessary or advisable or may be required to enable the Corporation to
comply with the Securities Exchange Act of 1934, as amended, and any rules,
regulations or requirements of the Securities and Exchange Commission in respect
thereof, in connection with the preparation and filing as required by said Act
of the Corporation's 1996 Annual Report to Shareholders, Annual Report on Form
10-K for the year ended December 31, 1996 (the "10-K"), and Proxy Statement and
Proxy Card to be issued in connection with the Corporation's 1997 Annual
Meeting; including specifically, but without limiting the generality of the
foregoing, power and authority to sign the names of the undersigned directors
and officers thereof in the capacities indicated below to the 10-K and all
amendments and supplements thereto, or any other appropriate form about to be or
heretofore or hereafter filed with the Securities and Exchange Commission in
respect of said Annual Report to Shareholders, 10-K, Proxy Statement, Proxy Card
or Annual Meeting and all instruments or documents filed as a part thereof or in
connection therewith; and each of the undersigned hereby ratifies and confirms
all that said attorneys, agents, or any of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has subscribed these
presents as of March 12, 1997.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Robert D. Morton President and Director March 12, 1997
- -------------------------- (Principal Executive Officer)
Robert D. Morton
/s/ Anthony Priore, Jr. Treasurer and Secretary March 12, 1997
- -------------------------- (Chief Financial and
Anthony Priore, Jr. Accounting Officer)
/s/ Norbert H. Beauchemin Director March 12, 1997
- --------------------------
Norbert H. Beauchemin
/s/ Walter J. Hushak Director March 12, 1997
- --------------------------
Walter J. Hushak
<PAGE>
Signature Title Date
- --------- ----- ----
/s/ Michael J. Karabin Director March 12, 1997
- --------------------------
Michael J. Karabin
/s/ David P. Kelley Director March 12, 1997
- --------------------------
David P. Kelley
/s/ Frederick E. Kuhr Director March 12, 1997
- --------------------------
Frederick E. Kuhr
/s/ Joseph J. LaPorte Director March 12, 1997
- --------------------------
Joseph J. LaPorte
/s/ Ralph G. Mann Director March 12, 1997
- --------------------------
Ralph G. Mann
/s/ Andrew J. Meade Director March 12, 1997
- --------------------------
Andrew J. Meade
/s/ Frank R. Miller Director March 12, 1997
- --------------------------
Frank R. Miller
- -------------------------- Director March 12, 1997
Anthony S. Pizzitola
/s/ Dennis J. Stanek Director March 12, 1997
- --------------------------
Dennis J. Stanek
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000921746
<NAME> Bancorp 10-K
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 8,455
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 700
<TRADING-ASSETS> 2,430
<INVESTMENTS-HELD-FOR-SALE> 105,515
<INVESTMENTS-CARRYING> 44,097
<INVESTMENTS-MARKET> 43,974
<LOANS> 252,144
<ALLOWANCE> (4,875)
<TOTAL-ASSETS> 419,398
<DEPOSITS> 309,827
<SHORT-TERM> 42,819
<LIABILITIES-OTHER> 2,274
<LONG-TERM> 20,060
0
0
<COMMON> 2,768
<OTHER-SE> 39,963
<TOTAL-LIABILITIES-AND-EQUITY> 419,398
<INTEREST-LOAN> 21,123
<INTEREST-INVEST> 8,433
<INTEREST-OTHER> 371
<INTEREST-TOTAL> 29,927
<INTEREST-DEPOSIT> 12,176
<INTEREST-EXPENSE> 15,173
<INTEREST-INCOME-NET> 14,754
<LOAN-LOSSES> 435
<SECURITIES-GAINS> 344
<EXPENSE-OTHER> 8,599
<INCOME-PRETAX> 7,405
<INCOME-PRE-EXTRAORDINARY> 7,405
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,024
<EPS-PRIMARY> 1.77
<EPS-DILUTED> 1.76
<YIELD-ACTUAL> 7.67
<LOANS-NON> 2,939
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 6,505
<ALLOWANCE-OPEN> 5,488
<CHARGE-OFFS> 1,213
<RECOVERIES> 165
<ALLOWANCE-CLOSE> 4,875
<ALLOWANCE-DOMESTIC> 3,276
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,599
</TABLE>
