-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WzbmunYlHZ/dPojQKMQiBDdGGL71lvG77Mr6QCDmzbD7K4tVgswnT2c3LXvbicPj F9x15XWY9nTdKhVMpk0+gw== 0000950109-97-005165.txt : 19970805 0000950109-97-005165.hdr.sgml : 19970805 ACCESSION NUMBER: 0000950109-97-005165 CONFORMED SUBMISSION TYPE: 8-A12G PUBLIC DOCUMENT COUNT: 28 FILED AS OF DATE: 19970804 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NSS BANCORP INC CENTRAL INDEX KEY: 0001042806 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 061485317 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-A12G SEC ACT: 1934 Act SEC FILE NUMBER: 000-22937 FILM NUMBER: 97650925 BUSINESS ADDRESS: STREET 1: P O BOX 28 CITY: NORWALK STATE: CT ZIP: 06852 BUSINESS PHONE: 2038384545 MAIL ADDRESS: STREET 1: NSS BANCORP INC STREET 2: P O BOX 28 CITY: NORWALK STATE: CT ZIP: 06852 8-A12G 1 REGISTRATION STATEMENT 8A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-A FOR REGISTRATION OF CERTAIN CLASSES OF SECURITIES PURSUANT TO SECTION 12(b) or 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 NSS BANCORP, INC. (Exact Name of Registrant as Specified in its Charter) Connecticut 06-1485317 (State of Incorporation of Organization) (I.R.S. Employer Identification No.) 48 Wall Street, Norwalk, Connecticut 06852 (Address of Principal Executive Office) (Zip Code) If this form relates to the registration of a class of debt securities and is effective upon filing pursuant to General Instruction (A)(C)(1) please check the following box. If this form relates to the registration of a class of debt securities and is to become effective simultaneously with the effectiveness of a concurrent registration statement under the Securities Act of 1933 pursuant to General Information (A)(C)(2) please check the following box. Securities to be registered pursuant to Section 12(b) of the Act: NONE Securities to be registered pursuant to Section 12(g) of the Act: Name of Each Exchange on Which Title of Each Class to be so registered Each Class is to be registered Common Stock, par value, $0.01 NASDAQ - National Market INFORMATION REQUIRED IN REGISTRATION STATEMENT ITEM 1. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED a. Capital Stock The securities of NSS Bancorp, Inc. (the "Company") to be registered consist of 7,000,000 shares of common stock par value of $0.01 per share ("Common Stock"). No shares of Common Stock are presently issued or outstanding. The Common Stock will be issued in accordance with that certain Agreement and Plan of Reorganization dated May 20, 1997 between the Company and its wholly owned subsidiary, Norwalk Savings Society (the "Plan of Reorganization"). The following statements are summaries of certain provisions of the Plan of Reorganization, the Company's Certificate of Incorporation and Bylaws and the Connecticut Business Corporation Act ("CBCA"). The statements made herein do not purport to be complete in all respects and are qualified in their entirety by reference to the full Certificate of Incorporation, Bylaws and CBCA, the first two of which have been filed as Exhibit 3.1 and Exhibit 3.2, respectively, to this Form 8-A. (1) Dividends may be paid on Common Stock if and when declared by the Company's Board of Directors out of funds legally available for such purpose. Under present Federal Reserve Board policy, the Company may pay cash dividends only out of the Company's past year's net income, only if prospective earnings retention is consistent with the Company's expected future needs and only if payment of dividends does not undermine the Company's ability to serve as a source of strength to its subsidiary bank. When the Common Stock is issued and delivered in accordance with the Plan, it will be validly issued, fully paid, non-assessable, and not subject to any further calls by the Company. At the time of issuance, holders of Common Stock will possess voting power for the election of directors of the Company and for all other purposes, each holder being entitled to one vote for each share of Common Stock held. Holders of the Common Stock do not have cumulative voting rights, preemptive rights, or conversion rights with respect to any such shares. The Common Stock is not presently subject to any sinking fund or restrictions on transferability or alienability. In the event of a liquidation of the Company, holders of Common Stock are entitled to a pro-rata share in all assets of the Company after payment of all amounts due to creditors. The Certificate of Incorporation of the Company prohibits any person from directly or indirectly offering to acquire, or acquiring, beneficial ownership of 10% or more of the Common Stock without the prior written approval of the Company's Board of Directors, the Connecticut Banking Commissioner and all applicable federal regulatory agencies. Any shareholder owning 10% or more of the Common Stock may not vote any shares that exceed 10% on any matter that is submitted for a vote of the shareholders. The Company must give the Federal Reserve Board prior notice of any repurchase or redemption of shares of Common Stock if the gross consideration for the purchase or redemption, when combined with the net consideration paid by the holding company for all such purchases or redemptions during the preceding twelve months, exceeds 10% of the holding company's consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve Board order, or any condition imposed by, or written agreement with, the Federal Reserve Board. This prior notice requirement, however, will not apply to the Company if it continues to maintain its "well capitalized" status in accordance with applicable Federal Reserve Board regulations, if it continues to maintain a "1" or "2" rating in its most recent safety and soundness regulatory examination and if there continues to be no unresolved regulatory issues concerning the Company. Except as described above, there are no other restrictions on the repurchase or redemption of Common Stock by the Company. The Certificate of Incorporation of the Company provides for a staggered Board of Directors as it divides the directors into three classes, as nearly equal in number as possible, with one class elected each year. Each director of the Company holds office for a three year term. (2) The rights of holders of Common Stock may not be modified in any event or for any purpose except by a vote of a majority or more of the holders of outstanding shares of Common Stock. (3) No preferred stock is to be registered. (4) The rights of holders of Common Stock may, under certain circumstances, be limited by the holders of serial preferred stock of the Company. No serial preferred stock is presently issued or outstanding. The Certificate of Incorporation of the Company authorizes 500,000 shares of serial preferred stock, of which 50,000 shares have been designated as Series A Preferred Stock. Shares of Series A Preferred Stock may be issued in connection with a Shareholder's Rights Agreement which is attached hereto as Exhibit 4. Generally, the Shareholder Rights Agreement is designed to assure that holders of Common Stock receive fair and equal treatment in the event of an attempted hostile takeover of the Company and to maximize the value and rights of their shares of Common Stock in the event of a hostile takeover attempt. Series A Preferred Stock may be issued to holders of Common Stock (except for the potential hostile takeover person) under certain circumstances specified in the Shareholder Rights Agreement. If issued, shares of Series A Preferred Stock, in preference to the holders of Common Stock of the Corporation, and of any other junior stock, are entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash, in an amount per share equal to or greater than (i) $1 or (ii) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding payment of a quarterly dividend or, with respect to the initial quarterly dividend payment since the first issuance of any share or fraction of a share of Series A Preferred Stock. If the Company at any time declares or pays any dividend on the Common Stock payable in shares of Common Stock, or effects a subdivision or combination or consolidation of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Dividends may accrue and cumulate on outstanding shares of Series A Preferred Stock under certain circumstances but do not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. When issued in accordance with the Shareholder's Rights Agreement, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the shareholders of the Company. In the event the Company shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock have no other special voting rights and their consent is not required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Company will not declare or pay dividends, or make any other distributions, on Common Stock or any other shares of stock ranking junior as to dividends or upon liquidation, dissolution or winding up to the Series A Preferred Stock ("Junior Stock"). The Company also may not declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of such shares are then entitled. The Company cannot, under those circumstances redeem or purchase or otherwise acquire for consideration shares of any Junior Stock, provided that the Company may at any time redeem, purchase or otherwise acquire shares of any such Junior Stock in exchange for shares of any other Junior Stock. The Company may not redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (a) to the holders of Common Stock or shares of Junior Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (b) to the holders of shares of stock ranking on a parity (either as to dividends upon liquidation, dissolution or winding up) with the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of such shares are entitled upon such liquidation, dissolution or winding up. In the event the Company shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (a) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. In case the Company shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall be, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of common stock is changed or exchanged. If the Company shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. The shares of Series A Preferred Stock are not redeemable and rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the Corporation's Preferred Stock. (5) The Certificate of Incorporation of the Company provides that a "super-majority" vote of shareholders must approve certain business combinations, including mergers, consolidations, share exchanges, sales of all or substantially all assets, liquidations, dissolutions or reclassifications, between the Company and an "Interested Shareholder" (as such term is defined below) or any other corporation (whether or not itself an Interested Shareholder) which is or after such merger or consolidation would be, an affiliate or associate of any Interested Shareholder unless the transaction is approved by the Board of Directors of the Company or certain fair price procedural requirements are satisfied. An "Interested Shareholder" is generally defined as a person or entity who is the beneficial owner, directly or indirectly, of 10% or more of the voting power of the outstanding shares of voting stock of the Company. Such transactions must first be approved by the Company's Board of Directors and then by the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of the voting stock, and by two-thirds of the voting power of the outstanding shares of the voting stock exclusive of shares held by or on behalf of the Interested Shareholder, unless: (1) the transaction is approved by the Board of Directors before the Interested Shareholder first became an Interested Shareholder; (2) or in the case of a merger, consolidation or share exchange, and in all other business combinations, certain fair price and procedural provisions are met. The fair price provisions generally require that shareholders whose stock is acquired in a business combination be paid at least as much as the highest price the Interested Shareholder paid for shares within the two prior years or the price that the Interested Shareholder paid in the transaction by which the Interested Shareholder first became an Interested Shareholder, whichever is higher. The procedural provisions include prohibitions against omissions of dividends on preferred stock, reductions in dividends on the Common Stock and acquisitions by the Interested Shareholder of more stock of the Company. In the event that the fair price and procedural requirements are met or the requisite approval of the Board of Directors is given with respect to a particular business combination, the normal voting requirements of Connecticut law would apply. Under Connecticut law, a merger, consolidation, sale of substantially all of the assets of the Company and the adoption of a plan of dissolution of the Company would generally require the approval of a majority of the issued and outstanding shares of the Company's capital stock entitled to vote thereon. A reclassification of the Company's securities involving an amendment to its Certificate of Incorporation and other issues requiring shareholder approval would also require the approval of the holders of a majority of the voting power of the Company's capital stock entitled to vote thereon. A sale of less than substantially all of the assets of the Company, a merger of the Company with a company in which it owns not less than 90% of the outstanding capital stock or a reclassification of the Company's securities not involving an amendment to its Certificate of Incorporation would not require shareholder approval. As noted above the Certificate of Incorporation of the Company prohibits any person from acquiring 10% or more of the outstanding stock of the Company entitled to vote for the election of directors (defined as "Voting Stock") unless: (a) such acquisition has been approved prior to its consummation by the affirmative vote of the holders of at least two-thirds of the Voting Stock entitled to vote at a meeting of shareholders called for such purpose; and (b) all federal and state regulatory approvals required under the Change in Bank Control Act of 1978, the Bank Holding Company Act of 1956 and any similar Connecticut law and in accordance with all regulations of the FDIC, Federal Reserve Board and Connecticut Banking Commissioner. Moreover no person may make an offer to acquire 10% or more of the then-outstanding Voting Stock unless such person has notified the Company's Board of Directors of such intent and the Board of Directors has not within fifteen days after receipt of such notice, disapproved of such offer, or before the offer is made, obtained prior approval of the acquisition by the FDIC or FRB and the Banking Commissioner. b. Debt Securities No debt securities are to be registered hereunder. c. Warrants and Rights The Common Stock will not be offered pursuant to warrants or rights. d. Other Securities No securities other than the Common Stock are to be registered hereunder. e. Market Information for Securities other than Common Equity No securities other than the Common Stock are to be registered hereunder. f. American Depository Receipts No Depository Shares will be registered hereunder. g. Security Rating The Company has not obtained a security rating from a nationally recognized statistical rating organization with respect to its securities. ITEM 2. EXHIBITS Exhibit 2: Agreement and Plan of Reorganization Exhibit 3i: Certificate of Incorporation of NSS Bancorp, Inc. Exhibit 3ii: Bylaws of NSS Bancorp, Inc. Exhibit 4: Shareholder Rights Agreement Exhibit 4.1 Amendment to Rights Agreement Exhibit 4.2 Assignment of Rights Agreement Exhibit 10.1: Employment Agreement-Robert T. Judson Exhibit 10.1.2 Amendment One to Employment Agreement Exhibit 10.1.3 Amendment Two to Employment Agreement Exhibit 10.1.4 Amendment Three to Employment Agreement Exhibit 10.2.1: Employment Agreement-Charles F. Howell Exhibit 10.2.2 Amendment One to Employment Agreement Exhibit 10.2.3 Amendment Two to Employment Agreement Exhibit 10.2.4 Amendment Three to Employment Agreement Exhibit 10.3.1: Employment Agreement-Jeremiah T. Dorney Exhibit 10.3.2 Amendment One to Employment Agreement Exhibit 10.3.3 Amendment Two to Employment Agreement Exhibit 10.3.3 Amendment Three to Employment Agreement Exhibit 10.4.1: Employment Agreement-Marcus I. Braverman Exhibit 10.4.2 Amendment One to Employment Agreement Exhibit 10.4.3 Amendment Two to Employment Agreement Exhibit 10.4.4 Amendment Three to Employment Agreement Exhibit 10.4.5 Amendment Four to Employment Agreement Exhibit 10.5: Divestiture Agreement between Westport Asset Management and Norwalk Savings Society Exhibit 21: Subsidiaries of NSS Bancorp, Inc. 1. Norwalk Savings Society Exhibit 99.1: Form F-2 Annual Report Norwalk Savings Exhibit 99.2 Form F-4 Quarterly Report Norwalk Savings SIGNATURE Pursuant to the requirements of section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned thereto duly authorized. NSS BANCORP, INC. Registrant Date: By: Robert T. Judson Its President 1 EX-2 2 PLAN OF REORGANIZATION Exhibit 2 AGREEMENT AND PLAN OF REORGANIZATION This Agreement and Plan of Reorganization (the "Plan of Reorganization"), dated as of May 20, 1997, is made and entered into by and between NORWALK SAVINGS SOCIETY, a Connecticut stock savings bank (the "Bank") and NSS BANCORP, INC., a newly formed capital stock corporation organized at the direction of the Bank (the "Holding Company") pursuant to Section 36a-181 of the Connecticut General Statutes. WHEREAS, the authorized capital stock of the Bank consists of (a) 7,000,000 shares of Common Stock, par value $0.01 per share (the "Bank Common Stock"), of which 2,442,129 shares are issued and outstanding and 422,332 shares are reserved for issuance pursuant to the Bank's various stock option and benefit plans, and (b) 500,000 shares of Preferred Stock, par value $0.01 (the "Bank Preferred Stock"), none of which are issued or outstanding and 50,000 of which are reserved for issuance pursuant to a Shareholders Rights Agreement, as more fully described below. WHEREAS, the authorized capital stock of the Holding Company shall consist of (a) 7,000,000 shares of Common Stock, par value $0.01 per share (the "Holding Company Common Stock"), none of which are issued and outstanding or reserved for issuance, and (b) 500,000 shares of Preferred Stock, $0.01 (the "Holding Company Preferred Stock"), none of which are issued and outstanding and 50,000 of which are reserved for issuance. WHEREAS, the Bank and the Holding Company wish to enter into the Plan of Reorganization whereby the Holding Company will acquire all of the issued and outstanding shares of the Bank Common Stock (other than shares held by the Dissenting Shareholders, as hereinafter defined) in exchange for an equal number of shares of Holding Company Common Stock (such exchange is hereinafter referred to as the "Reorganization"). WHEREAS, each Shareholder of Bank Common Stock (other than Dissenting Shareholders who have validly exercised their rights under Section 36a-181(c) of the Connecticut General Statutes) will receive one share of Holding Company Common Stock for each share of Bank Common Stock held as of the Effective Time (as hereinafter defined). WHEREAS, the Bank believes that the Reorganization is desirable and in the best interests of its shareholders. WHEREAS, the Bank and the Holding Company intend the Reorganization to constitute a non-taxable event to each entity and to their respective shareholders pursuant to the Internal Revenue Code of 1986, as amended (the "Code"). WHEREAS, this Plan of Reorganization has been approved by the Board of Directors of the Bank which has duly authorized the officers whose respective signatures appear below to execute and deliver the Plan of Reorganization. NOW, THEREFORE, in consideration of the mutual promises, representations, and covenants herein contained, the Bank and the Holding Company agree as follows: Section 1. Approval and Filing of Plan of Reorganization. 1.1 This Plan of Reorganization shall be submitted for the approval of holders of Bank Common Stock at a meeting to be duly called and held on May 20, 1997 in accordance with the Bylaws of the Bank and all applicable laws and regulations (the "Annual Meeting"). Notice of the Annual Meeting shall be mailed directly to all stockholders at their last known addresses as contained on the records of the Bank. 1.2 Subject to the approval of this Plan of Reorganization by the affirmative vote of the holders of at least two-thirds of each class of the voting securities of the Bank, this Plan of Reorganization shall be submitted, in accordance with Section 36a-181 of the Connecticut General Statutes, for the approval of the Commissioner of Banking of the State of Connecticut (the "Banking Commissioner"). This Plan of Reorganization shall be accompanied by a certificate from the Bank that this Plan of Reorganization has been submitted to and approved by the required two-thirds vote of and such other documentation as may be required by law or by regulation of the Banking Commissioner. 1.3 If the Plan of Reorganization is approved by the requisite number of votes of Shareholders at the Annual Meeting, thereafter and until the Effective Time (as hereinafter defined), the Bank shall issue certificates for Bank Common Stock, whether upon transfer or otherwise, only if such certificates bear a legend indicating that this Plan of Reorganization has been approved and that shares of Bank Common Stock evidenced by such certificates are subject to the acquisition by the Holding Company pursuant to this Plan of Reorganization. Section 2. The Closing. 2.1 Subject to the terms and conditions of this Plan of Reorganization, the closing of the Reorganization (the "Closing") shall take place on the date on which this Plan of Reorganization is filed in the Office of the Secretary of the State of Connecticut (the "Secretary of State"), which filing shall not occur until all of the conditions to Closing set forth in Section 7 hereof have been satisfied. The Closing and this Plan of Reorganization shall be effective at the time of such filing (the "Effective Time"). 2.2 At the Closing, the Holding Company and the Bank shall deliver to each other such certificates and other documents as are required pursuant to this Plan of Reorganization and as are necessary and appropriate, in the reasonable opinion of counsel for the Bank, to consummate the Reorganization. Section 3. Actions at the Effective Time. 3.1 At the Effective Time, the Holding Company shall, without any further action by it or by holders of the Bank Common Stock, automatically and by operation of law, acquire and become the owner of all issued and outstanding shares of Bank Common Stock (excluding shares held by the Bank as treasury stock, all of which shall be canceled and extinguished as of the Effective Time) and shall be entitled to have issued to it by the Bank a certificate or certificates representing such shares. Thereafter, the Holding Company shall have full and exclusive power to vote such shares of Bank Common Stock, to receive dividends thereon and to exercise all rights of an owner thereof. 3.2 At the Effective Time, each share of Bank Common Stock issued and outstanding prior to the Effective Time shall, without any further action by Shareholders or by the Holding Company, automatically and by operation of law, be converted into one share of Holding Company Common Stock. Holders of the issued and outstanding shares of Bank Common Stock (except for holders exercising Dissenters Rights) shall, automatically and by operation of law, cease to own such shares and shall instead become the owners of one share of Holding Company Common Stock for each share of Bank Common Stock held by them. Thereafter, such persons holding Holding Company Common Stock shall have full and exclusive power to vote such shares, to receive dividends thereon, except as otherwise provided herein, and to exercise all rights of an owner thereof. Notwithstanding any of the foregoing, any Dissenting Shareholder shall have such rights as provided for in Section 8 hereof and by the laws of the State of Connecticut. 3.3 At the Effective Time, all previously issued and outstanding certificates representing shares of Bank Common Stock (the "Old Certificates") shall automatically and by operation of law cease to represent shares of Bank Common Stock or any interest therein and each Old Certificate shall instead represent the ownership by the holder thereof of an equal number of shares of Holding Company Common Stock. No holder of an Old Certificate shall be entitled to vote the shares of Bank Common Stock formerly represented by such certificate, or to receive dividends thereon, or to exercise any other rights of ownership in respect thereof. Section 4. Shareholders Rights Agreement. 4.1 Upon approval of the Plan of Reorganization but in any event not later than the Effective Time, the Holding Company shall adopt and enter into a shareholders' rights agreement which shall be, in form and substance, acceptable to and approved by the Board of Directors of the Bank (the "HC Agreement"). 4.2 The HC Agreement shall contain terms, covenants, and conditions which shall be as nearly identical as possible to the terms, covenants, and conditions contained in that certain Shareholders' Rights Agreement between the Bank and Chemical Mellon Shareholder Services, LLC dated May 10, 1996 (the "NSS-Chemical Agreement"), a copy of which is required to be furnished to the Holding Company not later than ten days after the Annual Meeting. 4.3 At the Effective Time, the Bank shall, without any further action by the Bank or Holding Company, assign all right, title and interest, in the NSS-Chemical Agreement to the Holding Company and the Holding Company shall accept such assignment and become the Bank's successor-in-interest to the NSS-Chemical Agreement. 4.4 At the Effective Time, the Holding Company shall, in connection with its acquisition of all issued and outstanding shares of Bank Common Stock and without any further action by the Holding Company or by the shareholders of the Bank, acquire and become the holder of all Rights (as defined in the "NSS-Chemical Agreement") issued as a dividend distribution to holders of Bank Common Stock under the NSS-Chemical Agreement. Thereafter, the Holding Company shall terminate the NSS-Chemical Agreement and retire and extinguish all such Rights acquired by it thereunder. 4.5 At the Effective Time, the Holding Company shall, without any further action by it or by the Bank, declare a dividend distribution to holders of Holding Company Common Stock entitling such holders to a "Holding Company Right" (as defined in the HC Agreement) in an amount and under such terms and conditions as are prescribed in the HC Agreement. 4.6 At the Effective Time, Holders of Bank Common Stock shall, automatically and by operation of law, cease to own such Rights issued under the NSS-Chemical Agreement and, in substitution therefor, shall, automatically and by operation of law, be granted an equal number of Holding Company Rights. 4.7 Holding Company Rights shall be automatically traded with Holding Company Common Stock subject to the terms and conditions of the HC Agreement. Section 5. Stock Option and Benefit Plans. 5.1 At the Effective Time, the Holding Company shall automatically and without further action on its part adopt, and assume the rights and obligations of the Bank under the Bank's 1994 Employee Stock Option Plan, the Bank's 1994 Director Stock Option Plan, the Bank's 1995 Executive Incentive Plan, and the Bank's 1994 Employee Stock Ownership Plan, all as amended (collectively, the "Stock Plans"), as the Stock Plans are then in effect (subject to certain conforming amendments necessitated by or appropriate for the change in sponsorship of such Stock Plans). The Stock Plans shall, pursuant to their terms, thereafter apply only to shares of Holding Company Common Stock in the same manner as they theretofore applied to shares of Bank Common Stock. The Holding Company shall reserve for issuance a sufficient number of shares of Holding Company Common Stock in order to fulfill its obligations pursuant to this Section 5.1 and shall take such action as it deems necessary or advisable to permit the issuance of such shares under applicable state and federal securities laws and rules and regulations thereunder. Approval of the Reorganization by the shareholders of the Bank shall be deemed to be approval of the Stock Plans and any grants of Holding Company Common Stock thereunder by the Holding Company. 5.2 At the Effective Time, all options then outstanding under any of the Stock Plans, which immediately prior thereto had given the holder thereof the right to purchase shares of Bank Common Stock shall, automatically and without further action on the part of the holder thereof, be converted into options giving the holder thereof the right to purchase the same number of shares of Holding Company Common Stock at the same exercise price per share, and in accordance with such other terms and conditions, as pertained under the options outstanding under any of the Stock Plans immediately prior to the Effective Time. Section 6. Actions After the Effective Time. As soon as practicable and in any event not more than thirty days after the Effective Time: 6.1 The Holding Company shall deliver to the transfer agent for the Bank and the Holding Company (the "Transfer Agent"), as agent for the holders of the Old Certificates (other than Old Certificates representing shares of Bank Common Stock as to which Dissenting Shareholders' appraisal rights shall have been properly exercised), a certificate or certificates for the aggregate number of shares of Holding Company Common Stock (the "New Certificates"), to which such holders shall be entitled. Each such holder may, but shall not be required to, surrender his Old Certificates to the Transfer Agent and receive in exchange therefor a New Certificate for an equal number of shares of Holding Company Common Stock. Until so surrendered, each Old Certificate shall be deemed, for all corporate purposes, to evidence the Ownership of the number of shares of Holding Company Common Stock which the holder thereof would be entitled to receive upon its surrender, except that the Holding Company may in its sole discretion, deny the holders of such shares voting rights thereon and withhold from the holder of shares represented by such Old Certificate, distribution of any or all dividends declared by the Holding Company on such shares until such time as such Old Certificate shall be surrendered in exchange for one or more New Certificates, at which time dividends so withheld by the Holding Company with respect to such shares shall be delivered (without interest thereon and less the amount of taxes, if any, which may have been imposed or paid thereon or which are required by law to be withheld in respect thereof), to the shareholder to whom such New Certificates are issued. 6.2 If any certificate for shares of Holding Company Common Stock is to be issued in a name other than that in which the certificate surrendered in exchange therefor is registered, it shall be a condition of the issuance thereof that the certificate so surrendered shall be properly endorsed and otherwise in proper form for transfer as the Holding Company in its sole discretion may specify and that such transfer otherwise be proper and that the person requesting such transfer pay to the Transfer Agent any transfer or other taxes or other fee payable by reason of the issuance of such New Certificate in any name other than the registered holder of the certificate surrendered, or establish to the satisfaction of the Transfer Agent that such tax has been paid or is not payable or that any fee has been paid to the party to which it is due and waived by such party. 6.3 The Holding Company shall publish, in accordance with applicable law, a notice to the holders of all Old Certificates, specifying the Effective Time of this Plan of Reorganization and notifying such holders that they may present their Old Certificates to the Transfer Agent for exchange. Such notice shall likewise be given by mail to such holders at their last known addresses as contained on the Bank's records. Section 7. Conditions Precedent. 7.1 The Plan of Reorganization and the transactions provided for herein shall not become effective unless all of the following conditions shall have occurred, none of which may be waived: (a) This Plan of Reorganization and the transactions contemplated hereby shall have been approved by the affirmative vote of at least two-thirds of the voting securities of the Bank at the Annual Meeting or at any adjournment thereof. (b) The Plan of Reorganization shall have been approved by the Banking Commissioner, and the Reorganization and the other transactions contemplated hereby shall have been approved by any other bank regulatory agency of competent jurisdiction, and all notice and waiting periods after the granting of any such approval shall have expired. (c) The Holding Company shall have provided notice to the Federal Reserve Bank of New York (the "Reserve Bank") in accordance with 12 C.F.R. 225.15 and the Reserve Bank shall not have objected to the consummation of the transaction contemplated under this Plan of Reorganization within 30 days after the Reserve Bank's receipt of such notice or, alternatively, the Reserve Bank or the Board of Governors of the Federal Reserve System pursuant to section 3(a)(1) of the Bank Holding Company Act of 1956, as amended, shall have approved the application of the Holding Company to become a bank holding company upon consummation of the Reorganization and any and all applicable waiting periods shall have expired. (d) Unless otherwise waived, all approvals from the Federal Deposit Insurance Corporation and any other state or federal government agency having jurisdiction for the lawful consummation of the transactions contemplated by this Plan of Reorganization shall have been obtained, all conditions imposed by such regulatory approvals shall have been satisfied, and all waiting periods required in connection with such approvals shall have expired. (e) The Shares of Holding Company Common Stock to be issued to holders of Bank Common Stock pursuant to the Plan of Reorganization shall have been registered or qualified for such issuance without registration to the extent required under the Securities Act of 1933 and under all applicable state securities law. (f) The Holding Company and the Bank shall have received an opinion from the Bank's independent auditors to the effect that the Reorganization will qualify for pooling-of-interests accounting treatment. (g) The number of shares of Bank Common Stock as to which the Dissenting Shareholders shall have exercised their rights to be paid the value of such Bank Common Stock shall not exceed the lesser of (i) 5% of the number of shares of Bank Common Stock issued and outstanding at the Effective Time, or (ii) such number of shares as in the opinion of the Bank's independent auditors would prevent accounting for the Reorganization on a "pooling of interests" basis in accordance with generally accepted accounting principles. Section 8. Rights of Dissenting Shareholders. 8.1 "Dissenting Shareholders" shall mean those holders of Bank Common Stock who file with the Bank, before the taking of the vote on this Plan of Reorganization and the transactions contemplated hereby, written objection thereto, pursuant to Section 36a-181(c) of the Connecticut General Statutes, which written objection states that they intend to demand payment for their shares of Bank Common Stock if the Reorganization is consummated and whose shares are not voted in favor of the Reorganization. 8.2 Dissenting Shareholders who comply with the provisions of Section 36a-181(c) of the Connecticut General Statutes and all other applicable provisions of law shall be entitled to receive from the Bank payment of the value of their shares of Bank Common Stock upon surrender by such holders of the certificates which previously represented shares of Bank Common Stock. Certificates so obtained by the Bank, upon payment of the value of such shares as provided by law, shall be canceled. Shares of Holding Company Common Stock to which Dissenting Shareholders would have been entitled had they not dissented, shall be deemed to constitute authorized but unissued shares of Holding Company Common Stock and may be sold or otherwise disposed of by the Holding Company at the discretion of, and at such time and on such terms as may be fixed by, its Board of Directors. Section 9. Termination, Abandonment, Amendment and Waiver. 9.1 This Plan may be abandoned or terminated by either the Bank or the Holding Company at any time before the Effective Time in the event that: (a) The number of shares of Bank Common Stock owned by Dissenting Stockholders, as defined in Section 8 hereof, shall make consummation of the transactions contemplated by this Plan of Reorganization inadvisable in the opinion of the Bank or the Holding Company; (b) Any action, suit, proceeding or claim has been instituted, made or threatened relating to this Plan of Reorganization which shall make consummation of the transactions contemplated by this Plan inadvisable in the opinion of the Bank or the Holding Company; (c) The Reorganization shall not have been consummated by August 1, 1997; or (d) For any other reason consummation of the transactions contemplated by this Plan of Reorganization is inadvisable in the opinion of the Bank or the Holding Company. 9.2 In the event of termination or abandonment of this Plan of Reorganization in any manner, this Plan of Reorganization shall be terminated and shall be of no further force or effect and there shall be no liability hereunder or on account of such abandonment or termination on the part of the Bank or the Holding Company or the Directors, officers, employees, agents or stockholders of either entity. In the event of such abandonment or termination of this Plan of Reorganization, the Bank shall pay all expenses incurred in connection with this Plan of Reorganization and the proposed transactions contemplated hereby. If either party hereto gives written notice of abandonment or termination to the other party pursuant to this, the party giving such written notice shall simultaneously furnish a copy thereof to the Banking Commissioner. 9.3 This Plan of Reorganization may be amended by the parties hereto, by action taken by or on behalf of their respective Boards of Directors, at any time before or after approval of the Reorganization by the Shareholders of the Bank; provided, however, that any material change in the Plan of Reorganization subsequent to the approval thereof by Shareholders shall require the additional approval of Shareholders of any such material change or amendment, and, provided further, that after the initial Shareholder approval, no such amendment shall be submitted for the approval of Shareholders which has the effect of reducing the amount or change the form of the consideration to be delivered to the Bank's Shareholders as contemplated by this Plan of Reorganization. This Plan of Reorganization may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. Section 10. Governing Law. 10.1 This plan of Reorganization shall be governed by and construed in accordance with the laws of the State of Connecticut. IN WITNESS WHEREOF, the parties have executed this Plan of Reorganization as of the date first written above. NORWALK SAVINGS SOCIETY /s/ Robert T. Judson ------------------------------ By: Robert T. Judson Its President NSS BANCORP, INC. /s/ Robert T. Judson ------------------------------- By: Robert T. Judson Its President EX-3.I 3 ARTICLES OF INCORPORATION Exhibit 3.I CERTIFICATE OF INCORPORATION OF NSS BANCORP, INC. The undersigned incorporator, Norwalk Savings Society, a Connecticut stock savings bank, hereby forms a Corporation under the Connecticut Business Corporation Act. I. CORPORATE NAME. The name of the Corporation is NSS Bancorp, Inc. The principal office of the Corporation shall be located in the City of Norwalk, County of Fairfield, and State of Connecticut. II. PURPOSES. The nature of the business to be transacted and the purposes to be promoted, carried out or engaged in by the Corporation are the following activities: A. To acquire, invest in or hold stock in any subsidiary permitted under the Bank Holding Company Act of 1956 or sections 36a-180, et. seq., of the Connecticut General Statutes, as such statutes may be amended from time to time, and engaging in any other enterprise or activity which may be lawfully conducted under said statutes; and B. To engage generally in any business activity that may be lawfully carried on by a corporation organized under the Connecticut Business Corporation Act. III. CAPITAL STOCK. The amount of capital stock of the Corporation hereby authorized shall consist of 7,000,000 million shares of Common Stock, par value $0.01 per share, and 500,000 shares of Serial Preferred Stock, par value $0.01 per share. A description of the different classes and series of the Corporation's capital stock and a statement of the powers, designations, preferences, limitations and relative rights of the shares of each class of and series of capital stock are as follows: A. Common Stock. Except as provided in this Article Third (or in any resolution or resolutions adopted by the Board of Directors pursuant hereto), the holders of the Common Stock shall exclusively possess all voting power. Each holder of shares of Common Stock shall be entitled to one vote for each share held by such holder. There shall be no cumulative voting rights in the election of directors. Each share of Common Stock shall have the same relative rights as and be identical in all respects with all other shares of Common Stock. Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the Common Stock as to the payment of dividends, the full amount of dividends or sinking fund or retirement fund or other retirement payments, if any, to which such holders are respectively entitled in preference to the Common Stock, then dividends may be paid on the Common Stock and on any class or series of stock entitled to participate therewith as to dividends, out of any assets legally available for the payment of dividends; but only when and as declared by the Board of Directors. In the event of any liquidation, dissolution or winding up of the Corporation after there shall have been paid to or set aside for the holders of any class having preferences over the Common Stock in the event of liquidation, dissolution or winding up of the full preferential amounts of which they are respectively entitled, the holders of the Common Stock, and of any class or series of stock entitled to participate therewith, in whole or in part, as to distribution of assets, shall be entitled after payment or provision for payment of all debts and liabilities of the Corporation, to receive the remaining assets of the Corporation available for distribution, in cash or in kind. B. Serial Preferred Stock. The Board of Directors of the Corporation is authorized, subject to limitations prescribed by law and the provisions of this Article Third, to provide by resolution for the issuance of Serial Preferred Stock in series, including convertible preferred Stock, and by filing a certificate pursuant to the applicable law of the State of Connecticut, to establish from time to time the number of shares to be included in each such series, and to fix the designations, powers, preferences and relative, participating, optional and other special rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: (1) The number of shares constituting that series and the distinctive designation of that series; (2) The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series; (3) Whether that series shall have voting rights, in addition to the voting rights provided by law, and if so, the terms of such voting rights, including but not limited to providing voting rights which are more or less heavily weighted than other series of Preferred Stock and/or of Common Stock; (4) Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; (5) Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case or redemption, which amount may vary under different conditions and at different redemption dates; (6) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amounts of such sinking fund; (7) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution, or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; and (8) Any other relative rights, preferences, and limitations of that series. To the extent that this Certificate of Incorporation does not fix or determine the terms, limitations and relative rights and preferences of any shares of Preferred Stock, or does not establish series and fix and determine the variations as among series, the Board of Directors shall have the authority to do so from time to time. C. Series A Junior Participating Preferred Stock: (1) Designation and Amount. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be 50,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock. (2) Dividends and Distributions. (a) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock of the Corporation, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (i) $1 or (ii) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (ii) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (a) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (c) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by- share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than sixty days prior to the date fixed for the payment thereof. (3) Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights: (a) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the shareholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) Except as otherwise provided herein or as otherwise provided by law, if the Board of Directors creates a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of shareholders of the Corporation. (c) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. (4) Certain Restrictions. (a) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to divi dends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (a) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. (5) Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein or in any other Certificate of Designations creating a series of Preferred Stock or any similar stock or as otherwise required by law. (6) Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (a) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (b) to the holders of shares of stock ranking on a parity (either as to dividends upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (a) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (7) Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (8) No Redemption. The shares of Series A Preferred Stock shall not be redeemable. (9) Rank. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the Corporation's Preferred Stock. IV. QUORUM. Unless otherwise provided in this Certificate of Incorporation or by law, to constitute a quorum for the transaction of business on any matter at a meeting of shareholders, there must be present, in person or by proxy, the holders of a majority of the shares of voting stock of the Corporation entitled to vote thereon. The shareholders present at a duly held meeting at which a quorum was present may continue to transact business notwithstanding the withdrawal of enough shares to leave less than a quorum. V. DIRECTORS; BYLAWS. All the powers of the Corporation, insofar as the same may be lawfully vested by this Certificate of Incorporation in the Board of Directors, are hereby conferred upon the Board of Directors of the Corporation. In furtherance and not in limitation of that power, the Board of Directors shall have the power to make, adopt, alter, amend and repeal from time to time Bylaws of the Corporation, subject to the right of the shareholders entitled to vote with respect thereto to adopt, alter, amend and repeal Bylaws made by the Board of Directors. Any shareholder action effecting an amendment or repeal of or an adoption of a provision inconsistent with the Corporation's Bylaws shall require: (i) the affirmative vote of the holders of not less than 60% of the voting power of the issued and outstanding shares entitled to vote for the election of Directors, and (ii) if there is an Interested Shareholder (as defined in Article Seventh hereof), the affirmative vote of not less than 60% of the voting power of the issued and outstanding shares entitled to vote for the election of Directors held by shareholders other than the Interested Shareholder. The business, property and affairs of the Corporation shall be managed by and under the direction of its Board of Directors. The number of directors shall be not less than seven and not more than eleven as fixed from time to time by the Board of Directors pursuant to the Corporation's Bylaws, except as a greater number may be required to give effect to the rights of the holders of the Preferred Stock or any series thereof to elect additional Directors. The Board of Directors, other than those who may be elected by the holders of Preferred Stock or any series thereof, shall be divided into three classes, as nearly equal in number as possible. At each annual meeting of the shareholders of the Corporation, the successors of the class of directors whose terms expire at that meeting shall be elected to hold office for a term expiring at the annual meeting of shareholders held in the third year following their year of election. Each director shall hold office until his or her successor shall have been duly elected and qualified. The election of directors need not be by ballot unless the Bylaws so provide. No decrease in the number of directors shall shorten the term of any incumbent director. If the number of director is not evenly divisible by three, the remaining director(s) shall be allocated first to Class Two, and then to Class Three. The names, addresses and occupations of those persons of each class to initially serve on the Board of Directors and the year of expiration of their respective initial terms (which should expire on the date of the annual meeting in the year shown below) shall be as follows: Class One: 1998 Charles F. Howell Alan R. Staack Herbert L. Jay Class Two: 1999 Donald St. John Robert T. Judson Edward J. Kelley Class Three: 2000 Brian A. Fitzgerald John L. Segall The terms, classifications, qualifications, and election of the Board of Directors, and the method of filling vacancies thereon shall be provided herein and in the Bylaws. VI. BUSINESS COMBINATIONS. The shareholder vote required to approve any Business Combination shall be set forth in this Article Sixth. The term "Business Combination" is used as defined in Section B of this Article Sixth. All other capitalized terms not otherwise defined in this Article Seventh or elsewhere in this Certificate of Incorporation are used as defined in Section 4 of this Article Sixth. A. Higher Vote for Business Combinations. In addition to any affirmative vote required by law or this Certificate of Incorporation, and except as otherwise expressly provided in Section C of this Article Sixth; (1) any merger or consolidation of the Corporation or any Subsidiary with (a) any Interested Shareholder or (b) any other corporation (whether or not itself an Interested Shareholder) which is or after such merger or consolidation would be, an Affiliate or Associate of an Interested Shareholder that was an Interested Shareholder prior to the transaction; or (2) any sale, lease, exchange, mortgage, pledge, transfer or other disposition other than in the usual and regular course of business, in one transaction or a series of transactions in any twelve-month period to or with any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder, other than the Corporation or any of its Subsidiary having, measured at the time the transaction or transactions are approved by the Board of Directors of the Corporation, an aggregate book value as of the end of the Corporation's most recent fiscal quarter of 10% or more of the total Market Value of the outstanding shares of the Corporation or of its retained earnings as of the end of its most recent fiscal quarter; or (3) the issuance of transfer by the Corporation or any Subsidiary in one transaction or a series of transactions of any equity securities of the Corporation or any Subsidiary having an aggregate Market Value of 5% or more of the total Market Value of the outstanding shares of the Common Stock of the Corporation to any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder, other than the Corporation or any of its Subsidiaries, except pursuant to the exercise of warrants, rights or options to subscribe to or purchase securities offered, issued or granted pro rata to all holders of the Voting Stock of the Corporation or any other method affording substantially proportionate treatment to the holders of Voting Stock; or (4) the adoption of any resolution for the liquidation or dissolution of the Corporation or any Subsidiary proposed by or on behalf of an Interested Shareholder or any Affiliate or Associate of any Interested Shareholder, other than the Corporation or any of its Subsidiaries; or (5) any reclassification of securities, including any reverse stock split, or recapitalization of the Corporation, or any merger, consolidation or share exchange of the Corporation with any of its Subsidiaries which has the effect, directly or indirectly, in one transaction or a series of transactions, of increasing by 5% or more of the total number of outstanding shares, the proportionate amount of the outstanding shares of any class or equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder, other than the Corporation or any of its subsidiaries; shall first be approved by the Board of Directors and then be approved by the affirmative vote of: (a) the holders of at least 80% of the voting power of the then outstanding shares of Voting Stock of the Corporation, and (b) the holders of at least two-thirds of the voting power of the then outstanding shares of Voting Stock, exclusive of any shares of Voting Stock held by or on behalf of such Interested Shareholder or any Affiliate or Associate of such Interested Shareholder. Such affirmative votes shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law, in any agreement with any national securities exchange, or otherwise. B. Definition of "Business Combination". The term "Business Combination" as used in this Article Sixth shall mean any transaction which is referred to in any one or more of paragraphs (1) through (5) of Section A of this Article Sixth. C. When Higher Vote is Not Required. The provision of Section A of this Article Sixth shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law, any other provision of this Certificate of Incorporation, or otherwise if in the case of any Business Combination defined in paragraph (1) of Section A of this Article Sixth the conditions specified in either of the following paragraphs (1) or (2) are met, or in the case of any other Business Combination the condition specified in the following paragraph A is met: (1) Approval by Board of Directors. If such Business Combination involves transactions with a particular Interested Shareholder or its existing or future Affiliates, or Associates, such Business Combination shall have been approved by a resolution of the Board of Directors at any time prior to the time that the Interested Shareholder first became an Interested Shareholder. (2) Price and Procedure Requirements. All of the following conditions shall have been met: (a) The aggregate amount of the cash and the Market Value as of the Valuation Date of the consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be an amount at least equal to the highest of the following (it being intended that the requirements of this paragraph (a) shall be required to be met with respect to all shares of Common Stock outstanding, whether or not the Interested Shareholder has previously acquired any shares of the Common Stock): (i) the highest per share price, including any brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the Interested Shareholder for any shares of Common Stock acquired by it (a) within the two-year period immediately prior to the first public announcement of the proposed Business Combination (the "Announcement Date") or (2) in the transaction in which it became an Interested Shareholder, whichever is higher; or (ii) the Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Shareholder became an Interested Shareholder (the "Determination Date"), whichever is higher; or (iii) the price per share equal to the Market Value per share of Common Stock determined pursuant to subsection (a) (ii) hereof, multiplied by the fraction of (1) the highest per share price, including any brokerage commission transfer taxes and soliciting dealers' fees, paid by the Interested Shareholder for any shares of Common Stock acquired by it within the two-year period immediately prior to the Announcement Date, over (2) the Market Value per share of Common Stock on the first day in such two-year period on which the Interested Shareholder acquired any shares of Common Stock. (b) The aggregate amount of the cash and The Market Value as of the Valuation Date of the consideration other than cash to be received per share by holders of shares of any class or series of outstanding Voting Stock, other than the Common Stock, shall be an amount at least equal to the highest of the following: (i) the highest per share price including any brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the Interested Shareholder for any shares of such class or series of Voting Stock acquired by it (1) within the two-year period immediately prior to the Announcement Date or (2) in the transaction in which it becomes an Interested Shareholder, whichever is higher; or (ii) the highest preferential amount per share to which the holders of shares of such class or series of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; or (iii) the Market Value per share of such class or series of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher; or (iv) the price per share equal to the Market Value per share of such class or series of stock determined pursuant to subsection (b)(iii) hereof multiplied by the fraction of: (1) the highest per share price, including any brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the Interested Shareholder for any shares of any class or series of Voting Stock acquired by it within the two-year period immediately prior to the Announcement Date, over (2) the Market Value per share of the same class or series of Voting Stock on the first day in such two-year period on which the Interested Shareholder acquired any shares of the same class or series of Voting Stock. (c) The consideration to be received by holders of a particular class or series of outstanding Voting Stock shall be in cash or in the same form as the Interested Shareholder has previously paid for shares of such class or series of Voting Stock. If the Interested Shareholder has paid for shares of any class or series of Voting Stock with varying forms of consideration, the form of consideration for such class or series of Voting Stock previously acquired by it. (d) After such Interested Shareholder has become an Interested Shareholder and prior to the consummation of such Business Combination: (i) there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding Preferred Stock; (ii) there shall have been no reduction in the annual rate of dividends paid on the Common Stock, except as necessary to reflect any subdivision of the Common Stock; and there shall have been an increase in such annual rate of dividends as necessary to reflect any reclassification including any reverse stock split, recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of Common Stock; and (iii) such Interested Shareholder shall not have become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which resulted in such Interested Shareholder or by virtue of proportionate stock splits or stock dividends. The provisions of subdivisions (d)(i) and (d)(ii) of this subsection do not apply if no Interested Shareholder and no Affiliate or Associate of any Interested Shareholder voted as a director of the Corporation in a manner inconsistent with such subdivisions and the Interested Shareholder, within ten days after any act or failure to act inconsistent with such subdivisions, notifies the Board of Directors of the Corporation in writing that the Interested Shareholder disapproves thereof and requests in good faith that the Board of Directors rectify such act or failure to act. (e) After such Interested Shareholder has become an Interested Shareholder, such Interested Shareholder shall not have received the benefit, directly or indirectly, except proportionately as a shareholder, of any loans, advances, guarantees, pledges or other financial assistance of any tax credits or other tax advantages provided by the Corporation or any of its Subsidiaries, whether in anticipation of or in connection with such Business Combination or otherwise. (f) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder, or any subsequent provisions replacing such Act, rules or regulations, shall be mailed to the shareholders of the Corporation at least thirty days prior to the consummation of such Business Combination, whether or not such proxy or registration statement is required to be mailed pursuant to such Act or subsequent provisions. D. Definitions. For the purposes of this Article Sixth: 1. "Affiliate" means a person that directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, a specified person. 2. "Associate", when used to indicate a relationship with any person, means: (a) any domestic or foreign corporation or organization, other than the Corporation or a subsidiary of the Corporation, of which such person is an officer, director or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities; (b) any beneficial interest or as to which such person serves as a trustee or in a similar fiduciary capacity; and (c) any relative or spouse of such person, or any relative of such spouse, who has the same home as such person or who is a director or officer of the Corporation or any of its Affiliates. 3. "Beneficial Owner", when used with respect to any Voting Stock, means a person: (a) which, or any of its Affiliates or Associates of which, beneficially owns Voting Stock directly or indirectly; or (b) which has (a) the right to acquire Voting Stock, whether such right is exercisable immediately or only after passage of time, pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise; or (b) the right to vote or direct the voting of Voting Stock pursuant to any agreement, arrangement or understanding; or (c) the right to dispose of or to direct the disposition of Voting Stock pursuant to any agreement, arrangement or understanding; or (c) which, or any of its Affiliates or Associates of which, has an agreement, arrangement or understanding for the purposes of acquiring, holding, voting or disposing of Voting Stock with any other person that beneficially owns or whose Affiliates or Associates beneficially own, directly or indirectly, such shares of Voting Stock. 4. "Interested Shareholder" means any person, other than the Corporation or any Subsidiary, who or which: (a) is the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding Voting Stock; or (b) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the combined voting power of the then outstanding Voting Stock; or (c) is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any person described in (i) or (ii) above, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving one of the following: a public offering within the meaning of the Securities Act of 1933, a transfer of shares on the open market, or a transfer of shares made with the approval of the Connecticut Banking Commissioner. 5. For the purposes of determining whether a person is an Interested Shareholder pursuant to paragraph 4 of this Section D, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of paragraph 3 of this Section D, but shall not include any other shares of voting Stock which may be issuable to persons other than the person in question pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. 6. "Market Value" as of any date means: (a) in the case of stock, the highest closing sale price during the thirty-day period immediately preceding the date in question of a share of such stock on the composite tape for New York Stock Exchange-Listed Stocks, or, if such stock is not quoted on the composite tape, on the New York Stock Exchange, or, if such stock is not listed on such exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid or last sale quotation with respect to a share of such stock during the thirty-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any similar system then in use, or if no such quotations are available, the Fair Market Value on the date in question of a share of such stock as determined by a majority of the Board of Directors in good faith; and (b) in the case of property other than cash or stock, the Fair Market Value of such property on the date in question as determined by a majority of the Board of Directors in good faith. 7. A "person" means any natural person, company, partnership, trust, unincorporated organization or other entity, and any two or more of the foregoing acting together or in concert. 8. "Subsidiary" means any natural person, company, partnership, trust, unincorporated organization or other entity, and any two or more of the foregoing acting together or in concert. 9. "Valuation Date" means: (a) for a Business Combination voted on by shareholders, the latter of the day prior to the date of the shareholders vote or the date twenty days prior to the consummation of the Business Combination; and (b) for a Business Combination not voted upon by the shareholders, the date of the consummation of the Business Combination. 10. "Voting Stock" means the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors. 11. In the event of any Business Combination in which the Corporation is the surviving corporation, the phrase "consideration other than cash to be received" as used in paragraph 2(a) and 2(b) of Section 2 of this Article Sixth shall include the shares of Common Stock and/or the shares of any other class or series of outstanding Voting Stock retained by the holders of such shares. E. Powers of the Board of Directors. A majority of the Board of Directors of the Corporation shall have the power and duty to determine, on the basis of information known to them after reasonable inquiry, all facts necessary to determine compliance with this Article Sixth, including without limitation: (A) whether a person is an Interested Shareholder, (B) the number of shares of Voting Stock beneficially owned by any person, (C) whether a person is an Affiliate or Associate of another, and (D) whether the requirements of paragraph B of Section 3 have been met with respect to any Business Combination; and the good faith determination of a majority of the Board of Directors on such matters shall be conclusive and binding for all the purposes of this Article Sixth. F. No Effect on Fiduciary Obligations of Interested Shareholders. Nothing contained in this Article Sixth shall be construed to relieve the Board of Directors or any Interested Shareholder form any fiduciary obligation imposed by law. VII. SPECIAL MEETING OF SHAREHOLDERS. Special meetings of Shareholders may be called at any time but only by the Chairman of the Board, the President or a majority of the Board of Directors of the Corporation, unless otherwise required by law. VIII. VACANCIES ON THE BOARD. Vacancies created by an increase in the number of directors may be filled by action of the Board of Directors. Vacancies occurring by reasons other than by an increase in the number of directors may be filled until the next shareholders meeting at which directors are elected by a concurring vote of a majority of the Directors remaining in office, even though such remaining Directors may be less than a quorum, even though the number of Directors at the meeting may be less than a quorum and even though such majority may be less than a quorum. Any Director elected in accordance with the preceding sentence shall hold office until the next shareholders' meeting at which Directors are elected, provided that he shall serve until such Director's successor shall have been elected and qualified or until there is a decrease in the number of Directors. No decrease in the number of Directors constituting the Board of Directors shall shorten the term of any incumbent Director. Any voting requirement provided for under Connecticut law or under the Bylaws of the Corporation may be amended by the affirmative vote of the Shareholder provided that the adoption of any such Bylaw must meet the same quorum requirement and be approved by the same vote then effective or proposed to be adopted, whichever is greater. IX. DIRECTOR LIABILITY. The personal liability to the Corporation or its shareholders of a person who is or was a director of the Corporation for monetary damages for breach of duty as a director shall be limited to the amount of the compensation received by the director for serving the corporation during the year of the violation if such breach did not: (1) involve a knowing and culpable violation of law by the director; (2) enable the director or an associate, as defined in subdivision (3) of Section 33-843 of the Connecticut General Statutes, as amended to receive an improper personal economic gain; (3) show a lack of good faith and a conscious disregard for the duty of the director to the Corporation under circumstances in which the director was aware that his or her conduct or omission created an unjustifiable risk of serious injury to the Corporation; (4) constitute a sustained and unexcused patter of inattention that amounted to an abdication of the director's duty to the Corporation; or (5) create liability under Section 33-757, as amended, or Section 36a-58 of the Connecticut General Statutes. This paragraph shall not limit or preclude the liability of a person who is or was a director for any act or omission occurring prior to the effective date hereof. Any lawful repeal or modification of this paragraph or the adoption of any provision inconsistent herewith by the Board of Directors and the shareholders of the Corporation shall not, with respect to a person who is or was a director, adversely affect any limitation of liability, right or protection existing at or prior to the effective date of such repeal, modification or adoption of a provision inconsistent herewith. X. REMOVAL OF DIRECTORS. Any Director may be removed from office at any time for cause by the affirmative vote of at least two-thirds of the Directors then in office. XI. NOMINATIONS FOR DIRECTOR. Not less than twenty days advance notice of nominations for the election of Directors, other than by the Board of Directors or a committee thereof, shall be given in the manner provided in the Bylaws. XII. ACTION BY SHAREHOLDERS. Any action required or permitted to be taken by the shareholders of the Corporation must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders. XIII. APPROVAL FOR CERTAIN ACQUISITIONS AND OFFERS TO ACQUIRE VOTING STOCK. No person, acting singly or together with any Affiliates, Associates or group of persons acting in concert with such person, shall acquire 10% or more of the issued and outstanding stock of the Corporation entitled to vote for the election of directors ("Voting Stock") at any time, unless: (a) such acquisition has been approved prior to its consummation by the affirmative vote of the holders of at least two-thirds of the outstanding Voting Stock entitled to vote at a duly constituted meeting of shareholders called for such purpose, and (b) all federal and state regulatory approvals required under the Change in Bank Control Act of 1978 (the "Change in Control Act"), the Bank Holding Company Act of 1956 (the "Holding Company Act") and any similar Connecticut law (including but not limited to The Connecticut Bank Holding Company and Bank Acquisition Act) and in the manner provided by all applicable regulations of the Federal Deposit Insurance Corporation (the "FDIC"), the Federal Reserve Board (the "FRB") and the Connecticut Banking Commissioner have been obtained (or, as applicable, with regard to each such agency, any required filings has not been disapproved within the applicable time period). Notwithstanding any provision of this Certificate of Incorporation, nothing in this Certificate shall be construed to restrict any authority of the Connecticut Banking Commissioner to authorize an acquisition as provided in The Connecticut Bank Holding Company and Bank Acquisition Act. The Corporation shall be entitled to institute a private right of action to enforce such statutory and regulatory provisions. Moreover, no person may make an offer to acquire 10% or more of the then outstanding Voting Stock of the Corporation unless such person has notified the Board of Directors of the Corporation in writing of its intention to so offer and the Board of Directors has not, within fifteen days after receipt of such notice, disapproved such offer or, before the offer is made, obtained prior approval of the acquisition by the FDIC or the FRB and the Banking Commissioner (or, as applicable, with regard to each such agency, any required filings with such regulatory agency have been made in a timely fashion and the action or proposed action set forth therein has not been disapproved within applicable time period.) All shares of Voting Stock owned by any person violating the foregoing provisions of this Article Thirteenth shall be considered from and after the date of the acquisition by such Person to be "excess shares" to the extent such shares exceed 10%, of the Voting Stock issued and outstanding. Such excess shares shall thereafter no longer be entitled to vote on any matter or to take other shareholder action or be counted in determining the total number of outstanding shares for purposes of any matter involving shareholder action, and the Board of Directors may cause such excess shares to be transferred to an independent trustee for sale on the open market or otherwise, with the expenses of such trustee to be paid out of the proceeds from such sale. The term "person" shall include any individual, group acting in concert, firm, corporation, partnership, association, joint stock company, trust, unincorporated organization thereof, syndicate, or other entity. When any person, directly or indirectly, acquires beneficial ownership of more than 10% of the then outstanding voting stock of the Corporation without the prior written approval of said Commissioner as required by this Article Thirteenth, any voting stock beneficially owned by said person in excess of said 10% shall not be counted as shares of voting stock entitled to notice, to vote or to take any other shareholder action and shall not be voted by any person or be counted in determining the total number of outstanding shares for purposes of any matter involving shareholder action. The term "group acting in concert" includes persons seeking to combine or pool their voting or other interests in the securities of the Corporation for a common purpose, pursuant to any contract, trust, understanding, relationship, agreement, or other arrangement, whether written or otherwise. The term "offer" includes every offer to buy or acquire, solicitation of an offer to sell, tender offer for, or request or invitation for tender of, a security or interest in a security for value. XIV. CONSIDERATIONS FOR MERGER, CONSOLIDATION OR OTHER OFFERS. The Board of Directors of the Corporation, when evaluating any tender or exchange offer for stock of the Corporation, offer or proposal to merge or consolidate the Corporation with another institution, or an offer or proposal to purchase or otherwise acquire all or substantially all of the properties and assets of the Corporation, shall, in connection with the exercise of its judgment in determining what is in the best interests of the Corporation and its shareholders, give due consideration to all relevant factors, including without limitation what he reasonably believes to be in the best interests of the Corporation, including (a) the long-term as well as the short-term interests of the EX-3.II 4 BYLAWS Exhibit 3.ii BY-LAWS of NSS BANCORP, INC. Effective June 30, 1997 ARTICLE I Offices Section 1. Location. The principal office of the Company shall be located in the Town of Norwalk, County of Fairfield and State of Connecticut, but the Company may maintain such branch office or offices within or without the State of Connecticut as authorized by the Board of Directors and any other regulatory body that might have jurisdiction over the Company. ARTICLE II Shareholders' Meetings Section 1. Place of Meetings. Every meeting of the shareholders of the Company shall be held at the principal office of the Company or at such other place either within or without the State of Connecticut as shall be specified in the notice of said meeting given as hereinafter provided. Section 2. Annual Meeting. The annual meeting of the shareholders shall be held on such day and at such time and place in the month of April or such other month of each year as the Board of Directors may determine from time to time. At such meetings, the shareholders shall elect Directors and transact such other business as may properly be brought before the meeting. Failure to hold an annual meeting as herein prescribed shall not affect otherwise valid corporate acts. In the event of such failure, a substitute annual meeting may be called in the same manner as a special meeting. Except for nominations of Directors as provided in Article III, Section 2 of these By-laws, business is properly brought before an annual meeting if it is (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board, (b) otherwise properly brought before the meeting by or at the direction of the Board, or (c) otherwise properly brought before the meeting by a shareholder. For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Company not less than twenty (20) days nor more than one hundred thirty (130) days prior to the meeting. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Company's books, of the shareholder proposing such business, (c) the class and number of shares of the Company which are beneficially owned by the shareholder, and (d) any material interest of the shareholder in such business. The Secretary may also require, in writing and prior to the meeting, any and all information about the shareholder or the proposed matter which the Secretary determines in his discretion to be appropriate using the then current requirements of Securities Exchange Commission Rule 14a-101 as a guide. Notwithstanding anything in the By-laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this paragraph. The presiding officer of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this paragraph, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Section 3. Special Meetings. Special meetings of the shareholders may be called at any time but only by the Chairman of the Board, the President or a majority of the Board of Directors of the Corporation unless otherwise required by law. Section 4. Notice of Meetings. Notice of the time and place of all annual and special meetings of shareholders and the purpose thereof shall be handed or mailed, postage prepaid, by or at the direction of the Secretary, not less than ten (10) nor more than sixty (60) days before such meeting, to each shareholder of record and at such address as shall appear on the books of the Company. Whenever notice is required to be given to any person, a written waiver of notice signed by the person or persons entitled to such notice, whether before or after the time stated therein, and filed with the Secretary, shall be equivalent to the giving of such notice. Any shareholder who attends any shareholders' meeting without protesting the lack of proper notice, prior to or at the commencement of the meeting, shall be deemed to have waived such notice. Failure of any shareholder to receive notice of any meeting shall not invalidate the meeting. Section 5. Quorum. To constitute a quorum for the transaction of business at any meeting of shareholders, there must be present, in person or by proxy, the holders of a majority of the issued and outstanding shares of stock of the Company entitled to vote thereat. The shareholders present at a duly held meeting at which a quorum was present may continue to transact business notwithstanding the withdrawal of enough shares to leave less than a quorum. Section 6. Adjournment of Meetings. The holders of a majority of the voting power of the shares present, in person or by proxy, and entitled to vote, whether or not a quorum is present, may adjourn the meeting to a future date as may be agreed. Notice of such adjournment shall be given to the shareholders not present or represented at the meeting. The holders of the voting power of the shares present and entitled to vote, whether or not a quorum is present, may recess the meeting to a future time to resume not later than 48 hours after the time of recess for the sole purpose of collecting and soliciting proxies. Notice of such recess need not be given to the shareholders not present or represented at the meeting. Section 7. Voting Requirements. Except as may be otherwise specifically provided in these By-laws or in the Certificate of Incorporation, the vote requirements provided for in the Connecticut Business Corporation Act, the Connecticut banking laws, or other applicable law, shall be the act of the shareholders. Section 8. Record Date. For the purpose of determining the shareholders entitled to notice of or to vote at a meeting of shareholders, or entitled to receive a payment of any dividend, the Board of Directors may set a record date which shall not be a date earlier than the date on which such action is taken by the Board of Directors, nor more than seventy (70) nor less than ten (10) days before the particular event requiring such determination is to occur. If no record date is fixed by the Board of Directors, the date on which the notice of the meeting is mailed or if no notice is given, the day preceding the meeting shall be the record date for determination of shareholders entitled to vote at such meeting, and the date on which the resolution of the Board of Directors declaring a dividend is adopted shall be the record date for determination of shareholders entitled to receive such distribution. Section 9. Proxies. At all meetings of shareholders, any shareholder entitled to vote may vote either in person or by proxy. All proxies shall be in writing, signed and dated and shall be filed with the Secretary of the Company before or at the time of the meeting. No proxy shall be valid for more than eleven (11) months after its execution, unless otherwise provided therein and in no event shall a proxy be valid for more than ten (10) years after its execution. Section 10. Committee on Proxies. The Board, in advance of any shareholders' meeting, shall appoint not less than two inspectors to act as a Committee on Proxies and as tellers at the meeting or any adjournment thereof. In case the Board does not so act, or any person appointed to be an inspector fails to appear or act, the vacancy may be filled by appointment made by the Board in advance of the meeting or at the meeting by the presiding officer. The inspectors shall receive and take in charge the proxies and ballots, shall decide all questions concerning the qualification of voters, the validity of proxies and the acceptance or rejection of votes, and shall count the ballots cast and report to the presiding officer the result of the vote. Section 11. Presiding Officer. The Chairman of the Board, or such Director as he may designate, shall preside over all meetings of the shareholders. Section 12. Number of Votes for Each Shareholder. Each shareholder shall be entitled to one vote for each share of stock standing in his name on the books of the Company as of the record date unless, and except to the extent that, voting rights of shares of any class are increased, limited, or denied pursuant to the Certificate of Incorporation. ARTICLE III Directors Section 1. Authority and Term of Office. The business, property and affairs of the Company shall be managed by, and under the direction of, the Board of Directors. The Board of Directors are empowered to engage the Company in any activity authorized by the Connecticut Business Corporation Act or by applicable State or Federal banking laws. The Board of Directors shall have charge of the care and management of the affairs and property of the Company. The Board of Directors shall, pursuant to the laws of the State of Connecticut, as the same may be amended from time to time, be empowered to make rules and regulations essential to the performance of its duties of caring for and managing the property and affairs of the Company, to elect the officers, to fill the vacancy of any elected officer, to elect or appoint such assistants and committees as it may deem necessary for the business of the Company and to prescribe their duties, to determine the amount and sufficiency of the bonds and to prescribe the duties of all the officers and employees, to fix the compensation of the Directors, officers and employees of the Company, to declare dividends, to prescribe the rate, method of computation and time of payment of such dividends due depositors and to take or to prescribe the taking of such other action as may be necessary to the performance of its duties. Directors need not be residents of Connecticut. At the time of election, however, each Director must own in his individual capacity one or more shares of stock of the Company. No Director attaining the age of seventy-five (75) years shall be eligible for reelection, and if he or she attains such age during his or her term of office, he or she shall be retired on the first day of the month following, and his or her office will be deemed vacant at that time. Section 2. Nominations. Subject to any rights of the holders of Preferred Stock to elect Directors under specified circumstances, only persons who are nominated in accordance with the procedures set forth in this section shall be eligible for election as Directors. Nominations of persons for election to the Board may be made at a meeting of shareholders by or at the direction of the Board or by any shareholder of the Company entitled to vote for the election of Directors at the meeting who complies with the notice procedures set forth in this section. Such nominations by a shareholder shall be made only if written notice of such shareholder's intent to make such nomination or nominations has been given to the Secretary, delivered to or mailed and received at the principal executive offices of the Company not less than twenty (20) days nor more than one hundred thirty (130) days prior to the meeting. Such shareholder's notice shall set forth (1) as to each person whom the shareholder proposes to nominate for election as a Director, (a) the name, age, business address and residence address of such person, (b) the principal occupation or employment of such person, (c) the class and number of shares of the Company which are beneficially owned by such person, and (d) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to applicable law and regulations (including without limitation such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected); and (2) as to the shareholder giving the notice, (a) the name and address, as they appear on the Company's books, of such shareholder, (b) the class and number of shares of the Company which are beneficially owned by such shareholder, (c) representation that the shareholder is a holder of record of stock of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, and (d) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder. At the requirement of the Board, any person nominated by the Board for election as a Director shall furnish to the Secretary that information which would be required to be set forth in a shareholder's notice of nomination which pertains to the nominee. The presiding officer of the meeting shall refuse to acknowledge the nomination of any person not made in compliance with this section and the defective nomination shall be disregarded. Section 3. Vacancies. Except as otherwise fixed by or pursuant to the provisions of law or the Certificate of Incorporation and subject to the rights of holders of the Preferred Stock, if any, to elect additional Directors under specified circumstances, vacancies in the Board resulting from death, resignation, disqualification, removal from office or other cause shall be filled until the next shareholders meeting at which Directors are elected by a majority vote of the Directors then in office even though such remaining Directors may be less than a quorum of the Board and such majority may be less than a quorum. Any Director so chosen shall hold office for a term expiring at the annual meeting of shareholders at which the term of the class to which he has been elected expires and until such Director's successor shall have been elected and qualified. Vacancies created by an increase in the number of Directors may be filled by action of the Board of Directors. Section 4. Removal of Directors. Subject to the rights of the holders of the Preferred Stock to elect Directors under specified circumstances, any Director may be removed from office at any time for cause in accordance with the provisions of the Certificate of Incorporation or applicable provisions of the Connecticut Business Corporation Act. In addition, the office of any Director who fails to attend six (6) consecutive meetings of the Board, special or regular, shall become vacant if the majority of the Board of Directors determines that such absence was without good cause. Section 5. Place of Meetings. The Board of Directors shall hold its meetings at the principal office of the Company or at such place or places within or without the State of Connecticut as it may determine from time to time. Section 6. Regular Meetings. Regular meetings of the Board of Directors shall be held at least monthly, at such times and places as shall be fixed by the Directors, or with such other frequency as the Board of Directors may determine. Section 7. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, the President, or, in their absence or disability, by a Vice President, or in writing by three (3) of the Directors. Notice thereof, oral or written, specifying the date, time, place and object of such meeting, shall be given to each Director at least two (2) days prior to such meeting. If notice is given by mail, the Secretary shall address notices to the Directors at their usual place of business or such address as may appear on the Company's books. Section 8. Waiver of Notice. Whenever notice is required to be given to any person, a written waiver of notice signed by the person or persons entitled to such notice, whether before or after the time stated therein, and filed with the Secretary, shall be equivalent to the giving of such notice. If any Director present at a meeting of the Board of Directors does not protest the lack of proper notice prior to or at the commencement of the meeting such Director shall be deemed to have waived notice of such meeting. Section 9. Action by Directors Without a Meeting. Any resolution in writing concerning action to be taken by the Company, which resolution is approved and signed by all of the Directors, severally or collectively, shall have the same force and effect as if such action were authorized at a meeting of the Board of Directors duly called and held for that purpose, and such resolution together with the Directors' written approval thereof, shall be recorded by the Secretary in the minute book of the Company. Section 10. Telephonic Participation in Directors Meetings. A Director or member of a committee of the Board of Directors may participate in a meeting of the Board of Directors or of such committee by means of a conference telephone or similar communications equipment enabling all Directors participating in the meeting to hear one another, and participation in such a meeting shall constitute presence in person at such meeting. Section 11. Quorum and Voting Requirement. A majority of the number of directors shall constitute a quorum for the transaction of business at all meetings of the Board of Directors. The act of a majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board, unless a higher percentage vote is required by law, the Certificate of Incorporation, or these By-laws. Section 12. Voting. At meetings of the Board of Directors, each Director shall have one vote. Section 13. Committees; Appointment and Authority. The Board of Directors, by resolution adopted by the affirmative vote of Directors holding a majority of the directorships, may designate two or more Directors to constitute an Executive Committee or other committees, which committees shall have and may exercise all such authority of the Board as shall be provided in such resolution and may be permitted by law. Directors may be removed from committee memberships by resolution adopted by the affirmative vote of a majority of the Directors. Vacancies on any committee shall be filled by the Board of Directors at any regular or special meeting. All committees shall perform such duties as may be assigned to them and shall report to the Board of Directors at such time and in such manner as the Board shall direct. A majority of any committee shall constitute a quorum. If the Board of Directors does not designate a Chairman of the committee, the committee shall elect its own Chairman. Section 14. Compensation of Directors. The Board of Directors shall have authority to fix the fees of Directors, including reasonable allowance for expenses actually incurred in connection with their duties. Section 15. Chairman of the Board. The Board of Directors, at the next regular meeting following the annual meeting, shall elect, each year, from among its members, a person to be Chairman of the Board to preside at all meetings of the Board of Directors and at the annual meeting of the shareholders, and such Chairman shall have one (1) vote to break any ties that exist at the meetings of the Board of Directors. In the event that such Chairman shall be absent from any meeting of the Board of Directors, the remaining Directors shall have the power to elect a temporary Chairman in his or her place and stead. ARTICLE IV Officers Section 1. Election of Officers. At the next regular meeting of the Board of Directors, following the annual meeting of the shareholders, or at another time as determined by the Board, the Board of Directors shall elect a President, one or more Vice Presidents (who may be designated "Executive," "Senior," or other to distinguish them from other Vice Presidents), a Secretary, a Treasurer and shall designate a Chief Executive Officer for the ensuing year. The Board may, in its discretion, from time to time, appoint such other officers and assistants as it shall deem necessary who shall have such authority and such designation and shall perform such duties as the Board of Directors or the President from time to time prescribe. The same person may be elected or appointed to serve simultaneously in more than one office. The officers need not be shareholders, and need not be residents of Connecticut. The duties of the officers of the Company shall be such as are imposed by these By-laws and from time to time prescribed by the Board of Directors or the President. Section 2. Vacancies. Vacancies in any office may be filled at any regular or special meeting of the Board of Directors. Section 3. Removal. Any officer may be removed from office by the affirmative vote of two-thirds (2/3) of the whole Board of Directors at any regular or special meeting, or as may otherwise be provided in any agreement between the Company and the officer. In addition, any officer below the level of Vice President may be removed from office in the discretion and at the direction of the President unless such officer's duties require that he report directly to the Board. Section 4. President. The President shall have the general charge, supervision, and control of the business and affairs of the Company subject to the direction of the Board of Directors. The President shall have such other powers and perform such other duties as are generally incident to the office of President and as may be assigned to the President by the Board of Directors. The President shall be an ex-officio member of all committees of the Board, except the Auditing Committee. Section 5. Vice Presidents. The Vice Presidents shall perform such executive and administrative duties as from time-to- time may be assigned to them by the President or the Board of Directors and in the absence of the President, the Vice Presidents, in the order of their ranking in the Company's management hierarchy, as determined by the Board of Directors from time to time, shall perform the duties of the President. Section 6. Treasurer. The Treasurer shall be responsible for the custody and safekeeping of all of the assets of the Company and shall perform all acts incident to the position of Treasurer and shall submit such reports and statements as may be required by law or by the Board of Directors and perform such other duties as are assigned to the Treasurer from time-to-time by the Board of Directors or the President. Section 7. Secretary. The Secretary shall perform such executive and administrative duties as from time-to-time may be assigned to the Secretary by the Board of Directors or the President. The Secretary shall have charge of the seal of the Company and shall have such other powers and perform such other duties as designated in these By-laws or as are generally incident to the office of Secretary. The Secretary shall notify the shareholders and Directors of all meetings and shall keep the minutes of meetings of the shareholders and of the Board of Directors. Section 8. Retirement. The normal retirement age of any officer or employee shall be age sixty-five (65); under unusual conditions, the Directors may retain the services of an officer or employee on an annual basis beyond such age, depending upon the ability of the officer or employee to perform the duties of the position in a satisfactory manner, but there shall be no more than five (5) such annual extensions. Notwithstanding the foregoing, this provision shall not be enforceable if it is determined by a court in a final adjudication to be illegal or contrary to any law or regulation. ARTICLE V Indemnification Section 1. Indemnification. The Company shall indemnify the Directors, officers, employees and agents of the Company to the maximum extent permitted by and/or required by the Connecticut Business Corporations Act. Without otherwise limiting the foregoing, Sections 33-770 to 33-778 of the Connecticut Business Corporations Act of Connecticut as from time to time amended governs and applies to certain matters of indemnification of Directors, officers, employees and agents of the Company, and is incorporated herein by reference as a part of these By-laws. ARTICLE VI Stock Section 1. Issuance by the Board of Directors. The Board of Directors may issue at one time, or from time to time, all or a portion of the authorized but unissued shares of the capital stock of the Company, including treasury stock, as in their opinion and discretion may be deemed in the Company's best interests. The Board may accept, in consideration for such shares, money, promissory notes, other securities and other property of any description actually received by the Company, provided, that such consideration equals or exceeds in value the par value of said shares, if any, and that the consideration is legally acceptable for the issue of said shares. Section 2. Certificates of Stock. Certificates of stock shall be in a form adopted by the Board of Directors and shall be signed by the President or the Vice President and by the Secretary or Assistant Secretary, or by facsimile signature of any or all of the foregoing, and shall carry the corporation seal of the Company. All certificates shall be consecutively numbered and the name of the person owning the shares represented thereby and the number of such shares and the date of issue shall be entered on the Company's books. Section 3. Transfer of Stock. Shares of stock shall be transferred only on the books of the Company by the holder thereof in person or by his attorney, upon surrender of the certificate of stock properly endorsed. The Company shall issue a new certificate to the person entitled thereto for all shares surrendered. Section 4. Cancellation of Certificate. All surrendered certificates properly endorsed, shall be marked "cancelled" with the date of cancellation and a notation of such cancellation made in the shareholder book. Section 5. Lost Certificates. The President or any officer designated by the President may, in case any share certificate is lost, stolen, destroyed, or mutilated, authorize the issuance of a new certificate in lieu thereof, upon such terms and conditions, including reasonable indemnification of the Company, as the President or any designated officer shall determine, and notation of the transaction made in the shareholder book. Section 6. Closing of Stock Transfer Book. The stock transfer book may be closed, if so ordered by the Board, for not exceeding twenty (20) days before any dividend payment date or any meeting of the shareholders. ARTICLE VII Finance and Dividends Section 1. Fiscal Year. The fiscal year of the Company shall begin on the first day of January in each year. Section 2. Dividends. Dividends may be voted by the Directors as prescribed by applicable law, as from time to time amended. Such dividends will be payable to shareholders of record at the close of business on such subsequent days as the Directors may designate and to be paid on a named day not more then seventy (70) days thereafter, and the Directors may further close the transfer books during the period from the day as of which the right to such dividend is determined through the day upon which the same is to be paid. No dividend shall be paid unless duly voted by the Directors of the Company and the name of each Director voting for any dividend shall be entered by the Secretary on the records of the Company. Dividends may be paid in cash, property, or shares of the Company. ARTICLE VIII Amendment of By-laws These By-laws may be altered or amended by the Board at any meeting by a majority vote of the directors on the entire Board or at any meeting of the shareholders, whether annual or special, by a majority in interest of the stock entitled to vote, provided however that in order to amend or repeal or to adopt any provision inconsistent with Article II, Article III (other than sections 5, 6, 14, the last paragraph of section 1 thereof and the last sentence of section 4 thereof) or this Article XIII, any vote of shareholders shall require (i) the affirmative vote of the holders of at least sixty percent (60%) of the voting power of all of the issued and outstanding shares of the Company then entitled to vote for the election of Directors, and (ii) if there is an "Interested Shareholder" (as that term is defined in the Certificate of Incorporation), the affirmative vote of sixty percent (60%) of the voting powers of all of the issued and outstanding shares of the Company entitled to vote for the election of Directors held by shareholders other than the Interested Shareholder, and any action of Directors shall require the affirmative vote of a majority of the Directors then in office. Any changes in the By-laws made by the Board between meetings of the shareholders shall be reported to the shareholders at the next annual meeting. Any notice of a meeting of the shareholders or the Board at which the By-laws are to be altered or amended shall include notice of such proposed action. ARTICLE IX These new adopted By-laws supersede any and all prior By-laws previously adopted. CERTIFICATION These By-laws were adopted at a meeting of the Directors of the Company on the 20th day of May, 1997. /s/ Jeremiah T. Dorney ---------------------------------- Secretary EX-4 5 SHAREHOLDERS RIGHTS Exhibit 4 NORWALK SAVINGS SOCIETY and CHEMICAL MELLON SHAREHOLDER SERVICES, L.L.C. as Rights Agent RIGHTS AGREEMENT Dated as of May 10, 1996 INDEX
Page Section 1. Certain Definitions Section 2. Appointment of Rights Agent Section 3. Issue of Right Certificates Section 4. Form of Right Certificates Section 5. Countersignature and registration Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights Section 8. Cancellation and Destruction of Right Certificates Section 9. Reservation and Availability of Capital Stock Section 10. Common Stock Record Date Section 11. Adjustment of Purchase Price, Number and Kind of Shares or Number of Rights Section 12. Certificate of Adjusted Purchase Price or Number of Shares Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power Section 14. Fractional Rights and Fractional Shares Section 15. Rights of Action Section 16. Agreement of Right Holders Section 17. Right Certificate Holder Not Deemed a Stockholder Section 18. Concerning the Rights Agent Section 19. Merger or Consolidation or Change of Name of Rights Agent Section 20. Duties of Rights Agent Section 21. Change of Rights Agent Section 22. Issuance of New Right Certificates Section 23. Redemption Section 24. Notice of Proposed Actions Section 25. Notices Section 26. Supplements and Amendments Section 27. Successors Section 28. Determinations and Actions by the Board of Directors, etc
Section 29. Benefits of This Agreement Section 30. Severability Section 31. Governing Law Section 32. Counterparts Section 33. Descriptive Headings Testimonium and Signatures Exhibit A - Form of Amendment to Articles of Incorporation Exhibit B - Form of Right Certificate Exhibit C - Summary of Rights to Purchase Preferred Shares
RIGHTS AGREEMENT This Rights Agreement dated as of May 10, 1996, between NORWALK SAVINGS SOCIETY, a Connecticut-chartered capital stock savings bank (the "Bank"), and CHEMICAL MELLON SHAREHOLDER SERVICES, L.L.C., as Rights Agent (the "Rights Agent"), W I T N E S S E T H: WHEREAS, on May 10, 1996 the Bank declared a dividend distribution of one Right (hereafter referred to as a "Right") for each outstanding share of the Common Stock, par value $.01 per share, of the Bank (the "Common Stock") outstanding at the close of business on May 28, 1996 (hereinafter referred to as the "Record Date") (other than shares of such Common Stock held in the Bank's treasury on such date) and has authorized the issuance of one Right (as such number may hereafter be adjusted pursuant to the provisions of Section 11(p) hereof) in respect of each share of Common Stock of the Bank that shall become outstanding after the Record Date (whether originally issued or delivered from the Bank's treasury) and on or prior to the earlier of the Distribution Date and the Expiration Date (as such terms are hereinafter defined), each Right representing the right to purchase one one-hundredth of a share of the Bank's Series A Junior Participating Preferred Stock upon the terms and subject to the conditions hereinafter set forth (the "Rights"); NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: Section 1. Certain Definitions. For purposes of this Agreement, the following terms have the meanings indicated; (a) "Acquiring Person" shall mean any Person (as hereinafter defined) who or which, together with all Affiliates (as hereinafter defined) and Associates (as hereinafter defined) of such Person, shall be the Beneficial Owner (as hereinafter defined) of 10% or more of the shares of Common Stock then outstanding, but shall not include the Bank, any Subsidiary (as hereinafter defined) of the Bank, any employee benefit plan of the Bank or any Subsidiary of the Bank, or any entity (including its Affiliates) organized, appointed or established for or pursuant to the terms of any such plan acting solely in its capacity (or their capacities) under such plan. Notwithstanding the foregoing, no Person shall become an "Acquiring Person" solely as the result of an acquisition of Common Stock by the Bank which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 10% or more of the shares of Common Stock then outstanding; provided however, that if a Person becomes the Beneficial Owner of 10% or more of the shares of Common Stock then outstanding by reason of share acquisitions by the Bank and shall, after such acquisitions, become the Beneficial Owner of any additional shares of Common Stock, then such Person shall be deemed to be an "Acquiring Person." (b) "Affiliate", "Associate" and "Control" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect on the date hereof. (c) A Person shall be deemed the "Beneficial Owner" of, and shall be deemed to "beneficially own", any securities: (i) which such Person or any of such Person's Affiliates or Associates, directly or indirectly, beneficially owns (as determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Exchange Act as in effect on the date of this Agreement) or has the right to dispose of; (ii) which such Person or any of such Person's Affiliates or Associates, directly or indirectly, has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in writing), or upon the exercise of conversion rights, exchange rights, rights (other than the Rights), warrants or options, or otherwise; provided, however, that a Person shall not be deemed the "Beneficial Owner" of or to "beneficially own" securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange; or (B) the right to vote, including pursuant to any agreement, arrangement or understanding (whether or not in writing); provided, however, that a Person shall not be deemed the "Beneficial Owner" of or to "beneficially own" any security under this clause (B) as a result of an agreement, arrangement or understanding to vote such security if such agreement, arrangement or understanding (1) arises solely from a revocable proxy or consent given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations under the Exchange Act and (2) is not also then reportable by such Person on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding (whether or not in writing) for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in clause (B) of subparagraph (ii) of this paragraph (c)) or disposing of any voting securities of the Bank. (d) "Business Day" shall mean any day other than a Saturday, Sunday, or a day on which banking institutions in the State of Connecticut are authorized or obligated by law or executive order to close. (e) "Close of business" on any given date shall mean 5:00 P.M., Eastern time, on such date; provided, however, that if such date is not a Business Day it shall mean 5:00 P.M., Eastern time, on the next succeeding Business Day. (f) "Common Stock" shall mean the Common Stock, par value $.01 per share, of the Bank, except that "Common Stock" when used with reference to any Person other than the Bank shall mean the capital stock of such Person with the greatest voting power, or the equity securities or other equity interest having power to control or direct the management, of such Person. (g) "Common Stock Equivalent" shall mean a share, or depositary receipt exchangeable for a fraction of a share, of any authorized class or series of preferred stock of the Bank having dividend, voting, liquidation and other rights which result, in the judgment of the Board of Directors, in such share, or depositary receipt, being approximately equivalent in value to one share of Common Stock as of the date of occurrence of a Section 11 (a) (ii) Event (as such term is hereinafter defined) (the "Event Date"); provided, however, that, if there is no authorized class or series of preferred stock of the Bank or if in the judgment of the Board of Directors there are not sufficient authorized but unissued shares of preferred stock available for the creation of Common Stock Equivalents, "Common Stock Equivalent" shall mean such cash, reduction in Purchase Price (as such term is hereinafter defined), other equity securities, debt securities, other assets or any combination of the foregoing, that the Board of Directors shall determine to be approximately equivalent in value to one share of Common Stock as of the Event Date. (h) "Continuing Director" shall mean (i) any member of the Board of Directors of the Bank, while such Person is a member of the Board, who is not an Acquiring Person or an Affiliate or Associate of an Acquiring Person or a representative or nominee of an Acquiring Person or of any such Affiliate or Associate and was a member of the Board prior to the time any Person becomes an Acquiring Person, and (ii) any Person who subsequently becomes a member of the Board, while such Person is a member of the Board, who is not an Acquiring Person or an Affiliate or Associate of an Acquiring Person or a representative or nominee of an Acquiring Person or of any such Affiliate or Associate, if such Person's nomination for election or election to the Board is recommended or approved by a majority of the Continuing Directors. (i) "Distribution Date" shall have the meaning defined in Section 3 hereof. (j) "Exchange" and "Exchange Ratio" shall have the respective meanings defined in Section 25 hereof. (k) "Exchange Date" shall have the meaning defined in Section 7(a) hereof. (l) "Expiration Date" shall have the meaning defined in Section 7(a), hereof. (m) "Person" shall mean any individual, firm, limited liability company, corporation, partnership or other entity. (n) "Preferred Shares" shall mean shares of Series A Junior Participating Preferred Stock, par value $.01 per share, of the Bank having the rights and preferences set forth in the Form of Amendment to Articles of Incorporation attached to this Agreement as Exhibit A. (o) "Purchase Price" shall have the meaning defined in Section 4 hereof. (p) "Section 11(a) (ii) Event" shall mean the event described in Section 11(a) (ii). (q) "Stock Acquisition Date" shall mean the first date of public announcement (which, for purposes of this definition, shall include, without limitation, the filing of a report pursuant to Section 13(d) under the Exchange Act or pursuant to a comparable successor statute) by the Bank or an Acquiring Person indicating that an Acquiring Person has become such. (r) "Subsidiary" of any Person shall mean any other Person of which securities or other ownership interests having ordinary voting power, in the absence of contingencies, to elect a majority of the board of directors or other Persons performing similar functions as a board of directors are at the time directly or indirectly owned by such first Person, or which is otherwise controlled by such first Person. (s) "Trading Day" shall have the meaning defined in Section 11(d) hereof. (t) "Triggering Event" shall mean any Section 11(a) (ii) Event or any event described in Sections 13(a)(i), (ii) or (iii) hereof. Section 2. Appointment of Rights Agent. The Bank hereby appoints the Rights Agent to act as agent for the Bank in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Bank may from time to time appoint such Co-Rights Agents as it may deem necessary or desirable. In the event the Bank appoints one or more Co-Rights Agents, the respective duties of the Rights Agent and any Co-Rights Agents shall be as the Bank shall determine. Section 3. Issue of Right Certificates. (a) Until the earliest of (i) the close of business on the tenth day after the Stock Acquisition Date (or, if the tenth business day after the Stock Acquisition Date occurs before the Record Date, the close of business on the Record Date); or (ii) the close of business on the tenth Business Day after the date of the commencement of a tender or exchange offer by any Person if, upon consummation thereof, such Person would be an Acquiring Person (including any such date which is after the date of this Agreement and prior to the issuance of the Rights; or (iii) the tenth day (or such later day as may be determined by action of the Board of Directors of the Bank prior to such time as any person becomes an Acquiring Person) after the filing by any Person (other than the Bank) of a registration statement under the Securities Act of 1933, as amended, with respect to a contemplated exchange offer to acquire (when added to any shares as to which such person is the beneficial owner immediately prior to such filing) beneficial ownership of 10% or more of the issued and outstanding shares of Common Stock; the earliest of such dates being herein referred to as the "Distribution Date"), (x) the Rights will be evidenced (subject to the provisions of paragraph (b) of this Section 3) by the certificates for the Common Stock registered in the names of the holders of the Common Stock (which certificates for Common Stock shall be deemed also to be Right Certificates) and not by separate Right Certificates, and (y) the Rights will be transferable only in connection with the transfer of the underlying shares of Common Stock. As soon as practicable after the Bank has notified the Rights Agent of the occurrence of the Distribution Date, the Rights Agent will send, by first-class, insured, postage prepaid mail, to each record holder of the Common Stock as of the close of business on the Distribution Date, at the address of such holder shown on the records of the Bank, one or more right certificates, in substantially the form of Exhibit B hereto (the "Right Certificates"), evidencing one Right for each share of Common Stock so held, subject to adjustment as provided herein. In the event that an adjustment in the number of Rights per share of Common Stock has been made pursuant to Section 11(p) hereof, at the time of distribution of the Right Certificates, the Bank shall make the necessary and appropriate rounding adjustments (in accordance with Section 14(a) hereof) so that the Right Certificates representing only whole numbers of Rights are distributed and cash is paid in lieu of any fractional Rights. As of and after the Distribution Date, the Rights will be evidenced solely by such Right Certificates. (b) As soon as practicable after the Record Date, the Bank will send a copy of a Summary of Rights to Purchase Preferred Shares, in substantially the form of Exhibit C hereto (the "Summary of Rights"), by first-class, postage prepaid mail, to each record holder of the Common Stock as of the close of business on the Record Date at the address of such holder shown on the records of the Bank. With respect to certificates for the Common Stock outstanding as of the Record Date, until the Distribution Date (or the earlier redemption, exchange or expiration of the Rights), the Rights will be evidenced by such certificates for the Common Stock registered in the names of the holders of the Common Stock together with a copy of the Summary of Rights, and the registered holders of the Common Stock shall also be registered holders of the associated Rights. Until the Distribution Date (or the earlier redemption, exchange or expiration of the Rights), the transfer of any of the certificates for the Common Stock outstanding as of the Record Date with or without a copy of the Summary of Rights attached thereto, shall also constitute the transfer of the Rights associated with the Common Stock represented by such certificates. (c) Rights shall be issued in respect of all shares of Common Stock which become outstanding after the Record Date but on or prior to the Distribution Date (or the earlier redemption, exchange or expiration of the Rights). Certificates representative of such shares of Common Stock shall be deemed also to be certificates for Rights and shall have impressed on, printed on, written on or otherwise affixed to them the following legend: This certificate also evidences and entitles the holder hereof to certain Rights as set forth in a Rights Agreement between Norwalk Savings Society (the "Bank") and Chemical Mellon Shareholder Services, L.L.C. dated as of May 10, 1996 (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of the Bank. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. The Bank will mail to the holder of this certificate a copy of the Rights Agreement without charge promptly after receipt of a written request therefor. As described in the Rights Agreement, Rights beneficially owned by (i) an Acquiring Person or any Associate or Affiliate thereof (as such terms are defined in the Rights Agreement), (ii) a transferee of an Acquiring Person (or of any such Affiliate) who becomes a transferee after the Acquiring Person becomes such is designated as such or (iii) under certain circumstances, a transferee of an Acquiring Person (or of any such Affiliate) who becomes a transferee before or concurrently with the Acquiring Person becoming such, shall become null and void. With respect to such certificates containing the foregoing legend, until the Distribution Date (or the earlier redemption, exchange or expiration of the Rights) the Rights associated with the Common Stock represented by such certificates shall be evidenced by such certificates alone, and the transfer of any of such certificates shall also constitute the transfer of the Rights associated with the Common Stock represented by such certificates. (d) Effective on or before the Distribution Date, the Board of Directors of the Bank shall, pursuant to the provisions of Connecticut General Statutes 33-341(c) and 33-360(b), cause the Articles of Incorporation of the Bank to be amended to include the provisions related to the Preferred Shares as set forth in the Form of Amendment to Articles of Incorporation attached hereto as Exhibit A and made a part hereof. Section 4. Form of Right Certificates. The Right Certificates (and the forms of election to purchase and of assignment to be printed on the reverse thereof) shall be substantially in the form of Exhibit B hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Bank may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law, rule or regulation or with any rule or regulation of any stock exchange on which the Rights may from time to time be listed, or to conform to usage. Subject to the provisions of Section 11 and Section 22 hereof, the Right Certificates, whenever distributed, shall be dated as of the Record Date and on their face shall entitle the holders thereof to purchase such number of one one-hundredths of a Preferred Share as shall be set forth therein at the price per one one-hundredths of a Preferred Share set forth therein (such exercise price per one one-hundredth of a share, the "Purchase Price"), but the amount and type of securities purchasable upon the exercise of each Right and the Purchase Price thereof shall be subject to adjustment as provided herein. Section 5. Countersignature and Registration. (a) The Right Certificates shall be executed on behalf of the Bank by its Chairman of the Board, its President or any Vice President, either manually or by facsimile signature, and shall have affixed thereto the Bank's seal or a facsimile thereof which shall be attested by the Secretary or an Assistant Secretary of the Bank, either manually or by facsimile signature. The Right Certificates shall be manually countersigned by the Rights Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Bank whose manual or facsimile signature is affixed to the Right Certificates shall cease to be such officer of the Bank before countersignature by the Rights Agent and issuance and delivery by the Bank, such Right Certificates, nevertheless, may be countersigned by the Rights Agent, issued and delivered with the same force and effect as though the Person who signed such Right Certificates had not ceased to be such officer of the Bank. Any Right Certificate may be signed on behalf of the Bank by any Person who, at the actual date of the execution of such Right Certificate, shall be a proper officer of the Bank to sign such Right Certificate, although at the date of the execution of this Rights Agreement any such Person was not such an officer. (b) Following the Distribution Date, the Rights Agent will keep or cause to be kept, at its principal office or offices designated as the appropriate place for surrender of Right Certificates upon exercise or transfer, books for registration and transfer of the Right Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Right Certificates, the number of Rights evidenced on its face by each of the Right Certificates, the certificate number of each of the Right Certificates and the date of each of the Right Certificates. Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates. (a) Subject to the provisions of Section 7(e) and Section 14 hereof, at any time after the close of business on the Distribution Date, and at or prior to the close of business on the Expiration Date, any Right Certificate or Right Certificates (other than Right Certificates representing Rights that have become void pursuant to Section 11(a)(ii) hereof) may be transferred, split up, combined or exchanged for another Right Certificate or Right Certificates, entitling the registered holder to purchase a like number of shares of Common Stock (or, following a Triggering Event, Common Stock, other securities, cash or assets, as the case may be) as the Right Certificate or Right Certificates surrendered then entitled such holder (or former holder in the case of a transfer) to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Right Certificate or Certificates shall make such request in writing delivered to the Rights Agent, and shall surrender the Right Certificate or Right Certificates to be transferred, split up, combined or exchanged at the principal office or offices of the Rights Agent designated for such purpose. Neither the Rights Agent nor the Bank shall be obligated to take any action whatsoever with respect to the transfer of any such surrendered Right Certificate until the registered holder shall have completed and signed the certificate contained in the form of assignment on the reverse side of such Right Certificate and shall have provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Bank shall reasonably request. Thereupon the Rights Agent shall, subject to Section 7(e) and Section 14 hereof, countersign and deliver to the Person entitled thereto a Right Certificate or Right Certificates, as the case may be, as so requested. The Bank may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Right Certificates. (b) Upon receipt by the Bank and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Right Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and, at the Bank's request, reimbursement to the Bank and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Right Certificate if mutilated, the Bank will make and deliver a new Right Certificate of like tenor to the Rights Agent for countersignature and delivery to the registered owner in lieu of the Right Certificate so lost, stolen, destroyed or mutilated. Section 7. Exercise of Rights; Purchase Price; Expiration of Rights. (a) The Rights shall not be exercisable prior to the Distribution Date. Subject to Section 7(e) hereof, the registered holder of any Right Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein including, without limitation, the restrictions on exercisability set forth in Section 9(c), Section 11(a) (iii) and Section 23(a) hereof) in whole or in part at any time after the Distribution Date upon surrender of the Right Certificate, with the form of election to purchase and the certificate on the reverse side thereof duly executed, to the Rights Agent at the principal office or offices of the Rights Agent designated for such purpose, together with payment of the aggregate Purchase Price with respect to the total number of one one-hundredths of a Preferred Share (or other securities or property, as the case may be) as to which such surrendered Rights are then exercisable, at or prior to the earliest of (i) the close of business on May 27, 2006 (the "Final Expiration Date"), (ii) the time at which the Rights are redeemed as provided in Section 23 hereof or (iii) the time at which the Rights are exchanged as provided in Section 24 hereof (the "Exchange Date") (the earliest of (i), (ii) and (iii) being herein referred to as the "Expiration Date"). (b) The Purchase Price for each one one-hundredths of a Preferred Share purchasable pursuant to the exercise of a Right shall initially be $40.00, shall be subject to adjustment from time to time as provided in Section 11 and Section 13(a) hereof and shall be payable in lawful money of the United States of America in accordance with paragraph (c) below. (c) Upon receipt of a Right Certificate representing exercisable Rights, with the form of election to purchase and the certificate duly executed, accompanied by payment, with respect to each Right so exercised, of the Purchase Price per one one-hundredths of a Preferred Share (or other shares, securities or property, as the case may be) to be purchased, and an amount equal to any applicable transfer tax, in cash, or in the form of a certified check or money order payable to the order of the Bank, the Rights Agent shall, subject to Section 20(k) hereof, thereupon promptly (i) requisition from any transfer agent of the Preferred Shares (or make available, if the Rights Agent is the transfer agent therefor) certificates for the total number of Preferred Shares to be purchased and the Bank hereby irrevocably authorizes its transfer agent to comply with all such requests, (ii) requisition from the Bank the amount of cash, if any, to be paid in lieu of issuance of fractional shares in accordance with Section 14 hereof, (iii) promptly after receipt of such certificates cause the same to be delivered to or upon the order of the registered holder of such Right Certificate, registered in such name or names as may be designated by such holder and (iv) after receipt thereof, promptly deliver such cash, if any, to or upon the order of the registered holder of such Right Certificate. In the event that the Bank is obligated to issue other securities of the Bank, pay cash and/or distribute other property pursuant to Section 11(a) hereof, the Bank will make all arrangements necessary so that such other securities, cash and/or other property are available for distribution by the Rights Agent, if and when appropriate. (d) In case the registered holder of any Right Certificate shall exercise less than all the Rights evidenced thereby, a new Right Certificate evidencing Rights equivalent to the Rights remaining unexercised shall be issued by the Rights Agent and delivered to, or upon the order of, the registered holder of such Right Certificate, registered in such name or names as may be designated by such holder, subject to the provisions of Section 14 hereof. (e) Notwithstanding anything in this Agreement to the contrary, from and after the first occurrence of a Section 11(a)(ii) Event, any Rights beneficially owned by (i) an Acquiring Person or an Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such or (iii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person (or from any such Associate or Affiliate) to holders of equity interests in such Acquiring Person (or in any such Associate or Affiliate) or to any Person with whom the Acquiring Person (or any such Associate or Affiliate) has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer which the Board of Directors of the Bank has determined (whether before or after such transfer) is part of a plan, arrangement or understanding which has as a primary purpose or effect the avoidance of this Section 7(e), shall become null and void without any further action and no holder of such Rights shall have any rights whatsoever with respect to such Rights, whether under any provision of this Agreement or otherwise. No Right Certificate shall be issued pursuant to Section 3 hereof that represents Rights beneficially owned by an Acquiring Person or any Associate or Affiliate thereof and no Right Certificate shall be issued at any time upon the transfer of any Rights to an Acquiring Person or any Affiliate or Associate thereof or to any nominee of such Acquiring Person, Associate or Affiliate. Any Right Certificate delivered to the Rights Agent for transfer to any of the foregoing Persons, or which represents void Rights, shall be canceled. The Bank shall use all reasonable efforts to insure that the provisions of this Section 7(e) are complied with, but shall have no liability to any holder of Right Certificates or other Person as a result of its failure to make any determinations with respect to an Acquiring Person or its Affiliates and Associates or any transferee of any of them hereunder. (f) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Bank shall be obligated to undertake any action with respect to a registered holder of Rights upon the occurrence of any purported transfer as set forth in Section 6 hereof or exercise as set forth in this Section 7 unless such registered holder shall have (i) completed and signed the certificate contained in the form of election to purchase set forth on the reverse side of the Right Certificate surrendered for such exercise and (ii) provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Bank shall reasonably request. Section 8. Cancellation and Destruction of Right Certificates. All Right Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the Bank or to any of its agents, be delivered to the Rights Agent for cancellation or in canceled form, or, if surrendered to the Rights Agent, shall be canceled by it, and no Right Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Agreement. The Bank shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Right Certificate purchased or acquired by the Bank otherwise than upon the exercise thereof. The Rights Agent shall deliver all canceled Right Certificates to the Bank, or shall, at the written request of the Bank, destroy such canceled Right Certificates, and in such case shall deliver a certificate of destruction thereof to the Bank. Section 9. Reservation and Availability of Capital Stock. (a) The Bank covenants and agrees that it will cause to be reserved and kept available out of its currently authorized and unissued Preferred Shares (or other shares or securities, as the case may be) the number of Preferred Shares (or other shares or securities, as the case may be) that, as provided in this Agreement, including Section 11(a) (iii) hereof, will be sufficient to permit to the maximum extent possible the exercise of all outstanding Rights. (b) So long as the Preferred Shares (or other shares or securities, as the case may be) issuable and deliverable upon the exercise of Rights may be listed on any national securities exchange, the Bank shall use its best efforts to cause, from and after such time as the Rights become exercisable, all shares reserved for such issuance to be listed on such exchange upon official notice of issuance upon such exercise. (c) The Bank shall use its best efforts, if necessary, to (i) file, as soon as practicable following the earliest date after the occurrence of a Section 11(a)(ii) Event as of which the consideration to be delivered by the Bank upon exercise of the Rights has been determined in accordance with Section 11(a)(ii) or Section 11(a)(iii) hereof, or as soon as is required by law following the Distribution Date, as the case may be, a registration statement under the Securities Act of 1933, as amended (the "Act"), with respect to the securities purchasable upon exercise of the Rights on an appropriate form, (ii) cause such registration statement to become effective as soon as practicable after such filing and (iii) cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Act) until the earlier of (A) the date as of which the Rights are no longer exercisable for such securities and (B) the Expiration Date. The Bank will also take such action as may be appropriate under, or to ensure compliance with, the securities or "blue sky" laws of the various states in connection with the exercisability of the Rights. The Bank may temporarily suspend, for a period of time not to exceed 90 days after the date set forth in clause (i) of the first sentence of this Section 9(c), the exercisability of the Rights in order to prepare and file such registration statement and permit it to become effective. Upon any such suspension, the Bank shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended, as well as a public announcement at such time as the suspension is no longer in effect. Notwithstanding any such provision of this Agreement to the contrary, the Rights shall not be exercisable in any jurisdiction if the requisite qualification in such jurisdiction shall not have been obtained, the exercise thereof shall not be permitted under applicable law or a registration statement shall not have been declared effective. Nothing herein shall require the Bank to bear the expense of obtaining registration if the cost of such registration in a particular jurisdiction presents an unreasonable burden on the Bank under the circumstances. (d) The Bank covenants and agrees that it will take all such action as may be necessary to insure that all Preferred Shares (or other shares or securities, as the case may be) delivered upon exercise of Rights shall, at the time of delivery of the certificates for such shares (subject to payment of the Purchase Price), be duly and validly authorized and issued and fully paid and nonassessable. (e) The Bank further covenants and agrees that it will pay when due and payable any and all federal and state transfer taxes and charges which may be payable in respect of the issuance or delivery of the Right Certificates and of any certificates for Preferred Shares (or other shares or securities) upon the exercise of Rights. The Bank shall not, however, be required to pay any transfer tax which may be payable in respect of any transfer involved in the transfer or delivery of Right Certificates to a Person other than, or the issuance or delivery of Preferred Shares (or other shares or securities) in respect of a name other than that of, the registered holder of the Right Certificate evidencing Rights surrendered for exercise or to issue or deliver any certificates for Preferred Shares (or other shares or securities) in a name other than that of the registered holder upon the exercise of any Rights until any such tax shall have been paid (any such tax being payable by the holder of such Right Certificate at the time of surrender) or until it has been established to the Bank's satisfaction that no such tax is due. Section 10. Preferred Shares Record Date. Each Person in whose name any certificate for a Preferred Share (or other shares or securities) is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of such Preferred Shares (or other shares or securities) represented thereby on, and such certificate shall be dated, the date upon which the Right Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and any applicable transfer taxes) was made; provided, however, that if the date of such surrender and payment is a date upon which the Preferred Shares or other appropriate transfer books of the Bank are closed, such Person shall be deemed to have become the record holder of such shares on, and such certificate shall be dated, the next succeeding Business Day on which the Preferred Shares or other appropriate transfer books of the Bank are open. Prior to the exercise of the Rights evidenced thereby, the holder of a Right Certificate shall not be entitled to any rights of a stockholder of the Bank with respect to shares for which the Rights shall be exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to receive any notice of any proceedings of the Bank, except as provided herein. Section 11. Adjustment of Purchase Price. Number and Kind of Shares or Number of Rights. The Purchase Price, the number and kind of shares covered by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11. (a) (i) In the event the Bank shall at any time after the date of this Agreement (A) declare a dividend on the Preferred Shares payable in Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C) combine the outstanding Preferred Shares into a smaller number of shares or (D) issue any shares of its capital stock in a reclassification of the Preferred Shares (including any such reclassification in connection with a consolidation or merger in which the Bank is the continuing or surviving corporation) except as otherwise provided in this Section 11(a) and Section 7(e) hereof, the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of Preferred Shares or capital stock, as the case may be, issuable on such date, shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive, upon payment of the Purchase Price then in effect, the aggregate number and kind of Preferred Shares or capital stock, as the case may be, which, if such Right had been exercised immediately prior to such date and at a time when the Preferred Shares transfer books of the Bank were open, he would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. (ii) In the event that any Person, alone or together with its Affiliates and Associates or otherwise, shall become an Acquiring Person, then proper provision shall promptly be made so that each holder of a Right, except as provided below and in Section 7(e) hereof, shall thereafter have a right to receive, upon exercise thereof at the then current Purchase Price multiplied by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable, in accordance with the terms of this Agreement, such number of shares of Common Stock of the Bank as shall equal the result obtained by (x) multiplying the then current Purchase Price by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable and (y) dividing that product by 25% of the current market price per share of the Common Stock (determined pursuant to Section 11(d)) on the date of the occurrence of the Section 11(a) (ii) Event. (iii) In the event that the number of shares of Common Stock which are authorized by the Bank's certificate of incorporation but not outstanding or reserved for issuance for purposes other than upon exercise of the Rights is not sufficient to permit the exercise in full of the Rights in accordance with the foregoing subparagraph (ii) of this Section 11(a), proper provision shall promptly be made so that each holder of a Right, except as provided in Section 7(e) hereof, shall, in the discretion of the Bank's Board of Directors, thereafter have a right to receive, upon exercise thereof in accordance with the terms of this Agreement such number of Common Stock Equivalents or the maximum number of shares of Common Stock available for issuance to such holder at a reduced Purchase Price which reflects a per share Purchase Price of 25% of current market value as determined pursuant to subparagraph (ii) above. (b) In case the Bank shall fix a record date for the issuance of rights, options or warrants (other than the Rights) to all holders of Preferred Shares entitling them to subscribe for or purchase (for a period expiring within 45 calendar days after such record date) Preferred Shares (or securities having the same rights, privileges and preferences as the Preferred Shares ("equivalent Preferred Shares")) or securities convertible into Common Stock or equivalent Preferred Shares at a price per share of Preferred Shares or per share of equivalent Preferred Shares (or having a conversion or exercise price per share, if a security convertible into or exercisable for Preferred Shares or equivalent preferred shares) less than the current market price (as determined pursuant to Section 11(d) hereof) per share of Preferred Shares on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such date by a fraction, the numerator of which shall be the number of Preferred Shares outstanding on such record date, plus the number of Preferred Shares which the aggregate offering price of the total number of Preferred Shares and/or equivalent preferred shares so to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such current market price and the denominator of which shall be the number of Preferred Shares outstanding on such record date plus the number of additional Preferred Shares and/or equivalent preferred shares to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible). In case such subscription price may be paid by delivery of consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors of the Bank, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of Rights. Preferred Shares owned by or held for the account of the Bank shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such rights or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (c) In case the Bank shall fix a record date for the making of a distribution to all holders of Preferred Shares (including any such distribution made in connection with a consolidation or merger in which the Bank is the continuing or surviving corporation) of evidences of indebtedness, cash (other than a regular periodic cash dividend out of the earnings or retained earnings of the Bank), assets (other than a dividend payable in Preferred Shares, but including any dividend payable in stock other than Preferred Shares) or convertible securities, subscription rights or warrants (excluding those referred to in Section 11(b) hereof), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the current market price (as determined pursuant to Section 11(d) hereof) per share of Preferred Shares on such record date, less the fair market value (as determined in good faith by the Board of Directors of the Bank, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of Rights) of the portion of the cash, assets or evidences of indebtedness so to be distributed or of such convertible securities, subscription rights or warrants applicable to one Preferred Share and the denominator of which shall be such current market price (as determined pursuant to Section 11(d) hereof) per Preferred Share. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Purchase Price shall again be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (d) For the purpose of any computation hereunder, the "current market price" per share of any security of the Bank (a "Security") on any date shall be deemed to be the average of the daily closing prices per share of such Security for the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; provided, however, that in the event that the current market price per share of the Security is determined during a period following the announcement by the issuer of such Security of (A) a dividend or distribution on such Security payable in shares of such Security or securities convertible into shares of such Security (other than the Rights), or (B) any subdivision, combination or reclassification of such Security, and prior to the expiration of the requisite 30 Trading Day period, as set forth above, after the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, then, and in each such case, the "current market price" shall be properly adjusted to take into account ex-dividend trading. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported by the National Association of Securities Dealers, Inc. Automated Quotation System National Market ("NASDAQ") or such other exchange or system on which the Security is then listed or quoted, or, if on any such date the Security is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Security selected by the Board of Directors of the Bank. If on any such date no market maker is making a market in the Security, the fair value of such Security on such date as determined in good faith by the Board of Directors of the Bank shall be used. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Security is listed or admitted to trading or traded is open for the transaction of business or, if the shares of the Security are not listed or admitted to trading on any national securities exchange, a Business Day. If the Security is not publicly held or not so listed or traded, "current market price" per share shall mean the fair value per share as determined in good faith by the Board of Directors of the Bank, or, if at the time of such determination there is an Acquiring Person, by a majority of the Continuing Directors then in office, or if there are no Continuing Directors, by a nationally recognized investment banking firm selected by the Board of Directors, which determination shall be described in a statement filed with the Rights Agent and shall be conclusive for all purposes. (e) Anything herein to the contrary notwithstanding, no adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Purchase Price; provided, however, that any adjustments which by reason of this Section 11(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest one millionth of a Preferred Share or ten-thousandth of any other share or security, as the case may be. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 shall be made no later than the earlier of (i) three years from the date of the transaction which mandates such adjustment or (ii) the Expiration Date. (f) In the event that at any time, as a result of an adjustment made pursuant to Section 11(a) (ii), Section 11(a) (iii) or Section 13(a) hereof, the holder of any Right shall be entitled to receive upon exercise of such Right any shares of capital stock other than Preferred Shares, thereafter the number of such other shares so receivable upon exercise of any Right and the Purchase Price thereof shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in Section 11(a), (b), (c), (e), (g), (h), (i), (j), (k), (l) and (m) and the provisions of Sections 6, 7, 9, 10, 13 and 14 with respect to the Preferred Shares shall apply on like terms to any such other shares. (g) All Rights originally issued by the Bank subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of one one-hundredths of a Preferred Share purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. (h) Unless the Bank shall have exercised its election as provided in Section 11(i), upon each adjustment of the Purchase Price as a result of the calculations made in Section 11(b) and (c), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of one one-hundredths of a Preferred Share (calculated to the nearest one millionth) obtained by (i) multiplying (x) the number of one one-hundredths of a Preferred Share covered by a Right immediately prior to this adjustment by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price and (ii) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price. (i) The Bank may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights, in lieu of any adjustment in the number of one one- hundredths of a Preferred Share purchasable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights shall be exercisable for the number of one one-hundredths of a Preferred Share for which such Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest ten thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Bank shall make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Right Certificates have been issued, shall be at least 10 days later than the date of the public announcement. If Right Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(i), the Bank shall, as promptly as practicable, cause to be distributed to holders of record of Right Certificates on such record date Right Certificates evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Bank, shall cause to be distributed to such holders of record in substitution and replacement for the Right Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Bank, new Right Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Right Certificates so to be distributed shall be issued, executed and countersigned in the manner provided for herein (and may bear, at the option of the Bank, the adjusted Purchase Price) and shall be registered in the names of the holders of record of Right Certificates on the record date specified in the public announcement. (j) Irrespective of any adjustment or change in the Purchase Price or the number of Preferred Shares (or other shares or securities, as the case may be) issuable upon the exercise of the Rights, the Right Certificates theretofore and thereafter issued may continue to express the Purchase Price and the number of shares which were expressed in the initial Right Certificates issued hereunder. (k) Before taking any action that would cause an adjustment reducing the Purchase Price below one one-hundredth of the then par value, if any, of the Preferred Shares issuable upon exercise of the Rights, the Bank shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Bank may validly and legally issue fully paid and nonassessable Preferred Shares at such adjusted Purchase Price. (l) In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Bank may elect to defer until the occurrence of such event the issuance to the holder of any Right exercised after such record date of the Preferred Shares and other capital stock or securities of the Bank, if any, issuable upon such exercise over and above the Preferred Shares and other capital stock or securities of the Bank, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; provided however, that the Bank shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. (m) Anything in this Section 11 to the contrary notwithstanding, the Bank shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that it in its sole discretion shall determine to be advisable in order that any consolidation or subdivision of the Preferred Shares, issuance wholly for cash of any Preferred Shares at less than the current market price, issuance wholly for cash of Preferred Shares or securities which by their terms are convertible into or exchangeable for Preferred Shares, stock dividends or issuance of rights, options or warrants referred to hereinabove in this Section 11, hereafter made by the Bank to the holders of its Preferred Shares, shall not be taxable to such stockholders. (n) The Bank covenants and agrees that it shall not at any time after the earlier of the Stock Acquisition Date and the Distribution Date (i) consolidate with, (ii) merge with or into, or (iii) sell or transfer to, in one transaction or a series of related transactions, assets or earning power aggregating more than 50% of the assets or earning power of the Bank and its Subsidiaries taken as a whole, any other Person or Persons if (x) at the time of or immediately after such consolidation, merger or sale there are any rights, warrants or other instruments outstanding or agreements or arrangements in effect which would substantially diminish or otherwise eliminate the benefits intended to be afforded by the Rights or (y) prior to, simultaneously with or immediately after such consolidation, merger or sale, the stockholders of a Person who constitutes, or would constitute, the "Principal Party" for the purposes of Section 13(a) hereof shall have received a distribution of Rights previously owned by such Person or any of its Affiliates and Associates. (o) The Bank covenants and agrees that after the earlier of the Stock Acquisition Date and the Distribution Date it will not, except as permitted by Section 23, Section 24 or Section 27 hereof, take (or permit any Subsidiary to take) any action if at the time such action is taken it is reasonably foreseeable that such action will substantially diminish or otherwise eliminate the benefits intended to be afforded by the Rights. (p) Anything in this Agreement to the contrary notwithstanding, in the event that the Bank shall at any time after the date hereof and prior to the Distribution Date (i) declare a dividend on the outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, the number of Rights associated with each share of Common Stock then outstanding, or issued or delivered thereafter but prior to the Distribution Date, shall be proportionately adjusted so that the number of Rights thereafter associated with each share of Common Stock following any such event shall equal the result obtained by multiplying the number of Rights associated with each share of Common Stock immediately prior to such event by a fraction the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to the occurrence of the event and the denominator of which shall be the total number of shares of Common Stock outstanding immediately following the occurrence of such event. The adjustments provided for in this Section 11(p) shall be made successively when ever a dividend is declared or paid or such a subdivision or combination is effected. Section 12. Certificate of Adjusted Purchase Price or Number of Shares. Whenever an adjustment is made as provided in Sections 11 and 13 hereof, the Bank shall (a) promptly prepare a certificate setting forth such adjustment and a brief statement of the facts accounting for such adjustment, (b) promptly file with the Rights Agent and with each transfer agent for the Common Stock a copy of such certificate and (c) mail a brief summary thereof to each holder of a Right Certificate (or, if prior to the Distribution Date, to each holder of a certificate representing shares of Common Stock) in accordance with Section 25 hereof. The Rights Agent shall be fully protected in relying on any such certificate and on any adjustment therein contained. Section 13. Consolidation, Merger or Sale of Assets or Earning Power. (a) In the event that, following the earlier of the Distribution Date and the Stock Acquisition Date, directly or indirectly, (i) the Bank shall consolidate with, or merge with and into, any other Person, and the Bank shall not be the continuing or surviving corporation of such consolidation or merger, (ii) any Person shall merge with and into the Bank, and the Bank shall be the continuing or surviving corporation of such merger and, in connection with such merger, all or part of the Common Stock shall be changed into or exchanged for stock or other securities of any other Person or cash or any other property, or (iii) the Bank shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer), in one transaction or a series of related transactions, assets or earning power aggregating more than 50% of the assets or earning power of the Bank and its Subsidiaries (taken as a whole) to any other Person or Persons, then, and in each such case, proper provision shall be made so that: (w) each holder of a Right, except as provided in Section 7(e) hereof, shall thereafter have the right to receive, upon the exercise thereof at the then current Purchase Price multiplied by the number of one one- hundredths of a Preferred Share for which a Right is then exercisable (without taking into account any adjustment previously made pursuant to Section 11(a) (ii) or 11(a) (iii)), in accordance with the terms of this Agreement and in lieu of Preferred Shares, such number of validly authorized and issued, fully paid and nonassessable shares of freely tradeable Common Stock of the Principal Party (as hereinafter defined), not subject to any rights of call or first refusal, liens, encumbrances or other claims, as shall be equal to the result obtained by (1) multiplying the then current Purchase Price by the number of one one-hundredths of a Preferred Share for which a Right is then exercisable (without taking into account any adjustment previously made pursuant to Section 11(a) (ii) or 11(a)(iii)) and dividing that product by (2) 25% of the current market price (determined pursuant to Section 11(d) (i) hereof) per share of the Common Stock of such Principal Party on the date of consummation of such consolidation, merger, sale or transfer; (x) the Principal Party shall thereafter be liable for, and shall assume, by virtue of such consolidation, merger, sale or transfer, all the obligations and duties of the Bank pursuant to this Agreement; (y) the term "Bank" shall thereafter be deemed to refer to such Principal Party, it being specifically intended that the provisions of Section 11 hereof shall apply to such Principal Party and (z) such Principal Party shall take such steps (including, but not limited to, the authorization and reservation of a sufficient number of shares of its Common Stock to permit exercise of all outstanding Rights in accordance with this Section 13(a)) in connection with such consummation as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to the shares of its Common Stock thereafter deliverable upon the exercise of the Rights. (b) "Principal Party" shall mean (1) in the case of any transaction described in clause (i) or (ii) of the first sentence of Section 13(a), the Person that is the issuer of any securities into which shares of Common Stock of the Bank are converted in such merger or consolidation, and if no securities are so issued, the Person that is the other party to the merger or consolidation; and (2) in the case of any transaction described in clause (iii) of the first sentence of Section 13(a), the Person that is the party receiving the greatest portion of the assets or earning power transferred pursuant to such transaction or transactions; provided, however, that in any such case, (x) if the Common Stock of such Person is not at such time and has not been continuously over the preceding 12-month period registered under Section 12 of the Exchange Act, and such person is a direct or indirect Subsidiary of another Person the Common Stock of which is and has been so registered, "Principal Party" shall refer to such other Person; and (y) in case such Person is a Subsidiary, directly or indirectly, of more than one Person, the Common Stocks of two or more of which are and have been so registered, "Principal Party" shall refer to whichever of such Persons is the issuer of the Common Stock having the greatest aggregate market value. (c) The Bank shall not consummate any such consolidation, merger, sale or transfer unless the Principal Party shall have a sufficient number of authorized shares of its Common Stock which have not been issued or reserved for issuance to permit the exercise in full of the Rights in accordance with this Section 13 and unless prior thereto the Bank and such Principal Party shall have executed and delivered to the Rights Agent a supplemental agreement providing for the terms set forth in paragraphs (a) and (b) of this Section 13 and further providing that, as soon as practicable after the date of any consolidation, merger or sale of assets mentioned in paragraph (a) of this Section 13, the Principal Party will (i) prepare and file a registration statement under the Act with respect to the Rights and the securities purchasable upon exercise of the Rights on an appropriate form, will use its best efforts to cause such registration statement to become effective as soon as practicable after such filing and will use its best efforts to cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Act) until the Expiration Date; and (ii) will deliver to holders of the Rights historical financial statements for the Principal Party and each of its Affiliates which comply in all respects with the requirements for registration on Form 10 under the Exchange Act. The provisions of this Section 13 shall similarly apply to successive mergers or consolidations or sales or other transfers. If any event described in Section 13(a)(i), (ii) or (iii) shall occur at any time after the occurrence of a Section 11(a) (ii) Event, the Rights which have not theretofore been exercised shall thereafter become exercisable in the manner described in Section 13(a). Section 14. Fractional Rights and Fractional Shares. (a) The Bank shall not issue fractions of Rights or distribute Right Certificates which evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the registered holders of the Right Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a whole Right. For the purposes of this Section 14(a), the current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price of the Rights for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as quoted on NASDAQ or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Board of Directors of the Bank. If on any such date no such market maker is making a market in the Rights the fair value of the Rights on such date as determined in good faith by the Board of Directors of the Bank shall be used and shall be conclusive for all purposes. (b) The Bank shall not issue fractions of Preferred Shares, or of any other share or security, as the case may be, upon exercise of the Rights or distribute certificates which evidence fractions of Preferred Shares or of any other share or security, as the case may be. In lieu of fractional shares, the Bank shall pay to the registered holders of Right Certificates at the time such Right Certificates are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one Preferred Share or of one share or security, as the case may be, issued in lieu of a Preferred Share. For purposes of this Section 14(b), the current market value of one share of Preferred Share or one share or security, as the case may be, shall be the closing price of a share of Preferred Share or one share or security, as the case may be, (as determined pursuant to Section 11(d) hereof) for the Trading Day immediately prior to the date of such exercise. (c) The holder of a Right by the acceptance of the Rights expressly waives his right to receive any fractional Rights or any fractional share upon exercise of Rights. Section 15. Rights of Action. All rights of action in respect of this Agreement are vested in the respective registered holders of the Right Certificates (and, prior to the Distribution Date, the registered holders of Common Stock); and any registered holder of any Right Certificate (or, prior to the Distribution Date, of the Common Stock), without the consent of the Rights Agent or of the holder of any other Right Certificate (or, prior to the Distribution Date, of the Common Stock), may, in his own behalf and for his own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Bank to enforce, or otherwise act in respect of, his right to exercise the Rights evidenced by such Right Certificate in the manner provided in such Right Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations under, and injunctive relief against actual or threatened violations of the obligations of, any Person subject to this Agreement. Section 16. Agreement of Right Holders. Every holder of a Right by accepting the same consents and agrees with the Bank and the Rights Agent and with every other holder of a Right that: (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of Common Stock; (b) after the Distribution Date, the Right Certificates are transferable only on the registry books of the Rights Agent if surrendered at the principal office or offices of the Rights Agent designated for such purposes, duly endorsed or accompanied by a proper instrument of transfer and with the appropriate certificates fully executed; (c) subject to Section 6(a) and Section 7(f) hereof, the Bank and the Rights Agent may deem and treat the Person in whose name the Right Certificate (or, prior to the Distribution Date, the associated Common Stock certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Right Certificates or the associated Common Stock certificate made by anyone other than the Bank or the Rights Agent) for all purposes whatsoever, and neither the Bank nor the Rights Agent, subject to the last sentence of Section 7(e) hereof, shall be affected by any notice to the contrary; and (d) notwithstanding anything in this Agreement to the contrary, neither the Bank nor the Rights Agent shall have any liability to any holder of a Right or other Person as a result of its inability to perform any of its obligations under this Agreement by reason of any preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a governmental, regulatory or administrative agency or commission, or any statute, rule, regulation or executive order promulgated or enacted by any governmental authority prohibiting or otherwise restraining performance of such obligation; provided however, the Bank must use its best efforts to have any such order, decree or ruling lifted or otherwise overturned as soon as possible. Section 17. Right Certificate Holder Not Deemed a Stockholder. No holder, as such, of any Right Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the number of shares of Common Stock or any other securities of the Bank which may at any time be issuable on the exercise of the Rights represented thereby, nor shall anything contained herein or in any Right Certificate be construed to confer upon the holder of any Right Certificate, as such, any of the rights of a stockholder of the Bank or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in Section 25), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Right Certificate shall have been exercised in accordance with the provisions hereof. Section 18. Concerning the Rights Agent. (a) The Bank agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and disbursements and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Bank also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability, or expense, incurred without negligence, or willful misconduct on the part of the Rights Agent, for anything done or omitted by the Rights Agent in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability. (b) The Rights Agent shall be protected and shall incur no liability for or in respect of any action taken, suffered or omitted by it in connection with its administration of this Agreement in reliance upon any Right Certificate or certificate for Common Stock or for other securities of the Bank, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper Person or Persons. Section 19. Merger or Consolidation or Change of Name of Rights Agent. (a) Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any corporation succeeding to the corporate trust or stock transfer business of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of Section 21. In case at the time such successor Rights Agent shall succeed to the agency created by this Agreement, any of the Right Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of the predecessor Rights Agent and deliver such Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, any successor Rights Agent may countersign such Right Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Agreement. (b) In case at any time the name of the Rights Agent shall be changed and at such time any of the Right Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, the Rights Agent may countersign such Right Certificates either in its prior name or in its changed name; and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Agreement. Section 20. Duties of Rights Agent. The Rights Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions: (a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Bank), and the opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to any action taken or omitted by it in good faith and in accordance with such opinion. (b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter (including, without limitation, the identity of any "Acquiring Person" and the determination of "current market price") be proved or established by the Bank prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by the Chairman of the Board, the President or any Executive or Senior Vice President and by the Treasurer or any Assistant Treasurer or the Secretary or any Assistant Secretary of the Bank and delivered to the Rights Agent; and such certificate shall be full authorization to the Rights Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent shall be liable hereunder only for its own negligence, or willful misconduct. (d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Right Certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Bank only. (e) The Rights Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Right Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Bank of any covenant or condition contained in this Agreement or in any Right Certificate; nor shall it be responsible for any change in the exercisability of the Rights (including the Rights becoming void pursuant to Section 7(e) hereof) or any adjustment in the terms on the Rights (including the manner, method or amount thereof) provided for in Sections 3, 11, 13, 23 or 24, or the ascertaining of the existence of facts that would require any such adjustment (except with respect to the exercise of Rights evidenced. by Right Certificates after actual notice of any such adjustment); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Common Stock to be issued pursuant to this Agreement or any Right Certificate or as to whether any shares of Common Stock will, when issued, be validly authorized and issued, fully paid and nonassessable. (f) The Bank agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement. (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from the Chairman of the Board, the President or any Executive or Senior Vice President or the Secretary or any Assistant Secretary or the Treasurer or any Assistant Treasurer of the Bank, and to apply to such officers for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered to be taken by it in good faith in accordance with instructions of any such officer. (h) The Rights Agent and any shareholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Bank or become pecuniarily interested in any transaction in which the Bank may be interested, or contract with or lend money to the Bank or otherwise act as fully and freely as though it were not the Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Bank or for any other legal entity. (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys or agents or for any loss to the Bank resulting from any such act, default, neglect or misconduct, provided reasonable care was exercised in the selection and continued employment thereof. (j) No provision of this Agreement shall require the Rights Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if there shall be reasonable grounds for believing that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. (k) If, with respect to any Right Certificate surrendered to the Rights Agent for exercise or transfer, the certificate attached to the form of assignment or form of election to purchase, as the cases may be, has either not been completed or indicates an affirmative response to any item therein, the Rights Agent shall not take any further action with respect to such requested exercise or transfer without first consulting with the Bank. Section 21. Change of Rights Agent. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon 30 days' notice in writing mailed to the Bank and to each transfer agent of the Common Stock by registered or certified mail and to the holders of the Right Certificates by first-class mail. The Bank may remove the Rights Agent or any successor Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Stock by registered or certified mail and to the holders of the Right Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Bank shall appoint a successor to the Rights Agent. If the Bank shall fail to make such appointment within a period of 30 days after such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Right Certificate (who shall, with such notice, submit his Right Certificate for inspection by the Bank), then the registered holder of any Right Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Bank or by such a court, shall be (a) a corporation organized and doing business under the laws of the United States or of any state of the United States, in good standing, having a principal office in the State of Connecticut or New York, which is authorized under such laws to exercise stock transfer or corporate trust powers and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50,000,000 or (b) an Affiliate of a corporation described in clause (a) of this sentence. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment, the Bank shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Stock and mail a notice thereof in writing to the registered holders of the Right Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. Section 22. Issuance of New Right Certificates. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Bank may, at its option, issue new Right Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares of stock or other securities or property purchasable under the Right Certificates made in accordance with the provisions of this Agreement. In addition, in connection with the issuance or sale of shares of Common Stock following the Distribution Date and prior to the earliest of the redemption, exchange or expiration of the Rights, the Bank (a) shall, with respect to shares of Common Stock so issued or sold pursuant to the exercise of employee stock options or under or to any employee plan, profit sharing trust or other arrangement outstanding, granted or awarded as of the Distribution Date, or upon the exercise, conversion or exchange of securities issued by the Bank prior to such date, and (b) may, in any other case, if deemed necessary or appropriate by a majority of Continuing Directors, issue Right Certificates representing the appropriate number of Rights in connection with such issuance or sale; provided, however, that (i) no such Right Certificate shall be issued if, and to the extent that, the Bank shall be advised by counsel that such issuance would create a significant risk of material adverse tax consequences to the Bank or the person to whom such Right Certificate would be issued, and (ii) no such Right Certificate shall be issued if, and to the extent that, appropriate adjustment shall otherwise have been made in lieu of the issuance thereof. Section 23. Redemption. (a) The Board of Directors of the Bank may, at its option and subject to receipt of all necessary bank regulatory approvals (if any), at any time prior to the earlier of (i) the close of business on the tenth day after the Stock Acquisition Date or (ii) the Final Expiration Date, redeem all but not less than all the then outstanding Rights at a redemption price of $.001 per Right appropriately adjusted to reflect any stock split, stock dividend, reclassification or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the "Redemption Price"); provided, however, that if the Board of Directors of the Bank authorizes redemption of the Rights at or after the time a Person becomes an Acquiring Person, then there must be Continuing Directors then in office and such authorization shall require the concurrence of a majority of such Continuing Directors. Notwithstanding anything in this Agreement to the contrary, the Rights shall not be exercisable after the first occurrence of a Section 11(a) (ii) Event until such time as the Bank's right of redemption hereunder has expired which time period may be extended by the Board of Directors for so long as necessary to obtain any required bank regulatory approvals. The Bank may, at its option, pay the Redemption Price in cash, shares of Common Stock (based on the "current market price," as defined in Section 11(d)(i) hereof, of the Common Stock at the time of redemption) or any other form of consideration deemed appropriate by the Board of Directors. (b) Immediately upon the action of the Board of Directors of the Bank ordering the redemption of the Rights and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price for each Right so held. Promptly after the action of the Board of Directors ordering the redemption of the Rights, the Bank shall give notice of such redemption to the Rights Agent and the holders of the then outstanding Rights by mailing such notice to all such holders at their last addresses as they appear upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the Transfer Agent for the Common Stock. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Neither the Bank nor any of its Subsidiaries may redeem, acquire or purchase for value any Rights at any time in any manner other than that specifically set forth in this Section 23 or in Section 24 hereof, and other than in connection with the purchase or other acquisition of shares of Common Stock prior to the Distribution Date. Section 24. Notice of Proposed Actions. (a) In case the Bank shall propose, at any time after the Distribution Date, (i) to pay any dividend payable in stock of any class to the holders of Preferred Shares or to make any other distribution to the holders of Preferred Shares (other than a regular quarterly cash dividend out of earnings or retained earnings of the Bank), or (ii) to offer to the holders of its Preferred Shares rights or warrants to subscribe for or to purchase any additional shares of Preferred Shares or shares of stock of any class or any other securities, rights or options, or (iii) to effect any reclassification of its Preferred Shares (other than a reclassification involving only the subdivision of outstanding shares of Preferred Shares), or (iv) to effect any consolidation or merger into or with any other Person, or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or other transfer), in one transaction or a series of related transactions, of more than 50% of the assets or earning power of the Bank and its Subsidiaries (taken as a whole) to any other Person or Persons, (v) to effect the liquidation, dissolution or winding up of the Bank, or (vi) to declare or pay any dividend on the Common Stock payable in Common Stock or to effect a subdivision, combination or consolidation of the Common Stock (by reclassification or otherwise than by payment of dividends in Common Stock), then, in each such case, the Bank shall give to each holder of a Right, to the extent feasible and in accordance with Section 25, a notice of such proposed action, which shall specify the record date for the purposes of such stock dividend, distribution of rights or warrants, or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution, or winding up is to take place and the date of participation therein by the holders of Common Shares and/or Preferred Shares, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (i) or (ii) above at least 20 days prior to the record date for determining holders of the Preferred Shares for purposes of such action, and in the case of any such other action, at least 20 days prior to the date of the taking of such proposed action or the date of participation therein by the holders of Common Shares and/or Preferred Shares, whichever shall be the earlier. The failure to give notice required by this Section 24 or any defect therein shall not affect the legality or validity of the action taken by the Bank or the vote upon any such action. (b) In case any Section 11(a) (ii) Event shall occur, then, in any such case, the Bank shall as soon as practicable thereafter give to each holder of a Right Certificate, in accordance with Section 25 hereof, a notice of the occurrence of such event, which notice shall describe such event and the consequences of such event to holders of Rights under Section 11(a)(ii) hereof. Section 25. Notices. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Right Certificate to or on the Bank shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: Norwalk Savings Society 48 Wall Street Norwalk, CT 06852 Attention: Corporate Secretary Subject to the provisions of Section 21, any notice or demand authorized by this Agreement to be given or made by the Bank or by the holder of any Right Certificate to or on the Rights Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid addressed (until another address is filed in writing with the Bank) as follows: Chemical Mellon Shareholder Services, L.L.C. Overpeck Centre 85 Challenger Road Ridgefield Park, N.J. 07660 Notices or demands authorized by this Agreement to be given or made by the Bank or the Rights Agent to the holder of any Right Certificate (or, prior to the Distribution Date, to the holder of any certificate representing shares of Common Stock) shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Bank. Section 26. Supplements and Amendments. Prior to the earlier of the Stock Acquisition Date and the Distribution Date and subject to the penultimate sentence of this Section 26, the Bank and the Rights Agent shall, if the Bank so directs, supplement or amend any provision of this Agreement (whether or not adverse to the holders of Rights) without the approval of any holders of Rights. From and after the earlier of the Stock Acquisition Date and the Distribution Date and subject to the penultimate sentence of this Section 26, the Bank and the Rights Agent shall, if the Bank so directs, supplement or amend this Agreement without the approval of any holders of Rights in order (i) to cure any ambiguity, (ii) to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, (iii) to shorten or lengthen any time period hereunder (which shortening or lengthening shall be effective only if there are Continuing Directors then in office and shall require the concurrence of a majority of such Continuing Directors if such supplement or amendment occurs at or after the time a Person becomes an Acquiring Person) or (iv) to change or supplement the provisions hereof in any manner which the Bank may deem necessary or desirable and which shall not materially adversely affect the interests of the holders of Rights Certificates (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person); provided, however, that this Agreement may not be supplemented or amended to lengthen, pursuant to clause (iii) of this sentence, (A) a time period relating to when the Rights may be redeemed at such time as the Rights are not then redeemable or (B) any other time period unless such lengthening is for the purpose of protecting, enhancing or clarifying the rights of, and/or the benefits to, the holders of Rights. Upon the delivery of a certificate from an appropriate officer of the Bank which states that the proposed supplement or amendment is in compliance with the terms of this Section 26, the Rights Agent shall execute such supplement or amendment. Notwithstanding anything contained in this Agreement to the contrary, no supplement or amendment shall be made which decreases the Redemption Price. Prior to the Distribution Date, the interests of the holders of Rights shall be deemed coincident with the interests of the holders of Common Stock. Section 27. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Bank or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 28. Determinations and Actions by the Board of Directors, etc. For all purposes of this Agreement, any calculation of the number of shares of Common Stock and/or Preferred Shares outstanding at any particular time, including for purposes of determining the particular percentage of such outstanding shares of Common Stock of which any Person is the Beneficial Owner, shall be made in accordance with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act. The Board of Directors of the Bank (with, where specifically provided for herein, the concurrence of the Continuing Directors) shall have the exclusive power and authority to administer this Agreement and to exercise all rights and powers specifically granted to the Board (with, where specifically provided for herein, the concurrence of the Continuing Directors) or to the Bank, or as may be necessary or advisable in the administration of this Agreement, including without limitation, the right and power to (i) interpret the provisions of this Agreement and (ii) make all determinations deemed necessary or advisable for the administration of this Agreement (including a determination to redeem or not redeem the Rights, to exchange or not to exchange the rights or to amend the Agreement). All such actions, calculations, interpretations and determinations (including, for purposes of clause (y) below, all omissions with respect to the foregoing) which are done or made by the Board (or, where specifically provided for herein, by the Continuing Directors) in good faith, shall (x) be final, conclusive and binding on the Bank, the Rights Agent, the holders of the Rights and all other parties, and (y) not subject to the Board or the Continuing Directors to any liability to the holders of the Right. Section 29. Benefits of This Agreement. Nothing in this Agreement shall be construed to give to any Person other than the Bank, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Stock) any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Bank, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Stock). Section 30. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. Section 31. Governing Law. This Agreement, each Right and each Right Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Connecticut and for all purposes shall be governed by and construed in accordance with the laws of such state applicable to contracts to be made and performed entirely within such state. Section 32. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute one and the same instrument. Section 33. Descriptive Headings. The captions herein and in the table of contents hereto are included for convenience of reference only, do not constitute a part of this Agreement and shall be ignored in the construction and interpretation hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, all as of the day and year first above written. NORWALK SAVINGS SOCIETY By /s/ Robert T. Judson ------------------------------------ President CHEMICAL MELLON SHAREHOLDER SERVICES, L.L.C. By /s/ ------------------------------------ Vice President Exhibit A FORM of AMENDMENT TO ARTICLES OF INCORPORATION of NORWALK SAVINGS SOCIETY (Pursuant to Connecticut General Statutes Sections 33-341(c) and 33-360(b)) NORWALK SAVINGS SOCIETY, a capital stock savings bank organized and existing under the laws of the State of Connecticut (hereinafter called the "Corporation"), hereby certifies that the following resolution was adopted by the Board of Directors of the Corporation at a meeting duly called and held on April 24, 1996: RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of this Corporation (hereinafter called the "Board of Directors" or the "Board") in accordance with the provisions of the Amended and Restated Articles of Incorporation of the Corporation and sections 33-341(b) and (c) of the Connecticut General Statutes, the Board of Directors hereby creates a series of Preferred Stock, par value $0.01 per share (the "Preferred Stock"), of the Corporation and hereby states the designation and number of shares, and fixes the relative rights, preferences, and limitations thereof as set forth in the following amendment to the Amended and Restated Articles of Incorporation of the Corporation: FURTHER RESOLVED, that the Amended and Restated Articles of Incorporation of the Corporation shall be, and they hereby are, amended by the addition of the following pursuant to ARTICLE THIRD: Series A Junior Participating Preferred Stock: Section 1. Designation and Amount. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be 50,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock. Section 2. Dividends and Distributions. (A) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock, par value $0.01 per share (the "Common Stock"), of the Corporation, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non- cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein, if the Board of Directors creates a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Certificate of Incorporation, or in any other Certificate of Designations creating a series of Preferred Stock or any similar stock or as otherwise required by law. Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. No Redemption. The shares of Series A Preferred Stock shall not be redeemable. Section 9. Rank. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the Corporation's Preferred Stock. Section 10. Amendment. The Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock, voting together as a single class. FURTHER RESOLVED, that 50,000 shares of Series A Preferred Stock be, and they hereby are, initially reserved for issuance upon exercise, in accordance with the terms of a certain Rights Agreement dated as of May 10, 1996 by and between the Corporation and Chemical Mellon Transfer Services, Inc. as Rights Agent, as amended from time to time (the "Rights Agreement"), of the Rights (as defined in the Rights Agreement), such number to be subject to adjustment from time to time in accordance with the Rights Agreement. Exhibit B Form of Right Certificate Certificate No. R- __________ Rights NOT EXERCISABLE AFTER MAY 27, 2006 OR EARLIER IF REDEEMED OR EXCHANGED BY THE BANK. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE BANK, AT $.001 PER RIGHT, AND TO EXCHANGE AT THE OPTION OF THE BANK, ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. AS DESCRIBED IN THE RIGHTS AGREEMENT, RIGHTS BENEFICIALLY OWNED BY (l) AN ACQUIRING PERSON OR ANY ASSOCIATE OR AFFILIATE THEREOF (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT), (2) A TRANSFEREE OF AN ACQUIRING PERSON (OR OF ANY SUCH ASSOCIATE OR AFFILIATE) WHO BECOMES A TRANSFEREE AFTER THE ACQUIRING PERSON BECOMES SUCH OR (3) UNDER CERTAIN CIRCUMSTANCES, A TRANSFEREE OF AN ACQUIRING PERSON (OR OF ANY SUCH ASSOCIATE OF AFFILIATE) WHO BECOMES A TRANSFEREE BEFORE OR CONCURRENTLY WITH THE ACQUIRING PERSON BECOMING SUCH, SHALL BECOME NULL AND VOID. Right Certificate Norwalk Savings Society This certifies that __________________________, or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Rights Agreement dated as of May 10, 1996 (the "Rights Agreement") between Norwalk Savings Society, a Connecticut-chartered capital stock savings bank (the "Bank"), and Chemical Mellon Shareholder Services, L.L.C. (the "Rights Agent"), to purchase from the Bank at any time after the Distribution Date (as such term is defined in the Rights Agreement) and prior to 5:00 P.M. (Eastern time) on May 27, 2006 at the office or offices of the Rights Agent designated for such purpose, or its successors as Rights Agent, one one-hundredths of a fully paid, non-assessable share of Series A Junior Participating Preferred Stock, par value $.01, (the "Preferred Shares") of the Bank, at a cash purchase price of $40.00 per one one-hundredths of a Preferred Share (the "Purchase Price"), upon presentation and surrender of this Right Certificate with the Form of Election to Purchase and the related Certificate duly executed. The number of Rights evidenced by this Right Certificate (and the number of one one- hundredths of a Preferred Share which may be purchased upon exercise thereof) set forth above, and the Purchase Price per one one-hundredths of a Preferred Share set forth above, are the number and Purchase Price as of May 28, 1996, based on the Preferred Shares as constituted at such date. Upon the occurrence of a Section 11(a) (ii) Event (as such term is defined in the Rights Agreement), if the Rights evidenced by this Right Certificate are beneficially owned by (i) an Acquiring Person or an Affiliate or Associate of any such Acquiring Person (as such terms are defined in the Rights Agreement), (ii) a transferee of an Acquiring Person (or of any such Affiliate or Associate) who becomes a transferee after the Acquiring Person becomes such), or (iii) under certain circumstances specified in the Rights Agreement, a transferee of an Acquiring Person (or of any such Affiliate or Associate) who becomes a transferee before or concurrently with the Acquiring Person becoming such), such Rights shall become null and void and no holder hereof shall have any right with respect to such Rights from and after the occurrence of such Section 11(a) (ii) Event. As provided in the Rights Agreement, the Purchase Price and the number of one one-hundredths of the Preferred Shares and the number and kind of other securities which may be purchased upon the exercise of the Rights evidenced by this Right Certificate are subject to modification and adjustment upon the happening of certain events. This Right Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Bank and the holders of the Right Certificates, which limitations of rights include the temporary suspension of the exercisability of such Rights under the specific circumstances set forth in the Rights Agreement. Copies of the Rights Agreement are on file at the above-mentioned office of the Rights Agent and are also available upon written request to the Bank. This Right Certificate, with or without other Right Certificates, upon surrender at the office or offices of the Rights Agent designated for such purpose, may be exchanged for another Right Certificate or Right Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of Preferred Shares as the Rights evidenced by the Right Certificate or Right Certificates surrendered shall have entitled such holder to purchase. If this Right Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Right Certificate or Right Certificates for the number of whole Rights not exercised. Subject to the provisions of the Rights Agreement, the Rights evidenced by this Certificate (i) may be redeemed by the Bank at its option at a redemption price of $.001 per Right or (ii) may be exchanged by the Bank at its option for Preferred Shares or shares of the Bank's Common Stock, par value $.01 per share (or, in certain circumstances, Common Stock Equivalents (as such term is defined in the Rights Agreement)). No fractional Preferred Shares or fractional shares of Common Stock or other securities will be issued upon the exercise of any Right or Rights evidenced hereby, but in lieu thereof a cash payment will be made, as provided in the Rights Agreement. No holder of this Right Certificate shall be entitled to vote or receive dividends or be deemed for any purpose the holder of Preferred Shares or of shares of any other securities of the Bank which may at any time be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Bank or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or, to receive notice of meetings or other actions affecting stockholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Right Certificate shall have been exercised as provided in the Rights Agreement. This Right Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent. WITNESS the facsimile signature of the proper officers of the Bank and its corporate seal. Dated as of ____________________, 19__. Attest: Norwalk Savings Society - -------------------------- --------------------------- Secretary Title: (seal) Countersigned: - -------------------------- as Rights Agent By ------------------------ Authorized Signature Form of Reverse Side of Right Certificate FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the Right Certificate.) FOR VALUE RECEIVED _____________________________________________ hereby sells, assigns and transfers unto _______________________ ________________________________________________________________ (Please print name and address of transferee) _______________________________________________________________ this Right Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ________________ Attorney, to transfer the within Right Certificate on the books of the within-named Bank, with full power of substitution. Dated: _______________, ____. --------------------------------- Signature Guaranteed: Signature Certificate The undersigned hereby certifies by checking the appropriate boxes that: (1) the Rights evidenced by this Right Certificate ____ are ____ are not being exercised by or on behalf of a Person who is or was an Acquiring Person or an Affiliate or Associate of any such Acquiring Person (as such terms are defined in the Rights Agreement); (2) after due inquiry and to the best knowledge of the undersigned, the Rights evidenced by this Right Certificate ___ are ___ are not being sold, assigned and transferred to a Person who is an Acquiring Person, an Affiliate or Associate of an Acquiring Person or a nominee of any such Acquiring Person, Affiliate or Associate. (3) after due inquiry and to the best knowledge of the undersigned, it ____ did ____ did not acquire the Rights evidenced by this Right Certificate from any Person who is, was or subsequently became an Acquiring Person or an Affiliate or Associate of an Acquiring Person. Dated: ___________, 19__ ------------------------------ Signature NOTICE The signatures to the foregoing Assignment and Certificate must correspond to the name as written upon the face of this Right Certificate in every particular, without alteration or enlargement or any change whatsoever. FORM OF ELECTION TO PURCHASE (To be executed if holder desires to exercise Rights represented by the Right Certificate.) To: Norwalk Savings Society The undersigned hereby irrevocably elects to exercise ___________________ Rights represented by this Right Certificate to purchase the Preferred Shares issuable upon the exercise of the Rights (or such other securities of the Bank or of any other person which may be issuable upon the exercise of the Rights) and requests that certificates for such shares be issued in the name of and delivered to: Please insert social security or other identifying number ________________________________________________________________ (Please print name and address) ________________________________________________________________ If such number of Rights shall not be all the Rights evidenced by this Right Certificate, a new Right Certificate for the balance of such Rights shall be registered in the name of and delivered to: Please insert social security or other identifying number ___________________________________________________________________ (Please print name and address) ___________________________________________________________________ ___________________________________________________________________ Dated: __________________, 19__. ---------------------------------- Signature Guaranteed: Signature Certificate The undersigned hereby certifies by checking the appropriate boxes that: (1) the Rights evidenced by this Right Certificate ____ are ____ are not being exercised by or on behalf of a Person who is or was an Acquiring Person or an Affiliate or Associate of any such Acquiring Person (as such terms are defined in the Rights Agreement); (2) after due inquiry and to the best knowledge of the undersigned, it ____ did ____ did not acquire the Rights evidenced by this eight Certificate from any Person who is, was or became an Acquiring Person or an Affiliate or Associate of an Acquiring Person. Dated: ____________, 19__. -------------------------------- Signature NOTICE The signature to the foregoing Election to Purchase and Certificate must correspond to the name as written upon the face of this Right Certificate in every particular, without alteration or enlargement or any change whatsoever. Exhibit C NORWALK SAVINGS SOCIETY SUMMARY OF RIGHTS TO PURCHASE COMMON SHARES On May 10, 1996 (the "Declaration Date"), Norwalk Savings Society (the "Bank") declared a dividend distribution of one Right for each outstanding share of Common Stock of the Bank. The dividend is payable on May 28, 1996 to the stockholders of record as of the close of business on such date (the "Record Date"). Each Right entitles the registered holder to purchase from the company one one-hundredths of a share of Series A Junior Participating Preferred Stock, par value $.01 per share (the "Preferred Shares") at a price of $40.00 per one one-hundredths of a Preferred Share (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement") between the Bank and Chemical Mellon Shareholder Services, L.L.C. (the "Rights Agent"). Until the close of business on the earliest of (i) the tenth day after a public announcement that a person or group of affiliated or associated persons has acquired, or obtained the right to acquire, beneficial ownership of 10% or more of the outstanding shares of Common Stock of the Bank (an "Acquiring Person"); (ii) the tenth day (or such later day as may be determined by action of the Board of Directors of the Bank prior to such time as any person becomes an Acquiring Person) after the date of the commencement of a tender or an exchange offer by any person (other than the Bank) to acquire (when added to any shares as to which such person is the beneficial owner immediately prior to such commencement) beneficial ownership of 10% or more of the issued and outstanding shares of Common Stock; and (iii) the tenth day (or such later day as may be determined by action of the Board of Directors of the Bank prior to such time as any person becomes an Acquiring Person) after the filing by any Person (other than the Bank) of a registration statement under the Securities Act of 1933, as amended, with respect to a contemplated exchange offer to acquire (when added to any shares as to which such person is the beneficial owner immediately prior to such filing) beneficial ownership of 10% or more of the issued and outstanding shares of Common Stock (the earliest of such dates being called the "Distribution Date"), the Rights will be evidenced, with respect to any of the Bank's Common Stock certificates outstanding as of the Record Date, by such Common Stock certificate and this Summary. The date of announcement of the existence of an Acquiring Person referred to in clause (i) above is hereinafter referred to as the "Stock Acquisition Date." The Rights Agreement provides that, until the Distribution Date, the Rights will be transferred with and only with the Bank's Common Stock. New Common Stock certificates issued after the Record Date upon transfer or new issuance of the Bank's Common Stock will contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date, the surrender for transfer of any of the Common Stock certificates outstanding as of the Record Date will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate and the number of Rights associated with each share of Common Stock shall be proportionately adjusted in the event of any dividend in Common Stock on the Common Stock or subdivision, combination or reclassification of the Common Stock. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the Bank's Common Stock as of the close of business on the Distribution Date and such separate certificates alone will evidence Rights. The Rights are not exercisable until the Distribution Date. The Rights will expire on May 27, 2006, unless earlier redeemed by the Bank as described below. The Purchase Price payable, and the number of Preferred Shares or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Preferred Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights or warrants to subscribe for or purchase Preferred Shares at a price, or securities convertible into Preferred Shares with a conversion price, less than the then-current market price of the Preferred Shares or (iii) upon the distribution to holders of the Preferred Shares of evidences of indebtedness or assets (excluding regular periodic cash dividends paid out of earnings or retained earnings or dividends payable in Preferred Shares) or of subscription rights or warrants (other than those referred to above). The number of outstanding Rights and the number of one one- hundredths of a Preferred Share issuable upon exercise of each Right are also subject to adjustment in the event of a stock split of the Common Shares or a stock dividend on the Common Shares payable in Common Shares or subdivisions, consolidations or combinations of the Common Shares occurring, in any such case, prior to the Distribution Date. Preferred Shares purchasable upon exercise of the Rights will not be redeemable. Each Preferred Share will be entitled to a minimum preferential quarterly dividend payment of $1 per share but will be entitled to an aggregate dividend of 100 times the dividend declared per Common Share. In the event of liquidation, the holders of the Preferred Shares will be entitled to a minimum preferential liquidation payment of $100 per share but will be entitled to an aggregate payment of 100 times the payment made per Common Share. All liquidation payments are subject to the prior rights of Bank account holders to the Bank's "liquidation account" established in accordance with Connecticut Banking Law in connection with the Bank's conversion from mutual to capital stock form in 1994. Each Preferred Share will have 100 votes, voting together with the Common Shares. Finally, in the event of any merger, consolidation or other transaction in which Common Shares are exchanged, each Preferred Share will be entitled to receive 100 times the amount received per Common Share. These rights are protected by customary anti-dilution provisions. In the event that the Bank is acquired in a merger or other business combination, proper provision shall be made so that each holder of a Right shall thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the surviving company (or its parent company or other controlling entity) which at the time of such transaction would have a market value of four times the exercise price of the Right. In the event that the Bank were the surviving corporation in a merger with any Person, or in the event that the Stock Acquisition Date occurs, the Rights Agreement provides that proper provision would be made so that each holder of a Right, other than the Acquiring Person (whose Rights would thereafter be null and void) and certain of its transferees, would thereafter have the right to receive upon exercise that number of shares of the Bank's Common Stock having a market value of four times the exercise price of the Right (i.e., a 75% discount to market value); if insufficient shares are available to satisfy the Right, the Bank may substitute other consideration, as appropriate, or make an adjustment to the exercise price of the Right to achieve substantially the intended economic benefit to shareholders (other than the Acquiring Person) of the 75% discount. With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price. No fractional Preferred Shares or fractional shares of other securities will be issued and, in lieu thereof, if necessary, an adjustment in cash will be made based on the market price of the Preferred Shares or other securities on the last trading date prior to the date of exercise. At any time prior to the close of business on the date that Rights holders become entitled to purchase Preferred Shares of the Bank (which time period may be extended by the Board of Directors for so long as necessary to obtain any required bank regulatory approvals), the Bank may redeem the Rights in whole, but not in part, at a price of $.001 per Right (payable in cash, Preferred Shares, shares of Common Stock or other consideration), appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (the "Redemption Price"). Immediately upon the action of the Board of Directors of the Bank electing to redeem the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Bank, including, without limitation, no right to vote or to receive dividends. The terms of the Rights may be amended by the Bank and the Rights Agent, provided that following the earlier of the Distribution Date and the Stock Acquisition Date, the amendment does not materially adversely affect the interests of the holders of the Rights (other than an Acquiring Person) and provided that no amendment shall be made which decreases the Redemption Price. A copy of the Rights Agreement is being filed with the Federal Deposit Insurance Corporation as an Exhibit to a Form F-10. A copy of the Rights Agreement will be available free of charge from the Bank. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which is incorporated herein by reference. EX-4.1 6 AMENDMENT TO EX 4 Exhibit 4.1 AMENDMENT TO RIGHTS AGREEMENT THIS AMENDMENT TO RIGHTS AGREEMENT between NORWALK SAVINGS SOCIETY, a Connecticut Chartered stock savings bank (the "Bank") and CHASEMELLON SHAREHOLDERS SERVICES, L.L.C., as successor-in- interest to Chemical-Mellon Shareholder Services, L.L.C., (the "Rights Agent") is dated as of February 28, 1997 (the "Amendment"). WHEREAS, the Bank and the Rights Agent have entered into that certain Rights Agreement dated May 10, 1996 (the "Agreement"), a copy of which is attached hereto and incorporated by reference. WHEREAS, Section 26 of the Agreement provides that, under certain conditions, the Bank and the Rights Agent may, if the Bank so directs, amend the Agreement in any manner which the Bank may deem necessary or desirable and which shall not materially adversely affect the interests of Rights Holders (as defined in the Agreement) without the approval of Rights Holders. WHEREAS, the Board of Directors of the Bank has determined at a meeting held on February 26, 1997 that it is in the best interest of the Bank to amend the Agreement as set forth herein. NOW THEREFORE, the undersigned parties mutually agree to following terms and conditions and to amend the Agreement as follows: 1. Section 1(a) of the Agreement shall be amended and restated in its entirety to read as follows: " Section 1. Certain Definitions. For purposes of this Agreement, the following terms have the meanings indicated: (a) "Acquiring Person" shall mean any Person (as hereinafter defined) who or which, together with all Affiliates (as hereinafter defined) and Associates (as hereinafter defined) of such Person, shall be the Beneficial Owner (as hereinafter defined) of 10% or more of the shares of Common Stock then outstanding, but shall not include (i) the Bank, (ii) any Subsidiary (as hereinafter defined) of the Bank, (iii) any employee benefit plan of the Bank or any Subsidiary of the Bank, (iv) any entity (including its Affiliates) organized, appointed or established for or pursuant to the terms of any such plan acting solely in its capacity (or their capacities) under such plan, or (v) any Person that beneficially owns 10% or more of the Common Stock if the Bank's Board of Directors, in its sole discretion, formally determines that such Person should not be considered an "Acquiring Person" for purposes of this Agreement because of the identity of such Person and/or the nature of the ownership of shares of Common Stock held by such Person or for other good cause shown. Notwithstanding the foregoing, no Person shall become an "Acquiring Person" solely as the result of an acquisition of Common Stock by the Bank which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 10% or more of the shares of Common Stock then outstanding; provided however, that if a Person becomes the Beneficial Owner of 10% or more of the shares of Common Stock then outstanding by reason of share acquisitions by the Bank and shall, after such acquisitions, become the Beneficial Owner of any additional shares of Common Stock, then such Person shall be deemed to be an "Acquiring Person" subject only to the foregoing. 2. Section 3 of the Agreement shall be amended to add a new Section 3(e) as set forth below: " Section 3. Issuance of Rights Certificates. (e) In no event shall Rights Certificates be issued to Rights Holders if, pursuant to Section 1(a)(v) of this Agreement, the Board of Directors of the Bank determines, on or before the 10th day after a Stock Acquisition Date, that a Beneficial Owner of 10% or more of Common Stock should not be considered an "Acquiring Person" for purposes of this Agreement because of the identity of such Person and/or the nature of the ownership of shares of Common Stock held by such Person or for other good cause shown. 3. Except as expressly modified or amended by this Amendment, all of the terms, covenants and conditions of the Agreement are hereby ratified and confirmed, all to remain in full force and effect. IN WITNESS WHEREOF, the undersigned parties have executed this Amendment as of the date first written above. NORWALK SAVINGS SOCIETY By: /s/ Robert T. Judson Robert T. Judson Its President CHASE MELLON SHAREHOLDERS SERVICES, LLC By: /s/ Harriet Drandoff Harriet Drandoff Its EX-4.2 7 AMENDMENT 2 TO EX 4 Exhibit 4.2 ASSIGNMENT This ASSIGNMENT is dated May 20, 1997 and is entered into between and among NORWALK SAVINGS SOCIETY, a Connecticut stock savings bank (the "Assignor"), NSS BANCORP, INC., a Connecticut corporation (the "Assignee"), and CHASEMELLON SHAREHOLDER SERVICES, LLC (the "Rights Agent") WHEREAS, the Assignor and the Rights Agent have entered into that certain Rights Agreement dated May 10, 1996, as amended by that certain Amendment to Rights Agreement dated as of February 28, 1997 (collectively, the "Rights Agreement"); WHEREAS, section 27 of the Rights Agreement provides that all of the covenants and provisions of the Rights Agreement by or for the benefit of the Assignor or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns; and WHEREAS, pursuant to that certain Agreement and Plan of Reorganization entered into between the Bank and that Company dated May 20, 1997 (the "Plan"), the Bank is obligated to assign all right, title, and interest in the Rights Agreement to the Company and the Company is obligated to accept such assignment from the Bank. NOW THEREFORE, in consideration of the mutual promises and covenants contained herein, the Bank, the Company and the Rights Agent agree as follows: 1. Assignment. The Assignor hereby assigns to Assignee all right, title, and interest in and to the Rights Agreement and Assignee hereby accepts such assignment effective upon the effective date of the Plan. 2. Covenants of Assignor. Assignor warrants that the Rights Agreement is valid and is now in full force and effect and that all covenants and conditions of the Rights Agreement have been and continue to be fulfilled. 3. Covenants of Assignee; Performance of Duties. The Assignee hereby agrees to perform all duties of the Assignor under the Rights Agreement, and shall indemnify and hold harmless Assignor from any claim or demand made thereunder. 4. Amendment to Rights Agreement. The following terms as used in the Rights Agreement shall have the following meaning: (a) Section 1(f) of the Rights Agreement shall be deleted in its entirety and the following shall be substituted in lieu thereof: (f) "Common Stock" shall mean the Common Stock, par value $0.01 per share, of NSS Bancorp, Inc., except that "Common Stock" when used with reference to any Person other than the Bank shall mean the capital stock of such Person with the greatest voting power, or the equity securities or other equity interest having power to control or direct the management, of such Person. (b) All references to the "Bank" made in the Rights Agreement shall hereafter be deemed to refer not to "Norwalk Savings Society" but instead to "NSS Bancorp, Inc." 5. Acknowledgement of Rights Agent. The Rights Agent hereby acknowledges that all right, title, and interest in the Rights Agreement previously vested in the Assignor has been validly assigned to and accepted by the Assignee. The Rights Agent hereby releases the Assignor from all of Assignor's obligations to perform under the Rights Agreement and agrees to accept performance of all obligations thereunder by the Assignee. IN WITNESS WHEREOF, the undersigned parties have executed this Assignment this 20th day of May, 1997. NORWALK SAVINGS SOCIETY By: /s/ Robert T. Judson Robert T. Judson Its President NSS BANCORP, INC. By: /s/ Robert T. Judson Robert T. Judson Its President CHASE MELLON SHAREHOLDERS SERVICES, LLC By: /s/ Harriet Drandoff Harriet Drandoff Its Relationship Manager EX-10.1.1 8 EMPLOYMENT AGREEMENT Exhibit 10.1.1 EMPLOYMENT AGREEMENT This Employment Agreement, dated as of March 1, 1994, is between NORWALK SAVINGS SOCIETY, a mutual savings bank organized and existing under the laws of the State of Connecticut with headquarters located in Norwalk, Connecticut (the "Bank"), and ROBERT T. JUDSON of Wilton, Connecticut ("Executive"). RECITALS Executive has worked for the Bank for approximately 37 years, most recently as President, Treasurer and Chief Executive Officer. The Bank desires to enter into an Employment Agreement with Executive for several primary reasons: (1) to provide Executive with additional job security, particularly in the event that the Bank experiences a change-of-control; (2) to provide further incentive to Executive in the discharge of his responsibilities to the Bank; (3) to further define Executive's duties and terms of employment; and (4) to obtain certain contractual commitments from Executive not present in the existing, at-will employment arrangement. The Executive desires to enter into an Employment Agreement primarily to obtain contractual commitments from the Bank not present in his existing, at-will employment arrangement. The Bank and Executive contemplate that the Bank will: (i) disclose to Executive information concerning the Bank's business affairs, including certain confidential information; and (ii) assist Executive in establishing good will and rapport with certain customers of the Bank. The use by Executive of this information, good will and rapport in competing with or in aiding others in competing with the Bank would have a detrimental effect on future profitable operations of the Bank. NOW THEREFORE, in consideration of the mutual promises and covenants hereinafter described, the parties agree as follows: 1. Term of Employment. The Bank agrees to employ Executive, and Executive agrees to accept employment with the Bank for a term commencing on March 1, 1994 and continuing for a period of three (3) years, unless subsequently extended or sooner terminated as provided in this Agreement (the "Employment Period"). 2. Duties. (a) During the Employment Period, Executive shall perform the duties and exercise the powers relating to the office of President, Treasurer and Chief Executive Officer (provided such designations may change during the course of the Employment Period except the designation of Chief Executive Officer) as the Bank shall from time to time assign to him. All duties assigned shall be consistent with the customary duties of persons exercising the functions of the above-described offices at a Connecticut-chartered savings bank and, if the Bank converts from mutual to capital stock form, at a capital stock savings bank. Executive shall continue to be nominated to serve on the Bank's Board of Directors. (b) During the Employment Period, Executive shall devote his entire business time, best efforts and ability to the business of the Bank, shall faithfully and diligently perform his duties, shall comply in all material respects with the overall policies established by the Board of Directors of the Bank and shall do all that is reasonably in his power to promote, develop and extend the business of the Bank. 3. Compensation and Benefits. (a) Salary. The Bank shall pay Executive as compensation for his services during the Employment Period an annual base salary of One Hundred Sixty-Eight Thousand Eight Hundred Dollars ($168,800.00). Salary payments shall be made in equal increments consistent with the Bank's standard payroll practices for its officers. The base annual salary shall be reviewed by the Directors each year during the Employment Period and set by the Directors in an amount not less than the prior year's salary; any increase in annual salary may take the form of a contingent increase based upon achievement of articulated personal or corporate goals, or both. (b) Expenses. Upon submission of appropriate invoices or vouchers, the Bank shall pay or reimburse Executive for all reasonable expenses incurred by him in the performance of his duties under this Agreement in furthering the business, and in keeping with the policies, of the Bank. (c) Vacation. Executive shall be entitled to four (4) weeks paid vacation each contract year, to be taken each year at a time or times as shall be mutually agreed upon by the Bank and Executive and consistent with applicable regulatory requirements. If Executive fails to use all of his vacation time during a particular calendar year, the unused portion shall not be carried over to the subsequent year nor shall he be paid additionally for such unused time. (d) Incentive Compensation. The Bank's Board of Directors, in its sole discretion, may authorize the payment of cash incentive compensation to Executive from time to time. Payment of incentive compensation will not set a precedent requiring or suggesting that similar incentive compensation will be paid in the future. (e) Insurance Policies i. Term Life Insurance. During the Employment Period, Bank shall provide term life insurance coverage for Executive in such form and amount as is not less favorable than that coverage provided by the Bank to other Bank employees from time to time generally. ii. Key Man Insurance. During the Employment Period, Executive shall permit the Bank to insure his life under a policy or policies of life insurance issued by an insurance company or companies selected by the Bank, and to name the Bank as sole beneficiary thereunder. Executive agrees to submit to any physical examinations which may be reasonably required in connection with such policies. iii. Disability Insurance. During the Employment Period, Bank shall provide Executive with disability insurance coverage in such form and amount consistent with that provided to other Bank employees generally. (f) Benefits. During the Employment Period, Executive shall be entitled to and shall be included in any employee welfare and retirement plan or program of the Bank available generally to its employees and/or officers including, without limitation, plans for hospital services, medical services benefits, sick pay, dental and other health plans. (g) Stock Plans. During the Employment Period, Executive may be included in any stock incentive or stock compensation plan as the Board of Directors of the Bank may determine. 4. Disability. If during any period in which Executive shall have continued to perform his duties as an employee of the Bank, Executive shall incur a total or partial disability (as defined in subparagraph (d) below), then until the earlier of (a) 180 days after the date such disability is incurred, or (b) the expiration of the term of the Employment Period (either shall be termed the "Disability Period"), the Bank shall pay Executive during the Disability Period on the basis of his then-regular salary (any payments that Executive does or would otherwise receive pursuant to the Bank's disability coverage for employees generally for this period of disability shall be set off against these payments). (a) If Executive's total disability shall terminate prior to the expiration of the Employment Period, then Executive shall return to full and active employment with the Bank under the terms of this Agreement; provided that if he shall again become disabled within a period of three (3) months after such return, other than by reason of an event which is not causatively related to his original disability, then Executive shall be deemed to have been continuously disabled from the date he incurred his original disability; (b) In the event Executive shall incur a partial disability (as defined in (d) below), then during the period of the partial disability, the compensation to be paid to him in consideration of his services to the Bank shall be equitably adjusted to reflect the time that he is able to devote to the affairs of and the value of the service he is able to impart to the Bank; provided, however, that during the Disability Period, the compensation shall not be less than Executive would have received under this Section 4 had he been totally rather than partially disabled (this is to say, he shall receive his then- regular salary for that Disability Period); (c) Payments to Executive under this Section 4 shall be reduced by the amounts, if any, as may be payable to him by reason of his disability under policies of insurance maintained and/or paid for by the Bank; (d) As used in this Agreement, the term "total disability" shall mean a disability such that, for physical or mental reasons, Executive is unable to perform substantially his obligations hereunder for the reasonably foreseeable future (not less than 90 days), as determined by the Bank's Board of Directors after considering competent medical evidence. As used in this Agreement, the term "partial disability" shall mean a disability, other than a total disability, such that, for physical or mental reasons, Executive is unable to perform a material portion of his usual duties at the Bank on a full-time basis. As determined by the Bank's Board of Directors after considering competent medical evidence. 5. Termination. (a) Termination by Death. If Executive dies during the Employment Period, the Bank's obligations under this Agreement shall terminate immediately and Executive's estate shall be entitled to all arrearages of salary and expenses but shall not be entitled to further compensation. (b) Termination With or Without Cause. This Agreement and Executive's employment with the Bank may be terminated for cause at any time upon thirty (30) days advance written notice from the Bank to Executive, which notice shall set forth the facts on which the termination is based. Upon termination, Executive shall be entitled to all arrearages of salary and expenses, but shall not be entitled to further compensation or benefits. As used in this Agreement, and without limitation, "cause" shall include: (i) Executive's conviction by any trial court of any crime involving fraud, embezzlement, theft or dishonesty; (ii) serious willful misconduct by Executive, including personal dishonesty in connection with Bank business or customers or the breach of a fiduciary duty to the Bank or its customers; (iii) the total disability of Executive, as defined in Paragraph 4 above; (iv) any material breach by Executive of this Agreement; or (v) if the Bank's regulatory authorities issue an order removing Executive from his positions at the Bank, or if such regulatory authorities inform the Directors that continuation of Executive in his position at the Bank would constitute an unsafe and unsound banking practice. Executive's employment may be terminated by the Bank without cause at any time, provided that, in such event, Bank shall pay Executive, in one lump-sum payment paid within 30 days after such termination, an amount equal to the higher of the following: (i) that amount which is equal to the aggregate amount of salary payments that would be made to Executive for the remainder of the Employment Period, calculated at the Executive's then annual base salary; or (ii) that amount which is equal to the number of Executive's full years of service to the Bank at the time of termination multiplied by a number derived by dividing his then annual base salary by twenty-six (26). In addition, if Executive is terminated without cause, the Bank shall either continue to carry Executive at no cost to him under the Bank's employee hospital, medical services, dental and other health plans for the remainder of the Employment Period, or, if he is not eligible for continued coverage under such plans, pay the cost of similar coverage for Executive pursuant to COBRA or similar private insurance plans offering comparable coverage. Also, if Executive is terminated without cause, the Bank agrees to provide Executive, at his request, with outplacement services for a period not to exceed one year after the date of termination, provided the Bank's obligation to provide these services shall not exceed a maximum aggregate cost of $25,000. Executive, should he elect to receive such services, agrees to pursue possible employment opportunities diligently and in good faith, and to cooperate in all reasonable respects with the requests and instructions of the outplacement services firm. A termination "without cause" shall mean any termination not satisfying the "cause" criteria specified in this Paragraph 5(b). (c) Termination of the Old Arrangement. This Agreement shall supersede any and all terms and conditions of Executive's employment at the Bank that may be assertable by Executive pursuant to previous documents, decisions of the Board, custom and practice, or the like. (d) Immediate Cessation of Employment. In the event Executive's employment terminates for cause pursuant to subparagraph (b), the Bank may further direct Executive to cease immediately his activities on behalf of the Bank and to discontinue using any of the Bank's facilities; provided, however, that in the event of these directions, the Bank shall continue to provide Executive with salary and other benefits required by this Agreement until the expiration of the notice period set forth in sub- paragraph (b). (e) Survival. Anything in this Agreement to the contrary not withstanding, the provisions of Paragraphs 6, 7, 8, 9 and 10 shall survive the termination of Executive's employment with the Bank. 6. Non-Competition Agreement. (a) Executive absolutely and unconditionally covenants and agrees with the Bank that, from the period commencing on the date of this Agreement and continuing for a period of one (1) year following the termination of his employment as provided for in this Agreement, Executive will not, anywhere in the Restricted Area (as defined in subparagraph (b) below), either directly or indirectly, solely or jointly with any other person or persons (a "Competitor"), as an employee, consultant, or advisor (whether or not engaged in business for profit), or an individual proprietor, partner, shareholder (provided that share ownership of less than 5% of the share voting power shall be permitted), director, officer, joint venturer, investor (provided that such investment will not be a violation if it is limited to less than 5% of the ownership of such entity), lender, or in any other capacity, compete with the business of the Bank (i) as conducted as of the date of execution of this Agreement; or (ii) as conducted during the Employment Period; or (iii) as conducted as of the end of the Employment Period; or (iv) as proposed to be conducted by the Bank as of the end of the Employment Period (collectively, the "Business"). (b) As used in this Section 6: (i) the term "compete" shall mean engaging , participating, or being involved in any respect in the business of banking, or furnishing any aid, assistance or service of any kind to any person in connection with, the Business; (ii) the term "Restricted Area" shall refer to a Competitor which has its home office in Norwalk, or which has a branch or other place of business in Norwalk and where Executive is based or in which he spends the majority of his office time. (c) If a court or arbitration panel concludes through appropriate proceedings that Executive has breached the covenant set forth in this Section, the term of the covenant shall be extended for a term equal to the period for which Executive is determined to have breached the covenant. 7. Covenant Not to Disclose. Executive agrees that, by virtue of the performance of the normal duties of his position with the Bank and by virtue of the relationship of trust and confidence between Executive and the Bank, he possesses and will possess certain data and knowledge of operations of the Bank which are proprietary in nature and confidential. Executive covenants and agrees that he will not, at any time, whether during the term of this Agreement or otherwise, reveal, divulge or make known to any person(other than the Bank) or use for his own account, any confidential or proprietary record, data, trade secret, price policy, rate structure, personnel policy, method or practice of obtaining or doing business by the Bank, or any other confidential or proprietary information whatever (the "Confidential Informa- tion"), whether or not obtained with the knowledge and permission of the Bank and whether or not developed, devised or otherwise created in whole or in part by his efforts. Executive further covenants and agrees that he shall retain all such knowledge and information which he shall acquire or develop respecting such Confidential Information in trust for the sole benefit of the Bank and its successors and assigns. 8. Non-Interference Covenant. Executive covenants and agrees that he will not, for a period of one (1) year following the termination of this Agreement, directly or indirectly, for whatever reason, whether for his own account or for the account of any other person, firm, corporation or other organization: (i) solicit, employ, or otherwise interfere with any of the Bank's contracts or relationships with any employee, officer, director or any independent contractor who is employed by or associated with the Bank at the time of termination of this Agreement; or (ii) actively solicit, or otherwise actively interfere with any of the Bank's contracts or relationships with any independent contractor, customer, client or supplier of the Bank. 9. Business Materials and Property Disclosure. All written materials, records and documents made by Executive or coming into his possession concerning the business or affairs of the Bank shall be the sole property of the Bank and, upon termina- tion of his employment with the Bank, Executive shall deliver the same to the Bank and shall retain no copies. Executive shall also return to the Bank all other property in his possession owned by the Bank upon termination of his employment. 10. Breach by Executive. It is expressly understood, acknowledged and agreed by Executive that (i) the restrictions contained in Sections 6, 7, 8 and 9 of this Agreement represent a reasonable and necessary protection of the legitimate interests of the Bank and that his failure to observe and comply with his covenants and agreements in those Sections will cause irreparable harm to the Bank; (ii) it is and will continue to be difficult to ascertain the nature, scope and extent of the harm; and (iii) a remedy at law for such failure by Executive will be inadequate. Accordingly, it is the intention of the parties that, in addition to any other rights and remedies which the Bank may have in the event of any breach of said Sections, the Bank shall be entitled, and is expressly and irrevocably authorized by Executive, to demand and obtain specific performance, including without limitation, temporary and permanent injunctive relief, and all other appropriate equitable relief against Executive in order to enforce against Executive, or in order to prevent any breach or any threatened breach by Executive, of the covenants and agreements contained in those Sections. 11. Change of Control. If during the Employment Period and thereafter (provided the Executive is then a full-time officer of the Bank) there is a "Change of Control" of the Bank, the Executive shall be entitled to receive a severance payment in consideration of services previously rendered to the Bank. The severance payment shall be made as a lump sum cash payment as provided for herein, unless the Executive and Bank enter into a new employment agreement within two months after the Change of Control. The amount of such severance payment shall equal three (3) times the Executive's average annual compensation which was payable by the Bank and was includible in the Executive's gross income for federal income tax purposes with respect to the five (5) most recent taxable years ending before the date on which the Change of Control occurs, less one dollar. Payment under this Section 11 shall be in lieu of any amount due or payable to the Executive under Sections 3 and 5. Payment under this Section 11 shall be paid in full within 90 days following the date of the Change of Control and shall not be reduced by any compensation which the Executive may receive from other employment with another employer after termination of the Executive's employment with the Bank. Notwithstanding any other provision of this Agreement or of any other agreement, understanding or compensation plan, Bank shall not pay, and Executive shall not receive, any payment which would be deemed (taking into account all payments, rights and benefits whether or not under this Agreement) to be an "excess parachute payment" under Section 280G of the Internal Revenue Code of 1986 as amended, and the amount of the payment hereunder shall be reduced to the extent necessary to ensure that Executive receives no "parachute payment" in connection with such Change of Control. (a) "Change of Control" shall be deemed to have occurred if: (1) a Person (as defined below) beneficially owns (i.e. directly, indirectly or acting through one or more other persons owns, controls or has power to vote) 25% or more of any class of voting securities of Bank; (2) a Person controls in any manner the election of more than 20% of the directors of Bank; or (3) the Board of Directors of Bank determines that a Person directly or indirectly exercises a controlling influence over the management or policies of Bank. A "Change of Control" shall be deemed not to have occurred if (A) such event is mandated or directed by a regulatory body having jurisdiction over the Bank's operations; or (B) it occurs pursuant to the terms of a plan for the acquisition of the capital stock of the Bank by a newly formed bank holding company if in the consummation of such plan the shareholders of Bank will receive, pro rata, all of the common stock of such bank holding company; unless, in such conversion, a Person satisfies sub-paragraph (1), (2) or (3) above. A "Person" shall include a natural person, corporation, or other entity. When two or more persons act as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding or disposing of Bank capital stock, such partnership, syndicate or group shall be considered a Person. Beneficial ownership shall be determined under the then current provisions of Securities Exchange Act Rule 13d-3; Reg. Section 240. 13d-3, or their successor provision(s). This Section 11 shall survive and continue beyond the term of employment set forth in Section 1 for as long as the Executive is a full-time officer of the Bank. 12. Regulatory Restrictions. Notwithstanding any provision to the contrary in this Agreement, the Bank shall not be required under this Agreement to continue Executive in his position(s) at the Bank, or to make any payments to Executive, if the regulatory authorities having jurisdiction over the Bank order the Executive's removal from the Bank, or if such regulations determine that any payment would constitute an illegal "excess parachute" payment under 12 U.S.C. Section 1828(k) and regulations promulgated thereunder, or an "unsafe or unsound banking practice" pursuant to 12 U.S.C. Section 1818(b). 13. Arbitration. Any dispute whatsoever relating to the interpretation, validity or performance of this Agreement, or any other dispute arising out of this Agreement which cannot be resolved by any party upon thirty days' written notice to the other party shall be settled by arbitration in the City of Norwalk, Connecticut, in accordance with the rules then prevailing of the American Arbitration Association, and the judgment upon the award rendered by the arbitrators may be entered in any court of competent jurisdiction. It is the purpose of this Agreement, and the intent of the parties hereto to make the submission to arbitration of any dispute or controversy arising out of this Agreement, as set forth hereinabove, an express condition precedent to any legal or equitable action or proceeding of any nature whatsoever. 14. General Provisions. (a) All notices required by this Agreement shall be in writing and shall be sufficiently given if delivered or mailed by registered or certified mail, return receipt requested, to the parties at their respective addresses set forth below. Any party may specify a different address by written notice to the other, in accordance with this Section. All notices shall be deemed to have been given as of the date so delivered or mailed. To the Bank Norwalk Savings Society 48 Wall Street Norwalk, CT 06852 To Executive: Robert T. Judson 21 Bald Hill Road Wilton, CT 06897 (b) Except insofar as Executive may be subject to general policies adopted by the Bank from time to time, this Agreement contains the entire agreement between the parties, and there are no other representations, warranties, conditions or agreements relating to the subject matter of this Agreement. (c) The waiver by any party of any breach or default of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. (d) This Agreement may not be changed orally but only by an agreement in writing duly executed on behalf of the party against which enforcement of any waiver, change, modification, consent or discharge is sought. (e) This Agreement shall be binding upon and inure to the benefit of the Bank and Executive and their respective successors, assigns, heirs and legal representatives. Insofar as Executive is concerned, this Agreement is personal and Executive's duties under it shall not be assigned by Executive. (f) Each of the parties agrees to execute all further instruments and documents and to take all further action as the other party may reasonably request in order to effectuate the terms and purposes of this Agreement. (g) This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same instrument. (h) This Agreement shall be construed pursuant to and in accordance with the laws of the State of Connecticut. (i) Wherever used in this Agreement, the masculine, feminine and neuter pronouns shall be fully interchangeable, and the singular shall include the plural where the context so requires and vice versa. (j) If any term or provision of this Agreement is held or deemed to be invalid or unenforceable, in whole or in part, by a court of competent jurisdiction, such term or provision shall be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. NORWALK SAVINGS SOCIETY By Chairman of Board of Directors EXECUTIVE Robert T. Judson EX-10.1.2 9 AMENDMENT Exhibit 10.1.2 AMENDMENT NO. ONE TO EMPLOYMENT AGREEMENT Amendment No. One, dated as of April 1, 1994, to Employment Agreement, dated as of March 1, 1994, between NORWALK SAVINGS SOCIETY, a mutual savings bank organized and existing under the laws of the State of Connecticut with headquarters located in Norwalk, Connecticut (the "Bank"), and ROBERT T. JUDSON of Wilton, Connecticut ("Executive"). RECITALS WHEREAS, the Bank and the Executive mutually desire to amend the Employment Agreement, dated as of March 1, 1994. NOW THEREFORE, the parties agree as follows: 1. Section 5(b) of the Employment Agreement shall be amended to include the following sentence as the new last sentence of such Section: "In no event, however, shall the lump-sum payment described in the fourth sentence of this Section 5(b) be equal to or in excess of three times the Executive's then annual base salary." 2. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same instrument. 3. This Amendment No. One to Employment Agreement shall be construed pursuant to and in accordance with the laws of the State of Connecticut. IN WITNESS WHEREOF, the parties have executed this Amendment No. One to Employment Agreement on the date first above written. NORWALK SAVINGS SOCIETY By ------------------------------------- Chairman of the Board of Directors EXECUTIVE ---------------------------------- Robert T. Judson EX-10.1.3 10 AMENDMENT Exhibit 10.1.3 AMENDMENT NO. TWO TO EMPLOYMENT AGREEMENT Amendment No. Two, dated as of November 7, 1995, to Employment Agreement, dated as of March 1, 1994, amended by Amendment No. One dated as of April 1, 1994, between NORWALK SAVINGS SOCIETY, a capital stock savings bank organized and existing under the laws of the State of Connecticut with headquarters located in Norwalk, Connecticut (the "Bank"), and ROBERT T. JUDSON of Wilton, Connecticut ("Executive"). RECITALS WHEREAS, the Bank and the Executive mutually desire to amend the Employment Agreement. NOW THEREFORE, the parties agree as follows: 1. Section 1 of the Agreement shall be amended to provide that the term of employment shall be extended to March 1, 1999, unless subsequently extended or sooner terminated as provided in the Agreement. 2. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same instrument. 3. This Amendment No. Two to Employment Agreement shall be construed pursuant to and in accordance with the laws of the State of Connecticut. The Agreement shall otherwise remain in full force and effect as originally written, except that the Change of Control provisions of Section 11 have been and are superseded by a separate agreement regarding change of control between the Executive and the Bank. IN WITNESS WHEREOF, the parties have executed this Amendment No. Two to Employment Agreement on the date first above written. NORWALK SAVINGS SOCIETY By -------------------------------------- Chairman of the Board of Directors EXECUTIVE ----------------------------------------- Robert T. Judson EX-10.1.4 11 AMENDMENT Exhibit 10.1.4 AMENDMENT NO. THREE TO EMPLOYMENT AGREEMENT Amendment No. Three, dated as of ________________, 1997, to Employment Agreement, dated as of March 1, 1994, amended by Amendment No. One dated as of April 1, 1994, and Amendment No. Two dated as of November 7, 1995, between NORWALK SAVINGS SOCIETY, a capital stock savings bank organized and existing under the laws of the State of Connecticut with headquarters located in Norwalk, Connecticut (the "Bank"), and ROBERT T. JUDSON of Wilton, Connecticut ("Executive"). RECITALS WHEREAS, the Bank and the Executive mutually desire to amend the Employment Agreement. NOW THEREFORE, the parties agree as follows: 1. Section 1 of the Agreement shall be amended to provide that the term of employment shall be extended to March 1, 2001, unless subsequently extended or sooner terminated as provided in the Agreement. 2. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same instrument. 3. This Amendment No. Three to Employment Agreement shall be construed pursuant to and in accordance with the laws of the State of Connecticut. The Agreement shall otherwise remain in full force and effect as originally written, except that the Change of Control provisions of Section 11 have been and are superseded by a separate agreement regarding change of control between the Executive and the Bank. IN WITNESS WHEREOF, the parties have executed this Amendment No. Three to Employment Agreement on the date first above written. NORWALK SAVINGS SOCIETY By -------------------------------------- Chairman of the Board of Directors EXECUTIVE ----------------------------------------- Robert T. Judson EX-10.2.1 12 EMPLOYMENT AGREEMENT Exhibit 10.2.1 EMPLOYMENT AGREEMENT This Employment Agreement, dated as of March 1, 1994, is between NORWALK SAVINGS SOCIETY, a mutual savings bank organized and existing under the laws of the State of Connecticut with headquarters located in Norwalk, Connecticut (the "Bank"), and CHARLES F. HOWELL of Danbury, Connecticut ("Executive"). RECITALS Executive has worked for the Bank for approximately 25 years, most recently as Executive Vice President and Chief Operating Officer. The Bank desires to enter into an Employment Agreement with Executive for several primary reasons: (1) to provide Executive with additional job security, particularly in the event that the Bank experiences a change-of-control; (2) to provide further incentive to Executive in the discharge of his responsibilities to the Bank; (3) to further define Executive's duties and terms of employment; and (4) to obtain certain contractual commitments from Executive not present in the existing, at-will employment arrangement. The Executive desires to enter into an Employment Agreement primarily to obtain contractual commitments from the Bank not present in his existing, at-will employment arrangement. The Bank and Executive contemplate that the Bank will: (i) disclose to Executive information concerning the Bank's business affairs, including certain confidential information; and (ii) assist Executive in establishing good will and rapport with certain customers of the Bank. The use by Executive of this information, good will and rapport in competing with or in aiding others in competing with the Bank would have a detrimental effect on future profitable operations of the Bank. NOW THEREFORE, in consideration of the mutual promises and covenants hereinafter described, the parties agree as follows: 1. Term of Employment. The Bank agrees to employ Executive, and Executive agrees to accept employment with the Bank for a term commencing on March 1, 1994 and continuing for a period of three (3) years, unless subsequently extended or sooner terminated as provided in this Agreement (the "Employment Period"). 2. Duties. (a) During the Employment Period, Executive shall perform the duties and exercise the powers relating to the office of EX-10.2.2 13 AMENDMENT EXHIBIT 10.2.2 AMENDMENT NO. ONE TO EMPLOYMENT AGREEMENT Amendment No. One, dated as of April 1, 1994, to Employment Agreement, dated as of March 1, 1994, between NORWALK SAVINGS SOCIETY, a mutual savings bank organized and existing under the laws of the State of Connecticut with headquarters located in Norwalk, Connecticut (the "Bank"), and CHARLES F. HOWELL of Danbury, Connecticut ("Executive"). RECITALS WHEREAS, the Bank and the Executive mutually desire to amend the Employment Agreement, dated as of March 1, 1994. NOW THEREFORE, the parties agree as follows: 1. Section 5(b) of the Employment Agreement shall be amended to include the following sentence as the new last sentence of such Section: "In no event, however, shall the lump-sum payment described in the fourth sentence of this Section 5(b) be equal to or in excess of three times the Executive's then annual base salary." 2. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same instrument. 3. This Amendment No. One to Employment Agreement shall be construed pursuant to and in accordance with the laws of the State of Connecticut. IN WITNESS WHEREOF, the parties have executed this Amendment No. One to Employment Agreement on the date first above written. NORWALK SAVINGS SOCIETY By_____________________________________ Chairman of the Board of Directors EXECUTIVE __________________________________ Charles F. Howell EX-10.2.3 14 AMENDMENT EXHIBIT 10.2.3 AMENDMENT NO. TWO TO EMPLOYMENT AGREEMENT Amendment No. Two, dated as of November 7, 1995, to Employment Agreement, dated as of March 1, 1994, amended by Amendment No. One dated as of April 1, 1994, between NORWALK SAVINGS SOCIETY, a capital stock savings bank organized and existing under the laws of the State of Connecticut with headquarters located in Norwalk, Connecticut (the "Bank"), and CHARLES F. HOWELL of Danbury, Connecticut ("Executive"). RECITALS WHEREAS, the Bank and the Executive mutually desire to amend the Employment Agreement. NOW THEREFORE, the parties agree as follows: 1. Section 1 of the Agreement shall be amended to provide that the term of employment shall be extended to March 1, 1999, unless subsequently extended or sooner terminated as provided in the Agreement. 2. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same instrument. 3. This Amendment No. Two to Employment Agreement shall be construed pursuant to and in accordance with the laws of the State of Connecticut. The Agreement shall otherwise remain in full force and effect as originally written, except that the Change of Control provisions of Section 11 have been and are superseded by a separate agreement regarding change of control between the Executive and the Bank. IN WITNESS WHEREOF, the parties have executed this Amendment No. Two to Employment Agreement on the date first above written. NORWALK SAVINGS SOCIETY By _____________________________________ Chairman of the Board of Directors EXECUTIVE _________________________________________ Charles F. Howell EX-10.2.4 15 AMENDMENT EXHIBIT 10.2.4 AMENDMENT NO. THREE TO EMPLOYMENT AGREEMENT Amendment No. Three, dated as of ________________, 1997, to Employment Agreement, dated as of March 1, 1994, amended by Amendment No. One dated as of April 1, 1994, and Amendment No. Two dated as of November 7, 1995, between NORWALK SAVINGS SOCIETY, a capital stock savings bank organized and existing under the laws of the State of Connecticut with headquarters located in Norwalk, Connecticut (the "Bank"), and CHARLES F. HOWELL of Danbury, Connecticut ("Executive"). RECITALS WHEREAS, the Bank and the Executive mutually desire to amend the Employment Agreement. NOW THEREFORE, the parties agree as follows: 1. Section 1 of the Agreement shall be amended to provide that the term of employment shall be extended to March 1, 2001, unless subsequently extended or sooner terminated as provided in the Agreement. 2. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same instrument. 3. This Amendment No. Three to Employment Agreement shall be construed pursuant to and in accordance with the laws of the State of Connecticut. The Agreement shall otherwise remain in full force and effect as originally written, except that the Change of Control provisions of Section 11 have been and are superseded by a separate agreement regarding change of control between the Executive and the Bank. IN WITNESS WHEREOF, the parties have executed this Amendment No. Three to Employment Agreement on the date first above written. NORWALK SAVINGS SOCIETY By _____________________________________ Chairman of the Board of Directors EXECUTIVE _________________________________________ Charles F. Howell EX-10.3.1 16 EMPLOYMENT AGREEMENT EXHIBIT 10.3.1 EMPLOYMENT AGREEMENT This Employment Agreement, dated as of March 1, 1994, is between NORWALK SAVINGS SOCIETY, a mutual savings bank organized and existing under the laws of the State of Connecticut with a headquarters located in Norwalk, Connecticut (the "Bank"), and JEREMIAH T. DORNEY of Wilton, Connecticut ("Executive"). RECITALS Executive has worked for the Bank for approximately 31 years, most recently as Senior Vice President and Secretary. The Bank desires to enter into an Employment Agreement with Executive for several primary reasons: (1) to provide Executive with additional job security, particularly in the event that the Bank experiences a change-of-control; (2) to provide further incentive to Executive in the discharge of his responsibilities to the Bank; (3) to further define Executive's duties and terms of employment; and (4) to obtain certain contractual commitments from Executive not present in the existing, at-will employment arrangement. The Executive desires to enter into an Employment Agreement primarily to obtain contractual commitments from the Bank not present in his existing, at-will employment arrangement. The Bank and Executive contemplate that the Bank will: (i) disclose to Executive information concerning the Bank's business affairs, including certain confidential information; and (ii) assist Executive in establishing good will and rapport with certain customers of the Bank. The use by Executive of this information, good will and rapport in competing with or in aiding others in competing with the Bank would have a detrimental effect on future profitable operations of the Bank. NOW THEREFORE, in consideration of the mutual promises and covenants hereinafter described, the parties agree as follows: 1. Term of Employment. The Bank agrees to employ Executive, and Executive agrees to accept employment with the Bank for a term commencing on March 1, 1994 and continuing for a period of three (3) years, unless subsequently extended or sooner terminated as provided in this Agreement (the "Employment Period"). 2. Duties. (a) During the Employment Period, Executive shall perform the duties and exercise the powers relating to the office of Senior Vice President and Secretary (provided such designations may change during the course of the Employment Period) as the Bank shall from time to time assign to him. All duties assigned shall be consistent with the customary duties of persons exercising the functions of the above-described offices at a Connecticut-chartered savings bank, and, if the Bank converts from mutual to capital stock form, at a capital stock savings bank. (b) During the Employment Period, Executive shall devote his entire business time, best efforts and ability to the business of the Bank, shall faithfully and diligently perform his duties, shall comply in all material respects with the overall policies established by the Board of Directors of the Bank and shall do all that is reasonably in his power to promote, develop and extend the business of the Bank. 3. Compensation and Benefits. (a) Salary. The Bank shall pay Executive as compensation for his services during the Employment Period an annual base salary of Eighty-Eight Thousand Six Hundred Dollars ($88,600.00). Salary payments shall be made in equal increments consistent with the Bank's standard payroll practices for its officers. The base annual salary shall be reviewed by the Directors each year during the Employment Period and set by the Directors in an amount not less than the prior year's salary; any increase in annual salary may take the form of a contingent increase based upon achievement of articulated personal or corporate goals, or both. (b) Expenses. Upon submission of appropriate invoices or vouchers, the Bank shall pay or reimburse Executive for all reasonable expenses incurred by him in the performance of his duties under this Agreement in furthering the business, and in keeping with the policies, of the Bank. (c) Vacation. Executive shall be entitled to four (4) weeks paid vacation each contract year, to be taken each year at a time or times as shall be mutually agreed upon by the Bank and Executive and consistent with applicable regulatory requirements. If Executive fails to use all of his vacation time during a particular calendar year, the unused portion shall not be carried over to the subsequent year nor shall he be paid additionally for such unused time. (d) Incentive Compensation. The Bank's Board of Directors, in its sole discretion, may authorize the payment of cash incentive compensation to Executive from time to time. Payment of incentive compensation will not set a precedent requiring or suggesting that similar incentive compensation will be paid in the future. (e) Insurance Policies i. Term Life Insurance. During the Employment Period, Bank shall provide term life insurance coverage for Executive in such form and amount as is not less favorable than that coverage provided by the Bank to other Bank employees from time to time generally. ii. Key Man Insurance. During the Employment Period, Executive shall permit the Bank to insure his life under a policy or policies of life insurance issued by an insurance company or companies selected by the Bank, and to name the Bank as sole beneficiary thereunder. Executive agrees to submit to any physical examinations which may be reasonably required in connection with such policies. iii. Disability Insurance. During the Employment Period, Bank shall provide Executive with disability insurance coverage in such form and amount consistent with that provided to other Bank employees generally. (f) Benefits. During the Employment Period, Executive shall be entitled to and shall be included in any employee welfare and retirement plan or program of the Bank available generally to its employees and/or officers including, without limitation, plans for hospital services, medical services benefits, sick pay, dental and other health plans. (g) Stock Plans. During the Employment Period, Executive may be included in any stock incentive or stock compensation plan as the Board of Directors of the Bank may determine. 4. Disability. If during any period in which Executive shall have continued to perform his duties as an employee of the Bank, Executive shall incur a total or partial disability (as defined in subparagraph (d) below), then until the earlier of (a) 180 days after the date such disability is incurred, or (b) the expiration of the term of the Employment Period (either shall be termed the "Disability Period"), the Bank shall pay Executive during the Disability Period on the basis of his then-regular salary (any payments that Executive does or would otherwise receive pursuant to the Bank's disability coverage for employees generally for this period of disability shall be set off against these payments). (a) If Executive's total disability shall terminate prior to the expiration of the Employment Period, then Executive shall return to full and active employment with the Bank under the terms of this Agreement; provided that if he shall again become disabled within a period of three (3) months after such return, other than by reason of an event which is not causatively related to his original disability, then Executive shall be deemed to have been continuously disabled from the date he incurred his original disability; (b) In the event Executive shall incur a partial disability (as defined in (d) below), then during the period of the partial disability, the compensation to be paid to him in consideration of his services to the Bank shall be equitably adjusted to reflect the time that he is able to devote to the affairs of and the value of the service he is able to impart to the Bank; provided, however, that during the Disability Period, the compensation shall not be less than Executive would have received under this Section 4 had he been totally rather than partially disabled (this is to say, he shall receive his then- regular salary for that Disability Period); (c) Payments to Executive under this Section 4 shall be reduced by the amounts, if any, as may be payable to him by reason of his disability under policies of insurance maintained and/or paid for by the Bank; (d) As used in this Agreement, the term "total disability" shall mean a disability such that, for physical or mental reasons, Executive is unable to perform substantially his obligations hereunder for the reasonably foreseeable future (not less than 90 days), as determined by the Bank's Board of Directors after considering competent medical evidence. As used in this Agreement, the term "partial disability" shall mean a disability, other than a total disability, such that, for physical or mental reasons, Executive is unable to perform a material portion of his usual duties at the Bank on a full-time basis. As determined by the Bank's Board of Directors after considering competent medical evidence. 5. Termination. (a) Termination by Death. If Executive dies during the Employment Period, the Bank's obligations under this Agreement shall terminate immediately and Executive's estate shall be entitled to all arrearages of salary and expenses but shall not be entitled to further compensation. (b) Termination With or Without Cause. This Agreement and Executive's employment with the Bank may be terminated for cause at any time upon thirty (30) days advance written notice from the Bank to Executive, which notice shall set forth the facts on which the termination is based. Upon termination, Executive shall be entitled to all arrearages of salary and expenses, but shall not be entitled to further compensation or benefits. As used in this Agreement, and without limitation, "cause" shall include: (i) Executive's conviction by any trial court of any crime involving fraud, embezzlement, theft or dishonesty; (ii) serious willful misconduct by Executive, including personal dishonesty in connection with Bank business or customers or the breach of a fiduciary duty to the Bank or its customers; (iii) the total disability of Executive, as defined in Paragraph 4 above; (iv) any material breach by Executive of this Agreement; or (v) if the Bank's regulatory authorities issue an order removing Executive from his positions at the Bank, or if such regulatory authorities inform the Directors that continuation of Executive in his position at the Bank would constitute an unsafe and unsound banking practice. Executive's employment may be terminated by the Bank without cause at any time, provided that, in such event, Bank shall pay Executive, in one lump-sum payment paid within 30 days after such termination, an amount equal to the higher of the following: (i) that amount which is equal to the aggregate amount of salary payments that would be made to Executive for the remainder of the Employment Period, calculated at the Executive's then annual base salary; or (ii) that amount which is equal to the number of Executive's full years of service to the Bank at the time of termination multiplied by a number derived by dividing his then annual base salary by twenty-six (26). In addition, if Executive is terminated without cause, the Bank shall either continue to carry Executive at no cost to him under the Bank's employee hospital, medical services, dental and other health plans for the remainder of the Employment Period, or, if he is not eligible for continued coverage under such plans, pay the cost of similar coverage for Executive pursuant to COBRA or similar private insurance plans offering comparable coverage. Also, if Executive is terminated without cause, the Bank agrees to provide Executive, at his request, with outplacement services for a period not to exceed one year after the date of termination, provided the Bank's obligation to provide these services shall not exceed a maximum aggregate cost of $25,000. Executive, should he elect to receive such services, agrees to pursue possible employment opportunities diligently and in good faith, and to cooperate in all reasonable respects with the requests and instructions of the outplacement services firm. A termination "without cause" shall mean any termination not satisfying the "cause" criteria specified in this Paragraph 5(b). (c) Termination of the Old Arrangement. This Agreement shall supersede any and all terms and conditions of Executive's employment at the Bank that may be assertable by Executive pursuant to previous documents, decisions of the Board, custom and practice, or the like. (d) Immediate Cessation of Employment. In the event Executive's employment terminates pursuant to subparagraph (b), the Bank may further direct Executive to cease immediately his activities on behalf of the Bank and to discontinue using any of the Bank's facilities; provided, however, that in the event of these directions, the Bank shall continue to provide Executive with salary and other benefits required by this Agreement until the expiration of the notice period set forth in sub- paragraph (b). (e) Survival. Anything in this Agreement to the contrary not withstanding, the provisions of Paragraphs 6, 7, 8, 9 and 10 shall survive the termination of Executive's employment with the Bank. 6. Non-Competition Agreement. (a) Executive absolutely and unconditionally covenants and agrees with the Bank that, from the period commencing on the date of this Agreement and continuing for a period of one (1) year following the termination of his employment as provided for in this Agreement, Executive will not, anywhere in the Restricted Area (as defined in subparagraph (b) below), either directly or indirectly, solely or jointly with any other person or persons (a "Competitor"), as an employee, consultant, or advisor (whether or not engaged in business for profit), or an individual proprietor, partner, shareholder (provided that share ownership of less than 5% of the share voting power shall be permitted), director, officer, joint venturer, investor (provided that such investment will not be a violation if it is limited to less than 5% of the ownership of such entity), lender, or in any other capacity, compete with the business of the Bank (i) as conducted as of the date of execution of this Agreement; or (ii) as conducted during the Employment Period; or (iii) as conducted as of the end of the Employment Period; or (iv) as proposed to be conducted by the Bank as of the end of the Employment Period (collectively, the "Business"). (b) As used in this Section 6: (i) the term "compete" shall mean engaging , participating, or being involved in any respect in the business of banking, or furnishing any aid, assistance or service of any kind to any person in connection with, the Business; (ii) the term "Restricted Area" shall refer to a Competitor which has its home office in Norwalk, or which has a branch or other place of business in Norwalk and where Executive is based or in which he spends the majority of his office time. (c) If a court or arbitration panel concludes through appropriate proceedings that Executive has breached the covenant set forth in this Section, the term of the covenant shall be extended for a term equal to the period for which Executive is determined to have breached the covenant. 7. Covenant Not to Disclose. Executive agrees that, by virtue of the performance of the normal duties of his position with the Bank and by virtue of the relationship of trust and confidence between Executive and the Bank, he possesses and will possess certain data and knowledge of operations of the Bank which are proprietary in nature and confidential. Executive covenants and agrees that he will not, at any time, whether during the term of this Agreement or otherwise, reveal, divulge or make known to any person(other than the Bank) or use for his own account, any confidential or proprietary record, data, trade secret, price policy, rate structure, personnel policy, method or practice of obtaining or doing business by the Bank, or any other confidential or proprietary information whatever (the "Confidential Information"), whether or not obtained with the knowledge and permission of the Bank and whether or not developed, devised or otherwise created in whole or in part by his efforts. Executive further covenants and agrees that he shall retain all such knowledge and information which he shall acquire or develop respecting such Confidential Information in trust for the sole benefit of the Bank and its successors and assigns. 8. Non-Interference Covenant. Executive covenants and agrees that he will not, for a period of one (1) year following the termination of this Agreement, directly or indirectly, for whatever reason, whether for his own account or for the account of any other person, firm, corporation or other organization: (i) solicit, employ, or otherwise interfere with any of the Bank's contracts or relationships with any employee, officer, director or any independent contractor who is employed by or associated with the Bank at the time of termination of this Agreement; or (ii) actively solicit, or otherwise actively interfere with any of the Bank's contracts or relationships with any independent contractor, customer, client or supplier of the Bank. 9. Business Materials and Property Disclosure. All written materials, records and documents made by Executive or coming into his possession concerning the business or affairs of the Bank shall be the sole property of the Bank and, upon termination of his employment with the Bank, Executive shall deliver the same to the Bank and shall retain no copies. Executive shall also return to the Bank all other property in his possession owned by the Bank upon termination of his employment. 10. Breach by Executive. It is expressly understood, acknowledged and agreed by Executive that (i) the restrictions contained in Sections 6, 7, 8 and 9 of this Agreement represent a reasonable and necessary protection of the legitimate interests of the Bank and that his failure to observe and comply with his covenants and agreements in those Sections will cause irreparable harm to the Bank; (ii) it is and will continue to be difficult to ascertain the nature, scope and extent of the harm; and (iii) a remedy at law for such failure by Executive will be inadequate. Accordingly, it is the intention of the parties that, in addition to any other rights and remedies which the Bank may have in the event of any breach of said Sections, the Bank shall be entitled, and is expressly and irrevocably authorized by Executive, to demand and obtain specific performance, including without limitation, temporary and permanent injunctive relief, and all other appropriate equitable relief against Executive in order to enforce against Executive, or in order to prevent any breach or any threatened breach by Executive, of the covenants and agreements contained in those Sections. 11. Change of Control. If during the Employment Period and thereafter (provided the Executive is then a full-time officer of the Bank) there is a "Change of Control" of the Bank, the Executive shall be entitled to receive a severance payment in consideration of services previously rendered to the Bank. The severance payment shall be made as a lump sum cash payment as provided for herein, unless the Executive and Bank enter into a new employment agreement within two months after the Change of Control. The amount of such severance payment shall equal three (3) times the Executive's average annual compensation which was payable by the Bank and was includible in the Executive's gross income for federal income tax purposes with respect to the five (5) most recent taxable years ending before the date on which the Change of Control occurs, less one dollar. Payment under this Section 11 shall be in lieu of any amount due or payable to the Executive under Sections 3 and 5. Payment under this Section 11 shall be paid in full within 90 days following the date of the Change of Control and shall not be reduced by any compensation which the Executive may receive from other employment with another employer after termination of the Executive's employment with the Bank. Notwithstanding any other provision of this Agreement or of any other agreement, understanding or compensation plan, Bank shall not pay, and Executive shall not receive, any payment which would be deemed (taking into account all payments, rights and benefits whether or not under this Agreement) to be an "excess parachute payment" under Section 280G of the Internal Revenue Code of 1986, as amended, and the amount of the payment hereunder shall be reduced to the extent necessary to ensure that Executive receives no "parachute payment" in connection with such Change of Control. (a) "Change of Control" shall be deemed to have occurred if: (1) a Person (as defined below) beneficially owns (i.e. directly, indirectly or acting through one or more other persons owns, controls or has power to vote) 25% or more of any class of voting securities of Bank; (2) a Person controls in any manner the election of more than 20% of the directors of Bank; or (3) the Board of Directors of Bank determines that a Person directly or indirectly exercises a controlling influence over the management or policies of Bank. A "Change of Control" shall be deemed not to have occurred if (A) such event is mandated or directed by a regulatory body having jurisdiction over the Bank's operations; or (B) it occurs pursuant to the terms of a plan for the acquisition of the capital stock of the Bank by a newly formed bank holding company if in the consummation of such plan the shareholders of Bank will receive, pro rata, all of the common stock of such bank holding company; unless, in such conversion, a Person satisfies sub-paragraph (1), (2) or (3) above. A "Person" shall include a natural person, corporation, or other entity. When two or more persons act as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding or disposing of Bank capital stock, such partnership, syndicate or group shall be considered a Person. Beneficial ownership shall be determined under the then current provisions of Securities Exchange Act Rule 13d-3; Reg. Section 240.13d-3, or their successor provision(s). This Section 11 shall survive and continue beyond the term of employment set forth in Section 1 for as long as the Executive is a full-time officer of the Bank. 12. Regulatory Restrictions. Notwithstanding any provision to the contrary in this Agreement, the Bank shall not be required under this Agreement to continue Executive in his position(s) at the Bank, or to make any payments to Executive, if the regulatory authorities having jurisdiction over the Bank order the Executive's removal from the Bank, or if such regulations determine that any payment would constitute an illegal "excess parachute" payment under 12 U.S.C. Section 1828(k) and regulations promulgated thereunder, or an "unsafe or unsound banking practice" pursuant to 12 U.S.C. Section 1818(b). 13. Arbitration. Any dispute whatsoever relating to the interpretation, validity or performance of this Agreement, or any other dispute arising out of this Agreement which cannot be resolved by any party upon thirty days' written notice to the other party shall be settled by arbitration in the City of Norwalk, Connecticut, in accordance with the rules then prevailing of the American Arbitration Association, and the judgment upon the award rendered by the arbitrators may be entered in any court of competent jurisdiction. It is the purpose of this Agreement, and the intent of the parties hereto to make the submission to arbitration of any dispute or controversy arising out of this Agreement, as set forth hereinabove, an express condition precedent to any legal or equitable action or proceeding of any nature whatsoever. 14. General Provisions. (a) All notices required by this Agreement shall be in writing and shall be sufficiently given if delivered or mailed by registered or certified mail, return receipt requested, to the parties at their respective addresses set forth below. Any party may specify a different address by written notice to the other, in accordance with this Section. All notices shall be deemed to have been given as of the date so delivered or mailed. To the Bank Norwalk Savings Society 48 Wall Street Norwalk, CT 06852 To Executive: Jeremiah T. Dorney 11 Blueberry Hill Place Wilton, CT 06897 (b) Except insofar as Executive may be subject to general policies adopted by the Bank from time to time, this Agreement contains the entire agreement between the parties, and there are no other representations, warranties, conditions or agreements relating to the subject matter of this Agreement. (c) The waiver by any party of any breach or default of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. (d) This Agreement may not be changed orally but only by an agreement in writing duly executed on behalf of the party against which enforcement of any waiver, change, modification, consent or discharge is sought. (e) This Agreement shall be binding upon and inure to the benefit of the Bank and Executive and their respective successors, assigns, heirs and legal representatives. Insofar as Executive is concerned, this Agreement is personal and Executive's duties under it shall not be assigned by Executive. (f) Each of the parties agrees to execute all further instruments and documents and to take all further action as the other party may reasonably request in order to effectuate the terms and purposes of this Agreement. (g) This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same instrument. (h) This Agreement shall be construed pursuant to and in accordance with the laws of the State of Connecticut. (i) Wherever used in this Agreement, the masculine, feminine and neuter pronouns shall be fully interchangeable, and the singular shall include the plural where the context so requires and vice versa. (j) If any term or provision of this Agreement is held or deemed to be invalid or unenforceable, in whole or in part, by a court of competent jurisdiction, such term or provision shall be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. NORWALK SAVINGS SOCIETY By Chairman of Board of Directors EXECUTIVE Jeremiah T. Dorney EX-10.3.2 17 AMENDMENT Exhibit 10.3.2 AMENDMENT NO. ONE TO EMPLOYMENT AGREEMENT Amendment No. One, dated as of April 1, 1994, to Employment Agreement, dated as of March 1, 1994, between NORWALK SAVINGS SOCIETY, a mutual savings bank organized and existing under the laws of the State of Connecticut with headquarters located in Norwalk, Connecticut (the "Bank"), and JEREMIAH T. DORNEY of Wilton, Connecticut ("Executive"). RECITALS WHEREAS, the Bank and the Executive mutually desire to amend the Employment Agreement, dated as of March 1, 1994. NOW THEREFORE, the parties agree as follows: 1. Section 5(b) of the Employment Agreement shall be amended to include the following sentence as the new last sentence of such Section: "In no event, however, shall the lump-sum payment described in the fourth sentence of this Section 5(b) be equal to or in excess of three times the Executive's then annual base salary." 2. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same instrument . 3. This Amendment No. One to Employment Agreement shall be construed pursuant to and in accordance with the laws of the State of Connecticut. IN WITNESS WHEREOF, the parties have executed this Amendment No. One to Employment Agreement on the date first above written. NORWALK SAVINGS SOCIETY By ------------------------------------- Chairman of the Board of Directors EXECUTIVE ------------------------------------- Jeremiah T. Dorney EX-10.3.3 18 AMENDMENT Exhibit 10.3.3 AMENDMENT NO. TWO TO EMPLOYMENT AGREEMENT Amendment No. Two, dated as of November 7, 1995, to Employment Agreement, dated as of March 1, 1994, amended by Amendment No. One dated as of April 1, 1994, between NORWALK SAVINGS SOCIETY, a capital stock savings bank organized and existing under the laws of the State of Connecticut with headquarters located in Norwalk, Connecticut (the "Bank"), and JERE T. DORNEY of Wilton, Connecticut ("Executive"). RECITALS WHEREAS, the Bank and the Executive mutually desire to amend the Employment Agreement. NOW THEREFORE, the parties agree as follows: 1. Section 1 of the Agreement shall be amended to provide that the term of employment shall be extended to March 1, 1999, unless subsequently extended or sooner terminated as provided in the Agreement. 2. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same instrument. 3. This Amendment No. Two to Employment Agreement shall be construed pursuant to and in accordance with the laws of the State of Connecticut. The Agreement shall otherwise remain in full force and effect as originally written, except that the Change of Control provisions of Section 11 have been and are superseded by a separate agreement regarding change of control between the Executive and the Bank. IN WITNESS WHEREOF, the parties have executed this Amendment No. Two to Employment Agreement on the date first above written. NORWALK SAVINGS SOCIETY By ---------------------------------- Chairman of the Board of Directors EXECUTIVE ---------------------------------- Jere T. Dorney EX-10.3.4 19 AMENDMENT Exhibit 10.3.4 AMENDMENT NO. THREE TO EMPLOYMENT AGREEMENT Amendment No. Three, dated as of ______________, 1997, to Employment Agreement, dated as of March 1, 1994, amended by Amendment No. One dated as of April 1, 1994, and Amendment No. Two dated as of November 7, 1995, between NORWALK SAVINGS SOCIETY, a capital stock savings bank organized and existing under the laws of the State of Connecticut with headquarters located in Norwalk, Connecticut (the "Bank"), and JERE T. DORNEY of Wilton, Connecticut ("Executive"). RECITALS WHEREAS, the Bank and the Executive mutually desire to amend the Employment Agreement. NOW THEREFORE, the parties agree as follows: 1. Section 1 of the Agreement shall be amended to provide that the term of employment shall be extended to March 1, 2001, unless subsequently extended or sooner terminated as provided in the Agreement. 2. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same instrument. 3. This Amendment No. Three to Employment Agreement shall be construed pursuant to and in accordance with the laws of the State of Connecticut. The Agreement shall otherwise remain in full force and effect as originally written, except that the Change of Control provisions of Section 11 have been and are superseded by a separate agreement regarding change of control between the Executive and the Bank. IN WITNESS WHEREOF, the parties have executed this Amendment No. Three to Employment Agreement on the date first above written. NORWALK SAVINGS SOCIETY By ---------------------------------- Chairman of the Board of Directors EXECUTIVE ---------------------------------- Jere T. Dorney EX-10.4.1 20 EMPLOYMENT AGREEMENT Exhibit 10.4.1 EMPLOYMENT AGREEMENT This Employment Agreement, dated as of March 1, 1994, is between NORWALK SAVINGS SOCIETY, a mutual savings bank organized and existing under the laws of the State of Connecticut with a headquarters located in Norwalk, Connecticut (the "Bank"), and MARCUS I. BRAVERMAN of Yorktown Heights, New York ("Executive"). RECITALS The Bank desires to enter into an Employment Agreement with Executive for several primary reasons: (1) to provide Executive with job security, particularly in the event that the Bank experiences a change-of-control; (2) to provide incentive to Executive in the discharge of his responsibilities to the Bank; (3) to define Executive's duties and terms of employment; and (4) to obtain certain contractual commitments from Executive. The Executive desires to enter into an Employment Agreement primarily to obtain contractual commitments from the Bank. The Bank and Executive contemplate that the Bank will: (i) disclose to Executive information concerning the Bank's business affairs, including certain confidential information; and (ii) assist Executive in establishing good will and rapport with certain customers of the Bank. The use by Executive of this information, good will and rapport in competing with or in aiding others in competing with the Bank would have a detrimental effect on future profitable operations of the Bank. NOW THEREFORE, in consideration of the mutual promises and covenants hereinafter described, the parties agree as follows: 1. Term of Employment. The Bank agrees to employ Executive, and Executive agrees to accept employment with the Bank for a term commencing on March 1, 1994 and continuing for a period of one (1) year, unless subsequently extended or sooner terminated as provided in this Agreement (the "Employment Period"). 2. Duties. (a) During the Employment Period, Executive shall perform the duties and exercise the powers relating to the office of Senior Vice President and Chief Financial Officer (provided such designations may change during the course of the Employment Period) as the Bank shall from time to time assign to him. All duties assigned shall be consistent with the customary duties of persons exercising the functions of the above-described offices at a Connecticut-chartered savings bank, and, if the Bank converts from mutual to capital stock form, at a capital stock savings bank. (b) During the Employment Period, Executive shall devote his entire business time, best efforts and ability to the business of the Bank, shall faithfully and diligently perform his duties, shall comply in all material respects with the overall policies established by the Board of Directors of the Bank and shall do all that is reasonably in his power to promote, develop and extend the business of the Bank. 3. Compensation and Benefits. (a) Salary. The Bank shall pay Executive as compensation for his services during the Employment Period an annual base salary of Eighty- Five Thousand Dollars ($85,000.00). Salary payments shall be made in equal increments consistent with the Bank's standard payroll practices for its officers. The base annual salary shall be reviewed by the Directors each year during the Employment Period and set by the Directors in an amount not less than the prior year's salary; any increase in annual salary may take the form of a contingent increase based upon achievement of articulated personal or corporate goals, or both. (b) Expenses. Upon submission of appropriate invoices or vouchers, the Bank shall pay or reimburse Executive for all reasonable expenses incurred by him in the performance of his duties under this Agreement in furthering the business, and in keeping with the policies, of the Bank. (c) Vacation. Executive shall be entitled to four (4) weeks paid vacation each contract year, to be taken each year at a time or times as shall be mutually agreed upon by the Bank and Executive and consistent with applicable regulatory requirements. If Executive fails to use all of his vacation time during a particular calendar year, the unused portion shall not be carried over to the subsequent year nor shall he be paid additionally for such unused time. (d) Incentive Compensation. The Bank's Board of Directors, in its sole discretion, may authorize the payment of cash incentive compensation to Executive from time to time. Payment of incentive compensation will not set a precedent requiring or suggesting that similar incentive compensation will be paid in the future. (e) Insurance Policies i. Term Life Insurance. During the Employment Period, Bank shall provide term life insurance coverage for Executive in such form and amount as is not less favorable than that coverage provided by the Bank to other Bank employees from time to time generally. ii. Key Man Insurance. During the Employment Period, Executive shall permit the Bank to insure his life under a policy or policies of life insurance issued by an insurance company or companies selected by the Bank, and to name the Bank as sole beneficiary thereunder. Executive agrees to submit to any physical examinations which may be reasonably required in connection with such policies. iii. Disability Insurance. During the Employment Period, Bank shall provide Executive with disability insurance coverage in such form and amount consistent with that provided to other Bank employees generally. (f) Benefits. During the Employment Period, Executive shall be entitled to and shall be included in any employee welfare and retirement plan or program of the Bank available generally to its employees and/or officers including, without limitation, plans for hospital services, medical services benefits, sick pay, dental and other health plans. (g) Stock Plan. During the Employment Period, Executive may be included in any stock incentive or stock compensation plan as the Board of Directors of the Bank may determine. 4. Disability. If during any period in which Executive shall have continued to perform his duties as an employee of the Bank, Executive shall incur a total or partial disability (as defined in subparagraph (d) below), then until the earlier of (a) 180 days after the date such disability is incurred, or (b) the expiration of the term of the Employment Period (either shall be termed the "Disability Period"), the Bank shall pay Executive during the Disability Period on the basis of his then-regular salary (any payments that Executive does or would otherwise receive pursuant to the Bank's disability coverage for employees generally for this period of disability shall be set off against these payments). (a) If Executive's total disability shall terminate prior to the expiration of the Employment Period, then Executive shall return to full and active employment with the Bank under the terms of this Agreement; provided that if he shall again become disabled within a period of three (3) months after such return, other than by reason of an event which is not causatively related to his original disability, then Executive shall be deemed to have been continuously disabled from the date he incurred his original disability; (b) In the event Executive shall incur a partial disability (as defined in (d) below), then during the period of the partial disability, the compensation to be paid to him in consideration of his services to the Bank shall be equitably adjusted to reflect the time that he is able to devote to the affairs of and the value of the service he is able to impart to the Bank; provided, however, that during the Disability Period, the compensation shall not be less than Executive would have received under this Section 4 had he been totally rather than partially disabled (this is to say, he shall receive his then-regular salary for that Disability Period); (c) Payments to Executive under this Section 4 shall be reduced by the amounts, if any, as may be payable to him by reason of his disability under policies of insurance maintained and/or paid for by the Bank; (d) As used in this Agreement, the term "total disability" shall mean a disability such that, for physical or mental reasons, Executive is unable to perform substantially his obligations hereunder for the reasonably foreseeable future (not less than 90 days), as determined by the Bank's Board of Directors after considering competent medical evidence. As used in this Agreement, the term "partial disability" shall mean a disability, other than a total disability, such that, for physical or mental reasons, Executive is unable to perform a material portion of his usual duties at the Bank on a full-time basis. As determined by the Bank's Board of Directors after considering competent medical evidence. 5. Termination. (a) Termination by Death. If Executive dies during the Employment Period, the Bank's obligations under this Agreement shall terminate immediately and Executive's estate shall be entitled to all arrearages of salary and expenses but shall not be entitled to further compensation. (b) Termination With or Without Cause. This Agreement and Executive's employment with the Bank may be terminated for cause at any time upon thirty (30) days advance written notice from the Bank to Executive, which notice shall set forth the facts on which the termination is based. Upon termination, Executive shall be entitled to all arrearages of salary and expenses, but shall not be entitled to further compensation or benefits. As used in this Agreement, and without limitation, "cause" shall include: (i) Executive's conviction by any trial court of any crime involving fraud, embezzlement, theft or dishonesty; (ii) serious willful misconduct by Executive, including personal dishonesty in connection with Bank business or customers or the breach of a fiduciary duty to the Bank or its customers; (iii) the total disability of Executive, as defined in Paragraph 4 above; (iv) any material breach by Executive of this Agreement; or (v) if the Bank's regulatory authorities issue an order removing Executive from his positions at the Bank, or if such regulatory authorities inform the Directors that continuation of Executive in his position at the Bank would constitute an unsafe and unsound banking practice. Executive's employment may be terminated by the Bank without cause at any time, provided that, in such event, Bank shall pay Executive, in one lump-sum payment paid within 30 days after such termination, an amount equal to the higher of the following: (i) that amount which is equal to the aggregate amount of salary payments that would be made to Executive for the remainder of the Employment Period, calculated at the Executive's then annual base salary; or (ii) that amount which is equal to the number of Executive's full years of service to the Bank at the time of termination multiplied by a number derived by dividing his then annual base salary by twenty-six (26). In addition, if Executive is terminated without cause, the Bank shall either continue to carry Executive at no cost to him under the Bank's employee hospital, medical services, dental and other health plans for the remainder of the Employment Period, or, if he is not eligible for continued coverage under such plans, pay the cost of similar coverage for Executive pursuant to COBRA or similar private insurance plans offering comparable coverage. Also, if Executive is terminated without cause, the Bank agrees to provide Executive, at his request, with outplacement services for a period not to exceed one year after the date of termination, provided the Bank's obligation to provide these services shall not exceed a maximum aggregate cost of $25,000. Executive, should he elect to receive such services, agrees to pursue possible employment opportunities diligently and in good faith, and to cooperate in all reasonable respects with the requests and instructions of the outplacement services firm. A termination "without cause" shall mean any termination not satisfying the "cause" criteria specified in this Paragraph 5(b). (c) Immediate Cessation of Employment. In the event Executive's employment terminates pursuant to subparagraph (b), the Bank may further direct Executive to cease immediately his activities on behalf of the Bank and to discontinue using any of the Bank's facilities; provided, however, that in the event of these directions, the Bank shall continue to provide Executive with salary and other benefits required by this Agreement until the expiration of the notice period set forth in sub-paragraph (b). (d) Survival. Anything in this Agreement to the contrary not withstanding, the provisions of Paragraphs 6, 7, 8, 9 and 10 shall survive the termination of Executive's employment with the Bank. 6. Non-Competition Agreement. (a) Executive absolutely and unconditionally covenants and agrees with the Bank that, from the period commencing on the date of this Agreement and continuing for a period of one (1) year following the termination of his employment as provided for in this Agreement, Executive will not, anywhere in the Restricted Area (as defined in subparagraph (b) below), either directly or indirectly, solely or jointly with any other person or persons (a "Competitor"), as an employee, consultant, or advisor (whether or not engaged in business for profit), or an individual proprietor, partner, shareholder (provided that share ownership of less than 5% of the share voting power shall be permitted), director, officer, joint venturer, investor (provided that such investment will not be a violation if it is limited to less than 5% of the ownership of such entity), lender, or in any other capacity, compete with the business of the Bank (i) as conducted as of the date of execution of this Agreement; or (ii) as conducted during the Employment Period; or (iii) as conducted as of the end of the Employment Period; or (iv) as proposed to be conducted by the Bank as of the end of the Employment Period (collectively, the "Business"). (b) As used in this Section 6: (i) the term "compete" shall mean engaging, participating, or being involved in any respect in the business of banking, or furnishing any aid, assistance or service of any kind to any person in connection with, the Business; (ii) the term "Restricted Area" shall refer to a Competitor which has its home office in Norwalk, or which has a branch or other place of business in Norwalk and where Executive is based or in which he spends the majority of his office time. (c) If a court or arbitration panel concludes through appropriate proceedings that Executive has breached the covenant set forth in this Section, the term of the covenant shall be extended for a term equal to the period for which Executive is determined to have breached the covenant. 7. Covenant Not to Disclose. Executive agrees that, by virtue of the performance of the normal duties of his position with the Bank and by virtue of the relationship of trust and confidence between Executive and the Bank, he possesses and will possess certain data and knowledge of operations of the Bank which are proprietary in nature and confidential. Executive covenants and agrees that he will not, at any time, whether during the term of this Agreement or otherwise, reveal, divulge or make known to any person(other than the Bank) or use for his own account, any confidential or proprietary record, data, trade secret, price policy, rate structure, personnel policy, method or practice of obtaining or doing business by the Bank, or any other confidential or proprietary information whatever (the "Confidential Information"), whether or not obtained with the knowledge and permission of the Bank and whether or not developed, devised or otherwise created in whole or in part by his efforts. Executive further covenants and agrees that he shall retain all such knowledge and information which he shall acquire or develop respecting such Confidential Information in trust for the sole benefit of the Bank and its successors and assigns. 8. Non-Interference Covenant. Executive covenants and agrees that he will not, for a period of one (1) year following the termination of this Agreement, directly or indirectly, for whatever reason, whether for his own account or for the account of any other person, firm, corporation or other organization: (i) solicit, employ, or otherwise interfere with any of the Bank's contracts or relationships with any employee, officer, director or any independent contractor who is employed by or associated with the Bank at the time of termination of this Agreement; or (ii) actively solicit, or otherwise actively interfere with any of the Bank's contracts or relationships with any independent contractor, customer, client or supplier of the Bank. 9. Business Materials and Property Disclosure. All written materials, records and documents made by Executive or coming into his possession concerning the business or affairs of the Bank shall be the sole property of the Bank and, upon termination of his employment with the Bank, Executive shall deliver the same to the Bank and shall retain no copies. Executive shall also return to the Bank all other property in his possession owned by the Bank upon termination of his employment. 10. Breach by Executive. It is expressly understood, acknowledged and agreed by Executive that (i) the restrictions contained in Sections 6, 7, 8 and 9 of this Agreement represent a reasonable and necessary protection of the legitimate interests of the Bank and that his failure to observe and comply with his covenants and agreements in those Sections will cause irreparable harm to the Bank; (ii) it is and will continue to be difficult to ascertain the nature, scope and extent of the harm; and (iii) a remedy at law for such failure by Executive will be inadequate. Accordingly, it is the intention of the parties that, in addition to any other rights and remedies which the Bank may have in the event of any breach of said Sections, the Bank shall be entitled, and is expressly and irrevocably authorized by Executive, to demand and obtain specific performance, including without limitation, temporary and permanent injunctive relief, and all other appropriate equitable relief against Executive in order to enforce against Executive, or in order to prevent any breach or any threatened breach by Executive, of the covenants and agreements contained in those Sections. 11. Change of Control. If during the Employment Period and thereafter (provided the Executive is then a full-time officer of the Bank) there is a "Change of Control" of the Bank, the Executive shall be entitled to receive a severance payment in consideration of services previously rendered to the Bank. The severance payment shall be made as a lump sum cash payment as provided for herein, unless the Executive and Bank enter into a new employment agreement within two months after the Change of Control. The amount of such severance payment shall equal three (3) times the Executive's average annual compensation which was payable by the Bank and was includible in the Executive's gross income for federal income tax purposes with respect to the five (5) most recent taxable years ending before the date on which the Change of Control occurs (or for such shorter period as Executive has been employed by the Bank), less one dollar. Payment under this Section 11 shall be in lieu of any amount due or payable to the Executive under Sections 3 and 5. Payment under this Section 11 shall be paid in full within 90 days following the date of the Change of Control and shall not be reduced by any compensation which the Executive may receive from other employment with another employer after termination of the Executive's employment with the Bank. Notwithstanding any other provision of this Agreement or of any other agreement, understanding or compensation plan, Bank shall not pay, and Executive shall not receive, any payment which would be deemed (taking into account all payments, rights and benefits whether or not under this Agreement) to be an "excess parachute payment" under Section 280G of the Internal Revenue Code of 1986, as amended, and the amount of the payment hereunder shall be reduced to the extent necessary to ensure that Executive receives no "parachute payment" in connection with such Change of Control. (a) "Change of Control" shall be deemed to have occurred if: (1) a Person (as defined below) beneficially owns (i.e. directly, indirectly or acting through one or more other persons owns, controls or has power to vote) 25% or more of any class of voting securities of Bank; (2) a Person controls in any manner the election of more than 20% of the directors of Bank; or (3) the Board of Directors of Bank determines that a Person directly or indirectly exercises a controlling influence over the management or policies of Bank. A "Change of Control" shall be deemed not to have occurred if (A) such event is mandated or directed by a regulatory body having jurisdiction over the Bank's operations; or (B) it occurs pursuant to the terms of a plan for the acquisition of the capital stock of the Bank by a newly formed bank holding company if in the consummation of such plan the shareholders of Bank will receive, pro rata, all of the common stock of such bank holding company; unless, in such conversion, a Person satisfies sub-paragraph (1), (2) or (3) above. A "Person" shall include a natural person, corporation, or other entity. When two or more persons act as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding or disposing of Bank capital stock, such partnership, syndicate or group shall be considered a Person. Beneficial ownership shall be determined under the then current provisions of Securities Exchange Act Rule 13d-3; Reg. Section 240. 13d-3, or their successor provision(s). This Section 11 shall survive and continue beyond the term of employment set forth in Section 1 for as long as the Executive is a full- time officer of the Bank. 12. Regulatory Restrictions. Notwithstanding any provision to the contrary in this Agreement, the Bank shall not be required under this Agreement to continue Executive in his position(s) at the Bank, or to make any payments to Executive, if the regulatory authorities having jurisdiction over the Bank order the Executive's removal from the Bank, or if such regulations determine that any payment would constitute an illegal "excess parachute" payment under 12 U.S.C. Section 1828(k) and regulations promulgated thereunder, or an "unsafe or unsound banking practice" pursuant to 12 U.S.C. Section 1818(b). 13. Arbitration. Any dispute whatsoever relating to the interpretation, validity or performance of this Agreement, or any other dispute arising out of this Agreement which cannot be resolved by any party upon thirty days' written notice to the other party shall be settled by arbitration in the City of Norwalk, Connecticut, in accordance with the rules then prevailing of the American Arbitration Association, and the judgment upon the award rendered by the arbitrators may be entered in any court of competent jurisdiction. It is the purpose of this Agreement, and the intent of the parties hereto to make the submission to arbitration of any dispute or controversy arising out of this Agreement, as set forth hereinabove, an express condition precedent to any legal or equitable action or proceeding of any nature whatsoever. 14. General Provisions. (a) All notices required by this Agreement shall be in writing and shall be sufficiently given if delivered or mailed by registered or certified mail, return receipt requested, to the parties at their respective addresses set forth below. Any party may specify a different address by written notice to the other, in accordance with this Section. All notices shall be deemed to have been given as of the date so delivered or mailed. To the Bank Norwalk Savings Society 48 Wall Street Norwalk, CT 06852 To Executive: Marcus I. Braverman 3280 Princeton Drive Yorktown Heights, NY 10598 (b) Except insofar as Executive may be subject to general policies adopted by the Bank from time to time, this Agreement contains the entire agreement between the parties, and there are no other representations, warranties, conditions or agreements relating to the subject matter of this Agreement. (c) The waiver by any party of any breach or default of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. (d) This Agreement may not be changed orally but only by an agreement in writing duly executed on behalf of the party against which enforcement of any waiver, change, modification, consent or discharge is sought. (e) This Agreement shall be binding upon and inure to the benefit of the Bank and Executive and their respective successors, assigns, heirs and legal representatives. Insofar as Executive is concerned, this Agreement is personal and Executive's duties under it shall not be assigned by Executive. (f) Each of the parties agrees to execute all further instruments and documents and to take all further action as the other party may reasonably request in order to effectuate the terms and purposes of this Agreement. (g) This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same instrument. (h) This Agreement shall be construed pursuant to and in accordance with the laws of the State of Connecticut. (i) Wherever used in this Agreement, the masculine, feminine and neuter pronouns shall be fully interchangeable, and the singular shall include the plural where the context so requires and vice versa. (j) If any term or provision of this Agreement is held or deemed to be invalid or unenforceable, in whole or in part, by a court of competent jurisdiction, such term or provision shall be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. NORWALK SAVINGS SOCIETY By ------------------------------ Chairman of Board of Directors EXECUTIVE ------------------------------ Marcus I. Braverman EX-10.4.2 21 AMENDMENT Exhibit 10.4.2 AMENDMENT NO. ONE TO EMPLOYMENT AGREEMENT Amendment No. One, dated as of April 1, 1994, to Employment Agreement, dated as of March 1, 1994, between NORWALK SAVINGS SOCIETY, a mutual savings bank organized and existing under the laws of the State of Connecticut with headquarters located in Norwalk, Connecticut (the "Bank"), and MARCUS I. BRAVERMAN of Yorktown Heights, New York ("Executive"). RECITALS WHEREAS, the Bank and the Executive mutually desire to amend the Employment Agreement, dated as of March 1, 1994. NOW THEREFORE, the parties agree as follows: 1. Section 5(b) of the Employment Agreement shall be amended to include the following sentence as the new last sentence of such Section: "In no event, however, shall the lump-sum payment described in the fourth sentence of this Section 5(b) be equal to or in excess of three times the Executive's then annual base salary." 2. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same instrument. 3. This Amendment No. One to Employment Agreement shall be construed pursuant to and in accordance with the laws of the State of Connecticut. IN WITNESS WHEREOF, the parties have executed this Amendment No. One to Employment Agreement on the date first above written. NORWALK SAVINGS SOCIETY By ------------------------------------- Chairman of the Board of Directors EXECUTIVE ---------------------------------- Marcus I. Braverman EX-10.4.3 22 AMENDMENT Exhibit 10.4.3 AMENDMENT NO. TWO TO EMPLOYMENT AGREEMENT Amendment No. Two, dated as of March 1, 1995, to Employment Agreement, dated as of March 1, 1994, between NORWALK SAVINGS SOCIETY, a capital stock savings bank organized and existing under the laws of the State of Connecticut with headquarters located in Norwalk, Connecticut (the "Bank"), and MARCUS I. BRAVERMAN of Yorktown Heights, New York ("Executive"). RECITALS WHEREAS, the Bank and the Executive mutually desire to amend the Employment Agreement, dated as of March 1, 1994 (the "Agreement"). NOW THEREFORE, the parties agree as follows: 1. Section 1 of the Agreement shall be amended to extend the term of employment from March 1, 1995 to March 1, 1997, unless subsequently extended or sooner terminated as provided in the Agreement. All other provisions of the Agreement shall remain in full force and effect, except insofar as they may be modified by a Change of Control Agreement by and between Executive and Bank dated as of February 1, 1995. 2. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same instrument. 3. This Amendment No. Two to Employment Agreement shall be construed pursuant to and in accordance with the laws of the State of Connecticut. IN WITNESS WHEREOF, the parties have executed this Amendment No. Two to Employment Agreement on the date first above written. NORWALK SAVINGS SOCIETY By ------------------------------------- Chairman of the Board of Directors EXECUTIVE ---------------------------------- Marcus I. Braverman EX-10.4.4 23 AMENDMENT Exhibit 10.4.4 AMENDMENT NO. THREE TO EMPLOYMENT AGREEMENT Amendment No. Three, dated as of November 7, 1995, to Employment Agreement, dated as of March 1, 1994, amended by Amendment No. One dated as of April 1, 1994, and Amendment No. Two dated as of March 1, 1995, between NORWALK SAVINGS SOCIETY, a capital stock savings bank organized and existing under the laws of the State of Connecticut with headquarters located in Norwalk, Connecticut (the "Bank"), and MARCUS I. BRAVERMAN of Yorktown Heights, New York ("Executive"). RECITALS WHEREAS, the Bank and the Executive mutually desire to amend the Employment Agreement. NOW THEREFORE, the parties agree as follows: 1. Section 1 of the Agreement shall be amended to provide that the term of employment shall be extended to March 1, 1999, unless subsequently extended or sooner terminated as provided in the Agreement. 2. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same instrument. 3. This Amendment No. Three to Employment Agreement shall be construed pursuant to and in accordance with the laws of the State of Connecticut. The Agreement shall otherwise remain in full force and effect as originally written, except that the Change of Control provisions of Section 11 have been and are superseded by a separate agreement regarding change of control between the Executive and the Bank. IN WITNESS WHEREOF, the parties have executed this Amendment No. Three to Employment Agreement on the date first above written. NORWALK SAVINGS SOCIETY By ------------------------------------- Chairman of the Board of Directors EXECUTIVE ----------------------------------------- Marcus I. Braverman EX-10.4.5 24 AMENDMENT Exhibit 10.4.5 AMENDMENT NO. FOUR TO EMPLOYMENT AGREEMENT Amendment No. Four, dated as of ________________, 1997, to Employment Agreement, dated as of March 1, 1994, amended by Amendment No. One dated as of April 1, 1994, Amendment No. Two dated as of March 1, 1995, and Amendment No. Three dated as of November 7, 1995, between NORWALK SAVINGS SOCIETY, a capital stock savings bank organized and existing under the laws of the State of Connecticut with headquarters located in Norwalk, Connecticut (the "Bank"), and MARCUS I. BRAVERMAN of Yorktown Heights, New York ("Executive"). RECITALS WHEREAS, the Bank and the Executive mutually desire to amend the Employment Agreement. NOW THEREFORE, the parties agree as follows: 1. Section 1 of the Agreement shall be amended to provide that the term of employment shall be extended to March 1, 2001, unless subsequently extended or sooner terminated as provided in the Agreement. 2. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same instrument. 3. This Amendment No. Four to Employment Agreement shall be construed pursuant to and in accordance with the laws of the State of Connecticut. The Agreement shall otherwise remain in full force and effect as originally written, except that the Change of Control provisions of Section 11 have been and are superseded by a separate agreement regarding change of control between the Executive and the Bank. IN WITNESS WHEREOF, the parties have executed this Amendment No. Four to Employment Agreement on the date first above written. NORWALK SAVINGS SOCIETY By ------------------------------------- Chairman of the Board of Directors EXECUTIVE ----------------------------------------- Marcus I. Braverman EX-10.5 25 DIVESTITURE AGREEMENT Exhibit 10.5 AGREEMENT THIS AGREEMENT is dated as of the first day of May, 1997 and made and entered into by NORWALK SAVINGS SOCIETY, a Connecticut chartered stock savings bank (the "Bank") having an office located at 48 Wall Street, Norwalk, Connecticut and WESTPORT ASSET MANAGEMENT, INC., a Connecticut corporation having an office located at 253 Riverside Avenue, Westport, Connecticut ("Westport"). WHEREAS, the Bank's Articles of Incorporation (the "Articles") authorize 7,000,000 shares of common stock, par value 0.01, of which approximately 2,442,129 are issued and outstanding (the "Bank Common Stock", which shall include for purposes of this Agreement, any larger or smaller amount of shares of Bank Common Stock which may hereafter be issued and outstanding); WHEREAS, Westport has filed a Form F11-A under the Securities Exchange Act of 1934 indicating that 439,600 shares (the "Westport Shares") or approximately 18.0% of all outstanding shares of Bank Common Stock are held in certain discretionary managed accounts of Westport ("Managed Accounts") and Westport has disclaimed beneficial ownership of such shares beneficially owned by such persons and has disclaimed the existence of a group; WHEREAS, (i) certain provisions in the Articles prohibit any person from acquiring or offering to acquire 5% or more of the outstanding shares of Bank Common Stock until June 15, 1997 without prior approval of the Bank's Board of Directors and, in addition, prohibit any person from acquiring 10% or more of the outstanding shares of Bank Common Stock at any time without prior approval by a 2/3 vote of the Bank's shareholders and the Banking Commissioner of the State of Connecticut (the "Commissioner"), the Federal Deposit Insurance Corporation (the "FDIC"), and/or the Federal Reserve Board (the "FRB"), as appropriate; WHEREAS, Westport does not acknowledge that the ownership of Westport Shares as reported in the Form F11-A violates certain provisions of the Articles but is willing to enter into this Agreement to avoid any actions that the Bank may choose to pursue arising out of the approximately 18.0% ownership as reported; WHEREAS, the Bank does not acknowledge that Westport's ownership of the Westport Shares does not violate certain provisions of the Articles, but is willing to enter into this Agreement to avoid the time and expense of enforcing its provisions while at the same time achieving a result which is considered to be consistent with the corporate goals of the Bank; WHEREAS, Westport has represented to the Bank and their attorneys that Westport does not hold the shares of the Bank Common Stock with the purpose of changing or influencing management policies of the Bank; and WHEREAS, Westport and the Bank have proposed entering into an agreement whereby Westport will divest of certain of the Westport Shares on the terms and conditions as described herein. NOW, THEREFORE, in consideration of the mutual promises, representations and warranties contained herein, the Bank and Westport hereby agree as follows: 1. Termination Date. This Agreement shall terminate (a) one year from the execution date of this Agreement or (b) at such time that Westport shall be the Beneficial Owner (as hereinafter defined) of no more than the Maximum Stock Ownership Limit (as hereinafter defined), whichever shall occur first (the "Termination Date"). 2. Westport Divestiture. (a) On or before the Termination Date, Westport agrees that it shall be the Beneficial Owner (as hereinafter defined) of less than 10% of the Bank Common Stock (the "Maximum Ownership Limit"). Westport shall divest and relinquish ownership of a sufficient number of Westport Shares in order to comply with the Maximum Stock Ownership Limit in any manner which it deems advisable including, but not limited to, selling, donating, pledging, exchanging or forfeiting the Westport Shares. The term "Beneficial Owner" shall have the same meaning as set forth in Rule 13d-3 to the Securities and Exchange Act of 1934, as amended, and shall include any person who, directly or indirectly, through any contract arrangement, understanding, relationship, or otherwise has or shares (i) voting power which includes the power to vote, or to direct the voting of such securities or (ii) investment power, which includes the power to dispose of, or to direct the disposition of such securities. (b) Until the Termination Date, Westport agrees to furnish to the Bank, on or before the third business day of the month, a written summary showing Westport's then-current holdings of Bank Common Stock and a summary of each transaction in the Westport Shares entered into by Westport during the previous calendar month, provided however, that Westport shall not furnish such report to the Bank if Westport did not complete a transaction in the Westport Shares in the previous calendar month. (c) Until the Termination Date, the Bank agrees not to seek to exercise its Liquidation Right (as hereinafter defined) to require the liquidation of any of the Westport Shares, provided, that Westport shall be in compliance with this Agreement and, provided further, that Westport shall not have breached or otherwise violated this Agreement, which breach or violation shall remain uncured for a period of 15 days or more. (d) In the event that Westport fails to comply with the Maximum Stock Ownership Limit by the Termination Date, Westport agrees that the Bank may, in its sole discretion, require Westport to liquidate the Excess Shares (as defined below) in accordance with certain provisions in the Articles as in effect on the date of this Agreement (the "Liquidation Right"). The Bank's failure to exercise its Liquidation Right on or after the Termination Date shall not constitute a waiver by the Bank of its right to exercise such Liquidation Right at any future time. (e) In the event that Westport fails to comply with the Maximum Stock Ownership Limit by the Termination Date, the Bank reserves the right to take any other action at law or in equity that may be available to it. 3. Dividends. During the term of this Agreement, the owners of the Westport Shares shall be entitled to collect and receive all dividends that may be paid or accrue upon their shares of Bank Common Stock. 4. No Additional Acquisition. Until the Termination Date of this Agreement, Westport agrees that it shall not purchase any additional shares of Bank Common Stock. After the Termination Date, Westport may purchase such amounts of Bank Common Stock to the extent permitted by the Bank's Articles of Incorporation and applicable law. 5. Changes in Common Stock. Until the Termination Date, any shares or other securities that are issued on or in exchange for the shares of Bank Common Stock (other than the shares or securities of any other corporation issued to the stockholders of the Bank pursuant to a plan of merger) by reason of any stock split, stock dividend, consolidation of shares, reclassification or corporate reorganization (including an exchange of shares pursuant to the formation of a bank holding company), shall be deemed to be shares of Bank Common Stock for purposes of this Agreement. 6. Representations, Warranties and Covenants. (a) Westport hereby makes the following representations and warranties to the Bank: (i) Westport represents and warrants that, as of the date of this Agreement, it is the shareholder of record of all of the Westport Shares as set forth on Exhibit A to this Agreement. (ii) Westport represents and warrants that it does not hold the shares of the Bank's stock with the purpose of changing or influencing management policies of the Bank. (iii) Westport represents and warrants that it has full power to enter into this Agreement. (iv) Westport represents and warrants that, prior to the date of this Agreement, it has not executed or delivered any proxy or entered into any voting agreement, voting trust, or any other agreement that would adversely affect the Bank's ability to enforce this Agreement. (v) Westport represents and warrants that all consents of the Beneficial Owners of shares of Bank Common Stock required to enter into this Agreement, if any, have been obtained and that Westport's organizational documents and bylaws do not prevent it from entering into this Agreement. (vi) Westport covenants and warrants that it will not take any action inconsistent with the purposes of this Agreement. (b) The Bank hereby makes the following representations and warranties: (i) The Bank represents and warrants that it has full power to enter into this Agreement. (ii) The Bank represents and warrants that all corporate action required to enter into this Agreement has been obtained and that the Bank's Articles of Incorporation and bylaws do not prevent it from entering into this Agreement. (iii) The Bank covenants and warrants that it will not take any action inconsistent with the purposes of this Agreement. 7. Enforceability; Validity. Westport and the Bank expressly agree that this Agreement shall be specifically enforceable in any court of competent jurisdiction in accordance with its terms against it and that all of the covenants and agreements contained in this Agreement shall be binding upon and enforceable against Westport and the Bank and their successors, assigns, or other legal representatives. This Agreement constitutes the entire agreement between the parties as to the subject hereto, and shall take precedence over any actual or alleged prior agreement, whether written or oral. This Agreement may be modified only in writing executed by the parties hereto, their successors, assigns or other legal representatives. 8. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut. 9. Severability. If any provision of this Agreement shall be declared void or unenforceable by a court or administrative board of competent jurisdiction, such provision shall be deemed to have been severed from the remainder of this Agreement and this Agreement shall continue in all respects to be valid and enforceable. 10. Remedies for Breach. In the event of a breach or repudiation of this Agreement by Westport or the Bank, the nonbreaching party shall have all remedies available at law or equity, including the right to the specific performance of this Agreement. 11. Notices. All notices, offers, acceptances, requests and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered or mailed postage prepaid, first class, by certified or registered mail to the parties hereto at the addresses set forth below or to such other address as any party hereto shall designate to the other parties in writing: If to the Bank: Norwalk Savings Society. 45 Wall Street Norwalk, Connecticut 0618-2554 Attention: Robert T. Judson, President with a copy to: William W. Bouton III, Esquire Tyler Cooper & Alcorn City Place, 35th Floor 185 Asylum Street Hartford, Connecticut 06103 If to Westport: Westport Asset Management, Inc. 253 Riverside Avenue Westport, Connecticut 06511 Attention: Andrew J. Knuth, Chairman with a copy to: Robert M. Taylor, III, Esquire Day Berry & Howard CityPlace Hartford, Connecticut 06103 12. Amendment. This Agreement may not be amended, modified or altered in any manner unless and until such change is reduced to writing making specific reference to this Agreement and signed by the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of this first day of May, 1997. NORWALK SAVINGS SOCIETY /s/ Robert T. Judson By: Robert T. Judson Its President WESTPORT ASSET MANAGEMENT /s/ Andrew J. Knuth By: Andrew J. Knuth Its Chairman EX-21 26 SUBSIDIARIES Exhibit 21 Subsidiaries of NSS Bancorp, Inc. 1. Norwalk Savings Society EX-99.1 27 FORM F-2 Exhibit 99.1 FEDERAL DEPOSIT INSURANCE CORPORATION WASHINGTON, D.C. 20429 Form F-2 ANNUAL REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1996 FDIC Insurance Certificate No. 17944 NORWALK SAVINGS SOCIETY ----------------------- (Exact name of bank as specified in its charter) 48 Wall Street, Norwalk, CT 06852 --------------------------------- (Address of principal executive offices) Connecticut ----------- (State or other jurisdiction of incorporation or organization) 06-0475300 ---------- (I.R.S. Employer Identification Number) (203) 838-4545 -------------- (Bank's telephone number, including area code) Indicate by check mark if disclosure of delinquent filers pursuant to Item 10 is not contained herein, and will not be contained, to the best of the bank's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form F-2 or any amendment of this Form F-2. [ ] Indicate by check mark whether the Bank (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Bank was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the Bank's classes of common stock, as of the latest practicable date: 2,442,129 shares of Common Stock, par value $.0l per share as of March 7, 1997 As of March 7, 1997, the aggregate market value of the 2,442,129 shares of common stock of the registrant issued and outstanding on such date was $61,663,757.25. As of that same date, the aggregate market value of the voting stock held by non-affiliates of the registrant was $43,229,464.50. PART I. - ------- ITEM 1. BUSINESS - ----------------- General Historically, the principal business of the Bank has been attracting deposits from the general public, extending loans to individuals in the community for the purchase or construction of one- to four-family residences, making consumer installment loans, investing in securities, and providing typical consumer banking services. During the early 1980's, the Bank also began to emphasize loans secured by multi-family (e.g., five or more units) and commercial real estate, as well as construction loans, land acquisition and development loans and, to a lesser extent, commercial business, consumer and other loans. As a result, the Bank experienced dramatic growth as assets increased from $185 million in 1980 to $509 million in 1988. As the local and regional economies deteriorated in 1989, the Bank experienced increasing levels of problem loans and losses primarily resulting from delinquencies in commercial real estate, construction and land acquisition and development loans. Since 1990, a significant portion of the Bank's resources has been devoted to resolving problems associated with high levels of non-performing assets, including sales of OREO, loan restructurings and development for sale of a number of residential subdivisions and condominiums held as OREO. Since that time, the Bank has limited multi-family commercial real estate and construction lending to borrowers purchasing OREO from the Bank and to borrowers refinancing or restructuring currently outstanding loans. The Bank has since returned the focus of its lending activities to one- to four-family residential lending and is beginning to offer asset-based commercial and industrial loans to local small businesses. The Bank recently resumed commercial and commercial real estate lending. The principal sources of funds for the Bank's activities are deposit accounts, amortization and prepayment of loans, borrowings from the Federal Home Loan Bank (FHLB) and funds provided from operations. The Bank's principal sources of income are interest on loans and mortgage-backed securities, and interest and dividends on investments. In recent years, the Bank also has realized income from the sale of loans and mortgage-backed and investment securities. To a lesser extent, the Bank realizes other non-interest income, including income from service charges on deposit accounts and income from its Trust Department and Savings Bank Life Insurance ("SBLI"). Market Area and Competition Norwalk Savings Society (NSS) has seven retail banking offices located in Norwalk, Wilton, Westport, Georgetown, and Fairfield. All of the Bank's office facilities and its primary market area are located in Fairfield County, Connecticut. The State of Connecticut is reported to be the wealthiest state in the United States, and Fairfield County among the wealthiest counties in terms of per capita income. Fairfield County is located in the southwestern corner of Connecticut in close proximity to New York City. Based on 1990 census data, Fairfield County had a population of over 828,200 with approximately 307,800 households and average household income of $72,700. At December 31, 1996, the unemployment rate for the Norwalk metropolitan area was 3.0% compared to 4.6% for the State of Connecticut as a whole. Fairfield County has a diversified mix of industry groups, including manufacturing, service, government and corporate offices. Fairfield County is the location for the headquarters of 19 Fortune 500 industrial companies, 6 Fortune 500 service companies and 62 of Connecticut's largest 100 companies. The southwestern portion of Fairfield County, which includes the towns of Norwalk, Wilton and Westport, reported as of April 1992 that 43% of its residents over 25 years of age had completed four or more years of college, as compared to 27.2% for the State as a whole. Fairfield County's industrial economy includes the manufacture of helicopters and other aircraft, sophisticated electronics, missile parts, clothing and precision instrumentation. In addition to the headquarters of large corporations, Fairfield County is the home for an increasing number of small businesses as well as a large number of research and development laboratories, which take advantage of the County's convenient location, access to investment capital and sales opportunities, and a highly educated labor force. -1- As of December 31, 1996, the latest date for which information is available, the Bank ranked as the third largest depository institution headquartered in Fairfield County. In addition, the Bank ranked 6th out of 181 mortgage lenders in Fairfield County based on the number of mortgages originated in 1996. Intense competition exists in all major lines of business in which the Bank is presently engaged. The Bank's market area has a significant number of financial institutions with offices of commercial banks, thrift institutions and credit unions in Fairfield County alone. Due to its proximity and the number of commuters traveling to New York City, the Bank also faces intense and varied competition for loans and deposits with financial institutions headquartered in New York, many of which have, or have indicated plans to have, offices in Fairfield County. Recent federal legislation expanding interstate banking options may cause this type of competition to increase. The Bank faces additional competition for deposits from short-term money market funds and other securities funds offered by brokerage firms and other financial institutions as well as significant competition for retail products from insurance companies. Lending Activities General. Historically the Bank, like most other savings institutions, concentrated its lending activities on the origination of loans secured by first mortgage liens for the purchase or refinancing of one- to four-family residential properties. Through the 1980's, in an effort to diversify its loan portfolio and originate higher yielding adjustable rate loans, the Bank expanded its lending activities to include a significant volume of permanent and construction financing of a wide variety of real estate properties, including residential subdivision developments, condominium developments, land and various types of commercial properties. The Bank also emphasized various home equity, home improvement, commercial business and consumer loan products. However, following a sharp downturn in the New England real estate markets, a significant portion of the Bank's real estate loans became non-performing. The Bank has refocused its lending activities on maintaining and expanding its market presence as a one- to four-family residential lender and on maintaining current banking relationships with borrowers that have good credit histories with the Bank. The Bank is also engaged in lending activities to facilitate the sale of OREO and the refinancing and restructuring of non-performing and other loans. The Bank has expanded home equity, home improvement and direct consumer lending and has begun to offer small business lending. The Bank recently resumed commercial and commercial real estate lending on a conservative basis. A commercial lending department has been established and experienced commercial lenders have been hired to underwrite and service loans. The Bank is also engaged in indirect auto leasing on a limited basis. Such auto lease loans are secured by an assignment of individual consumer auto leases. NSS loan officers underwrite the individual auto lease loans prior to accepting the credit. In addition, the Bank is engaged in airplane financing on a limited basis. -2- Loan Portfolio Composition. The following table sets forth, at the dates indicated, information concerning the Bank's loan portfolio in dollar amounts and in percentages, by type of loan.
At December 31, ------------------------------------------------------------------------- 1996 % 1995 % 1994* % ---- --- ---- --- ----- --- (Dollars in thousands) Real Estate Loans: One- to four-family adjustable rate............ $302,686 72.28% $231,168 64.13% $180,275 62.07% One- to four-family fixed rate ................ 31,933 7.62 56,360 15.63 42,840 14.75 Multi-family .................................. 7,450 1.78 8,902 2.47 8,605 2.96 Commercial real estate ........................ 46,272 11.05 44,914 12.46 41,367 14.24 Land .......................................... 828 0.20 1,290 0.36 1,806 0.62 Construction .................................. 1,227 0.29 1,617 0.45 987 0.35 -------- ------ -------- ------ -------- ------ Total ....................................... 390,396 93.22 344,251 95.50 275,880 94.99 -------- ------ -------- ------ -------- ------ Other Loans: Commercial business ........................... 8,425 2.01 1,485 0.41 30 0.01 Home equity lines of credit ................... 7,127 1.70 5,698 1.58 6,570 2.25 Home improvement and second mortgages ........................... 2,568 0.61 3,422 0.95 4,392 1.51 Passbook ...................................... 1,510 0.36 1,634 0.45 1,761 0.62 Credit Cards................................... 991 0.24 - - - - Other consumer ................................ 7,801 1.86 3,985 1.11 1,783 0.62 -------- ------ -------- ------ -------- ------ Total ....................................... 28,422 6.78 16,224 4.50 14,536 5.01 -------- ------ -------- ------ -------- ------ Total Loans (before net items) .................. 418,818 100.00% 360,475 100.00% 290,416 100.00% -------- ======= -------- ======= -------- ======= Deduct: Deferred loan fees ............................ 718 509 704 Allowance for credit losses ................... 7,334 4,170 4,827 -------- -------- -------- Total ......................................... 8,052 4,679 5,531 -------- -------- -------- Loans, net ...................................... $410,766 $355,796 $284,885 ======== ======== ======== At December 31, -------------------------------------------------- 1993* % 1992* % ----- --- ----- --- (Dollars in thousands) Real Estate Loans: One- to four-family adjustable rate............ $150,333 55.82% $153,315 50.21% One- to four-family fixed rate ................ 39,124 14.53 53,359 17.47 Multi-family .................................. 8,391 3.12 9,507 3.11 Commercial real estate ........................ 50,259 18.66 57,333 18.77 Land .......................................... 2,338 0.87 6,201 2.03 Construction .................................. 3,505 1.30 6,678 2.19 -------- ------ -------- ------ Total ....................................... 253,950 94.30 286,393 93.78 -------- ------ -------- ------ Other Loans: Commercial business ........................... 30 0.01 30 0.01 Home equity lines of credit ................... 7,340 2.73 9,681 3.17 Home improvement and second mortgages ........................... 4,727 1.76 5,897 1.93 Passbook ...................................... 1,788 0.66 1,823 0.60 Credit Cards................................... - - - - Other consumer ................................ 1,465 0.54 1,562 0.51 -------- ------ -------- ------ Total ....................................... 15,350 5.70 18,993 6.22 -------- ------ -------- ------ Total Loans (before net items) .................. 269,300 100.00% 305,386 100.00% -------- ======= -------- ======= Deduct: Deferred loan fees ............................ 587 688 Allowance for credit losses ................... 2,532 4,567 -------- -------- Total ......................................... 3,119 5,255 -------- -------- Loans, net ...................................... $266,181 $300,131 ======== ========
- -------------------- * Includes assets originally disclosed as in-substance foreclosures, under then current accounting pronouncements, for the years ended December 31, 1994, 1993, and 1992. -3- Maturity of Loan Portfolio. The following table sets forth certain information at December 31, 1996 regarding the dollar amount of loans maturing in the Bank's loan portfolio. Demand loans and loans having no stated schedule of repayments and no stated maturity are reported as due within one year. Loan amounts are net of non-accruing loans.
After One After Year through Five Years Within Five through After Amount One Year Years Ten Years Ten Years ------ -------- ------------ ---------- --------- (In thousands) Real estate loans: One- to four-family adjustable rate... $265,717 $118,789 $127,989 $18,939 $ - One- to four-family fixed rate........ 74,588 1,244 2,013 12,061 59,270 All other loans secured by real estate........................... 49,623 25,562 14,643 2,601 6,817 All other loans (primarily consumer).... 18,449 8,292 8,308 1,364 485 -------- -------- -------- ------- ------- Total .................................. $408,377 $153,887 $152,953 $34,965 $66,572 ======== ======== ======== ======= =======
The following table sets forth the dollar amount of all loans maturing or repricing after December 31, 1997 by fixed or adjustable interest rates.
Fixed Rates Adjustable Rates ----------- ---------------- (In thousands) Real estate loans: One- to four-family................... $73,344 $146,928 All other loans secured by real estate...................... 15,740 8,321 All other loans (primarily consumer)................... 10,035 122 ------ ------- Total................................... $99,119 $155,371 ======= ========
-4- Loan Portfolio Activity. The following table shows loan origination, sale and repayment activity of the Bank at and during the periods indicated.
At or For the Year Ended December 31, --------------------------------------------- 1996 1995 1994 ---- ---- ---- (In thousands) Loans at beginning of period (before net items) ................ $360,475 $290,416 $269,300 -------- -------- -------- Add: Loans originated: Real estate loans: One- to four-family adjustable rate ........................ 102,109 78,624 48,263 One- to four-family fixed rate ............................. 23,574 18,116 13,954 Multi-family................................................ - - 1,214 Commercial real estate ..................................... 12,355 8,617 5,588 Land ....................................................... 58 525 847 Construction ............................................... 7,516 4,784 3,078 Other loans: Commercial business ........................................ 2,995 1,965 12 Home improvement and second mortgage ....................... 6,334 520 618 Passbook ................................................... 1,132 726 965 Other consumer ............................................. 5,911 1,424 1,179 -------- -------- -------- Total loans originated ......................................... 161,984 115,301 75,718 -------- -------- -------- Loans Purchased................................................. 13,724 - - -------- -------- -------- Less: Loans sold ..................................................... 45,319 1,296 221 Loans securitized .............................................. - 4,361 829 Loan repayments ................................................ 67,800 37,462 51,963 -------- -------- -------- Total loans sold, securitized and repaid ....................... 113,119 43,119 53,013 -------- -------- -------- Less: Charge-offs .................................................... 2,488 1,799 1,589 Net transfers to OREO .......................................... 1,758 324 - -------- -------- -------- Net increase in loans ...................................... 58,343 70,059 21,116 -------- -------- -------- Loans at end of period ......................................... $418,818 $360,475 $290,416 ======== ======== ========
-5- One to Four-Family Residential Lending. The Bank continues to focus on the origination of loans secured primarily by first mortgage liens on existing one- to four- family residences, offering a variety of fixed and variable-rate mortgage loan products. At December 31, 1996, $334.6 million, or 79.9%, of the Bank's total loan portfolio consisted of one- to four-family mortgage loans, substantially all of which are conventional loans (i.e., loans that are neither insured by the Federal Housing Administration ("FHA") nor partially guaranteed by the Veterans Administration (the "VA")). The Bank actively solicits one- to four-family residential mortgage loan applications through its branch banking offices, as well as its team of "outside" loan originators, who will complete residential loan applications "off-site" throughout the Bank's market area. In addition, the Bank periodically conducts first-time home buyer seminars in an effort to develop residential loan applications and promote the Bank's community reinvestment. Other than with respect to certain single-family residential loans originated in connection with loans to facilitate the sale of OREO, the Bank's current practice is primarily to originate single-family residential loans which qualify for sale to FNMA and FHLMC underwriting standards. In addition, the Bank has entered into agreements with several conduits whereby these institutions will purchase loans at a pre-determined price and on a pre-approved basis. This relationship will allow the Bank to make mortgage loans that do not conform to the Bank's asset/liability management strategy. All of the Bank's rights and interest in such loans, including, in some instances, the right to service the loan, are thereby transferred to the purchasers. The Bank will earn an origination fee on any loans sold. The Bank presently originates both fixed-rate and adjustable-rate mortgage loans with loan terms of 10, 15, 30 and 40 years. Adjustable-rate mortgage loans have interest rates that adjust at annual intervals based upon an index tied to the average yield on U. S. Treasury securities adjusted to a constant maturity of one year. These loans typically provide that the amount of any increase or decrease in the interest rate is limited to two percentage points per adjustment period and is limited to an aggregate of seven percentage points by which the rate can increase or decrease over the life of the loan. The Bank also originates, on a limited basis, self-insured residential loans with a maximum L.T.V. of 90% as well as limited documentation loans. Borrower demand for adjustable-rate versus fixed-rate mortgage loans is a function of the level of interest rates, expectations as to future changes in interest rates, and pricing differences between fixed-rate mortgage loans and adjustable-rate mortgage loans. The relative amount of fixed-rate and adjustable-rate residential loans that are originated at any time is therefore largely determined by market and financial conditions. At December 31, 1996, $31.9 million, or 7.6%, of the Bank's one- to four-family residential loan portfolio consisted of loans which provide for fixed rates of interest. Although these loans generally provide for repayment of principal over a fixed period of 10, 15 or 30 years, it is the Bank's experience that because of prepayments and due-on-sale clauses, such loans generally remain outstanding for a substantially shorter period of time. Adjustable-rate loans tend to decrease the risks to the Bank's net interest income associated with changes in interest rates, but involve credit risk, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. The Bank offers introductory rates on its adjustable-rate residential mortgage loans, which are lower than the fully indexed rate on adjustable-rate loans but are competitive with other lenders in the Bank's market. The Bank typically underwrites the ability of borrowers to service the one year adjustable-rate mortgage loans at the fully indexed rate or at rates acceptable to the secondary markets. The Bank's general practice is to lend up to 80% of the appraised value of the property securing a one- to four-family residential loan. Under certain circumstances, the Bank will lend up to 95% of the appraised value. Except as to certain loans to facilitate the sale of residential subdivision OREO, to the extent that a loan exceeds 80% of the appraised value of the property, the borrower generally must obtain private mortgage insurance on the portion of the principal amount of the loan that exceeds 80%, which effectively reduces the loss exposure to an 80% loan-to-value ratio or less. The Bank offers self-insured residential mortgage loans to a maximum L.T.V. of 90%. The Bank will, under certain circumstances, lend up to 95% of appraised value to facilitate the sale of residential OREO and up to 85% for the sale of non-residential OREO. -6- Appraisals on property securing the Bank's one- to four-family residential loans are made by both independent appraisers and by the Bank's licensed, in-house appraisal staff. The Bank's policy also requires that appraisals be performed in accordance with applicable federal and state laws and regulations. Borrowers also must obtain hazard insurance prior to closing and, when required by the United States Department of Housing and Urban Development, flood insurance. The Bank generally has required borrowers to advance funds, with each monthly payment of principal and interest, to a loan escrow account from which the Bank makes disbursements for items such as real estate taxes as they become due. Multi-Family, Commercial Real Estate, Land and Construction Lending. During the 1980s, the Bank expanded its origination of loans secured by multi-family and commercial real estate located primarily within the Bank's market area, and to a lesser extent throughout Connecticut. The Bank also increased the origination of land acquisition and development loans, as well as construction loans for one- to four-family, multi-family and commercial real estate projects. These loan programs reflected efforts to diversify the type of property securing loans in the Bank's portfolio and to increase the sensitivity of the loan portfolio to changes in interest rates by originating loans with adjustable rates tied to indices more reflective of actual market rates. Such loans also generally had higher fees and interest rates than comparable one- to four-family residential real estate loans. The Bank also originated fixed rate commercial mortgages generally matched by FHLB advances of like terms. At December 31, 1996, $7.5 million, or 1.8%, of the Bank's total loan portfolio consisted of loans secured by multi-family properties. Multi-family loans are comprised primarily of loans secured by income producing properties with five to 10 residential units. At December 31, 1996, $46.3 million, or 11.0%, of the Bank's total loan portfolio consisted of loans secured by commercial real estate. Also at December 31, 1996, $1.2 million, or 0.3% of the Bank's total loan portfolio, were construction loans, the majority of which were for construction of one to four-family residential units. Land loans to acquire and develop real estate at December 31, 1996 amounted to $828,000 or 0.2% of the Bank's total loan portfolio. Most of the Bank's land loans were for residential real estate development projects, and, to a lesser extent, commercial and small industrial developments. The Bank has curtailed the origination of land loans, except in connection with loans to facilitate the sale of land held and under other limited circumstances. From 1990 to December 31, 1994, the Bank had limited multi-family, commercial real estate and construction lending to borrowers purchasing OREO from the Bank and to borrowers refinancing or restructuring currently outstanding loans. Beginning in 1995, the Bank originates permanent loans to borrowers for owner-occupied, one- to four-family units and originates construction loans on a limited basis. The Bank's lending policy allows for loans secured by multi-family properties and commercial real estate with a maximum loan-to-value ratio of 80% (or up to 85% to finance the sale of OREO). Historically, the Bank's multi-family and commercial real estate loans had maturities of 15 to 30 years. As to current loans, the Bank typically offers maturities of 3 to 25 years and terms which provide that interest rates thereon adjust at regular intervals of one, three, five, seven, or ten years, based upon an index tied to a treasury securities index or the FHLB advance rate for a period matching the repricing period of the loan. The Bank also originates fixed rate commercial mortgages having maturities from 15 to 25 years. The Bank generally obtains personal guarantees on loans from the principals of the borrowing entity. Appraisals of the property securing such loans are generally made by both independent appraisers and by the Bank's licensed, in-house appraisal staff. Multi-family, commercial real estate and commercial construction lending to builders is generally considered to involve a higher degree of risk than one- to four-family residential lending. Such lending typically involves larger loan balances concentrated in a single property or with a single borrower or groups of related borrowers. In addition, the payment experience on loans secured by existing income-producing properties is typically dependent on the successful operation of the related real estate project and thus may be more susceptible to adverse conditions in the real estate markets or in the economy generally. Moreover, such financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, owner-occupied real estate because of the uncertainties of construction, including the possibility of cost exceeding the initial estimates and risk associated with the failure of the ultimate purchaser to purchase such property, or the failure of the lender holding take-out financing to -7- provide such financing. The Bank recently resumed such lending, but on a limited basis consistent with prudent underwriting standards. Home Equity Lines of Credit, Home Improvement and Second Mortgages. At December 31, 1996, $7.1 million, or 1.7% of the Bank's total loan portfolio, consisted of home equity lines of credit. At that date, the Bank had outstanding commitments for an additional $7.8 million of unused home equity lines of credit. Also at December 31, 1996, the Bank had outstanding a variety of home improvement loans and second mortgages secured by one- to four-family residential properties. Although home equity lines of credit and home improvement loans typically are secured by second mortgage liens on residential properties, some of the Bank's home equity lines and home improvement loans are secured by first mortgage liens on property which is not otherwise mortgaged or subject to similar encumbrances. Originations of home equity, home improvement and other second mortgages on residential properties have declined substantially since 1990. Reduced origination volume of equity line of credit, home equity and second mortgages are in part the result of lower interest rates which make refinancing a first mortgage a preferred alternative. Also in more recent periods, the Bank generally has not offered other introductory rates or substantial discounts on loan fees and closing costs which have been offered by some of its competitors. Management believes, however, that the residential real estate market in Fairfield County has stabilized and the Bank now markets such products more actively. The Bank currently offers home equity lines of credit consistent with prudent underwriting standards and favorable economic conditions. The Bank also currently offers amortizing second mortgage loans to enable home owners to access equity in their home. The Bank offers repayment schedules up to 15 years. The Bank also offers installment second mortgage loans fully amortized over five years. These loans are underwritten based on the borrower's consumer credit and may be up to 100% of the equity in the borrower's home. These loans do not exceed $40,000. The Bank's current Loan Policy permits home equity and second mortgage loans to be made for up to 80% of the appraised value of the property securing the loan, less any existing encumbrances. Appraisals on the property securing the Bank's home equity and second mortgage loan products and lines are made by both independent appraisers and by the Bank's licensed, in-house appraisal staff. Commercial Business Lending. The Bank formed a Commercial Business Lending Department in late 1994 offering a wide array of commercial lending and deposit services. The Bank is offering traditional commercial and industrial loan products and commercial real estate loans to local businesses consistent with prudent underwriting standards. The Bank believes these loan products will provide higher interest rates and will allow the Bank to serve the local small business community, a market sector which is not currently being served by large regional commercial banks or money center banks. Management believes development of the Bank's commercial department affords the Bank the best opportunity to increase market penetration in the Bank's local market area. Consumer Lending. The Bank currently offers a variety of consumer loan products, including loans secured by passbook accounts at the Bank, unsecured lines of credit, education and automobile loans and personal loans. Interest rates are set from time to time and are intended to be generally competitive in the Bank's market. The Bank is now more actively pursuing direct consumer lending. In addition, the Bank also funds indirect consumer auto leases subject to prudent underwriting. Management believes that higher interest rates and shorter maturities associated with this type of lending will complement both earnings and asset/liability management objectives. The Bank intends to actively market consumer loan products and to build the consumer loan and lease portfolio. -8- Credit Cards. The Bank currently offers consumer and business credit cards. In addition, the Bank provides merchants services as an additional source of fee income. The Bank acquired this department in conjunction with the Fairfield First Bank and Trust Co. transaction. See "Management's Discussion and Analysis - Financial Condition - Fairfield First Bank & Trust Company." Mortgage Loan Servicing. The following table sets forth information regarding the Bank's loan servicing portfolio at the dates indicated.
December 31, ------------------------------------------------------------------------- 1996 1995 1994 -------------------- -------------------- --------------------- (Dollars in thousands) Percent Percent Percent Amount of Total Amount of Total Amount of Total ------ -------- ------ -------- ------ -------- Loans owned and serviced by the Bank (before net items) ...... $418,818 85.74% $360,475 81.42% $286,167 76.17% Loans serviced for others .......... 69,680 14.26 82,281 18.58 89,545 23.83 -------- ------ -------- ------ -------- ------ Total loans serviced by the Bank (before net items) ...... $488,498 100.00% $442,756 100.00% $375,712 100.00% ======== ====== ======== ====== ======== ======
The Bank has historically serviced loans for other institutions as a means of maintaining customer relationships and generating fee income. These loans are comprised of loans originated by the Bank and securitized into participation certificates or whole loans sold to private banking institutions or FNMA or FHLMC. Fee income derived from these loans serviced for others totalled $334,000, $379,000 and $427,000 in 1996, 1995 and 1994, respectively. Non-Performing, Delinquent and Classified Assets General. At December 31, 1996, non-performing assets were comprised of $10.4 million of non-performing loans and $858,000 of OREO. Most of the Bank's non-performing assets consist of OREO and non-performing loans secured by property located in the Bank's Fairfield County, Connecticut market area. The Bank believes that the reduction in non-performing assets is the result of concentrated efforts by the Bank's management and Board of Directors to improve credit quality and dispose of problem assets. Utilizing the accelerated non-performing asset disposition program (ADP) which concluded in 1995, and through the normal course of business, the major steps taken to reduce non-performing assets included (i) the decision to build out and improve OREO properties, which were priced and marketed aggressively and subsequently sold through a subsidiary, The NSS Realty Corporation ("NSS Realty"), formed for this purpose; (ii) increased collection efforts and charge-offs; and (iii) the origination of loans to facilitate the sale of OREO at aggressive prices. The Bank believes the stabilization of the Fairfield County residential real estate market and lower market interest rates also helped facilitate the reduction in non-performing assets. The Bank also maintains a "watch list" which consists of Watch List Loans that are classified as performing loans but which the Bank believes exhibit a higher than normal degree of risk than other loans due to a variety of factors, such as geographic and industry related weaknesses, downturn in operations in recent years, bankruptcy of a related company and other loans from the same borrower that are classified as non-performing. Watch List Loans totalled $8.5 million at December 31, 1996, compared to $5.6 million at December 31, 1995. As mentioned above, the Bank implemented the Accelerated Non-Performing Asset Disposition Program in 1994 to allow the Bank to more rapidly dispose of certain non-performing assets at discounts below their net realizable value. The program established a $5.7 million special allowance to dispose of $14.0 million of non- -9- performing assets, $3.1 million allocated to the provision for credit losses and $2.6 million allocated to the provision for estimated losses on OREO. The Bank concluded the ADP program on December 31, 1995 with the following results having been achieved. In total, gross assets of $16.1 million were disposed of, and a total of $4.6 million was charged to the ADP allowances. The Bank continued to reduce non-performing assets in 1996 through the normal course of business. Non-performing loans totalled $10.4 million at December 31, 1996, a decrease of $2.7 million from the $13.1 million level at December 31, 1995. OREO totalled $858,000 at December 31, 1996, a decrease of $3.4 million from the $4.3 million level at December 31, 1995. Total non-performing assets totalled $11.3 million at December 31, 1996 or 1.9% of total assets compared to $17.3 million or 3.4% of total assets at December 31, 1995. -10- Non-Performing Assets. The following table sets forth the amounts of the Bank's non-performing assets, by category at the dates indicated.
At December 31, ---------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (Dollars in thousands) Non-performing loans: Real estate loans: One- to four-family ...................... $ 2,784 $ 1,422 $ 2,402 $ 6,219 $ 9,465 Multi-family ............................. 1,739 2,330 2,119 2,120 1,645 Commercial real estate ................... 3,819 7,645 4,538 15,756 22,106 Land ..................................... - 105 509 1,180 4,285 Construction ............................. - 450 191 590 3,152 Other loans: Commercial ............................... 1,197 65 12 - - Home equity lines of credit .............. 175 395 57 141 274 Home improvement and second mortgage ..... 653 658 148 169 160 Other consumer ........................... 74 - - 5 134 ------- ------- ------- ------- ------- Total non-performing loans (a) (b)............ 10,441 13,070 9,976 26,180 41,221 ------- ------- ------- ------- ------- OREO: One- to four-family ...................... 90 148 2,257 2,246 2,336 Multi-family ............................. - - - 548 426 Commercial real estate ................... 586 3,386 6,480 10,555 10,054 Land ..................................... 182 733 2,885 4,475 4,797 Allowance for estimated losses on OREO ................................ - - (802) (194) (1,025) ------- ------- ------- ------- ------- Total OREO, net .............................. 858 4,267 10,820 17,630 16,588 ------- ------- ------- ------- ------- Total non-performing assets, net ............. $11,299 $17,337 $20,796 $43,810 $57,809 ======= ======= ======= ======= ======= Total non-performing assets, net, as a percentage of total assets ............... 1.92% 3.36% 4.47% 10.24% 13.41%
- ----------------- (a) For presentation purposes, no amount of the allowance for credit losses has been allocated to non-performing loans. (b) Includes amounts previously reflected as in-substance foreclosures under prior accounting methods in effect as of the years ended December 31, 1992 through 1994. -11- Troubled debt restructurings ("TDRs") are loans to which the Bank has granted certain concessions in light of the borrower's financial difficulty. The objective of the Bank in granting these concessions, through a modification of terms, is to maximize the recovery of its investment. This modification of terms may include a reduction in stated rate, an extension of maturity at a more favorable rate and a reduction of accrued interest. In the past, any TDRs entered into by the Bank were classified as non-performing loans. The Bank may, from time to time, engage in TDRs when appropriate. At December 31, 1996, the Bank had no TDR's classified as non-performing. An additional form of troubled debt restructuring that is available to the Bank is loan splitting. In instances where cash flows are insufficient to service total debt, the debt may be split into two separate notes, one note at current market terms and a second at below market terms. This practice enables a certain portion of the loan to return to performing status. At December 31, 1996, the Bank had $2.1 million in former TDR's which have been integrated into the Bank's performing loan portfolio based on satisfactory performance. Delinquent Loans. Total loans delinquent 30 to 89 days increased to $4.1 million as of December 31, 1996 from $2.6 million at December 31, 1995. The delinquency consisted primarily of one- to four-family residential loans (29 loans with an aggregate balance of $2.7 million). The Bank continues to address collection of delinquent loans. Each loan officer is assigned a portfolio of delinquent loans. Delinquent borrowers receive written correspondence once a loan becomes 30 days past due. A loan officer will make contact before the loan becomes 20 days past due. A call letter will be sent out by the time a loan becomes 60 days past due unless a work-out schedule has been agreed to with the borrower. Foreclosure will commence after the loan becomes 90 days past due unless a repayment schedule has been mutually accepted or the Bank determines that foreclosure would not be in its best interests. Because of certain provisions of Connecticut foreclosure law, the Bank may encounter delays in its attempt to foreclose on property for which it is mortgagee. Unlike many states which permit a secured party such as a bank mortgagee to foreclose on real estate without court involvement, Connecticut foreclosure law requires a lawsuit by the foreclosing party against the mortgagor (owner) of real estate (and the suit must name as defendants all junior lien holders). In addition, Connecticut law protects consumers who are unemployed or under-employed, as defined by statute, by permitting them to obtain a six-month stay of a mortgage foreclosure action and to restructure their mortgage debt. In general, although foreclosure actions are subject to far fewer defenses than ordinary lawsuits, mortgagors can and sometimes do raise defenses which, even if not meritorious, can delay the foreclosure process for months or even years. Foreclosure in Connecticut is typically accomplished by strict foreclosure in contrast to foreclosure by sale. Strict foreclosure involves the rendering of a judgment by a court in favor of the foreclosing party (e.g., a bank) and sets a date by which the property owner (the mortgagor) and any other mortgagees must either redeem the property by paying the foreclosing party the full amount of its debt or lose their interest in the property. Foreclosure by sale requires a court to appoint a committee to sell property at public auction, and involves advertising and appraisal of the property. Although foreclosure by sale is less common in Connecticut than in some other states, to the extent it is used, it frequently imposes significant delays when compared to the strict foreclosure process. -12- Management of the Bank regularly reviews delinquent loans, which are placed on non-accrual status when, in its judgment, the probability of collection is too uncertain to warrant further accrual. All loans 90 days or more past due as to interest or principal are placed on non-accrual status unless, in exceptional circumstances, the loan is both well secured and in the process of collection. The Bank was accruing interest on one loan which was 90 days or more past due with a principal balance of $347,000 at December 31, 1996. Allowances for Credit Losses. The Bank uses four separate analyses for determining a reasonable range for an adequate level of allowance for credit losses. At December 31, 1996, the allowance calculations under the four analyses were $3.9 million, $3.3 million, $4.4 million, and $4.6 million. The average of these three methods was $4.1 million. The Bank's allowance for credit losses was $7.3 million at December 31, 1996. The Bank's Watch List loans, unused lines of credit, and letters of credit are also taken into account in establishing the allowance for credit losses. The following table sets forth an analysis of the activity in the allowance for credit losses at and during the periods indicated.
At or for the Year Ended December 31, -------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (Dollars in thousands) Balance at beginning of period........ $ 4,170 $ 4,827 $ 2,532 $ 4,567 $ 6,081 -------- -------- -------- -------- ------- Add: - --- Provision charged to operations....... 4,415 2,105 690 1,000 2,330 Allowance on Acquired Loans .......... 1,000 - - - - ADP plan ............................. - (1,100) 3,100 - - Recoveries............................ 237 137 94 38 56 -------- ------- -------- -------- -------- Less: - ---- Charge offs: Real estate loans: One- to four-family ................ 394 648 956 392 465 Multi-family ....................... 220 355 1 83 - Commercial real estate ............. 1,788 671 551 1,442 2,598 Land ............................... 18 118 - - 538 Construction ....................... - - 61 1,075 275 Consumer and commercial business ........................... 68 7 20 81 24 -------- -------- -------- -------- -------- 2,488 1,799 1,589 3,073 3,900 -------- -------- -------- -------- -------- Balance at end of period ............. $ 7,334 $ 4,170 $ 4,827 $ 2,532 $ 4,567 ======== ======== ======== ======== ======== Net charge-offs ...................... $ 2,251 $ 1,662 $ 1,495 $ 3,035 $ 3,844 ======== ======== ======== ======== ======== Loans outstanding (before net items) ................. $418,818 $360,475 $290,416 $269,300 $305,386 ======== ======== ======== ======== ======== Ratio of net charge-offs to loans outstanding (before net items) at end of period ............................. 0.54% 0.46% 0.51% 1.13% 1.26%
-13- The following table sets forth, at the dates indicated, the Bank's allocation of the allowance for credit losses to the total amount of loans in each of the categories listed.
At December 31, ------------------------------------------------------------------------------------------------- 1996 1995 -------------------------------------------- -------------------------------------------- Percent of Percent of Loans Percent of Percent of Loans Total Allowance in each Category Total Allowance in each Category Amount For Credit Losses to Total Loans Amount for Credit Losses to Total Loans ------ ----------------- ---------------- ------ ----------------- ---------------- (Dollars in thousands) Mortgage Loans Residential (a) ..... $1,045 14.2% 79.9% $ 750 18.0% 79.8% Commercial (b) ...... 4,710 64.3 13.3 3,153 75.6 15.7 Other Loans (c) ....... 1,579 21.5 6.8 267 6.4 4.5 ------ ------ ------ ------ ------ ------ Total allowance for credit losses ....... $7,334 100.0% 100.0% $4,170 100.0% 100.0% ====== ====== ====== ====== ====== ====== Ratio of allowance for credit losses to loans outstanding (before net items) at end of period .... 1.75% 1.16% ====== ====== At December 31, --------------------------------------------- 1994 --------------------------------------------- Percent of Percent of Loans Total Allowance in each Category Amount for Credit Losses to Total Loans ------ ----------------- ----------------- (Dollars in thousands) Mortgage Loans Residential (a) ..... $ 524 10.9% 76.8% Commercial (b) ...... 4,013 83.1 18.2 Other Loans (c) ....... 290 6.0 5.0 ------ ------ ------ Total allowance for credit losses ....... $4,827(d) 100.0% 100.0% ========= ====== ====== Ratio of allowance for credit losses to loans outstanding (before net items) at end of period .... 1.66% ======
- -------------------- (a) Includes one- to four-family loans. (b) Includes all commercial real estate loans, multi-family, land and construction loans. (c) Includes commercial business, home equity lines of credit, home improvement, second mortgages, passbook and other consumer loans. (d) Includes the 1994 provision of $3.1 million for the ADP Program, the balance of which was $2.2 million as of December 31, 1994. -14- Allowance for Estimated Losses on OREO. The following table sets forth an analysis of the activity in the allowance for estimated losses on OREO at and during the periods indicated.
At or For the Year Ended December 31, ---------------------------------------------------- Allowance for Estimated Losses on OREO 1996 1995 1994 1993 - -------------------------------------- ---- ---- ---- ---- (In thousands) Balance at beginning of period ........... $ - $ 802 $ 194 $ 1,025 ------ ------ ------ ------ Add: Provision charged to operations ........ 459 460 2,894(b) 3,975 ------ ------ ------ ------ Less: Charge-offs: One- to four-family .............. - 284 449 298 Multi-family ..................... - 58 153 224 Commercial real estate ........... 459 582 1,097 2,008 Land ............................. - 338 193 840 Construction ..................... - - 394 1,436 ------ ------ ------ ------ 459 1,262 2,286 4,806 ------ ------ ------ ------ Balance at end of period (a) ............. $ - $ - $ 802 $ 194 ====== ====== ====== ======
- -------------------- (a) The Bank carries OREO at net realizable value. Beginning in 1991, the Bank established general and specific reserves against OREO to arrive at net realizable value. Beginning in 1993, the Bank netted the specific reserves against OREO carrying values, and continues to maintain a general reserve when deemed necessary by management to arrive at net realizable value. (b) Of the $2.9 million provision charged to operations, $2.6 million was a result of the ADP Program. Investment Activities General. In accordance with Statement of Financial Accounting Standard No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"), which the Bank adopted as of January 1, 1994, the Bank was required to classify each security in the portfolio as either "Held-to-Maturity," "Available-for-Sale," or "Trading Account Security." It was the decision of management to classify substantially all of the portfolio as Held-to-Maturity at the adoption date based upon the Bank's ability and intent to hold, taking into account currently available liquidity and the potential for additional liquidity afforded by the Bank's stock conversion (see Note 2 to the consolidated financial statements). In accordance with the additional guidance provided by the Financial Accounting Standards Board ("FASB") in conjunction with SFAS 115, during 1995 the Bank reassessed and reclassified certain of its investments originally classified as Held-to-Maturity to Available-for-Sale. Most of the short-term Treasury and Federal Agency positions and all of the five- and seven-year balloon mortgage-backed securities were reclassified. Furthermore, during 1996 the Bank assessed whether the Held-to-Maturity classification was supported by management's intent due to the repositioning of the Bank's long term objectives and financial condition; as a result, the Bank reclassified substantially all of these investments to Available For Sale. This decision required the Bank to mark each security to market through Shareholders' equity as of December 31, 1996 and reflect each investment at fair value. Under Connecticut law, the Bank has authority to purchase a wide range of investment securities. However, as a result of recent changes in federal banking laws, financial institutions such as the Bank may not engage as principals in any activities that are not permissible for a national bank, unless the FDIC has determined that the activity would pose no significant risk to the Bank Insurance Fund and the Bank is in compliance with applicable capital standards. In March 1993, the Regional Director of the FDIC approved a request by the Bank to invest in certain listed stock and/or registered stock subject to certain conditions. As of December 31, 1996, the Bank had accumulated investments in equity securities amounting to $5.5 million compared to $4.8 million as of December 31, 1995. -15- The Bank utilized the trading account classification to account for the portion of the equity portfolio with common stock investments in the covered call option program. This program is designed for yield enhancement and to lessen the Bank's exposure to a potentially volatile stock market. In this program, the Bank purchases shares of qualified common stock and sells a call option against the investment. The holding period of each investment averages one to three months and there are ten to fifteen investment positions in the program. As required by SFAS 115 the Bank marks the common stock and related covered call option to market through current period earnings. The mark to market affect on earnings as of December 31, 1996 was a loss of $61,000 on the $3.3 million trading portfolio. During 1996 the Bank liquidated the utility stock portfolio; however, it intends to maintain the equity stock portfolio under the guidance provided by the investment committee of the Board of Directors and the policies and procedures established by the Bank's investment policy. During the second half of 1995, the Bank accumulated a significant investment in the common stock of Hometown Bancorporation ("Hometown"), a local bank holding company, which resulted in the Bank's filing a form 13-D with an over 5% ownership position. In April 1996 the Bank sold its position shortly after HUBCO, Inc., a New Jersey-based bank holding company, announced its planned acquisition of Hometown. The Bank recorded a $627,000 gain on the sale of its investment. -16- The following table sets forth the composition of the Bank's securities at fair value at the dates indicated.
At December 31, ------------------------------------------------------------------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (In thousands) Debt Securities: U.S. Treasury securities ........ $ - $ 8,316 $24,137 $38,488 $31,985 Obligations of other U.S. Government agencies .......... 42,120 20,366 25,240 19,633 - ------- ------- ------- ------- ------- Total ........................... $42,120 $28,682 $49,377 $58,121 $31,985 ======= ======= ======= ======= ======= Equity Securities.................. $ 5,528(1) $ 4,844 $ 22 $ 23 $ 23 ======= ======= ======= ======= =======
(1) Includes $3,292 classified as trading. The following table sets forth the maturities of the Bank's investment securities (excluding equity securities) by amortized cost at December 31, 1996 and the weighted average yields of such securities.
After One But After Five But Within One Year Within Five Years Within 10 Years After 10 Years Totals ---------------- ----------------- ---------------- ---------------- ------------------ (Dollars in Thousands) Weighted Weighted Weighted Weighted Weighted Average Average Average Average Average Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- Other Bonds and notes (a) ...... $ - -% $ - -% $29,316 7.40% $13,120 7.40% $42,436 7.40% Mortgage-backed securities (b) . 24,961 7.10 3,859 6.80 12,432 7.60 51,191 8.20 92,443 7.76 ------- ------ ------- ------- ------- Total ........... $24,961 7.10% $3,859 6.80% $41,748 7.46% $64,311 8.04% $134,879 7.65% ======= ====== ======= ======= ========
- ------------------- (a) Solely U.S. Government agencies. (b) Solely FHLMC and FNMA participation certificates. Mortgage-Backed Securities and Secondary Market Activities. Mortgage-backed securities increase the quality of the Bank's assets because of the insurance or guarantees of federal agencies on non-guaranteed mortgage loans. In addition, mortgage-backed securities are more liquid than individual mortgage loans and may be more readily available to collateralize borrowings or other obligations of the Bank. All of the FNMA or FHLMC securities owned by the Bank at December 31, 1996 had initial maturities of five to 30 years, although the Bank expects the average lives will be considerably shorter due to principal amortization and prepayments. There were no significant sales of mortgage-backed securities during 1994. In 1995 the Bank sold $38.6 million (carrying value) of securities, $4.4 million (carrying value) of which were created by mortgages originated and securitized by the Bank during that year to alleviate an excess concentration in those products. In 1996 the Bank sold $11.9 million (carrying value) of primarily low yielding fixed rate mortgage-backed securities for yield enhancement. -17- The following table sets forth the activity in the Bank's mortgage-backed securities portfolio at and during the periods indicated.
At or For the Year Ended December 31, -------------------------------------------------- 1996 1995 1994 ---- ---- ---- (In thousands) Mortgage-backed securities at beginning of period ...... $90,281 $97,719 $58,219 Purchases ............................................ 38,650 44,318 77,195 Acquired in exchange for loans ....................... - 4,361 829 Sales ................................................ (11,886) (38,615) - Repayments ........................................... (24,602) (17,502) (38,524) ------- ------- ------- Mortgage-backed securities at end of period ............ $92,443 $90,281 $97,719 ======= ======= =======
Sources of Funds The primary sources of funds for the Bank's use in its lending activities and for other general business purposes are amortization and prepayment of loans, deposit accounts and funds provided from operations. See "Management's Discussion and Analysis - Liquidity and Capital Resources." Loan repayments and funds provided from operations are relatively stable sources of funds, while deposit inflows and outflows are significantly influenced by prevailing interest rates and general economic conditions. See "Management's Discussion and Analysis - Liquidity and Capital Resources." The Bank offers a variety of deposit accounts having a wide range of interest rates and terms. The Bank attempts to control the flow of funds in its deposit accounts according to its need for funds and the cost of alternative sources of funds primarily through the pricing of deposits and, to a lesser extent, by promotional activities. Among the deposit accounts offered by the Bank at December 31, 1996 were regular passbook and statement savings accounts, which earn interest at an annual rate of 1.99% with an effective annual yield at 2.00%. Interest on passbook and statement savings accounts is compounded daily and credited monthly. The Bank requires a minimum deposit of $5.00 to open a passbook or statement savings account. The Super Savings Account earns interest at annual rates of 1.99% to 2.98% with an effective annual yield of 2.00% to 3.00%. The minimum deposit to open Super Savings Accounts is $1,000 and the interest is compounded and credited monthly. The Bank also offers money market accounts which are competitive with similar money market mutual funds. The Bank requires a $2,500 minimum deposit to open the account. Balances of less than $2,500 are subject to service charges. Interest is compounded and credited monthly. The interest rate is reviewed weekly and adjusted as money market conditions warrant. Minimum balance requirements for the Bank's certificates of deposit for one year or more are $500. Certificates which have a maturity of under one year have a minimum balance requirement of $1,000. Interest rates on all certificates are determined by the Bank's Funds Management Committee based on market conditions, competitive factors, cash flow requirements of the Bank, and funding objectives. Interest is compounded and credited monthly on all certificates. The Bank also offers checking accounts which require a $25 minimum initial deposit and bear no interest, and NOW accounts which pay interest on balances over $1,000 and require a $25 minimum initial deposit. -18- The following table sets forth, at the dates indicated, the distribution of the Bank's deposit accounts at the dates indicated and the weighted average cost on each category of deposits for the periods then ended.
At December 31, ----------------------------------------------------------------------- 1996 1995 --------------------------------- -------------------------------- (Dollars in Thousands) Percent of Weighted Percent of Weighted Total Average Total Average Total Deposits Cost Total Deposits Cost ----- ---------- -------- ----- ---------- -------- Demand deposits .................... $22,479 5.31% 0.00% $ 13,697 3.40% 0.00% Savings: Regular savings ................. 28,096 6.64 2.06 28,660 7.12 1.82 Super savings ................... 45,404 10.73 2.60 55,042 13.66 2.79 NOW ............................. 30,262 7.15 1.88 35,097 8.71 .95 Money Market fund ............... 47,957 11.33 2.95 59,724 14.83 3.89 Escrow deposits ................. 4,965 1.17 2.83 4,142 1.03 2.73 Certificates: Certificate accounts ............ 197,108 46.56 6.03 154,340 38.32 5.31 Money Market certificates....... 47,019 11.11 5.01 52,095 12.93 4.47 -------- ------ ------- ------ Total Deposits ..................... $423,290 100.00% 3.91% $402,797 100.00% 3.81% ======== ======= ======== ====== At December 31, -------------------------------- 1994 -------------------------------- (Dollars in Thousands) Percent of Weighted Total Average Total Deposits Cost ----- ---------- -------- Demand deposits .................... $ 9,201 2.53% 0.00% Savings: Regular savings ................. 29,052 8.00 1.52 Super savings ................... 84,555 23.29 2.50 NOW ............................. 26,998 7.44 1.00 Money Market fund ............... 38,390 10.57 2.93 Escrow deposits ................. 3,818 1.05 2.11 Certificates: Certificate accounts ............ 138,384 38.11 4.10 Money Market certificates....... 32,673 9.01 2.93 ------- ------ Total Deposits ..................... $363,071 100.00% 2.94% ======= =======
The following table sets forth the net deposit flows of the Bank during the periods indicated.
Year Ended December 31, -------------------------------- 1996 1995 1994 ---- ---- ---- (In thousands) Net deposit inflow (outflow)........ $ 3,649 (a) $ 25,557 $( 6,265) Interest credited .................. 16,844 14,169 10,273 ------- -------- -------- Net increase in deposits ........... $20,493 $ 39,726 $ 4,008 ======= ======== ========
(a) Includes deposits assumed in the FFB&T transaction of $47.6 million, and $48.0 million in deposits sold in the Brookfield and Bethel branch sales (see Management Discussion and Analysis - Financial Condition). -19- The following table presents the amounts of certificate accounts of the Bank at December 31, 1996 maturing during the periods reflected below and the weighted average interest rate of such accounts at such date:
Weighted Average Amount Interest Rate ------ ---------------- (Dollars in thousands) Certificate accounts maturing during the 12 months ending: December 31, 1997 ......................................... $186,547 5.39% December 31, 1998 ......................................... 32,981 5.77 December 31, 1999 ......................................... 7,937 5.89 Thereafter .............................................. 16,662 6.69 -------- Total ....................................................... $244,127 5.54% ========
The following table presents the maturities of the Bank's time certificates of deposit in amounts of $100,000 or more at December 31, 1996 by time remaining to maturity.
Maturing -------- (In thousands) Six months or less .............................................. $12,602 Over six through twelve months .................................. 3,366 Over twelve months .............................................. 5,759 ------- Total ................................................. $21,727 =======
Borrowings. Although deposits are the Bank's primary source of funds, the Bank also utilizes borrowings from the FHLB as an alternative funding source. The Federal Home Loan Bank System functions in a reserve credit capacity for savings institutions and certain other home financing institutions. The Bank is required to own capital stock in the FHLB in order to access the System and is authorized to apply for advances on the security of such stock and certain of its home mortgages and other assets (principally securities which are obligations of, or guaranteed by, the United States) provided certain credit worthiness standards have been met. FHLB advances to the Bank at December 31, 1994, 1995, and 1996 were $62.5 million, $61.8 million, and $82.2 million, respectively. -20- At December 31, 1996, the Bank had outstanding $82.2 million in borrowings from the FHLB, maturing as follows: Next Interest Adjustable Rate Due Date Adjustment Amount Rate (in thousands)
Next Interest Adjustable Rate Due Date Adjustment Amount Rate - --------------- -------- ------------- ------ ---- (in thousands) March 1997 January 1997 $10,000 5.61% May 1999 November 1997 4,400(a) 5.73 ------ Total Adjustable Rate 14,400 ------ Fixed Rate January 1997 5,000 5.40 - ---------- January 1997 900(b) 8.20 January 1997 600(b) 8.25 April 1997 3,000 5.39 April 1997 750 5.39 November 1997 10,000 5.66 November 1997 4,000 5.78 December 1997 2,000 5.50 February 1998 5,000 5.30 April 1998 5,000 5.98 May 1998 10,000 6.13 May 1998 5,000 6.28 June 1998 5,000 6.28 July 1998 5,000 5.26 November 1998 5,000 5.90 December 2013 1,558(b)(c) 6.55 ------- Total Fixed Rate 67,808 ------- Total Borrowings $82,208 -------
- -------------------- (a) These borrowings were initiated as a direct arbitrage against adjustable rate mortgage-backed securities to "lock in" an interest rate spread. (b) These borrowings were initiated as a direct arbitrage against long-term fixed rate lending to "lock in" an interest rate spread. On a weighted average basis, that spread amounts to 190 basis points. See "Management's Discussion and Analysis - Asset/Liability Management." (c) This borrowing has an amortization feature attached to it and pays down over a term consistent with the loan it is matched against. -21- From time to time, as interest rate market conditions allow, the Bank may also use reverse repurchase agreements as a short-term source of funds. The Bank had outstanding borrowings of $31.4 million and $4.6 million under various reverse repurchase agreements at December 31, 1996 and 1995, respectively. The following table sets forth, at the dates indicated, information concerning the Bank's reverse repurchase agreements:
Year Ended December 31, ------------------------------------------------ 1996 1995 1994 ---- ---- ---- (Dollar amounts in thousands) Average Balance During the Year $29,203 $6,857 $ - Maximum Month-End Balance During the Year $36,350 $9,310 $ - Average Interest Rate During the Year 5.61% 5.88% $ -
At December 31, 1996, repurchase agreements aggregating approximately $22.4 million and $9.0 million mature during the years ending December 31, 1997 and 1998, respectively. The following table sets forth, at the dates indicated, information regarding the weighted average interest rate and the highest and average month- end balances of the Bank's total borrowings.
Year Ended December 31, ------------------------------------------------ 1996 1995 1994 ---- ---- ---- (Dollars in thousands) Weighted average interest rate of total borrowings .......... 5.89% 6.44% 6.15% Highest outstanding balance of total borrowings ............. $159,903 $77,229 $62,981 Average month end balance of total borrowings ............... $115,465 $65,644 $49,386
Trust Department The Bank offers a full array of trust services through its Trust Department which was organized in 1984. The Trust Department generated $552,000 in gross revenues in 1996 on assets totalling $262.2 million. In 1995 and 1994, gross revenues were $515,000 and $513,000, respectively. Trust services are considered to be an integral element of the Bank's strategy for future growth of non-interest income by providing an alternative investment choice to depositors seeking returns other than that of traditional certificates of deposit, as well as an attractive investment for the Banks' commercial depositor base. Savings Bank Life Insurance The Bank offers savings bank life insurance ("SBLI") to customers up to a maximum of $300,000 per insured. The Bank also offers mortgage life, disability and credit life insurance relating to loans as part of its SBLI business. During 1995 and 1996, the Bank had pre-tax income of $23,000, and $18,000, respectively, from all SBLI sales. -22- Subsidiaries The Bank has one wholly owned subsidiary, NSS Realty, which was formed in 1990 for the sole purpose of developing and disposing of certain real estate the Bank acquired through foreclosure or deed in lieu of foreclosure. NSS Realty has recorded sales of Bank owned real estate of $1.2 million for the twelve months ended December 31, 1996. Currently, NSS Realty has one property with a book value of $114,000. NSS Realty has one wholly owned subsidiary, NSS Westport Development Corp., which was formed in 1992 solely for the purpose of developing an OREO property, Sherwood Farms in Westport, CT. This subdivision was completely sold out in 1996 and the subsidiary is currently inactive. Employees 155 employees were employed by the Bank as of February 28, 1997; 146 were full time equivalents. Miscellaneous A material portion of the Bank's deposits have not been obtained from a single customer. A material portion of the Bank's loans is not concentrated in one industry or related group (other than residential mortgage lending in Fairfield County, Connecticut). The Bank holds no material patents, trademarks, licenses or concessions except as required by regulatory authorities. The Bank has undertaken no material research activities related to new services or the improvement of existing services, other than routine activities in the ordinary course of the Bank's business. The Bank conducts substantially all of its marketing research using existing personnel, none of which is engaged full-time in such activities. -23- ITEM 2. - ------- Properties At December 31, 1996 the Bank had seven full service banking offices and one satellite (ATM) branch. The following table lists information at December 31, 1996 for the properties of the Bank.
Lease Year Office Area Amount of Owned or Location Opened by Square Feet Deposits Leased - -------- ------ -------------- --------- -------- Expiration - ---------- (Dollars in thousands) Executive Offices: 48 Wall Street 1849 24,000 Owned Norwalk, Connecticut Full Service Banking Offices: 48 Wall Street 1849 2,950 $155,047 Owned Norwalk, Connecticut 117 Old Ridgefield Road 1960 3,450 41,220 Owned Wilton, Connecticut Rt. 7 & 107 1972 2,560 29,207 Leased June 30, 2002 Georgetown, Connecticut Main Avenue & West Rocks Road 1974 3,560 71,405 Leased April 30, 2006 Norwalk, Connecticut 578 Westport Avenue 1983 3,500 53,043 Owned Norwalk, Connecticut 1815 Post Road East 1988 3,392 35,307 Owned Westport, Connecticut 2000 Post Road 1996 3,300 38,061 Leased October 31, 2006 Fairfield, Connecticut Satellite Branch So. Norwalk Railroad Station 1996 Free standing - Leased June 14, 2001 ATM -------- $423,290 ========
-24- ITEM 3. - ------- Legal Proceedings Norwalk Savings Society is not involved in any legal proceeding that it believes is material to its financial condition. ITEM 4. - ------- Security Ownership of Certain Beneficial Owners and Management Incorporated by reference from page 5 of the definitive Proxy Statement filed with the FDIC on March __, 1997, pursuant to Section 335.204 of the FDIC Rules and Regulations ("Proxy Statement"). PART II - ------- ITEM 5. - ------- Market for the Bank's Common Stock and Related Shareholder Matters See Item 7 in the section captioned "Market Price of Common Stock" on Page 53. The Bank began paying dividends to its shareholders in 1996. The first dividend since becoming a public company in June, 1994 was $0.05 per share payable to the shareholders of record as of the close of business on May 6, 1996. Subsequent dividends were declared and paid on a quarterly basis during 1996. The Board of Directors recognizes that it is under no obligation to continue paying dividends and will consider such a payment on a quarterly basis assuming such action would be consistent with its primary goal of maintaining the adequacy of the Bank's capital. Connecticut law prohibits the Bank from paying dividends other than to the extent of retained net profits from the current fiscal year and two preceding full fiscal years. -25- ITEM 6. - ------- Selected Financial Data The following tables set forth certain selected consolidated financial and other data of the Bank at or for the dates indicated. This information should be read in conjunction with the Consolidated Financial Statements and notes thereto included elsewhere herein. The consolidated financial data as of and for the years ended December 31, 1992 through 1996 have been derived from the audited Consolidated Financial Statements of the Bank.
At or For the Year Ended December 31, --------------------------------------------------------------------- ($ thousands, except per share data) 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Selected Balance Sheet Data: Total assets ................................. $589,589 $515,267 $464,901 $427,950 $431,079 Treasury & other gov't agency securities...... 42,120 28,682 51,139 58,129 31,743 Mortgage-backed securities ................... 92,453 90,339 97,270 58,219 46,725 Equity Securities............................. 5,528 4,844 22 9 9 Loans, net of deferred loan fees ............. 418,100 359,966 289,712 268,713 304,698 Allowance for credit losses................... 7,334 4,170 4,827 2,532 4,567 -------- -------- -------- -------- -------- Loans, net ................................... 410,766 355,796 284,885 266,181 300,131 OREO ......................................... 858 4,267 11,622 17,824 17,613 Allowance for estimated losses ............... - - 802 194 1,025 -------- -------- -------- -------- -------- OREO, net .................................... 858 4,267 10,820 17,630 16,588 Deposits ..................................... 423,290 402,797 363,071 359,063 368,214 Borrowings.................................... 114,043 67,123 63,510 48,765 42,550 Shareholders' Equity/Retained Earnings ....... 49,353 43,595 37,513 19,712 18,931 Non-Performing Assets: Non-performing loans ....................... 10,441 13,070 9,976 26,180 41,221 OREO, net .................................. 858 4,267 10,820 17,630 16,588 -------- -------- -------- -------- -------- Total non-performing assets ................ $ 11,299 $ 17,337 $ 20,796 $ 43,810 $ 57,809 ======== ======== ======== ======== ======== Summary of Operations: Interest and dividend income ................. $ 41,255 $ 33,015 $ 25,045 $ 24,520 $ 29,860 Interest expense ............................. 23,640 18,398 13,112 13,719 18,382 -------- -------- -------- -------- -------- Net interest income .......................... 17,615 14,617 11,933 10,801 11,478 Provision for credit losses .................. 4,415 1,005 * 3,790 1,000 2,330 -------- -------- -------- -------- -------- Net interest income after provision for credit losses .......................... 13,200 13,612 8,143 9,801 9,148 Non-interest income: Service charges and other income ........... 2,687 1,897 1,890 2,173 1,842 Gains (losses) on loans and investment securities .................... 517 798 (64) 2,410 1,454 Gain on sale of branches ................... 3,639 - - - - Non-interest expenses: Provision for estimated losses on OREO ..... 459 460 **2,894 3,975 1,550 Holding costs and expenses of OREO, net .... 903 955 532 850 44 Operating expenses ......................... 14,104 11,304 9,980 8,705 8,284 -------- -------- -------- -------- -------- Income (loss) before income taxes ............ 4,577 3,588 (3,437) 854 2,566 Current income tax provision ................. 175 10 50 73 430 Deferred income tax benefit .................. (1,300) (1,200) - - (600) -------- -------- -------- -------- -------- Net income (loss)............................. $ 5,702 $ 4,778 $ (3,487) $ 781 $ 2,736 ======== ======== ======== ======== ======== Net income excluding the effects of the ADP Program (*, **) .......................... $ 2,213 ======== Income (loss) per share....................... $2.39 $2.04 $(1.51) N/A N/A Income per share excluding the effects of the ADP Program (*, **)....................... N/A N/A $0.96 N/A N/A
- ----------------- * Includes $3.1 million allocated to loans of the total $5.7 million one-time special charge for the Accelerated Non-Performing Asset Disposition Program (ADP). ** Includes $2.6 million allocated to OREO of the total $5.7 million one-time special charge for the ADP Program. -26-
At or For the Year Ended December 31, ---------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (Dollars in thousands) Performance Ratios:(***) Return on average total assets ............... 0.97% 0.76% 0.51% 0.18% 0.63% Return on average retained earnings .......... 12.52 8.97 7.36 3.95 15.41 Net yield on interest-earning assets ......... 3.12 3.17 2.96 2.84 2.90 Asset Quality Data: Non-performing loans as a % of net loans ..... 2.54 3.67 3.50 9.84 13.73 Non-performing assets as a % of total assets.. 1.92 3.36 4.47 10.24 13.41 Allowance for credit losses as a % of net loans ................................ 1.79 1.17 1.69 0.95 1.52 Allowance for credit losses as a % of non-performing loans........................ 70.24 31.91 48.39 9.67 11.08 Net charge-offs to average loans ............. 0.56 0.53 0.56 1.13 1.30 Capital Ratios: Tier 1 leverage capital ...................... 7.9 8.4 8.2 4.6 4.4 Tier 1 risk-based capital .................... 15.7 16.7 14.5 8.9 7.8 Total risk-based capital ..................... 17.0 17.9 15.8 10.0 9.0 Other Selected Financial and Statistical Data: Loans originated during period ............... $161,984 $115,301 $75,718 $55,133 $43,204 Dividend payout ratio......................... 6.3% - - - -
- -------------------- *** Ratios for 1995 and 1994 exclude the effects of the ADP Program. All such ratios for 1994 would be negative if the ADP charge of $5.7 million was included. -27- ITEM 7. - ------ Management's Discussion and Analysis of Financial Condition and Results of Operations -28- MANAGEMENT'S DISCUSSION AND ANALYSIS Overview -------- Norwalk Savings Society was founded in 1849 and is a Connecticut chartered capital stock savings bank, with deposits insured by the Federal Deposit Insurance Corporation (FDIC), headquartered in Norwalk, Connecticut. Its initial public offering of common stock was effective June 15, 1994. The Bank reported net earnings of $5.7 million, or $2.39 per share, for the year ended December 31, 1996. Included in net earnings were $1.3 million in deferred tax benefits. During 1996, the Bank consummated a series of significant transactions to better position itself for profitable growth, franchise strength and flexibility. To that end, the Bank began the transformation of its financial condition and the refocus of its branch network toward the more commercially-oriented area of southern Fairfield County. The Bank acquired certain assets and assumed essentially all of the liabilities of Fairfield First Bank & Trust Company ("FFB&T") in an FDIC-assisted transaction (see Financial Condition-Fairfield First Bank & Trust Company) and applied for permission to open a new branch in Darien. The Bank completed the sale of its northernmost branch offices in Brookfield and Bethel to the Savings Bank of Danbury (see Financial Condition-Branch Sales). During the year the Bank aggressively expanded the residential mortgage portfolio and continued the expansion of its commercial loan operations, building upon the efforts initiated in 1995. To fund these activities the Bank aggressively pursued deposits, especially lower cost core deposits, and supplemented deposit growth with short-term use of FHLBB borrowings and reverse repurchase agreements. The Bank intends to replace these borrowings with additional core deposit growth from its newly refocused commercially-oriented franchise. In addition, in connection with the transformation of the Bank's financial condition, the Bank sold $44.8 million of five year adjustable rate residential mortgages with servicing released (see Financial Condition-Loans), reclassified all of its Held-to- Maturity securities to Available-for-Sale, and established a Trading portfolio of equity securities allocated to a covered call option program (see Financial Condition-Investment Securities). The Tier one leverage capital ratio was 7.9% as of December 31, 1996, qualifying the Bank as "well capitalized" according to standards established by the FDIC. Asset quality continued on a steady course of improvement. Non-performing assets, comprised of non-accrual and restructured loans (collectively, "non-performing loans"), and other real estate owned (OREO) declined to $11.3 million or 1.9% of total assets. In addition, the Bank substantially increased the provision for credit losses to $4.4 million for the year ended December 31, 1996, which resulted in a coverage ratio provided by the allowance for credit losses to the loan portfolio of 1.8% and to non- performing loans of 70.2% (see Financial Condition-Asset Quality). -29- RESULTS OF OPERATIONS --------------------- Comparison of Operating Results for the Years Ended --------------------------------------------------- December 31, 1996 and 1995. --------------------------- Overview -------- Net earnings for the year ended December 31, 1996 were $5.7 million, or $2.39 per share, compared to $4.8 million or $2.04 per share for 1995. Net earnings for 1996 and 1995 included $1.3 million and $1.2 million, respectively, of deferred tax benefits from the recognition of the benefits of operating loss carryforwards. Several significant non-recurring items were included in 1996 net earnings. The first of these items was the gain on the sale of the branch operations in Brookfield and Bethel, the result of the deposit premium of $3.6 million or 7 1/2% percent of total deposits of $48.0 million in the two branches. In addition, the Bank recognized a gain on the sale of its investment in Hometown Bancorporation of $627,000. The allowance for credit losses was increased to $7.3 million at December 31, 1996, resulting from a provision for credit losses aggregating $4.4 million for the year ended December 31, 1996 and a $1.0 million credit risk allocation for the loans acquired in the FFB&T transaction. Net Interest Income - ------------------- Net interest income, which is the primary source of income for the Bank, is the difference between the interest earned on loans and investments and the interest paid on deposits and borrowings. Net interest income was $17.6 million for the year ended December 31, 1996, an increase of 20.5% over the $14.6 million for the year ended December 31, 1995. The $3.0 million increase resulted from an increase in interest income of $8.2 million partially offset by a $5.2 million increase in interest expense. The 25% growth in interest income, from $33.0 million for 1995 to $41.3 million for 1996, was primarily attributable to the growth in the mortgage and commercial loan portfolios, while the 28% growth in interest expense, from $18.4 million in 1995 to $23.6 million in 1996, resulted primarily from the increased levels of deposits and short term borrowings. The Bank's "wholesale" borrowings, which increased 71% from 1995, are comprised of borrowings from the Federal Home Loan Bank and reverse repurchase agreements. These funding tools were utilized to sustain the Bank's substantial growth in total assets over the last two years. The Bank's plan, through the branch transactions accomplished in 1996 and the upcoming opening of a new branch in Darien in 1997, is to move away from higher cost borrowings from the wholesale market into less costly core deposits, primarily from small business commercial and consumer relationships. The overall favorable interest rate environment played a significant role in the Bank's net interest income improvement for 1996. The effect of lower, more attractively priced rates (from the borrower's viewpoint) in the residential mortgage loan market spurred activity, and the Bank's share of that activity contributed $6.8 million of the $7.6 million volume increase in the Bank's gross interest income, while $0.6 million of the increase was due to rate increases, primarily in the securities portfolio. -30- The Bank's average cost on interest-bearing liabilities rose to 4.54% for the year 1996 from 4.29% for the year 1995. The Bank's interest expense increased primarily as a result of the increase in the volume of borrowed funds and secondarily from the increased volume of time deposits, reflecting the continued shift by the consumer into time deposits from regular savings and money market accounts. However, the Bank was able to mitigate the effect of higher interest rates on time deposits through lower rates on borrowed funds. On an overall basis, approximately $2.4 million of the $3.0 million increase in net interest income was due to increased volume, while $0.6 million of the increase in net interest income was due to favorable rate adjustments. As a result of all of these significant movements in interest income and interest expense, the Bank experienced a slight decrease in its net interest margin during the year ended December 31, 1996, from 3.17% for 1995 down to 3.12% for 1996. The following table summarizes the Bank's net interest income and net yield on average interest-earning assets. Non-accruing loans are included in average loans outstanding during the periods, and daily average amounts were used to compute average balances. -31- TABLE 1 - AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ($ thousands)
Years Ended December 31, ------------------------------------------ 1996 ------------------------------------------ Average Average Balance Interest Rate ------- -------- ------- Interest-Earning Assets Loans Receivable $403,207 $30,589 7.59 % Investment Securities 36,012 2,571 7.14 Mortgage-Backed Securities 104,000 7,076 6.80 Short-Term Investments 14,970 739 4.94 Marketable Equity Investments 7,253 280 3.86 ------- ------ Total Interest-Earning Assets 565,442 41,255 7.30 % ------- ------ ---- Non-Interest-Earning Assets Cash and Cash Equivalents 9,310 Accrued Income Receivable 6,645 Premises and Equipment 3,150 Other 9,957 Less: Allowance for Credit Losses (4,882) ------- Total Non-Interest-Earning Assets 24,180 ------- Total Assets $589,622 ======= Interest-Bearing Liabilities Deposits -------- Regular Savings and NOW $ 58,599 $ 745 1.27 % Super and Money Market Savings 116,232 3,411 2.93 Time 227,255 12,580 5.54 ------- ------ Total Deposits 402,086 16,736 4.16 Borrowings 115,465 6,796 5.89 Mortgage Escrow Deposits 3,556 108 3.04 ------- ------ Total Interest-Bearing Liabilities 521,107 23,640 4.54 % ------- ------ ---- Non-Interest-Bearing Liabilities Non-Interest-Bearing Deposits 18,922 Other Liabilities 4,036 ------- Total Non-Interest-Bearing Liabilities 22,958 ------- Shareholders' Equity 45,557 ------- Total Liabilities and Shareholders' Equity $589,622 ======= Net Interest-Earning Assets and Interest Rate Spread $44,335 2.76 % ====== ---- Net Interest Income and Net Yield on Average Interest-Earning Assets $17,615 3.12 % ====== ==== Years Ended December 31, ------------------------------------------- 1995 ------------------------------------------- Average Average Balance Interest Rate ------- -------- ------- Interest-Earning Assets Loans Receivable $313,072 $23,666 7.56 % Investment Securities 39,490 1,961 4.97 Mortgage-Backed Securities 98,334 6,753 6.87 Short-Term Investments 6,915 514 7.43 Marketable Equity Investments 3,076 121 3.93 ------- ------ Total Interest-Earning Assets 460,887 33,015 7.16 % ------- ------ ---- Non-Interest-Earning Assets Cash and Cash Equivalents 8,138 Accrued Income Receivable 3,532 Premises and Equipment 3,117 Other 10,341 Less: Allowance for Credit Losses (4,468) ------- Total Non-Interest-Earning Assets 20,660 ------- Total Assets $481,547 ======= Interest-Bearing Liabilities Deposits Regular Savings and NOW $ 53,788 $ 749 1.39 % Super and Money Market Savings 123,582 3,902 3.16 Time 182,430 9,434 5.17 ------- ------ Total Deposits 359,800 14,085 3.91 Borrowings 65,644 4,229 6.44 Mortgage Escrow Deposits 3,089 84 2.72 ------- ------ Total Interest-Bearing Liabilities 428,533 18,398 4.29 % ------- ------ ---- Non-Interest-Bearing Liabilities Non-Interest-Bearing Deposits 10,221 Other Liabilities 1,787 ------- Total Non-Interest-Bearing Liabilities 12,008 ------- Shareholders' Equity 41,006 ------- Total Liabilities and Shareholders' Equity $481,547 ======= Net Interest-Earning Assets and Interest Rate Spread $32,354 2.87 % ====== ---- Net Interest Income and Net Yield on Average Interest-Earning Assets $14,617 3.17 % ====== ====
-32- Rate/Volume Analysis - -------------------- The following table presents the changes in interest and dividend income and the changes in interest expense attributable to changes in interest rates or changes in volume of interest-earning assets and interest-bearing liabilities during the years of 1996 and 1995. Changes which are attributable to both rate and volume have been allocated proportionately. TABLE 2 - RATE/VOLUME ANALYSIS ($ thousands) Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 ----------------------------
Net Rate Volume Change ---- ------ ------ Interest Income: --------------- Loans Receivable $ 94 $6,829 $6,923 Mortgage-Backed Securities (69) 392 323 Short-Term Investments (217) 442 225 Investment Securities 793 (24) 769 --- ----- ----- Total 601 7,639 8,240 --- ----- ----- Interest Expense: ---------------- Deposits: -------- Savings and Other 68 (64) 4 Super and Money Market 270 221 491 Time (709) (2,438) (3,147) --- ----- ----- Total Deposits (371) (2,281) (2,652) Borrowings 396 (2,962) (2,566) Mortgage Escrow Deposits (10) (14) (24) --- ----- ----- Total 15 (5,257) (5,242) --- ----- ----- Change in Net Interest Income $616 $2,382 $2,998 === ===== =====
-33- Provision for Credit Losses - --------------------------- The provision for credit losses for the year ended December 31, 1996 was $4.4 million, compared to $2.1 million for the year ended December 31, 1995. The allowance for credit losses as of December 31, 1996 was $7.3 million compared to $4.2 million as of December 31, 1995. Coverage of non-performing loans provided by the allowance for credit losses was 70.2% and 31.9% as of December 31, 1996 and 1995, respectively. Coverage of the net loan portfolio provided by the allowance for credit losses was 1.8% and 1.2% as of December 31, 1996 and 1995, respectively. The increase in the allowance was the result of several factors, including the overall loan portfolio growth, the increased level of higher risk consumer and commercial lending, the increasing average size of the residential mortgages being originated, and the increase in the Bank's Watch List from $5.6 million at December 31, 1995 to $6.0 million at September 30, 1996 and $8.5 million at December 31, 1996. The Bank's Watch List is comprised of loans which have been identified by the Bank's credit analysis system as exhibiting more than usual risk of nonperformance or loss. Non-Interest Income - ------------------- Non-interest income consists of deposit service charges and fees, fees derived from servicing of loans, net realized and unrealized gains on securities, net gain on sale of loans, fees derived from the Bank's Trust Department and, in 1996, the credit card program. Non-interest income for the year ended December 31, 1996 was $6.8 million compared to $2.7 million for the comparable period of 1995. The table below identifies the primary components of Non-interest income. The core elements of Non-interest income, in total, showed sustainable improvement over the prior period. TABLE 3 - NON-INTEREST INCOME ($ thousands)
Years Ended December 31, -------------------------- 1996 1995 ---- ---- Loan Servicing Fees $ 334 $ 379 Other Loan Fees 146 136 Deposit Service Charges 763 599 Credit Card Fees 514 - Trust Department Fees 552 515 Other 378 268 ----- ----- Total Fees 2,687 1,897 ----- ----- Net Gains on Securities 661 798 Net Loss on Sale of Loans (144) - Gain on Sale of Branches 3,639 - ----- ----- Total Gains on Sales of Assets and Liabilities 4,156 798 ----- ----- Total Non-Interest Income $6,843 $2,695 ===== =====
-34- Non-interest income for 1996 increased by $4.1 million, or 153.9% over 1995. Service fees from deposits increased to $763,000 for the year ended December 31, 1996 compared to $599,000 for the same period a year ago. The 27.4% increase of $164,000 is indicative of the Bank's strategy of establishing small business commercial account relationships, which provide a higher level of fee income. Excluding the gain transactions, the overall increase in fee income was primarily attributable to the credit card fees from both the consumer and merchant programs aggregating $514,000, which resulted from the Bank acquiring a credit card portfolio in the FFB&T transaction in July 1996. Included in Non-interest income for the year ended December 31, 1996 is $3.6 million of gain on deposits as a result of selling the Bank's branch operations in Brookfield and Bethel. Included in the net gain on sales of securities and loans was the $627,000 gain from the sale of the Bank's investment in Hometown Bancorporation, other securities gains and losses (both realized and unrealized as a result of the Trading portfolio of equities), and the loss of $144,000 from the sale of $44.8 million in five year adjustable residential mortgages. Non-Interest Expense - -------------------- Non-interest expense is comprised of general and administrative expenses incurred in managing the business of the Bank and costs associated with managing and selling OREO properties. Non-interest expense was $15.5 million for the year ended December 31, 1996, compared to $12.7 million for the same period in 1995. The table that follows indicates the elements of Non-interest expense, including OREO related expense, which is directly related to the level of non-performing assets. TABLE 4 - NON-INTEREST EXPENSE ($ thousands)
Years Ended December 31, ---------------------------- 1996 1995 ---- ---- General and Administrative Expense ---------------------------------- Compensation $ 5,726 $ 4,665 Employee Benefits 1,923 1,567 Occupancy and Equipment 1,646 1,336 Data Processing 1,303 702 Regulatory Assessments 9 438 Marketing 687 700 Legal and Professional 779 354 Office Supplies 578 481 Insurance 228 237 Other 1,225 824 ------ ------ Total 14,104 11,304 ------ ------ OREO Related Expense -------------------- Net Holding Costs and Expenses 352 728 Net Loss on Sales of OREO 551 227 Provision for Estimated Losses 459 460 ------ ------ Total 1,362 1,415 ------ ------ Total Non-Interest Expense $15,466 $12,719 ====== ======
-35- Overall, Non-interest expense increased by $2.7 million or 21.6%. The overall result was the difference between a net increase of $2.8 million in general and administrative expense and a $0.1 million decrease in OREO related expenses. On an overall basis, there were approximately $500,000 of nonrecurring expenses in 1996 included in the classifications of compensation, occupancy, data processing, and other, primarily related to the Bank's significant, one-time transactions. General and Administrative Expense - ---------------------------------- Of the total increase of $2.8 million in general and administrative expense, approximately $1.4 million was attributable to increased compensation and benefits expenses. Part of the increase was the result of the expanded labor force in the commercial loan and credit card departments, and additional branch personnel to enhance service capability; incentive compensation programs were also offered to all personnel for loan origination, service performance, and Bank profitability goals. As of December 31, 1996, the Bank employed 157 people based on a full time equivalent measure. The comparable number as of December 31, 1995 was 146, representing a 7.5% increase, most of which was attributable to the commercial lending function. The balance of the increase was attributable to an average salary increase of 4%. Employee benefits rose $356,000 as a result of higher staff levels, a severance package for former FFB&T employees, and an increase in Employee Stock Ownership Program (ESOP) costs. The ESOP cost is based on the average market price per share for NSS stock, which calculated out to be $21.56 per share for 1996, compared to $16.33 for 1995. The price per share increase of more than $5.00, combined with the shares allocated in 1996, resulted in an additional $128,000 of employee benefits expense. Although the ESOP purchased the shares at the time of the stock conversion for $10.00 per share, the accounting rules for ESOP compensation require the expense to be based upon the average market value of the Bank's stock during the period employees perform service to earn their allocated shares. Occupancy and equipment costs rose $310,000 from 1995's level as a result of increased square footage of space under lease for a period of time in 1996. The total square footage increased as there was an overlap of time between the FFB&T transaction and the sale of the Brookfield and Bethel branches. Additionally, the Bank incurred significantly higher depreciation costs on capital improvements, primarily attributable to the updating and replacement of the automated teller machine network during the year. Higher data processing costs resulted for the most part from the FFB&T transaction, the branch sales, and upgrades and integration enhancements to the Bank's EDP capabilities during the year. In addition, other elements of 1996 Non-interest expense not present in 1995, but likely to continue, are the fees the Bank paid to an outside service bureau relating to the credit card program, which amounted to $382,000 for the year ended December 31, 1996. Expenses associated with legal and professional fees increased as a result of the large and unusual transactions in 1996; legal fees also increased as a result of several new litigations related to the Bank's lending activities. Office supplies showed slightly more than a 20% increase, attributable to outfitting the Bank's newly acquired office in Fairfield and the Bank's generally expanded level of operations. These increases were partially offset by the decline in regulatory assessments from $438,000 for 1995 to $9,000 for 1996, reflecting the full year's effect of the roll-back of FDIC insurance assessments. The Bank qualifies as well-capitalized in accordance with FDIC guidelines and pays the lowest rate available to member institutions. OREO Related Expenses - --------------------- In addition to the general and administrative component of Non-interest expense, OREO related expenses declined by $53,000 to $1,362,000 for the year ended December 31, 1996. Net holding costs and expenses declined to $352,000 from $728,000 for the years ended December 31, 1996 and 1995, respectively. This reduction is a result of the overall decline in the OREO portfolio. The net balance of OREO was $0.9 million as of December 31, 1996 compared to $4.3 million at December 31, 1995. As of December 31, 1996 there were six properties comprising the OREO portfolio, four of which were under contract of sale. Management's long-standing approach has been to reduce OREO as quickly, efficiently and effectively as possible, balancing the effect of accepting a reduced offer for an OREO property against the holding costs associated with continued ownership. Aggregating the allowance provisions and net losses on sales, the Bank incurred losses on OREO properties of $1.0 million in 1996 and $687,000 in 1995. -36- Provision for Income Taxes - -------------------------- The current provision for income taxes for the year ended December 31, 1996 as well as the year ended December 31, 1995 represented estimated minimum state and federal tax requirements for the periods inasmuch as both federal and state income-based tax liabilities were offset by loss carryforwards. In 1995 the Bank recognized a portion of its net deferred tax assets in the amount of $1.2 million by reflecting a deferred tax benefit. In 1996 the Bank recovered the remainder of the valuation allowance against its net deferred tax assets by reflecting a deferred tax benefit in the current year's earnings of $1.3 million. As of December 31, 1996 the Bank has recognized all of its available net deferred tax assets, and future taxable earnings will be subject to taxation at a combined state and federal rate of approximately 40%. RESULTS OF OPERATIONS --------------------- Comparison of Operating Results for the Years Ended --------------------------------------------------- December 31, 1995 and 1994. -------------------------- Operations - ---------- Net earnings for the year ended December 31, 1995 were $4.8 million, or $2.04 per share, compared to a net loss of $3.5 million or $1.51 per share for 1994. Net earnings for 1995 included $1.2 million of net deferred tax benefits as well as a $1.1 million recovery from the successful completion of the ADP Program. The loss sustained for the year ended December 31, 1994 was due primarily to a one-time special charge of $5.7 million for the ADP Program in order to facilitate the rapid disposition of certain non-performing assets at discounts below their net realizable value. Excluding the one time special charge, the Bank recorded net earnings of $2.2 million, or $0.96 per share, for the year ended December 31, 1994. Net Interest Income - ------------------- Net interest income, which is the primary source of income for the Bank, is the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. The increase in net interest income of $2.7 million for the year ended December 31, 1995, compared to the year ended December 31, 1994, was attributable to an increase in interest income of $8.0 million partially offset by a $5.3 million increase in interest expense. The 31.8% improvement in interest income was the result of a combination of yield enhancement and increased levels of interest-earning assets. The yield on total interest-earning assets increased to 7.16% from 6.21% as of December 31, 1995 and 1994, respectively. In addition, average interest-earning assets rose to $460.9 million for 1995 from a $403.1 million average for 1994. The Bank's calculations indicate that of the $8.0 million improvement in interest income, $3.6 million was attributable to higher yields and $4.4 million was attributable to higher levels of interest-earning assets. During 1995 the Bank focused on maximizing returns on interest-earning assets through a number of different approaches. Interest income on investment securities and short-term investments declined by $809,000 as the Bank redirected the funds invested in these two portfolios toward higher yielding assets in loans and mortgage backed securities. Loan growth, centered in residential lending with added emphasis on commercial lending, provided for the majority of the higher yield of interest income. Additional interest income of $5.4 million came from the loan portfolio during 1995 and $3.3 million came from the mortgage-backed securities portfolio. Interest expense increased to $18.4 million for the year ended December 31, 1995, from $13.1 million for the comparable period of 1994. Interest expense was driven by a rising interest rate environment during most of 1995. Overall, the Bank's cost of funds rose to 4.29% from 3.28% on interest bearing-liabilities for the year ended December 31, 1995, compared to the same period a year ago. Volume, or the average balance of deposits and borrowings, rose to $428.5 million from $399.2 million for the years ended December 31, 1995 and 1994, respectively, contributing to the increase in interest expense as well. -37- As the competition for deposits intensified during much of 1995, the banking industry generally experienced a higher interest rate environment on liabilities while yields on earning assets remained constant or declined. NSS experienced just the opposite with regard to interest-earning assets. Taking advantage of a portfolio of loans and mortgage-backed securities heavily weighted toward adjustable rate products and, therefore, tied to shorter term interest rates, the Bank experienced higher yields on its portfolios. The higher yields achieved on loans and mortgage backed securities resulted from a combination of adjustable rates repricing to higher levels as well as additional investments at current rates; overall, net interest margin improved to 3.17% from 2.96%. The following table summarizes the Bank's net interest income and net yield on average interest-earning assets. For the purpose of this analysis, non-accruing loans are included in average loans outstanding during the periods indicated and daily average amounts were used to compute average balances. -38- TABLE 5 - NET INTEREST INCOME ANALYSIS ($ thousands)
Years Ended December 31, ---------------------------------------------------------------------------------- 1995 1994 ------------------------------------ ---------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ------- -------- ------ ------- -------- ------ Interest-Earning Assets Loans Receivable $313,072 $23,666 7.56 % $265,581 $18,234 6.87 % Investment Securities 39,490 1,961 4.97 58,870 2,633 4.47 Mortgage-Backed Securities 98,334 6,753 6.87 65,348 3,471 5.31 Short-Term Investments 3,498 277 7.92 9,802 445 4.54 Equity Investments 6,493 358 5.51 3,459 262 7.57 ------- ------ ------- ------ Total Interest-Earning Assets $460,887 $33,015 7.16 % $403,060 $25,045 6.21 % ======= ====== ---- ======= ====== ---- Interest-Bearing Liabilities Deposits -------- Savings and Other $177,086 $ 4,651 2.63 % $184,702 $ 4,046 2.19 % Time 182,714 9,434 5.16 161,841 6,144 3.80 ------- ------ ------- ------ Total Deposits 359,800 14,085 3.91 346,543 10,190 2.94 Borrowings 65,644 4,229 6.44 49,386 2,839 5.75 Mortgage Escrow Deposits 3,089 84 2.72 3,238 83 2.56 ------- ------ ------- ------ Total Interest-Bearing Liabilities $428,533 $18,398 4.29 % $399,167 $13,112 3.28 % ======= ====== ---- ======= ====== ---- Net Interest-Earning Assets and Interest Rate Spread $32,354 2.87 % $3,893 2.93 % ====== ---- ===== ---- Net Interest Income and Net Yield on Average Interest-Earning Assets $14,617 3.17 % $11,933 2.96 % ====== ==== ====== ====
-39- Rate/Volume Analysis - -------------------- The following table presents the changes in interest and dividend income and the changes in interest expense attributable to changes in interest rates or changes in volume of interest-earning assets and interest-bearing liabilities during the years of 1995 and 1994. Changes which are attributable to both rate and volume have been allocated proportionately. TABLE 6 - RATE/VOLUME ANALYSIS ($ thousands) Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 ----------------------------
Net Rate Volume Change ---- ------ ------ Interest Income: --------------- Loans Receivable $1,964 $3,468 $5,432 Mortgage-Backed Securities 1,205 2,077 3,282 Short-Term Investments 217 (385) (168) Investment Securities 180 (756) (576) ----- ----- ----- Total 3,566 4,404 7,970 ----- ----- ----- Interest Expense: ---------------- Deposits: -------- Savings and Other (778) 173 (605) Time (2,421) (869) (3,290) ----- ----- ----- Total Deposits (3,199) (696) (3,895) Borrowings (373) (1,017) (1,390) Mortgage Escrow Deposits (5) 4 (1) ----- ----- ----- Total (3,577) (1,709) (5,286) ----- ----- ----- Change in Net Interest Income ($11) $2,695 $2,684 == ===== =====
Provision for Credit Losses - --------------------------- The regular provision for credit losses for the year ended December 31, 1995 was $2.1 million compared to $690,000 for the year ended December 31, 1994. The $1.4 million increase resulted from loan growth of approximately $70 million during the period, of which $61 million was residential mortgages. In addition, the Bank's newly formed Commercial Loan Department originated $8.7 million of commercial loans, the majority of which closed in the second half of 1995. Increased commercial lending necessarily involves increased inherent credit risk. The additional provision in 1995 is deemed prudent by management to accommodate this increased risk. Upon the successful completion of the ADP program, the Bank recovered $1.1 million of the original ADP allowance. As a result, the Bank had a net provision of $1.0 million for the year ended December 31, 1995 compared to $3.8 million, of which $3.1 million was the special ADP provision, for the year ended December 31, 1994. The allowance for credit losses as of December 31, 1995 was $4.2 million compared to $4.8 million as of December 31, 1994. Coverage of non-performing loans provided by the allowance for credit losses was 31.9% and 48.4% as of December 31, 1995 and 1994, respectively. Coverage of net loans provided by the allowance for credit losses was 1.2% and 1.7% as of December 31, 1995 and 1994, respectively. -40- Non-Interest Income - ------------------- Non-interest income consists of service charges and fees, fees derived from servicing of loans, net securities gains, fees derived from the Bank's Trust Department, and third party sales of annuities and mutual funds. Non-interest income for the year ended December 31, 1995 was $2.7 million compared to $1.8 million for the comparable period of 1994. The increase of $869,000 or 47.6% was primarily attributable to gains on sales of securities of $798,000 recorded in 1995 compared to a net loss on the sale of securities of $64,000 during 1994. The table below identifies the primary components of non-interest income. The core elements of non-interest income were virtually unchanged for the periods. TABLE 7 - NON-INTEREST INCOME ($ thousands)
Years Ended December 31, --------------------------- 1995 1994 ---- ---- Loan Servicing Fees $ 379 $ 427 Other Loan Fees 136 152 Deposit Service Charges 599 546 Trust Department Fees 515 513 Other 268 252 ------ ------ Total Fees 1,897 1,890 Net Gains (Losses) on Securities 798 (64) ------ ------ Total Non-Interest Income $2,695 $1,826 ===== =====
Non-Interest Expense - -------------------- Non-interest expense is comprised of general and administrative expenses incurred in managing the business of the Bank and costs associated with managing and selling OREO properties. Non-interest expense was $12.7 million for the year ended December 31, 1995, compared to $13.4 million for the same period in 1994. -41- The table that follows indicates the elements of non-interest expense, including OREO related expense, which is directly related to the level of non-performing assets. TABLE 8 - NON-INTEREST EXPENSE ($ thousands)
Years Ended December 31, ------------------------------ 1995 1994 ---- ---- General and Administrative Expense ---------------------------------- Compensation $ 4,665 $ 3,888 Employee Benefits 1,567 1,229 Occupancy and Equipment 1,854 1,639 Regulatory Assessments 438 1,054 Marketing 700 400 Legal and Professional 354 271 Office Supplies 481 299 Insurance 237 310 Other 1,008 890 ------ ------ Total 11,304 9,980 ------ ------ OREO Related Expense -------------------- Net Holding Costs and Expenses 728 851 Net Loss (Gain) on Sales of OREO 227 (319) Provision for Estimated Losses 460 294 Provision for ADP - 2,600 ------ ------ Total 1,415 3,426 ------ ------ Total Non-Interest Expense $12,719 $13,406 ====== ======
Overall, non-interest expense decreased by $687,000 or 5.1%. The overall result was the difference between a net increase of $1.3 million in general and administrative expense and a $2.0 million decrease in OREO related expenses. Slightly more than half of the total increase in general and administrative expense, or $777,000, was attributable to compensation expense. The reason for the increase in compensation expense was two-fold: staff levels increased as the Bank added additional staff to the commercial lending function along with new residential loan originators; the balance of the increase was attributable to salary increases and incentive-based compensation. Employee benefits rose $338,000 as a result of higher staff levels along with increased Employee Stock Ownership Program (ESOP) costs. The ESOP cost is based on the average market price per share for NSS stock which calculated out to be $16.33 per share for 1995, compared to $11.69 for 1994. The price per share increase of almost $5.00 combined with the shares allocated in 1995 resulted in an ESOP employee benefits expense of $434,000 for 1995 compared to $283,000 for 1994. Although the ESOP purchased the shares at the time of the stock conversion for $10.00 per share, the accounting requirements for ESOP compensation expense is based upon the market value of the shares allocated to employees. Occupancy and equipment costs rose $215,000 from 1994's level as a result of increased depreciation costs on capital improvements coupled with higher data processing costs included in these totals. Marketing expenses increased as the Bank stepped up general image and specific product advertising campaigns. Expenses associated with legal and professional fees as well as office supplies are higher as a result of the Bank's having been a public company for a full year in 1995 and incurring a full year's worth of associated costs. All other expenses increased to $1.0 million from $890,000 for the years ended December 31, 1995 and 1994, respectively. Included in 1995 was an out-of-court settlement of a long running law suit amounting to $83,000. These increases were partially offset by regulatory assessments declining by $616,000 to $438,000 for 1995 reflecting the roll- back of FDIC insurance premiums during the year. The Bank qualified as well-capitalized in accordance with FDIC guidelines and paid the lowest rate available to member institutions. -42- In addition to the general and administrative component of non-interest expense, OREO related expenses declined to $1.4 million from $3.4 million for the years ended December 31, 1995 and 1994, respectively. The $2.0 million decline is primarily attributable to the ADP provision of $2.6 million included in 1994's OREO expense. The ADP was a program begun after the Bank's stock conversion in 1994 and was designed to more rapidly dispose of certain nonperforming assets at discounts below their net realizable values. The ADP program was concluded on December 31, 1995 with no additional provision taken during 1995. Holding costs and expenses declined to $728,000 from $851,000 for the years ended December 31, 1995 and 1994, respectively. This reduction is a result of the overall decline in the OREO portfolio. The net balance of OREO was $4.3 million as of December 31, 1995 compared to $10.8 million at December 31, 1994. The provision for estimated OREO losses amounted to $460,000 for 1995 compared to $294,000 in 1994. As a result of the relatively low balance of OREO as of year end 1995, combined with the stabilization in real estate values in Fairfield County, management determined that there was no need for an allowance for estimated OREO losses. Since management's approach is to reduce OREO as quickly, efficiently and effectively as possible, the Bank may incur losses to dispose of OREO below its net realizable value, should the opportunities arise. Sales of OREO properties in 1995 resulted in net losses of $227,000 compared to net gains in 1994 of $319,000. Provision for Income Taxes - -------------------------- The current provision for income taxes during the year ended December 31, 1995 as well as the year ended December 31, 1994 represented estimated minimum state income tax requirements for the periods as both federal and state income-based tax liabilities are offset by loss carryforwards. In addition, the Bank recovered a portion of the valuation allowance against its net deferred tax asset by reflecting a deferred tax benefit in the current year's earnings of $1.2 million. The remaining available net deferred tax asset as of December 31, 1995 amounted to $3.3 million and was offset entirely by a valuation allowance as of that date. FINANCIAL CONDITION ------------------- General - ------- Total assets were $589.6 million as of December 31, 1996, representing a $74.3 million increase from the $515.3 million at December 31, 1995. Total loans, net of allowance for credit losses, were $410.8 million, an increase of $55.0 million from the $355.8 million as of December 31, 1995. Total deposits were $423.3 million, an increase of $20.5 million from the December 31, 1995 level of $402.8 million. Shareholders' equity was $49.4 million as of December 31, 1996 compared to $43.6 million as of December 31, 1995. The tier one leverage capital ratio was 7.9% as of December 31, 1996 compared to 8.4% as of December 31, 1995. Two significant transactions during 1996 significantly affected the Bank's asset and liability composition. A summary of each transaction follows: Fairfield First Bank & Trust Company (FFB&T) - ------------------------------------------- In July 1996 the Bank assumed essentially all liabilities, primarily $47.6 million in deposits, and acquired certain assets of Fairfield First Bank & Trust Company (FFB&T), Fairfield, Connecticut, in an FDIC-assisted transaction. Certain of the commercial real estate loans acquired from the FDIC were simultaneously sold to another bank at an amount in excess of the Bank's bid price to the FDIC. As of September 30, 1996 the Bank completed its evaluation and allocated the net purchase price to the assets acquired and the liabilities assumed based upon their fair values. The net acquired loans were reflected at a fair value of $13.7 million, which was net of a valuation allowance of $1.0 million, and the excess of the purchase price over the net assets acquired, which approximated $1.8 million and which management deems to represent a core deposit intangible, has been reflected as Goodwill in the Consolidated Statement of Financial Condition. Approximately $76,000 of goodwill amortization has been included in Other non-interest expense for the year ended December 31, 1996, based on an estimated life of six years. -43- Branch Sales - ------------ In October 1996 the Bank sold two of its branch office operations, comprised of deposits aggregating $48.0 million, loans aggregating $0.2 million, and premises and equipment amounting to $307,000. As a result of the sale, the Bank recognized a total gain of $3.6 million, essentially all of which was the deposit premium gain. Investment Securities - --------------------- Total securities amounted to $140.1 million as of December 31, 1996 compared to $123.9 million at December 31, 1995, representing a $16.2 million increase or 13.1%. Purchases of investments made during 1996 amounted to $82.4 million, compared to $67.6 million for the year ended December 31, 1995. In accordance with Statement of Financial Accounting Standard No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115), which the Bank adopted as of January 1, 1994, the Bank was required to classify each security in the portfolio as either "Held-to-Maturity," "Available-for- Sale," or "Trading Account Security." In accordance with the additional guidance provided by the Financial Accounting Standards Board ("FASB") in conjunction with SFAS 115, during 1995 the Bank re-assessed and reclassified certain of its investments originally classified as Held-to-Maturity to Available-for-Sale. During 1996 management continued to assess the objectives of the Bank's investment portfolio in light of its plans to transform the Bank's financial condition, and decided during the fourth quarter that the Held-to-Maturity classification was no longer supported by management's intent for the portfolio. Therefore, effective December 31, 1996, the Bank reclassified all of its Held-to-Maturity investments to the Available-for-Sale classification. This decision required the Bank to mark each security to fair value through an adjustment to Shareholders' equity, net of income tax effect, as of December 31, 1996. During 1996 the Bank decided to liquidate its portfolio of utility stocks as a result of the decision to re-position the investment security portfolios. This resulted in a net loss of $165,000. The Bank has established two portfolios of equity securities, an Available-for-Sale portfolio of a variety of equities and mutual funds aggregating $2.2 million at December 31, 1996, and a Trading Account group of equities for certain other common stock equity securities against which the Bank sells covered call options from time to time as market conditions allow. The Bank's covered call option program is designed for yield enhancement and to lessen the Bank's exposure to a potentially volatile stock market. In this program, the Bank purchases shares of qualified common stock and sells a call option against the investment. The holding period of each investment is usually one to three months and there are ten to fifteen investment positions in the program. As required by SFAS 115, the Bank marks the common stock and related covered call option to market through current period earnings. The mark to market effect on earnings as of December 31, 1996 was a loss of $61,000 on the $3.3 million Trading Portfolio. Inasmuch as the Bank has had its equity investment privileges grandfathered by the FDIC, it intends to continue to maintain an equity stock portfolio. To provide direction, the Bank's Board of Directors has established upward limits and an investment policy which includes guidelines which require that the Bank's equity investments have a minimum quality rating of "A" by a widely recognized rating service; the policy also requires adequate diversification to avoid concentrations in lines of business and geographic regions. During the second half of 1995, the Bank accumulated a significant common stock position in Hometown Bancorporation ("Hometown"), a local bank holding company, to the extent that the Bank filed a Form 13-D with an over 5% ownership position. In April 1996 the Bank liquidated its position shortly after HUBCO, Inc., a New Jersey-based bank holding company, announced its planned acquisition of Hometown. The Bank recorded a $627,000 gain on the sale of its investment in Hometown in 1996. In total, net securities gains for the year ended December 31, 1996 were $661,000 compared to $798,000 for the year ended December 31, 1995. -44- The following table presents a summary of the investments and other securities portfolios as of December 31, 1996 and December 31, 1995, fair values and unrealized gains and losses as of those dates. TABLE 9 - INVESTMENT & OTHER SECURITIES ($ thousands)
December 31, 1996 ---------------------------------------------------------------------- Unrealized Holding Amortized ----------------------- Fair Cost Gains Losses Value --------- ----- ------ ----- Available for Sale - ------------------ U.S. Government and Federal Agency Obligations $ 42,436 $145 $461 $ 42,120 Mortgage Backed Securities 92,443 382 372 92,453 Equity Securities 2,110 138 12 2,236 ------- --- --- ------- Total Available for Sale $136,989 $665 $845 $136,809 ======= === === ======= Trading - ------- Equity Securities $3,353 $46 $107 $3,292 ===== == === ===== December 31, 1996 ---------------------------------------------------------------------- Unrealized Holding Amortized ----------------------- Fair Cost Gains Losses Value --------- ----- ------ ----- Trading - ------- Equity Securities $268 $ - $5 $263 === == = === Available for Sale - ------------------ U.S. Government and Federal Agency Obligations $26,611 $128 $ 55 $26,684 Mortgage-Backed Securities 50,243 220 162 50,301 Equity Securities 4,572 94 85 4,581 ------- ---- ---- ------- Total Available for Sale $81,426 $442 $302 $81,566 ====== === === ====== Held to Maturity - ---------------- U.S. Government and Federal Agency Obligations $ 1,998 $ - $ - $ 1,998 Mortgage-Backed Securities 40,038 358 114 40,282 ------ --- --- ------ Total Held to Maturity $42,036 $358 $114 $42,280 ====== === === ======
-45- Loans - ----- Total loans, before reductions for deferred credits, fees and the allowance for credit losses, amounted to $418.8 million, representing a $58.3 million or 16.2% increase over the December 31, 1995 level of $360.5 million. TABLE 10 - LOAN PORTFOLIO ($ thousands)
December 31, 1996 December 31, 1995 ----------------- ----------------- Real Estate Loans - ----------------- 1 To 4 Family Adjustable Rate $302,686 72.3% $231,168 64.1% 1 To 4 Family Fixed Rate 31,933 7.6% 56,360 15.6% Multi-Family 7,450 1.8% 8,902 2.5% Commercial 46,272 11.0% 44,914 12.5% Home Equity Lines Of Credit 7,127 1.7% 5,698 1.6% Home Improvement and Second Mortgages 2,568 0.6% 3,422 0.9% Land 828 0.2% 1,290 0.4% Construction 1,227 0.3% 1,617 0.4% ------- ------- Total Real Estate Loans 400,091 95.5% 353,371 98.0% ------- ------- Commercial Loans 8,425 2.0% 1,485 0.4% - ---------------- ------- ------- Consumer Loans - -------------- Passbook 1,510 0.4% 1,634 0.4% Automobile Loans 2,619 0.6% 2,792 0.8% Automobile Leases 3,149 0.8% 230 0.0% Credit Cards 991 0.2% - - All Other 2,033 0.5% 963 0.3% ------- ------- Total Consumer Loans 10,302 2.5% 5,619 1.6% ------- ------- Total Loans, Gross 418,818 100% 360,475 100% Deferred Fees and Credits (718) (509) ------- ------- 418,100 359,966 Allowance for Credit Losses (7,334) (4,170) ------- ------- Total Loans, Net $410,766 $355,796 ======= =======
The increase in demand for new residential mortgage loans continued during 1996 as a result of the Bank's loan originators offering competitively priced residential mortgage products combined with NSS's outstanding reputation for service. During 1996, the Bank continued to focus on originating adjustable rate residential loans. As indicated by the table, 79.9% of the total loan portfolio is in first mortgage residential loans. Of the $418.8 million in the loan portfolio, 72.3% of the portfolio or $302.7 million is in residential adjustable first mortgage loan products. The Bank continued to emphasize small business commercial lending during 1996. By December 31, 1996 the commercial and industrial portion of the portfolio had grown to $8.4 million from $1.5 million as of December 31, 1995. These loans are originated by the commercial loan team that was established in 1995 and continues to grow. The loans are most often at a margin over and above the NSS bank rate which follows the prime rate and adjusts whenever the prime changes. Automobile leases also increased substantially during the year. These leases are originated on an indirect basis, which means that they are acquired from a third party provider after having been re-underwritten by an NSS credit representative. The indirect automobile lease portfolio as of December 31, 1996 was $3.1 million compared to $0.2 million, last year. -46- In conjunction with the FFB&T transaction the Bank acquired a credit card portfolio. As of December 31, 1996 this portfolio was $1.0 million and the Bank plans to maintain the credit card product and to continue to offer it on a prudent lending basis. The sale of $44.8 million in five year adjustable rate residential mortgages was consummated during the fourth quarter of 1996. This sale generated a loss of $144,000 but alleviated a concentration of assets in a particular product and was done in conjunction with the plan to accomplish the transformation of the Bank's balance sheet. The sale was negotiated on a servicing-released basis, whereby the servicing of the loans was sold along with the mortgages. A marketing evaluation of these borrowers resulted in the assessment that as a group they could not be cross-sold on additional Bank products and services; as such, the profitability of a continued relationship was limited. There were no loan securitizations during 1996. Securitization of $4.3 million of certain types of adjustable rate mortgage loans took place during the year ended December 31, 1995 to alleviate an excess concentration in those products at that time. Non-Performing Assets/Asset Quality - ----------------------------------- The Bank's level of non-performing assets continued to steadily decline during 1996. Total non-performing assets as of December 31, 1996 were $11.3 million, representing 1.92% of total assets. As of December 31, 1995, non-performing assets were $17.3 million or 3.36% of total assets. Details of the Bank's asset quality are shown in the analysis provided by Table 11. -47- TABLE 11 - ASSET QUALITY ($ thousands)
AT DECEMBER 31, ----------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Non-Performing Assets - --------------------- Non-Accrual Loans $10,441 $12,598 $ 9,489 $26,180 $40,591 Restructured Loans - 472 487 - 630 ------- ------- -------- ------- ------- Total Non-Performing Loans 10,441 13,070 9,976 26,180 41,221 ------- ------- -------- ------- ------- Foreclosed Assets 858 4,267 11,622 17,824 17,613 Allowance for Estimated OREO Losses - - (802) (194) (1,025) ------- ------- -------- ------- ------- Total OREO 858 4,267 10,820 17,630 16,588 ------- ------- -------- ------- ------- Total Non-Performing Assets $11,299 $17,337 $ 20,796 $43,810 $57,809 ======= ======= ======== ======= ======= Allowance for Credit Losses - --------------------------- Balance at Beginning of Period $4,170 $4,827 $2,532 $4,567 $6,081 Provision for Credit Losses 4,415 1,005(A) 3,790 1,000 2,330 Allocated to FFB&T Acquired Loans 1,000 - - - - Charge-Offs (2,488) (1,799) (1,589) (3,073) (3,900) Recoveries 237 137 94 38 56 ------- ------- -------- ------- ------- Net Charge-Offs (2,251) (1,662) (1,495) (3,035) (3,844) ------- ------- -------- ------- ------- Balance at End of Period $7,334 $4,170 $4,827 $2,532 $4,567 ======= ======= ======== ======= ======= (A) Gross Provision of $2,105 Less ADP Credit of $1,100 Allowance for Estimated OREO Losses - ----------------------------------- Balance at Beginning of Period $ - $ 802 $ 194 $1,025 $1,146 Provision for Estimated OREO Losses 459 460 2,894 3,975 1,550 Charge-Offs (459) (1,262) (2,286) (4,806) (1,671) ------- ------- -------- ------- ------- Balance at End of Period $- $- $802 $194 $1,025 = = === === ===== Loans Receivable, Net - --------------------- End of Period $410,766 $355,796 $284,885 $266,181 $300,131 Average 403,207 313,072 265,581 267,729 295,209 ------- ------- -------- ------- ------- Total Assets, End Of Period $589,589 $515,267 $464,901 $427,950 $431,079 ======= ======= ======== ======= ======= Ratios - ------ Allowance for Credit Losses to Total Loans 1.79% 1.17% 1.69% 0.95% 1.52% Net Charge-Offs to Average Loans 0.56% 0.53% 0.56% 1.13% 1.30% Non-Performing Loans to Total Loans 2.54% 3.67% 3.50% 9.84% 13.73% Non-Performing Assets to Total Assets 1.92% 3.36% 4.47% 10.24% 13.41% Allowance for Credit Losses to Non-Performing Loans 70.24% 31.91% 48.39% 9.67% 11.08%
-48- Of the total non-performing assets, non-performing loans were $10.4 million as of December 31, 1996 compared to $13.1 million as of December 31, 1995. There were no troubled debt restructurings included in non-performing loans as of December 31, 1996 and $472,000 of troubled debt restructurings as of December 31, 1995. The allowance for credit losses amounted to $7.3 million as of December 31, 1996, representing coverage of 70.24% of non- performing loans compared to $4.2 million and 31.91% coverage of non-performing loans at December 31, 1995. The allowance for credit losses at December 31, 1996 includes $1.0 million of credit risk allowance allocated to the loans acquired through the FFB&T transaction. Net charge-offs for 1996 were $2.3 million or 56 basis points of the average loan portfolio, compared to $1.7 million and 53 basis points for the year ended December 31, 1995. During 1996 the Bank decided to substantially increase its allowance for credit losses in light of its increased levels of commercial and consumer loans, the significant increase in mortgage lending, and the substantial increase in its Watch List at December 31, 1996. No allowance for estimated OREO losses was deemed necessary as of December 31, 1996 as a result of the minimal amount of OREO remaining at that time, the stabilization of the residential real estate market, and management's assessment that the carrying value of OREO fairly represents net realizable values. The Bank concluded the ADP program on December 31, 1995 with the following results. In total, gross assets of $16.1 million were disposed of. A total of $4.6 million was charged to the ADP allowances. The Bank exceeded its initial target in each category, as originally the ADP program was set up to dispose of $14.0 million of assets utilizing a reserve of $5.7 million. The OREO component of the program resulted in sales of $12.4 million utilizing a reserve of $2.6 million. Loans disposed of through the program amounted to $3.7 million utilizing a reserve of $2.0 million. In addition, the $1.1 million remaining in the ADP allowance was credited to income upon the program's conclusion on December 31, 1995. Deposits - -------- Total deposits at December 31, 1996 were $423.3 million compared to $402.8 million as of December 31, 1995, an increase of $20.5 million or 5.1%. The Bank continues to seek deposits with marketing and sales efforts directed towards all of its products. As a result of the Bank's building the small business commercial lending operation, coupled with aggressive marketing campaigns, demand deposits ("DDA") increased by $8.8 million, or 64.1%, to $22.5 million as of December 31, 1996. This result comes after a year when the Bank had 48.9% growth in DDA deposits during 1995. Back-to-back substantial gains in interest-free money provided by demand accounts continues to contribute to net interest margin enhancement. The Bank does not solicit, nor does it accept, brokered deposits. -49- The following table presents a summary of deposits as of December 31, 1996 and 1995. TABLE 12 - DEPOSITS ($ thousands)
December 31, 1996 December 31, 1995 ----------------- ----------------- Demand $22,479 5.3% $13,697 3.4% Savings Regular Savings 28,096 6.6% 28,660 7.1% NOW 30,262 7.2% 35,097 8.7% Super and Money Market Accounts Super Savings 45,404 10.7% 55,042 13.7% Money Market 47,957 11.3% 59,724 14.8% Time Certificate Accounts 197,204 46.6% 154,205 38.3% Money Market Certificates 46,923 11.1% 52,230 13.0% Escrow Deposits 4,965 1.2% 4,142 1.0% --------- ------- --------- ------- Total Deposits $423,290 100.0% $402,797 100.0% ========= ======= ========= =======
Federal Home Loan Bank of Boston Advances and Other Borrowings - -------------------------------------------------------------- The Bank continues to utilize the FHLB as a source of funds alternative to the traditional deposit account relationship. As of December 31, 1996, borrowings from the FHLB totaled $82.2 million compared to $61.8 million as of December 31, 1995. In addition, the Bank increased the use of the reverse repurchase agreement as a means to borrow funds. These agreements are essentially collateralized borrowings, similar to FHLB borrowings, and to the extent that the rates and terms are more favorable, the Bank utilizes the reverse repurchase agreement in lieu of an FHLB borrowing. As of December 31, 1996 there was $31.4 million of borrowings outstanding under reverse repurchase agreements compared to $4.6 million as of December 31, 1995. In total, borrowings as of December 31, 1996 were $113.6 million at a weighted average rate of 5.74% and a weighted average maturity of 1.1 years, compared to $66.4 million at a weighted average rate of 6.42% and a weighted average maturity of 1.38 years as of December 31, 1995. As a percentage of total assets, borrowings amounted to 19.3% as of December 31, 1996 compared to 13.0% as of December 31, 1995. As a result of the Bank's stock conversion, the Bank has reflected the guaranty of the ESOP loan as an obligation of the Bank. This note is a five-year adjustable rate note (convertible to a fixed rate at the Bank's option) with interest and principal payable monthly. The outstanding balance was $485,000 and the rate in effect as of December 31, 1996 was 6.86%. -50- Shareholders' Equity - -------------------- Shareholders' equity at December 31, 1996 increased to $49.4 million from $43.6 million at December 31, 1995, reflecting Tier 1 regulatory leverage capital ratios of 7.9% and 8.4%, respectively. The following table indicates required and actual levels of capital as of December 31, 1996 and 1995. TABLE 13 - REGULATORY CAPITAL
Required Actual -------- ------ December 31, ------------ 1996 1995 ---- ---- Tier 1 Risk-Based Capital 4.0% 15.7% 16.6% Total Risk-Based Capital 8.0% 17.0% 17.9% Tier 1 Leverage Capital 4.0%-5.0% 7.9% 8.4%
Asset and Liability Management - ------------------------------ In accordance with the Asset and Liability Management Policy of Norwalk Savings Society, senior management postures the Bank toward an acceptable level of interest rate risk, in turn producing a stable net interest income in ever changing interest rate environments. On a continual basis, at its monthly asset and liability committee meeting and more frequently, if necessary, the level of interest-earning assets is monitored and measured in relation to interest-bearing liabilities utilizing the "gap" schedule in conjunction with other supporting documents and systems providing relevant information. Certain assumptions are made during this process, and the applicable assumptions to the gap schedule are indicated on the following page. These assumptions may or may not be indicative of future withdrawals of deposits or loan repayments. The following table presents the Interest Rate Risk Exposure ("GAP") as of December 31, 1996. -51- TABLE 14 - GAP AT DECEMBER 31, 1996
Repricing Repricing After One Repricing ($ thousands) Total Percent Within and Within Over A S S E T S Amount of Total One Year Five Years Five Years - ----------- ------ -------- -------- ---------- ---------- Loans (1) - --------- Fixed Rate by Maturity $105,890 17.96% $ 6,779 $ 17,664 $ 81,447 Floating Rate by Maturity 302,487 51.31 158,416 126,242 17,829 Securities: - ---------- Governments and Agencies 42,120 7.14 - - 42,120 Mortgage-Backed Securities (1) 92,453 15.68 42,862 3,859 45,732 Equity Securities/FHLB Stock 11,712 1.99 11,712 Short-Term Investments 4,121 0.70 4,121 -------- ------- ------- ------- ------- Total Rate Sensitive Assets 558,783 94.78 223,890 147,765 187,128 ------- ------- ------- Cumulative Rate Sensitive Assets $223,890 $371,655 $558,783 ======= ======= ======= Other Assets (2) 30,806 5.22 -------- ------- Total Assets $589,589 100.00% ======= ====== Liabilities and Shareholders' Equity - ------------------------------------ Deposits: - -------- Savings $ 28,096 4.77% $28,096 $ - $ - Super Savings 45,404 7.70 45,404 - - NOW 30,262 5.13 30,262 - - Money Market 47,957 8.13 47,957 - - Escrow 4,965 0.84 4,965 - - Certificates 244,127 41.42 186,405 57,722 - -------- ------- ------- ------- ------- Total Deposits 400,811 67.99 343,089 57,722 - Borrowings 114,043 19.34 68,557 44,051 1,435 -------- ------- ------- ------- ------- Total Rate Sensitive Liabilities 514,854 87.33 411,646 101,773 1,435 ------- ------- ------- Cumulative Rate Sensitive Liabilities $411,646 $513,419 $514,854 ======= ======= ======= Other Liabilities 25,382 4.30 Shareholders' Equity 49,353 8.37 -------- ------- Total Liabilities and Shareholders' Equity $589,589 100.00% ======== ======= Net Position of Assets (Liabilities) ($187,756) $45,992 $185,693 Adjustments (3), (4) (117,713) 61,947 55,766 ------- ------- ------- Adjusted GAP (70,043) (15,955) 129,927 ------- ------- Cumulative Repricing Difference (Cumulative Gap) ($70,043) ($85,998) $ 43,929 ======= ======= ======= Cumulative GAP to Total Assets (11.88%) (14.59%) 7.45% ===== ===== ====
Note: (1) Included in the one year period are regularly scheduled monthly payments to be received on Loans and Mortgage-backed securities. (2) Not included above as interest rate sensitive are $10.4 million in non-accruing loans and $0.9 million in OREO property. (3) 95% of savings and NOW accounts were reclassified to the over five year period. (4) Money market and super savings were divided 1/3, 2/3, respectively in each of the first two periods. 52 Liquidity and Capital Resources - ------------------------------- Liquidity is the ability of the Bank to meet its cash flow requirements arising from fluctuations in loans, securities, deposits, and other borrowings. At December 31, 1996, the Bank's primary liquidity, consisting of cash, cash equivalents and marketable securities with maturities of one year or less was $30.6 million or 5.2% of total assets, compared to $30.3 million or 5.9% of total assets at December 31, 1995. The Bank's primary sources of funds are deposits and other borrowings, primarily from the FHLB. The Bank monitors its liquidity in accordance with policy guidelines established by the Asset and Liability Management Policy and regulatory standards, administered by the Asset and Liability Management Committee of the Bank. As of December 31, 1996, the Bank had approved loan commitments outstanding for one-to four-family loans of $4.1 million. In addition, there was $7.8 million of unused credit under the home equity line of credit facility, $833,000 under the overdraft protection credit line facility, and $1.1 million in unused credit card lines. The unadvanced portion of residential construction loans amounted to $1.8 million. There were $2.6 million in approved loan commitments in the Commercial Lending Department, $1.7 million in unused commercial lines of credit and $603,000 in commercial letters of credit outstanding. Management believes that the Bank's liquidity is currently in a position to meet normal operating needs. To meet unexpected demands, the Bank maintains a line of credit with the FHLB. At December 31, 1996, this line of credit was $10.3 million, of which no amount was outstanding. Management also believes that the Bank's capital position is currently adequate to meet present needs and anticipated growth, and does not currently plan to raise capital from external sources in the near future. (see Shareholders' Equity). Market Price of Common Stock - ---------------------------- Norwalk Savings Society trades on the NASDAQ National Market under the symbol "NSSY". The following table sets forth the high/low price range as reported by NASDAQ and dividends paid for the periods indicated:
1996 1995 ---- ---- High Low Div(1) High Low Div (1) ---- --- --- ---- --- ---- First Quarter $22.00 $18.75 $ - $15.63 $11.00 $ - Second Quarter $22.25 $17.94 $.05 $16.38 $14.63 $ - Third Quarter $23.13 $20.88 $.05 $20.00 $15.88 $ - Fourth Quarter $24.88 $22.75 $.05 $19.25 $17.50 $ -
(1) The Bank began paying quarterly dividends during the second quarter of 1996. The Bank's initial public offering of common stock was effective June 15, 1994. At December 31, 1996 Norwalk Savings Society had approximately 750 shareholders of record. -53- ITEM 8. - ------- Financial Statements and Supplementary Data -54- NORWALK SAVINGS SOCIETY Consolidated Financial Statements YEARS ENDED DECEMBER 31, 1996 AND 1995 -55- NORWALK SAVINGS SOCIETY ----------------------- CONTENTS Independent auditor's report CONSOLIDATED FINANCIAL STATEMENTS Statements of financial condition..................................Exhibit A Statements of operations...........................................Exhibit B Statements of shareholders' equity.................................Exhibit C Statements of cash flows...........................................Exhibit D Notes to consolidated financial statements -56- [LETTERHEAD OF FRIEDBERG, SMITH & CO., P.C. APPEARS HERE] Independent Auditor's Report ---------------------------- The Board of Directors and Shareholders Norwalk Savings Society Norwalk, Connecticut We have audited the accompanying consolidated statements of financial condition of Norwalk Savings Society as of December 31, 1996 and 1995, and the related consolidated statements of operations, 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 Norwalk Savings Society's management. Our responsi-bility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. -57- The Board of Directors and Stockholders Norwalk Savings Society Page Two In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Norwalk Savings Society at December 31, 1996 and 1995, and the consolidated results of their operations, changes in their shareholders' equity and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. FRIEDBERG, SMITH & CO., P.C. Bridgeport, Connecticut February 20, 1997 -58- NORWALK SAVINGS SOCIETY EXHIBIT A ----------------------- CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1996 AND 1995 ----------------------------------------------
A S S E T S 1996 1995 - ----------- ---- ---- (Dollar amounts in thousands) Cash and Due from Banks (Note 1) $ 14,978 $ 10,222 Interest-Bearing Deposits in Other Banks (Notes 2 and 8) 2,373 406 Federal Funds Sold (Note 1) 1,500 8,000 Securities (Notes 1 and 2): - -------------------------- Trading, At Fair Value 3,292 263 Available-for-Sale, At Fair Value 136,809 81,566 Held-to-Maturity (Fair Value $42,280 in 1995) - 42,036 ------- ------- 140,101 123,865 Loans Receivable, Net of Allowance for Credit Losses of $7,334 in 1996 and $4,170 in 1995 (Notes 1, 3, 7, 14, 17 and 18) 410,766 355,796 Accrued Income Receivable (Notes 1 and 3) 4,034 3,012 Investment in FHLBB Stock, At Cost (Note 7) 6,184 3,621 OREO, Net (Notes 1, 4 and 14) 858 4,267 Bank Premises and Equipment, Net (Notes 1, 5 and 17) 3,151 3,319 Deferred Income Tax Asset, Net (Notes 1 and 9) 2,574 1,200 Other Assets (Notes 1 and 18) 3,070 1,559 ------- ------- TOTAL ASSETS $589,589 $515,267 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Liabilities - ----------- Deposits (Notes 6, 17 and 18): ----------------------------- Non-Interest Bearing $ 22,479 $ 13,697 Interest Bearing 400,811 389,100 ------- ------- 423,290 402,797 Advances from FHLBB (Note 7) 82,208 61,795 Securities Sold Under Agreements to Repurchase (Notes 2 and 7) 31,350 4,600 Other Borrowings (Notes 8 and 12) 485 728 Accrued Expenses and Other Liabilities (Note 8) 2,903 1,752 ------- ------- Total Liabilities 540,236 471,672 ------- ------- Commitments and Contingent Liabilities (Notes 5 and 11) - ------------------------------------------------------- Shareholders' Equity (Notes 1, 2, 5, 8, 11, 12, 13, 16 and 20): - -------------------------------------------------------------- Preferred Stock - $.01 Par Value - 500,000 shares Authorized, None Issued - - Common Stock - $.01 Par Value - Authorized 7,000,000 shares; Issued 2,442,129 shares in 1996 and 2,435,234 shares in 1995; Outstanding 2,397,312 shares in 1996 and 2,364,720 shares in 1995 24 24 Additional Paid-In Capital 23,545 23,133 Retained Earnings 26,339 21,003 Net Unrealized (Losses) Gains on Securities Available-for-Sale, Net of tax effect (106) 140 ------- ------- Total 49,802 44,300 Less: Unearned ESOP Shares (449) (705) ------- ------- Total Shareholders' Equity 49,353 43,595 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $589,589 $515,267 ======= =======
See notes to consolidated financial statements. -59- NORWALK SAVINGS SOCIETY EXHIBIT B ----------------------- CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 --------------------------------------------
1996 1995 1994 ---- ---- ---- (Dollar amounts in thousands, except per share data) Interest Income (Note 1) - ----------------------- Interest and Fees on Loans $30,589 $23,666 $18,234 ------ ------ ------ Securities: ---------- U.S. Government and Agencies 2,571 1,961 2,633 Mortgage-Backed Securities 7,076 6,753 3,471 Marketable and Other Equities 528 358 262 ------ ------ ------ 10,175 9,072 6,366 Cash Equivalent Investments and Other 491 277 445 ------ ------ ------ Total Interest Income 41,255 33,015 25,045 ------ ------ ------ Interest Expense - ---------------- Deposits (Note 6) 16,844 14,169 10,273 Borrowed Funds (Note 7) 6,796 4,229 2,839 ------ ------ ------ Total Interest Expense 23,640 18,398 13,112 ------ ------ ------ Net Interest Income 17,615 14,617 11,933 Provision for Credit Losses (Notes 1 and 3) 4,415 1,005 3,790 ------ ------ ------ Net Interest Income after Provision for Credit Losses 13,200 13,612 8,143 ------ ------ ------ Non-Interest Income - ------------------- Trust Department Fees 552 515 513 Net Securities Gains (Losses) (Note 2) 661 798 (64) Net Loss from Sale of Loans (Note 3) (144) - - Loan Servicing and Other Loan Fees 480 515 579 Service Charges on Deposit Accounts 763 599 546 Other (Note 17) 4,531 268 252 ------ ------ ------ Total Non-Interest Income 6,843 2,695 1,826 ------ ------ ------ Non-Interest Expense - -------------------- Salaries and Employee Benefits (Notes 8 and 13) 7,649 6,232 5,117 Occupancy and Equipment (Note 5) 2,391 1,854 1,639 Losses and Expenses of OREO, Net (Note 4) 1,362 1,415 3,426 Other (Notes 10, 12 and 18) 4,064 3,218 3,224 ------ ------ ------ Total Non-Interest Expense 15,466 12,719 13,406 ------ ------ ------ Income (Loss) before Income Tax (Benefit) Provision 4,577 3,588 (3,437) Income Tax (Benefit) Provision, Net (Notes 1 and 9) (1,125) (1,190) 50 ------ ----- ----- Net Income (Loss) $5,702 $4,778 ($3,487) ===== ===== ===== Per Share Data (Note 1) - ---------------------- Weighted Average Shares Outstanding 2,381,264 2,346,487 2,305,524 ========= ========= ========= Income (Loss) Per Share $2.39 $2.04 ($1.51) ==== ==== ====
See notes to consolidated financial statements. -60- NORWALK SAVINGS SOCIETY ----------------------- EXHIBIT C CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 --------------------------------------------------------------
Additional Unrealized Common Paid-In Retained Gains Shares Stock Capital Earnings (Losses) ------ ----- ---------- -------- ---------- (Notes 1 and 2) (Dollar amounts in thousands) Balance - January 1, 1994 - $ - $ - $19,712 $ - Net Loss for 1994 - - - (3,487) - Stock Conversion (Note 12) 2,426,740 24 22,797 - - Shares Purchased by ESOP (Note 12) (121,337) - - - - Shares Committed to be Released (Note 8) 24,267 - 41 - - Change in Unrealized Gains (Losses), Net - - - - (603) --------- -- ------ ------ --- Balance - December 31, 1994 2,329,670 24 22,838 16,225 (603) Net Income for 1995 - - - 4,778 - Shares Committed to be Released (Note 8) 26,556 - 168 - - Stock Options Exercised (Note 13) 8,494 - 127 - - Change in Unrealized Gains (Losses), Net - - - - 743 --------- -- ------ ------ --- Balance - December 31, 1995 2,364,720 24 23,133 21,003 140 Net Income for 1996 - - - 5,702 - Cash Dividends Paid on Common Stock, $0.15 per share (Note 12) - - - (366) - Shares Committed to be Released (Note 8) 25,697 - 304 - - Stock Options Exercised (Note 13) 6,665 - 103 - - Shares Distributed to Advisory Board (Note 12) 230 - 5 - - Change in Unrealized Gains (Losses), Net - - - - (246) --------- -- ------ ------ --- Balance - December 31, 1996 2,397,312 $24 $23,545 $26,339 ($106) ========= == ====== ====== === Total Unearned Share- ESOP holders' Shares Equity -------- ------ (Notes 8 and 12) (Dollar amounts in thousands) Balance - January 1, 1994 $ - $19,712 Net Loss for 1994 - (3,487) Stock Conversion (Note 12) - 22,821 Shares Purchased by ESOP (Note 12) (1,213) (1,213) Shares Committed to be Released (Note 8) 242 283 Change in Unrealized Gains (Losses), Net - (603) ----- ------ Balance - December 31, 1994 (971) 37,513 Net Income for 1995 - 4,778 Shares Committed to be Released (Note 8) 266 434 Stock Options Exercised (Note 13) - 127 Change in Unrealized Gains (Losses), Net - 743 --- ------ Balance - December 31, 1995 (705) 43,595 Net Income for 1996 - 5,702 Cash Dividends Paid on Common Stock, $0.15 per share (Note 12) - (366) Shares Committed to be Released (Note 8) 256 560 Stock Options Exercised (Note 13) - 103 Shares Distributed to Advisory Board (Note 12) - 5 Change in Unrealized Gains (Losses), Net - (246) --- ------ Balance - December 31, 1996 ($449) $49,353 === ======
See notes to consolidated financial statements. -61- NORWALK SAVINGS SOCIETY EXHIBIT D ----------------------- Page 1 of 2 CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 -------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents
1996 1995 1994 ---- ---- ---- (Amounts in thousands) Cash Flows from Operating Activities - ------------------------------------ Net Income (Loss) $ 5,702 $ 4,778 $(3,487) ------ ------ ------ Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities: ----------------------------------------- Provision for Credit Losses 4,415 1,005 3,790 Provision for Estimated Losses on OREO 459 460 2,894 Provision for ESOP Benefit Cost 560 434 283 Stock Issued to Advisory Board As Compensation 5 - - Depreciation and Amortization 521 391 286 Goodwill Amortization 76 - - Net Amortization (Accretion) of Discounts and Premiums on Securities 504 (954) (746) Deferred Income Tax Benefit (1,300) (1,200) - Net Gain on Sale of Deposits (3,600) - - Net Realized (Gains) Losses on Sales of Securities Available-for-Sale (693) (803) 64 Net Loss on Sale of Loans 144 - - Net Losses (Gains) on Sales of OREO 551 227 (319) Net Increase in Trading Securities (847) (263) - Net Gain on Sale of Bank Premises and Equipment (33) - - Increase in Accrued Income Receivable (1,022) (477) (341) Decrease (Increase) in Other Assets 243 (341) 31 Increase in Accrued Expenses and Other Liabilities 1,151 945 397 ------ ------ ------ Total Adjustments 1,134 (576) 6,339 ------ ------ ------ Net Cash Provided by Operating Activities 6,836 4,202 2,852 ------ ------ ------ Cash Flows from Investing Activities - ------------------------------------ Proceeds From: ------------- Sales of Securities Available-for-Sale 37,261 62,062 17,294 Maturities and Principal Amortization of Securities Available-for-Sale and Held-to-Maturity 29,612 37,199 30,134 Sale of Loans 45,319 - - Sale of Bank Premises and Equipment 340 - - Sales of OREO 2,917 3,288 12,907 Purchase of Loans (13,724) - - Purchases of Securities Available-for-Sale (81,601) (67,571) (55,746) Purchases of Securities Held-to-Maturity (792) - (22,847) Purchase of FHLBB Stock (2,563) (290) (158) Net Increase in Loans Receivable (91,532) (72,529) (29,277) Additions to OREO (110) (1,170) (2,719) Additions to Bank Premises and Equipment (660) (750) (330) Acquisition of Goodwill (1,830) - - ------ ------ ------ Net Cash Used by Investing Activities (77,363) (39,761) (50,742) ------ ------ ------
See notes to consolidated financial statements. -62- NORWALK SAVINGS SOCIETY EXHIBIT D ----------------------- Page 2 of 2 CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 -------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents
1996 1995 1994 ---- ---- ---- (Amounts in thousands) Cash Flows from Financing Activities Net Increase in Deposits from Customers $20,934 $39,726 $ 4,008 Assumption of Deposits 47,556 - - Sale of Deposits (44,397) - - Advances from FHLBB 68,750 32,900 30,681 Repayments of Advances from FHLBB and Other Borrowings (48,580) (33,887) (17,149) Net Increase in Securities Sold Under Agreements to Repurchase 26,750 4,600 - Net Proceeds from Stock Conversion - - 22,821 Proceeds from Exercised Stock Options 103 127 - Dividends Paid to Shareholders (366) - - ------ ------ ------ Net Cash Provided by Financing Activities 70,750 43,466 40,361 ------ ------ ------ Increase (Decrease) in Cash and Cash Equivalents (Note 1) 223 7,907 (7,529) Cash and Cash Equivalents - Beginning 18,628 10,721 18,250 ------ ------ ------ Cash and Cash Equivalents - Ending $18,851 $18,628 $10,721 ====== ====== ====== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION - ------------------------------------------------- Cash Paid During the Year For - ----------------------------- Interest $23,546 $18,458 $13,048 ====== ====== ====== Income Taxes $22 $ - $18 == === == Non-Cash Investing and Financing Activities Loans Receivable Transferred to OREO $1,758 $324 $ - ===== === === Loans Originated in Connection with Sales of OREO $1,350 $4,072 $7,650 ===== ===== ===== Exchange of Loans for Mortgage-Backed Securities $ - $4,361 $829 ===== ===== === Transfer of Securities Available-for-Sale to Trading $2,182 $ - $ - ===== ===== === Transfer of Securities Held-to-Maturity to Available-for-Sale $30,514 $36,628 $ ====== ====== ===
See notes to consolidated financial statements. -63- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ---------------------------------------------------- The following is a summary of significant accounting policies followed by Norwalk Savings Society (Bank) and its wholly owned subsidiary NSS Realty Corporation (NSSR), and reflected in the accompanying Consolidated financial statements: Nature of Operations -------------------- The Bank is primarily engaged in the business of providing credit secured by residential real estate and retail banking services to the consumer segment of its service area, which is in and around the Norwalk, Connecticut area. Its operations are regulated by the Banking Commissioner of the State of Connecticut and its deposit accounts are insured by the Federal Deposit Insurance Corporation, and as such its activities are subject to periodic examination by both agencies. NSSR is a special-purpose subsidiary whose operations consist of the development and sale of certain of the real property acquired by the Bank in satisfaction of loans. Principles of Consolidation --------------------------- The accompanying Consolidated financial statements include the accounts of the Bank and NSSR. Inasmuch as the results of the operations of NSSR and the financial condition of NSSR are wholly dependent on the financial and administrative support of the Bank, separate financial information on NSSR has not been provided. All significant intercompany accounts and transactions have been eliminated in consolidation. Basis of Consolidated Financial Statement Presentation ------------------------------------------------------ The accompanying Consolidated financial statements have been prepared in accordance with generally accepted accounting principles and general practice within the banking industry. In preparing the Consolidated financial statements, management is required to make estimates and assumptions that effect the reported amounts of assets, liabilities, income and expenses, and disclosure of contingent assets and liabilities. Actual results could differ significantly from those estimates. -64- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------- NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) - ---------------------------------------------------------------- Material Estimates ------------------ Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the Allowance for credit losses and the valuation of real estate acquired in satisfaction of loans (other real estate owned or OREO). Such estimates reflect the realization that the Bank's OREO and a substantial portion of the Bank's mortgage loans receivable are related to real estate located in markets in and around Norwalk, Connecticut, which have experienced value fluctuations in recent years. While management uses available information to recognize possible losses on loans and OREO, including the services of professional appraisers for significant properties, future adjustments to the Allowance for credit losses and valuation of OREO may be necessary based on changes in economic and real estate market conditions in and around the Bank's service area. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's Allowance for credit losses and valuation of OREO and may require the Bank to recognize adjustments based on their judgment of information available to them at the time of their examination. Cash Equivalents ---------------- For the purposes of reporting cash flows in the Consolidated statements of cash flows, cash equivalents include federal funds sold and interest-bearing deposits in other financial institutions. Securities ---------- Securities are accounted for in accordance with the Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115). This statement establishes standards of financial accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. -65- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) - --------------------------------------------------------------- Securities (continued) --------------------- SFAS No. 115 requires the classification of investment securi- ties into categories of Held-to-maturity, Available-for-sale or Trading. Investments in debt securities are classified as Held-to-maturity only if there is a positive intent and ability to hold those securities to maturity. Carrying basis is reflected at amortized cost and adjusted for any premiums or discounts. Premiums are amortized and discounts are accreted to interest income using the level yield method. Securities classified as Trading comprise securities purchased in connection with the Bank's trading activities and, as such, are expected to be sold in the near-term. Trading securities are carried at fair value with unrealized holding gains and losses recognized in Non-interest income. Equity securities and debt securities not classified as Held-to-maturity or Trading are classified as Available-for-sale. Securities classified as Available-for-sale are carried at estimated fair value, with net unrealized holding gains and losses reported as a separate component of Shareholders' equity, net of applicable income taxes. A decline in the estimated fair value of any security below its carrying value that is deemed by management to be other than temporary results in a write-down of the individual security to its estimated fair value. Such write-downs are recognized as a realized loss in Operations in the accompanying Consolidated financial statements. Mortgage-backed securities are accounted for in the same manner as debt securities and consist of certificates that are participation interests in pools of long-term first mortgage loans. Gain or loss on dispositions of securities is based on the net proceeds and adjusted carrying amount of the securities sold using the specific identification method. Loans Held for Sale ------------------- Loans held for sale generally consist of certain first mortgage loans that management has identified will most likely be sold for reasons of managing rate risk, liquidity, and/or asset growth and are reflected at the lower of aggregate cost or estimated market value. Net unrealized losses, if any, resulting from market value less than cost are recognized through a valuation allowance by a charge to Operations in the accompanying Consolidated financial statements. -66- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) - --------------------------------------------------------------- Loans Receivable ---------------- Loans receivable that the Bank has the intent and ability to hold for the foreseeable future or until maturity or payoff are reflected at amortized cost (unpaid principal balances reduced by any partial charge-offs or specific valuation accounts) net of any net deferred fees or costs on originated loans or any unamortized premiums or discounts on purchased loans, and less an Allowance for credit losses. Effective January 1, 1995, the Bank implemented the provisions of SFAS Nos. 114/118, "Accounting by Creditors for Impairment of a Loan" (SFAS Nos. 114/118). These statements address the accounting for loans considered impaired and the recognition of impairment. A loan is considered impaired when, in management's judgment, current information and events indicate it is probable that collection of all amounts due according to the contractual terms of the loan agreement will not be met. The provisions of these statements are prospective, with any adjustments resulting from initial application reflected as an adjustment to the provision for credit losses. The effect on the accompanying Consolidated financial statements of adopting these statements was not significant. Interest on loans is included in income as earned based on rates applied to principal amounts outstanding. The accrual of inter-est income is generally discontinued and all previously unpaid accrued interest is reversed when a loan becomes past due 90 days or more as to contractual payments of principal or interest, or is determined to be impaired. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal balance and accrued interest. Interest on purchased loans is adjusted for the accretion of discounts and the amortization of premiums using the interest method over the contractual lives of the loans, adjusted for estimated prepayments. -67- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) - --------------------------------------------------------------- Loans Receivable (continued) --------------------------- Loan origination fees and certain direct related costs are deferred, and the net fee or cost is amortized as an adjustment of the loan yield over the life of the related loan. The Allowance for credit losses has been established by provisions charged to Operations, decreased by loans charged off (net of recoveries). This Allowance represents an amount which, in management's judgment, is adequate to absorb possible losses on loans that may become uncollectible based on such factors as the Bank's past loan loss experience, changes in the nature and volume of the loan portfolio, current and prospective economic conditions that may affect the borrowers' ability to pay, overall portfolio quality, and review of specific problem loans. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated future cash flows. Effective January 1, 1996, the Bank implemented the provisions of SFAS No. 122, "Accounting for Mortgage Servicing Rights an Amendment to SFAS 65" (SFAS No. 122). This statement requires recognition of the value of the rights to service mortgage loans (MSR's) for others as a separate asset, however those servicing rights are acquired, and assessment for impairment based on fair value. Capitalized MSR's are amortized to Non-interest income in proportion to estimated mortgage service fee revenues. Any impairment adjustments are reflected through a valuation allowance recognized by a charge or credit to Non-interest income. The effect on the accompanying Consolidated financial statements of adopting this statement was not significant. Bank Premises and Equipment --------------------------- Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed by accelerated and straight-line methods, generally at rates based on estimated useful lives of the related assets. Bank premises are generally depreciated over periods ranging from 10 to 50 years; furniture and equipment are generally depreciated over periods ranging from 3 to 20 years. For income tax purposes, the Bank uses the appropriate depreciation provisions of the Internal Revenue Code. -68- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------- NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) - --------------------------------------------------------------- Other Real Estate Owned (OREO) ----------------------------- OREO includes real estate properties that are held for sale which have been acquired through foreclosure proceedings or deeds accepted in lieu of foreclosure. These properties are initially recorded at the lower of the carrying value of the related loans or the estimated fair value of the real estate acquired, with any excess of the loan balance over the estimated fair value of the property charged to the Allowance for credit losses. Subsequent changes in net realizable values are reflected by charges or credits to the Allowance for estimated losses on OREO. Costs relating to the subsequent development or improvement of a property are capitalized when value is increased. All other holding costs and expenses, net of rental income, if any, are expensed as incurred. Goodwill -------- The goodwill acquired in connection with the Fairfield First Bank and Trust Company transaction (Note 18) is being amortized on a straight-line basis over six years. Income Taxes ------------ Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences, which are differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income 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 effect on deferred income tax assets and liabilities of a change in tax rates is recognized in Operations in the period that includes the enactment date. -69- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) - --------------------------------------------------------------- Income Taxes (continued) ----------------------- Provisions for income taxes are computed based on all taxable revenue and deductible expense items included in the accompanying Consolidated statements of operations regardless of the period in which such items are recognized for income tax filing purposes. The Bank and NSSR file consolidated Federal and combined Connecticut income tax returns. Employee Retirement Benefits ---------------------------- Employee retirement benefits and related deferred assets and/or liabilities are accounted for in accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions" (SFAS No. 106). Post-retirement health care expenses are based on actuarial computations of current and future benefits. Earnings Per Share ------------------ Income (loss) per share is based on the weighted average number of common shares outstanding during the period. Shares held in trust by the Bank's Employee Stock Ownership Plan (ESOP) are not considered outstanding until such shares are committed to be released by the Trust (Note 8). Potential dilutive effects of exercisable stock options are reflected under applicable financial disclosure requirements, if and when material. Stock Options ------------- The Bank accounts for stock options in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Accordingly, no compensation cost is recognized at the time options are granted. Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), stock-based compensation awards granted in 1995 and 1996 that continue to be accounted for under APB 25 require pro forma disclosures of net income and earnings per share as if the fair value based method of accounting under SFAS No. 123 had been applied (Note 13). -70- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) - --------------------------------------------------------------- Financial Instruments --------------------- Financial instruments include substantially all the Bank's financial assets and liabilities, and certain off-balance-sheet rights and/or obligations. Such items generally reflect cash and cash equivalents and contractual rights or obligations to receive cash or other financial instruments, respectively. Derivative financial instruments are financial instruments used to construct a transaction that is derived from and reflects the underlying value of assets, other instruments or various indices. The primary purpose of derivative financial instruments is to transfer price risk associated with the fluctuations in asset values rather than borrow or lend funds. Such items include forward contracts, interest rate swap contracts, options and futures, and other financial instruments with similar characteristics, which include the Bank's off-balance-sheet financial instruments. All derivative financial instruments held or issued by the Bank are held or issued for purposes other than trading. In accordance with SFAS No. 105, "Disclosure of Information About Financial Instruments with Off-Balance-Sheet Risk and Concentrations of Credit Risk," SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," and SFAS No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments," the Bank is required to disclose information about financial instruments with off-balance-sheet market or credit risk and concentrations of credit risk associated with its financial instruments (Notes 14 and 15), fair values of its financial instruments (Note 15), and information about its derivative financial instruments (Note 15), respectively. -71- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) - --------------------------------------------------------------- Reclassification ---------------- Certain reclassifications have been made to the accompanying 1995 and 1994 Consolidated financial statements to conform to the 1996 presentation. NOTE 2 - SECURITIES - ------------------- Securities have been classified in the accompanying Consolidated statements of financial condition according to management's intent. Carrying amounts and approximate fair values of Securities consisted of the following:
December 31, 1996 -------------------------------------------------------------------- Amortized Gross Unrealized Holding Fair ------------------------ Trading Cost Gains Losses Value ------- --------- ----- ------ ----- (Amounts in thousands) Equity Securities $3,353 $46 ($107) $3,292 ===== == === ===== Available-for-Sale ------------------ U.S. Government and Agency Obligations $ 42,436 $145 ($461) $42,120 Mortgage-Backed Securities 92,443 382 (372) 92,453 Mutual Funds 2,011 88 (12) 2,087 Equity Securities 99 50 - 149 ------- --- --- ------- Total $136,989 $665 ($845) $136,809 ======= === === =======
-72- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 2 - SECURITIES (continued) - -------------------------------
December 31, 1995 --------------------------------------------------------------------- Amortized Gross Unrealized Holding Fair ------------------------ Trading Cost Gains Losses Value ------- ---- ----- ------ ----- (Amounts in thousands) Equity securities $268 $ - ($5) $263 === === = === Available-for-Sale ------------------ U.S. Government and Agency Obligations $26,611 $128 $(55) $26,684 Mortgage-Backed Securities 50,243 220 (162) 50,301 Equity Securities 4,572 94 (85) 4,581 ------ --- --- ------ Total $81,426 $442 ($302) $81,566 ====== === === ====== Held-to-Maturity ---------------- U.S. Government and Agency Obligations $ 1,998 $ - $ - $ 1,998 Mortgage-Backed Securities 40,038 358 (114) 40,282 ------ --- --- ------ Total $42,036 $358 ($114) $42,280 ====== === === ======
The scheduled contractual maturities of debt securities at December 31, 1996 were as follows:
Amortized Fair Cost Value --------- ----- (Amounts in thousands) Due After Five Years $ 29,316 $ 29,340 Through Ten Years 13,120 12,780 ------- ------- Due Over Ten Years 42,436 42,120 Mortgage-Backed Securities 92,443 92,453 ------- ------- Total $134,879 $134,573 ======= =======
-73- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 2 - SECURITIES (continued) - ------------------------------ Proceeds and gross realized gains and losses from sales of securities classified as Available-for-sale and Trading securities gains and losses consisted of the following:
1996 1995 1994 ---- ---- ---- (Amounts in thousands) Available-For-Sale ------------------ Proceeds from Sales $37,261 $62,062 $17,294 ====== ====== ====== Gross Realized Gains $1,157 $985 $ 9 Gross Realized Losses (464) (182) (73) ----- --- -- Net Realized Gains (Losses) 693 803 (64) --- --- -- Trading ------- Realized Gains 24 - - Gross Change in Unrealized Losses (56) (5) - --- --- -- (32) (5) - --- --- -- Net Securities Gains (Losses) $661 $798 ($64) === === ==
During the year ended December 31, 1996, the Bank transferred securities Available-for-sale with a carrying basis of approximately $2.2 million to the classification of Trading and securities Held-to-maturity with an amortized cost of approximately $30.5 million to the classification of Available-for-sale at their fair value of approximately $30.6 million. The transfer of securities Held-to-maturity to the classification of Available-for-sale was the result of management's assessment that there was no longer a positive intent to hold these securities to maturity based on management's revised asset/liability management strategies. Gross unrealized gains and losses reflected in the accompanying Consolidated statements of operations for the year ended December 31, 1996 as a result of the transfer to Trading were approximately $95,000 and $41,000, respectively. Net unrealized gains, net of tax effect, which were reflected in the accompanying Consolidated statements of shareholders' equity as a result of the transfer to Available-for-sale were approximately $46,000. -74- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 2 - SECURITIES (continued) - ------------------------------ The Financial Accounting Standards Board issued a "Special Report" in November 1995, "A Guide to Implementation of SFAS 115" (Note 1). This guide provided additional guidance as to the criteria for the financial statement classifications prescribed in SFAS No. 115. As a result of this additional guidance, the Bank could reassess the appropriateness of the classification of all its securities held and, accordingly, in December 1995, reclassified securities Held-to-maturity with an aggregate amor-tized cost approximating $37.0 million to the classification of Available-for-sale at a fair value approximating $36.6 million. At December 31, 1996, the aggregate amortized cost of securities pledged as collateral against public funds and securities sold under agreements to repurchase (Note 7) were approximately $3.0 million and $32.4 million, respectively, which approximated fair values. NOTE 3 - LOANS RECEIVABLE - ------------------------- The components of Loans receivable, net in the accompanying Consolidated statements of financial condition consisted of the following:
December 31, ---------------------- 1996 1995 ---- ---- (Amounts in thousands) Loans Secured by Real Estate: ---------------------------- One-to-Four Family Residential $344,314 $296,648 Commercial and Multi-Family 54,550 55,106 Construction and Land Development 1,227 1,617 ------- ------- 400,091 353,371 Consumer 10,302 5,619 Commercial 8,425 1,485 ------- ------- Total Loans Receivable 418,818 360,475 Less: ---- Net Deferred Fees, Premiums and Discounts (718) (509) ------- ------- 418,100 359,966 Less: ---- Allowance for Credit Losses (7,334) (4,170) ------- ------- Loans Receivable, Net $410,766 $355,796 ======= =======
Loans receivable carry interest rate terms as follows:
December 31, ---------------------- 1996 1995 ---- ---- (Amounts in thousands) Fixed Rate $110,245 $ 91,815 Variable Rate 308,573 268,660 ------- ------- Total Loans Receivable $418,818 $360,475 ======= =======
-75- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 3 - LOANS RECEIVABLE (continued) - ------------------------------------ Activity in the Allowance for credit losses consisted of the following:
Years Ended December 31, ------------------------------ 1996 1995 1994 ---- ---- ---- (Amounts in thousands) Balance - January 1 $4,170 $4,827 $2,532 Allowance on Acquired Loans (1) 1,000 - - ----- ----- ----- Provisions (Credit) for Credit Losses: ------------------ Regular 4,415 2,105 690 ADP (2) - (1,100) 3,100 ----- ----- ----- Net Provision for Credit Losses 4,415 1,005 3,790 ----- ----- ----- Loans Charged-Off or Settled at Loss: ------------------- Regular (2,488) (662) (726) ADP (2) - (1,137) (863) ----- ----- ----- Total Loans Charged-Off or Settled at Loss (2,488) (1,799) (1,589) Recoveries of Loans Previously Charged-Off 237 137 94 ----- ----- ----- Net Loans Charged-Off (2,251) (1,662) (1,495) ----- ----- ----- Balance - December 31 $7,334 $4,170 $4,827 ===== ===== =====
(1) In connection with the Fairfield First Bank and Trust Company transaction (Note 18), the Bank reflected approximately $1.0 million as an allowance against the acquired loans. This valuation allowance reflects the estimated credit risk associated with the respective loans and was based on the Bank's valuation analysis of the loans acquired in the transaction. -76- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 3 - LOANS RECEIVABLE (continued) - ------------------------------------ (2) In order to further position the Bank to reduce non- performing assets, the Board of Directors of the Bank approved an Accelerated Non-Performing Assets Disposition Program (the "Accelerated Disposition Program" or "ADP") in December 1993. In conjunction with the Bank's stock conversion in June 1994 (Note 12), the Bank made a special provision for credit losses of $3.1 million and a special provision for estimated losses on OREO of $2.6 million in order to more rapidly dispose of certain non-performing assets at discounts below their net realizable value. As of December 31, 1995 and 1994, the Bank had absorbed approximately $2.0 and $0.9 million of the special allowance for credit losses, respectively, and $2.6 and $1.8 million of the special allowance for OREO losses, respectively, through packaged or individual discounted sales of loans and OREO or other discounted settlements of non-performing assets with borrowers. The Bank concluded the ADP on December 31, 1995 and reflected a credit to the Provision for credit losses in the amount of $1.1 million for the unused portion of the special provisions for estimated losses. Total non-performing assets sold or otherwise settled under the ADP aggregated approximately $3.7 million of loans and $12.4 million of OREO. The Bank has sold the rights to receive payments of interest and principal on certain loans while retaining the related servicing rights (Note 1). Aggregate principal balances of loans serviced for others that are not reflected in the accompanying Consolidated statements of financial condition approximated $69.7 and $82.3 million at December 31, 1996 and 1995, respectively. During the year ended December 31, 1996, the Bank sold mortgage loans aggregating approximately $45.0 million, all with servicing released. As a result of such sale, a loss approximating $144,000 is reflected in Non-interest expense in the accompanying Consolidated statements of operations for the year ended December 31, 1996. There were no significant loan sales during the years ended December 31, 1995 and 1994. -77- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 3 - LOANS RECEIVABLE (continued) - ------------------------------------ Loans securitized into participation certificates (Note 1) issued by the Federal Home Loan Mortgage Corporation, with servicing retained, aggregated approximately $4.4 million and $0.8 million for the years ended December 31, 1995 and 1994, respectively. There were no loan securitizations during the year ended December 31, 1996. At December 31, 1996, the Bank had no capitalized mortgage servicing rights under SFAS No. 122 (Note 1). SFAS Nos. 114/118 (Note 1) applies to loans that are individually evaluated for impairment in accordance with the Bank's ongoing loan review procedures. The Bank's recorded investment in impaired loans and related Allowance for credit losses measured under SFAS Nos. 114/118 approximated $10.4 million and $1.4 million at December 31, 1996 and $13.1 million and $1.4 million at December 31, 1995, respectively. The average recorded investment in impaired loans during the years ended December 31, 1996 and 1995 was approximately $11.7 million and $12.4 million, respectively. During the years ended December 31, 1996 and 1995, amounts recognized as interest income on impaired loans were not significant. At December 31, 1996, the Bank had no commitments outstanding to lend additional funds to debtors whose loans were determined to be impaired. Loans to directors and their associates aggregated approximately $341,000 and $373,000 at December 31, 1996 and 1995, respectively. These related party loans are made on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectibility. -78- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 4 - OTHER REAL ESTATE OWNED (OREO) - -------------------------------------- OREO, net consisted of the following:
December 31, ------------------------- 1996 1995 ---- ---- (Amounts in thousands) Real Estate Owned: ----------------- One-to-Four Family Residential $272 $3,033 Commercial Real Estate 586 1,234 --- ----- Total Real Estate Owned 858 4,267 Allowance for Estimated Losses - - --- ----- OREO, Net $858 $4,267 === =====
Activity in the Allowance for estimated losses consisted of the following:
Years Ended December 31, ------------------------------------------- 1996 1995 1994 ---- ---- ---- (Amounts in thousands) Balance - January 1 $ - $ 802 $ 194 --- ----- ----- Provision Charged to Expense: ---------------------------- Regular 459 460 294 ADP (Note 3) - - 2,600 --- ----- ----- Total Provision Charged to Expense 459 460 2,894 --- ----- ----- Losses Charged to the Allowance: ------------------------------- Regular (459) (494) (454) ADP (Note 3) - (768) (1,832) --- ----- ----- Total Losses Charged to the Allowance (459) (1,262) (2,286) --- ----- ----- Balance - December 31 $ - $ - $802 === ===== ===
Losses and expenses, net related to OREO consisted of the following:
Years Ended December 31, -------------------------------------------- 1996 1995 1994 ---- ---- ---- (Amounts in thousands) Provision Charged to Expense $ 459 $ 460 $2,894 ----- ----- ----- Gains on Sales (73) (163) (573) Losses on Sales 624 390 254 ----- ----- ----- Losses (Gains) on Sales, Net 551 227 (319) ----- ----- ----- Holding Costs and Expenses 523 839 1,159 Rental Income (171) (111) (308) ----- ----- ----- 352 728 851 ----- ----- ----- Losses and Expenses of OREO, Net $1,362 $1,415 $3,426 ===== ===== =====
-79- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 5 - BANK PREMISES AND EQUIPMENT - ------------------------------------ Bank premises and equipment, net consisted of the following:
December 31, -------------------------- 1996 1995 ---- ---- (Amounts in thousands) Banking House and Land $4,086 $4,484 Furniture, Equipment and Autos 2,317 1,898 Leasehold Improvements 82 535 ----- ----- Total Bank Premises and Equipment 6,485 6,917 Accumulated Depreciation and Amortization (3,334) (3,598) ----- ----- Bank Premises and Equipment, Net $3,151 $3,319 ===== =====
Depreciation and amortization expense included in Non-interest expense in the accompanying Consolidated statements of operations for the years ended December 31, 1996, 1995 and 1994 was approximately $521,000, $391,000 and $286,000, respectively. The Bank has operating leases for certain branch and administrative offices and equipment. Rental expense of $333,000, $220,000 and $179,000 is included in Occupancy and equipment expense in the accompanying Consolidated statements of operations for the years ended December 31, 1996, 1995 and 1994, respectively. The office leases contain provisions which provide for adjustments of the rent to reflect changes in cost of living and real estate taxes. During the year ended December 31, 1995, the Bank entered into an operating lease agreement for office space with one of its directors. Amounts included in Occupancy and equipment expense in the accompanying Consolidated statements of operations for the years ended December 31, 1996 and 1995 relating to this lease aggregated approximately $49,000 and $32,000, respectively. Future minimum payments under non-cancellable operating leases with initial or remaining terms of one year or more at December 31, 1996 consisted of the following:
Years Ending December 31, Amount ------------------------ ------ (Amounts in thousands) 1997 $ 344 1998 322 1999 320 2000 284 2001 237 ----- Total Future Minimum Lease Payments $1,507 ======
-80- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 6 - DEPOSITS - ----------------- Deposits consisted of the following:
December 31, ------------------------------------------------------ 1996 1995 ------------------------ ------------------------ Weighted Average Weighted Average Rates (a) Amount Rates (a) Amount --------------- ------ ---------------- ------ (Dollar amounts in thousands) Demand - $ 22,479 - $ 13,697 NOW 1.00-2.75% 30,262 1.00-1.50% 35,097 Regular Savings 1.99 28,096 2.00 28,660 Money Market and Super Savings 1.99-2.98 93,361 1.99-3.45 114,766 Time Accounts 5.54 244,127 5.50 206,435 Escrow 3.10 4,965 2.80 4,142 ------- ------- Total Deposits $423,290 $402,797 ======= =======
(a) ranges indicate tiers Scheduled maturities of time accounts at December 31, 1996 were as follows:
Weighted Average Stated Rate Amount ------------------- ------ (Dollar amounts in thousands) Year of Maturity ---------------- 1997 5.39% $186,547 1998 5.77% 32,981 1999 5.89% 7,937 2000 6.82% 13,940 2001 5.95% 2,722 ------- Total Time Accounts 5.54% $244,127 =======
Time accounts of $100,000 or more approximated $21.7 million at December 31, 1996. Of those amounts approximately $12.6 million mature in six months or less, $3.3 million mature after six months to one year, and $5.8 million mature after one year. Interest expense on deposits consisted of the following:
Years Ended December 31, -------------------------- 1996 1995 1994 ---- ---- ---- (Amounts in thousands) NOW $ 309 $ 242 $ 251 Regular Savings 436 507 446 Money Market and Super Savings 3,411 3,902 3,349 Time Accounts 12,580 9,434 6,144 Escrow 108 84 83 ------ ------ ------ Total Interest Expense on Deposits $16,844 $14,169 $10,273 ====== ====== ======
-81- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 7 - BORROWED FUNDS - ----------------------- Advances from Federal Home Loan Bank of Boston (FHLBB) ------------------------------------------------------ Terms of the Advances from FHLBB consisted of the following:
1996 1995 ----------------- ------------------ Weighted Weighted Average Average Maturity/ Interest Interest Reprice Date Rate Amount Rate Amount ------------ -------- ------ -------- ------ (Dollar amounts in thousands) Fixed Rate 1996 -% $ - 6.52% $43,317(a) 1997 5.72 26,250 6.28 7,500 1998 5.91 40,000 - - 2013 6.55 1,558(b) 6.55 1,578(b) Adjustable Rate 1996 - - 7.00 5,000 1997 5.61 10,000 - - 1999/1997 5.73 4,400 6.00 4,400 ------ ------ Total Advances from FHLBB $82,208 $61,795 ====== ======
(a) includes amortizing balance of approximately $2.2 million; monthly payment $223,496 and a balloon payment of $222,206 at maturity (b) amortizing with monthly payment of $10,358 and balloon payment of $917,000 at maturity The Bank has a cash management line of credit with FHLBB approximating $10.3 million. There were no advances outstanding on the line at December 31, 1996 or 1995. The Bank's investment in the stock of the FHLBB, mortgage loans and mortgage-backed securities with market values as determined in accordance with FHLBB's blanket collateral pledge agreement, at least equal to the outstanding advances and any unused line of credit, are pledged against outstanding advances from the FHLBB. -82- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 7 - BORROWED FUNDS (continued) - ----------------------------------- Securities Sold Under Agreements to Repurchase (Repurchase Agreements) (Note 2) ----------------------------------------------- Information concerning Repurchase agreements consisted of the following:
Years Ended December 31, ------------------------ 1996 1995 ---- ---- (Dollar amounts in thousands) Average Balance During the Year $29,203 $6,857 Maximum Month-End Balance During the Year $36,350 $9,310 Average Interest Rate During the Year 5.61% 5.88%
Repurchase agreements aggregating approximately $22.4 million and $9.0 million mature during the years ending December 31, 1997 and 1998, respectively. Interest Expense ---------------- Interest expense on borrowed funds consisted of the following:
Years Ended December 31, -------------------------- 1996 1995 1994 ---- ---- ---- (Amounts in thousands) Advances from FHLBB $5,158 $4,015 $2,839 Repurchase Agreements 1,638 214 - ----- ----- ----- Total Interest Expense on Borrowed Funds $6,796 $4,229 $2,839 ===== ===== =====
NOTE 8 - EMPLOYEE BENEFIT PLANS - ------------------------------- Incentive Savings Plan ---------------------- The Bank sponsors an incentive savings plan which is available to substantially all of its employees. The Bank may make a discretionary 50% match of employee contributions up to 4% of each employee's salary. The Bank's matching expense contributions, included in Salaries and employee benefits in the accompanying Consolidated statements of operations for the years ended December 31, 1996 and 1995, approximated $86,000 and $60,000, respectively. No expense provision was made for the year ended December 31, 1994. -83- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 8 - EMPLOYEE BENEFIT PLANS (continued) - ------------------------------------------- Postretirement Benefits Other Than Pensions ------------------------------------------- The Bank provides certain health care, dental care and life insurance benefits to previously retired employees. The health care benefits are provided through an insurance company whose premiums are based on benefits paid during the year. The Bank is self-insuring the dental care and death benefits. The following table sets forth the accumulated postretirement benefit obligation (APBO) and amounts recognized in the accompanying Consolidated statements of financial condition:
December 31, ------------ 1996 1995 ---- ---- (Amounts in thousands) Accumulated Postretirement Benefit Obligation -------------------------- Retirees $290 $294 Unrecognized Transition Obligation (224) (246) --- --- Accrued Postretirement Benefit Cost Included in Accrued Expenses and Other Liabilities $66 $48 == ==
The APBO includes approximately $221,000 and $218,000 attributable to the Bank's postretirement health care plan at December 31, 1996 and 1995, respectively. The components of net periodic postretirement benefit cost reflected in Salaries and employee benefits in the accompanying Consolidated statements of operations consisted of the following:
Years Ended December 31, ------------------------ 1996 1995 1994 ---- ---- ---- (Amounts in thousands) Service Cost - Benefits Attributable to Service During the Period $ - $ - $ - Interest Cost on APBO 21 22 22 Amortization of Transition Obligation 22 22 22 -- -- -- Net Periodic Postretirement Benefit Cost $43 $44 $44 == == ==
-84- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 8 - EMPLOYEE BENEFIT PLANS (continued) - ------------------------------------------- Postretirement Benefits Other Than Pensions (continued) ------------------------------------------------------- For measurement purposes, a 4.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for each of the years ended December 31, 1996 and 1995. The rate was assumed to be consistent over the period of coverage. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by 1% in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996 by approximately $12,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by approximately $1,000. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation in 1996 and 1995 was 7.5%. Employee Stock Ownership Plan (ESOP) ------------------------------------ The Bank established a leveraged ESOP and a related trust in connection with its stock conversion in 1994 (Note 12) as a long-term non-contributory benefit for substantially all of its employees. In accordance with the terms of its Plan of Conversion, the Bank sold to the ESOP 5% of the shares issued in its conversion, or 121,337 shares at $10 per share, the stated conversion offering price. The shares were purchased by the ESOP with the proceeds of a five-year LIBOR-based interest- bearing loan from a third party lender guaranteed by the Bank and requiring monthly payments of principal and interest. The Bank has pledged an interest-bearing deposit as security for its guarantee of the loan. At December 31, 1996, the amount on deposit at the third party lender was approximately $605,000. The loan and guarantee are reflected in the accompanying Consolidated statements of financial condition as a long-term debt and a reduction of Shareholders' equity. At December 31, 1996 and 1995 the interest rate on the loan was 6.86%. Interest expense on the loan included in Salaries and employee benefits expense in the accompanying Consolidated statements of operations approximated $45,000, $60,000 and $37,000 for the years ended December 31, 1996, 1995 and 1994, respectively. -85- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 8 - EMPLOYEE BENEFIT PLANS (continued) - ------------------------------------------- Employee Stock Ownership Plan (ESOP) (continued) ------------------------------------------------ The shares are held by the ESOP in trust and are committed to be issued to employees' accounts in the ESOP ratably over a five-year period in settlement of the Bank's agreed-upon annual ESOP benefit cost. The Bank's ESOP benefit cost, included in Salaries and employee benefits in the accompanying Consolidated statements of operations, aggregated approximately $560,000, $434,000 and $283,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The difference between the annual ESOP benefit cost and the cost basis of the shares to be committed is charged or credited to Additional paid-in capital. The shares subject to the ESOP consisted of the following:
December 31, ---------------------- 1996 1995 1994 ---- ---- ---- Shares - Beginning 70,514 97,070 121,337 Shares Committed to be Released (25,697) (26,556) (24,267) ------ ------ ------- Shares - Ending 44,817 70,514 97,070 ====== ====== ====== Shares Allocated to ESOP 26,556 24,267 - ====== ====== ======
NOTE 9 - INCOME TAXES - --------------------- The components of the federal and state income tax (benefit) provision consisted of the following:
Years Ended December 31, ------------------------- 1996 1995 1994 ---- ---- ---- (Amounts in thousands) Current Income Tax Provision: ----------------------------- Federal $ 150 $ - $ - State 25 10 50 ----- ----- -- Total Current Income Tax Provision 175 10 50 ----- ----- -- Deferred Income Tax Benefit: ---------------------------- Federal (960) (984) - State (340) (216) - ----- ----- -- Total Deferred Income Tax Benefit (1,300) (1,200) - ----- ----- -- Income Tax (Benefit) Provision, Net ($1,125) ($1,190) $50 ===== ===== ==
-86- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 9 - INCOME TAXES (continued) - --------------------------------- The significant components of the deferred income tax (benefit) expense consisted of the following:
Years Ended December 31, ----------------------- 1996 1995 1994 ---- ---- ---- (Amounts in thousands) Allowances for Losses $ (869) $ 820 $(1,208) Basis Difference - Securities (389) (265) 345 Deferred Compensation and Benefits (106) (18) - Deferred Loan Fees 264 389 (26) Depreciation 75 - - Net Operating Losses 3,031 1,236 (736) Other, Net (42) 26 (6) ----- ----- ----- 1,964 2,188 (1,631) Valuation Allowance (3,264) (3,388) 1,631 ----- ----- ----- Total ($1,300) ($1,200) $ - ===== ===== =====
The Bank's effective income tax rate differed from the federal statutory tax rate of 34% as follows:
Years Ended December 31, --------------------------------------------- 1996 1995 1994 ------------- ------------- ------------- Amount % Amount % Amount % ------ ---- ------ ---- ------ ---- (Dollar amounts in thousands) Tax at Statutory Federal Rate $1,556 34.0 $1,220 34.0 ($1,169) (34.0) State Tax* 167 3.6 276 7.7 (419) (12.2) Capital Loss Carryover Benefit (95) (2.1) (200) (5.6) - - Effect of ESOP 108 2.4 65 1.8 - - Current Loss Carryover Benefit (1,930) (42.2) (1,322) (36.9) 1,631 47.4 Future Loss Carryover Benefit (1,037) (22.7) (1,200) (33.4) - - Federal Minimum Tax 150 3.3 - - - - Other (44) (0.9) (29) (0.8) 7 0.2 ----- ---- ----- ---- ----- ---- Total and Effective Rate ($1,125) 24.6 ($1,190) (33.2) $50 1.4 ===== ==== ===== ==== == ===
* Net of Federal tax benefit -87- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 9 - INCOME TAXES (continued) - --------------------------------- The tax effects of significant components of temporary differences and net unrealized gains (losses) on securities Available-for-sale that give rise to deferred income tax assets and deferred income tax liabilities consisted of the following:
December 31, ----------- 1996 1995 ---- ---- (Amounts in thousands) Deferred Income Tax Assets: -------------------------- Allowance for Credit Losses $1,798 $ 929 Goodwill 19 - Employee Benefits 149 43 Trading Loss 25 2 Future Loss Carryover Benefit 1,037 4,068 ----- ----- Gross Deferred Tax Asset 3,028 5,042 Less: Valuation Allowance - (3,264) ----- ----- Deferred Tax Asset, Net Of Allowance 3,028 1,778 ----- ----- Deferred Income Tax Liabilities: ------------------------------- Depreciation 75 - Basis Difference on Securities 68 457 Deferred Loan Fees 385 121 ----- ----- Gross Deferred Tax Liability 528 578 ----- ----- Net Deferred Income Tax Asset - Operations 2,500 1,200 Tax Benefit on Unrealized Loss on Securities Available-for-Sale 74 - ----- ----- Deferred Income Tax Asset, Net $2,574 $1,200 ===== =====
No income tax effect has been reflected on the net unrealized gains or losses on securities Available-for-sale as of December 31, 1995 and 1994 due to the Bank's net operating loss carryforward position and the substantial portion of net deferred income tax assets against which a valuation allowance has been reflected at both of those dates. During the first calendar quarter of the year ended December 31, 1995, management reviewed its current projections for future profitability and estimated that a portion of the Bank's net deferred income tax asset as of December 31, 1994 could be recognized in the amount of $1.2 million. The amount was recognized through a partial adjustment of the valuation allowance for the portion of the net deferred income tax asset attributable to a net operating loss carryforward benefit which management was of the opinion was realizable during the year ended December 31, 1995. At December 31, 1995, management again reviewed its current projections of future profitability and determined that $1.2 million of net deferred income tax asset was more likely than not realizable in the future. -88- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 9 - INCOME TAXES (continued) - --------------------------------- During the fourth quarter of 1996, management reviewed the Bank's estimated profitability for the year ended December 31, 1996 and, on a projected basis, for the year ending December 31, 1997. Based on this review, management determined that it was more likely than not that the Bank's net deferred tax assets, including available future net operating loss benefits of approximately $1.1 million, as of December 31, 1996 were realizable, and therefore, reversed the existing valuation allowance against net deferred tax assets. Realization of the Bank's net deferred tax assets is dependent, however, on various factors and is not assured. The Bank has state and Federal tax operating loss carryforwards aggregating approximately $3.0 million and $2.4 million, respectively, at December 31, 1996. The state carryforwards ultimately expire in the year ending December 31, 1999, and the Federal carryforward expires in the year ending December 31, 2009. During the years ended December 31, 1996 and 1995, the Bank was able to absorb approximately $278,000 and $494,000, respectively, of available capital loss carryforwards, the benefits of which approximated $95,000 and $200,000, respectively, which benefits had not been previously reflected in deferred income tax assets. Deductions from taxable income in prior years have been claimed as loan loss provisions for qualifying (real estate) loans in accordance with the Internal Revenue Code. Retained earnings at December 31, 1996 includes a tax reserve for qualifying loans aggregating approximately $4.6 million. If the reserve is used for any purpose other than to absorb losses on loans, an income tax liability could be incurred. Management does not anticipate that this reserve will be made available for any purposes other than to absorb losses on loans. In accordance with generally accepted accounting principles, no deferred income taxes have been provided for this temporary difference. -89- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 9 - INCOME TAXES (continued) - ---------------------------------- In August 1996, Congress amended the Internal Revenue Code retroactively to January 1, 1996 relative to existing tax bad debt reserves of savings banks as well as to allowable methods of taking future tax bad debt deductions. The amendment requires savings banks with "excess tax bad debt reserves", as defined, to recapture such excess into taxable income ratably over the next six to eight years beginning in 1996. In addition, future tax bad debt deductions will be based solely on loan charge-offs. Based on the Bank's tax return as filed for the year ended December 31, 1995, the Bank has an excess tax bad debt reserve approximating $1.9 million which is subject to recapture in accordance with the change in the tax law. NOTE 10 - OTHER NON-INTEREST EXPENSE - ------------------------------------ Other non-interest expense consisted of the following:
Years Ended December 31, ----------------------- 1996 1995 1994 ---- ---- ---- (Amounts in thousands) Advertising and Marketing $ 687 $ 700 $ 400 Legal and Professional 779 354 271 Regulatory Assessments 9 438 1,054 Office Supplies and Expense 578 481 299 Insurance 228 237 310 All Other, None Greater than 1% of Income 1,783 1,008 890 ----- ----- ----- Total Other Non-Interest Expense $4,064 $3,218 $3,224 ===== ===== =====
Payments to a related party for advertising services for the years ended December 31, 1996, 1995 and 1994 approximated $353,000, $316,000 and $284,000, respectively, significant portions of which were reimbursements for payments by the related party to media companies. -90- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 11 - COMMITMENTS AND CONTINGENCIES - --------------------------------------- Off-Balance-Sheet Risk ---------------------- The accompanying Consolidated financial statements do not reflect various commitments and contingent liabilities which arise in the normal course of business and which involve elements of credit risk, interest- rate risk and liquidity risk. These commitments and contingent liabilities are described in Note 15. Litigation ---------- The Bank and NSSR are parties to certain litigation and claims arising from the normal course of business. After consultation with legal counsel, management is of the opinion that the liabilities, if any, arising from such litigation and claims will not be material to the consolidated financial condition. NOTE 12 - SHAREHOLDERS' EQUITY - ------------------------------ Stock Conversion ---------------- On February 23, 1994, the Board of Directors unanimously adopted and approved the Bank's plan of Conversion (Conversion) to convert from a Connecticut-chartered mutual to a Connecticut-chartered capital stock savings bank through amendment of its mutual charter and the sale of common stock to the Bank's depositors and others. As part of the Conversion, the Board of Directors adopted a tax- qualified employee stock ownership plan (ESOP) (Note 8). In addition, the Board has adopted stock option plans for the benefit of the employees and directors of the Bank, which became effective following approval by the Bank's shareholders at the Annual Meeting in April 1995. The options to be issued under the plans are granted on a post- Conversion basis and began to become exercisable as of the first annual anniversary date of the Conversion (Note 13). At the time of Conversion, the Bank established a liquidation account in an amount equal to its Retained earnings as of that date, which approximated $19.7 million. The liquidation account will be maintained for a period of ten years from the date of the Conversion for the benefit of eligible account holders who continue to maintain their accounts in the Bank -91- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 12 - SHAREHOLDERS' EQUITY (continued) - ----------------------------------------- Stock Conversion (continued) ---------------------------- after Conversion. In the event of a complete liquidation (and only in such an unlikely event), each eligible account holder would be entitled to receive a liquidation distribution equal to the current amount in their subaccount balance. The Bank may not declare or pay dividends on its stock if such declaration and payment would violate statutory or regulatory requirements. In the event transactions resulting from the Conversion or from future events unrelated to the Conversion occur, causing an ownership change, as defined by the Internal Revenue Code, the Bank's ability to utilize its net operating losses may be limited (Note 9). Advisory Board Compensation --------------------------- During the year ended December 31, 1996, the Bank compensated its advisory board members with shares of the Bank's common stock in lieu of cash. The Bank reflected compensation expense in Other non-interest expense in the accompanying Consolidated statements of operations for the year ended December 31, 1996 in the amount of approximately $5,000, which represented the fair value of the shares on the date of issuance. Dividends --------- During the year ended December 31, 1996, the Bank declared and paid cash dividends on common stock aggregating $0.15 per share, which totalled approximately $366,000. In January 1997 the Bank declared a cash dividend of $0.05 per share to shareholders of record on February 10, 1997 and payable on February 28, 1997. Preferred Stock --------------- In May 1996, the Bank declared and paid a dividend distribution of one "Right" for each outstanding share of Bank common stock. Each Right entitles the holder to purchase from the Bank one one-hundredths of a share of preferred stock, at a price of $40.000 per one one-hundredths of a preferred share, subject to adjustment. The Rights are not exercisable except as a result of particular events, including certain acquisitions of 10% or more of the Bank's common stock and certain exchange offers. If not sooner exercised, the Rights will expire in May 2006. -92- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 12 - SHAREHOLDERS' EQUITY (continued) - ----------------------------------------- Preferred Stock (continued) -------------------------- Preferred shares purchasable upon exercise of the Rights will not be redeemable. Each preferred share will be entitled to a minimum preferential quarterly dividend payment of $1 per share but will be entitled to an aggregate dividend of 100 times the dividend declared per common share. In the event of liquidation, the holders of the preferred shares will be entitled to a minimum preferential liquidation payment of $100 per share but will be entitled to an aggregate payment of 100 times the payment made per common share. All liquidation payments are subject to the prior rights of Bank account holders to the Bank's "Liquidation Account". Each preferred share will have 100 votes, voting together with the common shares. In the event of any merger, consolidation or other transaction in which common shares are exchanged, each preferred share will be entitled to receive 100 times the amount received per common share. In the event that the Bank is acquired in a merger or other business combination, proper provision shall be made so that each holder of a Right shall thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the surviving company which at the time of such transaction would have a market value of four times the exercise price of the Rights. At any time prior to the close of business on the date that Rights holders become entitled to purchase preferred shares of the Bank, the Bank may redeem the Rights in whole, but not in part, at a price of $.001 per Right as adjusted. NOTE 13 - STOCK OPTIONS AND EXECUTIVE INCENTIVE PLANS - ----------------------------------------------------- Stock Option Plan ----------------- During the year ended December 31, 1995, the Bank's Share-holders approved stock option plans (Plans) for the benefit of the Bank's employees and directors. Under the Plans, 169,872 and 72,802 shares of the Bank's common stock were reserved for the Employee and Director Plans, respectively. In April 1996, the Shareholders approved increasing the shares of common stock reserved by 150,000 shares. -93- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 13 - STOCK OPTIONS AND EXECUTIVE INCENTIVE PLANS (continued) - ----------------------------------------------------------------- Stock Option Plan (continued) ---------------------------- At December 31, 1996, 377,515, shares of common stock remained reserved under the Bank's plans. Included in this amount are 111,477 shares of common stock reserved for the Director Plans and 266,038 shares of common stock reserved for the Employee Plans. The Bank accounts for its stock options under APB 25 (Note 1). Accordingly, at the time options are granted no accounting entry is made; however, when options are exercised, proceeds are credited to Common stock for the par value of the options purchased and the excess of the option price over the par value of shares issued is credited to Additional paid-in capital. The exercise price of options granted equalled the fair market value of the shares on the dates granted. The following table summarizes the shares subject to options under the Plans for the years ended December 31, 1996 and 1995:
Directors Employees Total --------- --------- ----- Outstanding at January 1, 1995 - - - Granted in 1995 54,602 169,804 224,406 Exercised in 1995 (8,494) - (8,494) ------ ------- ------- Outstanding at December 31, 1995 46,108 169,804 215,912 Granted in 1996 12,000 30,000 42,000 Exercised in 1996 (2,831) (3,834) (6,665) Cancelled in 1996 - (5,666) (5,666) ------ ------- ------- Outstanding at December 31, 1996 55,277(a) 190,304(b) 245,581(c) ====== ======= ======= Exercisable at December 31, 1996: Options 39,908 102,219 142,127 ====== ======= ======= Average Price $16.17 $15.25 $15.50 ===== ===== =====
(a) Exercisable at prices ranging from $15 to $18.88. (b) Exercisable at prices ranging from $15 to $21.75. (c) Includes options that are exercisable based on three-year vesting schedules from the dates of grant. These options expire after 10 years. -94- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 13 - STOCK OPTIONS AND EXECUTIVE INCENTIVE PLANS (continued) - ---------------------------------------------------------------- Executive Incentive Plan ------------------------ During the year ended December 31, 1995, the Bank's Share-holders approved an incentive plan for certain of the Bank's executives. Under the plan, the Bank has reserved 100,000 shares of the Bank's common stock. The Plan has a 10-year term during which awards of common stock can be made based on specific performance goals over a three-year period. The first measurement period covers the period January 1, 1995 to December 31, 1997. The Bank reflected an expense provision of approximately $200,000 in Salaries and employee benefits in the accompanying Consolidated statements of operations for the year ended December 31, 1996 relative to this plan; no compensation expense was reflected for the year ended December 31, 1995. In accordance with SFAS No. 123 (Note 1), the Bank has elected to continue accounting for its stock options under APB 25. Had compensation cost for the Bank's stock option plans been deter-mined based on the fair value at the grant dates for awards granted during the years ended December 31, 1996 and 1995, which is consistent with the method under SFAS No. 123, the Bank's net income and per share data would have been reduced to the pro forma amounts as follows:
Years Ended December 31, ----------------------- 1996 1995 ---- ---- (Dollar amounts in thousands, except per share data) Net Income ---------- As Reported $5,702 $4,778 ===== ===== Pro Forma $5,456 $4,650 ===== ===== Income Per Share ---------------- As Reported $2.39 $2.04 ==== ==== Pro Forma $2.29 $1.98 ==== ====
-95- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 14 - SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK - -------------------------------------------------------- The concentration of the Bank's loan portfolio by type of loan at December 31, 1996 and 1995 is set forth in Note 3. A substantial portion of these loans are collateralized by real estate located in markets in and around Norwalk, Connecticut. The Bank also has loan commitments, including unused lines of credit and amounts not yet advanced on construction loans, secured by real estate substantially located in these same markets. In addition, at December 31, 1996 a substantial portion of the Bank's OREO was located in those same markets. Accordingly, the ultimate collectibility of a substantial portion of the Bank's loan portfolio and the recovery of a substantial portion of the carrying amount of its OREO are particularly susceptible to changes in real estate market conditions in and around Norwalk, Connecticut. In the normal course of business the Bank may have deposits in correspondent accounts substantially in excess of depository insurance limits. To reduce the credit risk associated with such activities the Bank periodically reviews the financial condition of such correspondent banks. NOTE 15 - FINANCIAL INSTRUMENTS - ------------------------------- Financial Instruments with Off-Balance-Sheet Risk ------------------------------------------------- The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and basically includes commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of amounts recognized in the accompanying Consolidated statements of financial condition. The contract or notional amounts of these instruments reflect the extent of the Bank's involvement in particular classes of financial instruments. The Bank's exposure to credit loss in the event of non-performance by the counterparty for commitments to extend credit is represented by the contractual notional amount of those instruments. -96- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 15 - FINANCIAL INSTRUMENTS (continued) - ------------------------------------------ Commitments to Extend Credit ---------------------------- Loan commitments are agreements to lend to a customer as long as there is no violation of any condition established in the contract. These financial instruments are recorded in the financial statements when they are funded or when related fees are incurred or received. Loan commitments are subject to the same credit policies as loans and generally have fixed expiration dates or other termination clauses. Since commitments may 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 is based on management's credit evaluation of the counterparty. Collateral held is primarily residential and commercial real property. Interest rates are generally variable with the exception of the unadvanced portions of construction loans, which have fixed rates of interest and generally mature within one year. The contractual notional amounts of the Bank's credit commitments consisted of the following:
December 31, -------------------- 1996 1995 ---- ---- (Amounts in thousands) Loan Commitments: ---------------- Commitments to Extend Credit: ---------------------------- One-to-Four Family Residences $4,054 $5,869 Commercial Loans 2,581 100 Letters of Credit 603 - Unadvanced Portion of Construction Loans 1,823 4,076 Unused Lines of Credit: ---------------------- Home Equity 7,771 6,036 Consumer Loans 833 830 Consumer Credit Cards 1,080 - Commercial Loans 1,689 784
-97- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 15 - FINANCIAL INSTRUMENTS (continued) - ------------------------------------------ Fair Value of Financial Instruments ----------------------------------- Estimating the fair values of the Bank's financial instruments includes the use of information that is highly subjective. The subjective factors include, among other things, the estimated timing and amount of cash flows, risk characteristics, and credit quality and interest rates, all of which are subject to change. As a result, fair values estimated could be significantly different from amounts actually realized or paid at settlement or maturity of the financial instruments. The following methods and assumptions were used to estimate the fair values of each class of financial instruments: Cash and equivalent investments. For those short-term instruments, the ------------------------------- carrying amount is a reasonable estimate of fair value. Securities. Fair values are based on quoted market prices. ---------- Loans receivable. Fair value for certain homogeneous categories of loans ---------------- is estimated using quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. Fair value for other types of loans is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Accrued income receivable. The carrying amount approximates fair value. ------------------------- Investment in FHLBB stock. The carrying amount approximates fair value. ------------------------- -98- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 15 - FINANCIAL INSTRUMENTS (continued) - ------------------------------------------ Fair Value of Financial Instruments (continued) ---------------------------------------------- Deposit liabilities. Carrying amounts for checking, NOW accounts, ------------------- regular and club savings, money market and mortgagors' escrow accounts are reasonable estimates of fair value, since they generally represent amounts payable on demand. Fair value of time deposits is estimated to be the present value of the deposits using rates currently offered for deposits of similar remaining maturities. Advances from FHLBB. The fair values of advances and borrowings from the ------------------- FHLBB are estimated using rates which approximate the rates currently being offered by the FHLBB for similar remaining maturities. Securities sold under agreements to repurchase and Other borrowings. The ------------------------------------------------------------------- fair value of these borrowings is estimated using rates which approximate rates currently being offered for similar borrowings and remaining maturities. Off-balance-sheet financial instruments. The fair values of commitments --------------------------------------- to extend credit and unadvanced lines of credit are estimated based on interest rates and fees currently charged to enter into similar transactions, considering the remaining terms of the commitments and the creditworthiness of the potential borrowers. -99- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 15 - FINANCIAL INSTRUMENTS (continued) - ------------------------------------------ Fair Value of Financial Instruments (continued) ---------------------------------------------- the Bank's financial instruments consisted of the following:
December 31, ------------------------------------------------------------- 1 9 9 6 1 9 9 5 ------------------------ ------------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ----- -------- ----- (Amounts in thousands) Financial Assets ---------------- Cash and Due from Banks $ 14,978 $ 14,978 $ 10,222 $ 10,222 Federal Funds Sold and Interest- Bearing Deposits in Other Banks 3,873 3,873 8,406 8,406 Securities 140,101 140,101 123,865 124,109 Total Loans Receivable 418,818 411,200 360,475 354,000 Accrued Interest Receivable 4,034 4,034 3,012 3,012 Investment in FHLBB Stock 6,184 6,184 3,621 3,621 Financial Liabilities --------------------- Deposits 423,292 424,740 402,797 404,300 Advances from FHLBB 82,208 81,958 61,795 62,100 Securities Sold Under Agreements to Repurchase 31,350 31,369 4,600 4,630 Other Borrowings 485 485 728 728 Off-Balance-Sheet Financial Instruments ---------------------- Commitments to Extend Credit * (a) * (a)
(a) Amounts were not significant -100- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 16 - REGULATORY MATTERS AND CAPITAL ADEQUACY - ------------------------------------------------- The Bank is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities (Note 1). On May 13, 1992, the Board of Directors of the Bank and the Banking Commissioner of the State of Connecticut (Commissioner) entered into a Stipulation and Agreement (Stipulation) in order to address certain capital, asset quality and other concerns of the Commissioner. Although not a party to the Stipulation, the FDIC concurred that the corrective measures agreed to in the Stipulation were necessary to return the Bank to a safe and sound condition. In June 1994 the Bank obtained additional capital from its stock conversion to satisfy the capital requirements of the Stipulation (Note 12). On October 25, 1994 the Stipulation was terminated by the Commissioner with the concurrence of the FDIC. In December 1991 the Federal Deposit Insurance Corporation Improvement Act (FDICIA) established guidelines to determine capital adequacy for insured banks. These guidelines evaluate the capital adequacy of banks by the measure of their leverage capital ratio, which is the ratio of capital (defined essentially as shareholders' equity minus intangibles) to average assets. Such ratios are measured at the end of each calendar quarter. FDICIA establishes categories based on a bank's leverage capital ratio as of certain measurement dates; these categories affect a bank's deposit insurance cost, place restrictions on certain types of operating activities, and require certain types of regulatory action in cases of failure to achieve certain minimum ratios. The Bank's capital ratios consisted of the following at December 31, 1996:
Risk-Based Leverage ---------- Capital Tier 1 Total -------- ------ ----- Minimum Guidelines 4.0%-5.0% 4.0% 8.0% Norwalk Savings Society 7.9% 15.7% 17.0%
-101- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 17 - BRANCH SALE - --------------------- In October 1996, the Bank sold two of its branch office operations, comprised of deposits aggregating approximately $48.0 million, loans aggregating approximately $210,000, and premises and equipment amounting to approximately $307,000. As a result of the sale, the accompanying Consolidated statements of operations for the year ended December 31, 1996 includes a total gain, reflected in Other non-interest income, of approximately $3.64 million, which includes a deposit premium gain of approximately $3.6 million and a gain of approximately $33,000 from the sale of assets. NOTE 18 - ACQUISITION OF ASSETS AND RELATED LIABILITY OF FAIRFIELD FIRST BANK & TRUST COMPANY (FFBT) - ------------------------------------------------------------------------ In July 1996, the Bank assumed essentially all liabilities, primarily $47.6 million in deposits, and acquired certain assets of FFBT, in an FDIC-assisted transaction. Certain of the commercial real estate loans acquired from the FDIC were simultaneously sold to another bank at an amount in excess of the Bank's bid price to the FDIC. The Bank has allocated the net purchase price to the assets acquired and the liabilities assumed based upon their fair values. The net acquired loans were reflected at a fair value of approximately $13.7 million, which was net of a valuation allowance of $1.0 million (Note 3), and the excess of the purchase price over the net assets acquired, which approximated $1.8 million and which management deems to represent a core deposit intangible, has been reflected as Goodwill in the accompanying Consolidated statements of financial condition. Approximately $76,000 of goodwill amortization has been included in Other non-interest expense in the accompanying Consolidated statements of operations for the year ended December 31, 1996. -102- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 19 - RECENT ACCOUNTING PRONOUNCEMENTS - ------------------------------------------ In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," (SFAS No. 125) which was amended by SFAS No. 127 in December 1996 to defer the effective date of certain provisions of SFAS No. 125 for one year. SFAS No. 125 provides for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings and bases such distinguishment on control. It also amends SFAS No. 115 to clarify that a debt security may not be classified as held-to-maturity if it can contractually be prepaid in a way that an institution would not recover substantially all of its recorded investment. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, except as amended by SFAS No. 127, and is to be applied prospectively. Management has not yet determined the effect, if any, which application of SFAS No. 125 will have on the Bank's financial condition. NOTE 20 - PROPOSED HOLDING COMPANY - ---------------------------------- In January 1997, the Board of Directors authorized management to pursue the formation of a holding company and to present such proposal to the Shareholders at the Annual Meeting in 1997. -103- NORWALK SAVINGS SOCIETY ----------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 ------------------------------------------ NOTE 21 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) - ---------------------------------------------------- The quarterly results of operations consisted of the following:
Quarters Ended ------------------------------------------------------------ 12/31/96 9/30/96 6/30/96 3/31/96 -------- ------- ------- ------- (Dollar amounts in thousands) Interest Income $10,920 $11,298 $9,962 $9,075 Interest Expense 6,376 6,638 5,650 4,976 ---------------------------------------------------------- Net Interest Income 4,544 4,660 4,312 4,099 Provision for Credit Losses 3,205 405 405 400 Non-Interest Income 4,574 499 1,149 621 Non-Interest Expense 5,003 3,443 3,624 3,396 Income Taxes (1,147) - 17 5 --------------------------------------------------------- Net Income $2,057 $1,311 $1,415 $919 ========================================================= Income Per Share $0.85 $0.55 $0.60 $0.39 Average Shares 2,394,383 2,388,213 2,375,828 2,368,040 Quarters Ended 12/31/95 9/30/95 6/30/95 3/31/95 -------- ------- ------- ------- (Dollar amounts in thousands) Interest Income $8,670 $8,501 $8,106 $7,738 Interest Expense 4,970 4,829 4,423 4,176 --------------------------------------------------------- Net Interest Income 3,700 3,672 3,683 3,562 Provision for Credit Losses 255 350 250 150 Non-Interest Income 1,009 676 600 447 Non-Interest Expense 3,548 3,028 3,060 3,120 Income Taxes 10 - (15) (1,185) --------------------------------------------------------- Net Income $896 $970 $988 $1,924 ======================================================= Income Per Share $0.38 $0.41 $0.42 $0.83 Average Shares 2,361,401 2,350,501 2,332,703 2,332,703
-104- PART III - -------- ITEM 9. - ------- Directors and Principal Officers of the Registrant Director information is incorporated by reference from page of the definitive Proxy Statement. The principal officers of the Bank (other than Messrs. Judson and Howell, who are also Directors), all of whom are subject to election annually by the Board of Directors, are: Jeremiah T. Dorney has been Senior Vice President of the Bank since April 1985, and was elected Corporate Secretary in June 1988. His responsibilities are that of Senior Operations Officer and Director of Human Resources. Mr. Dorney's career spans 35 years of diversified banking education and experience. Marcus I. Braverman, C.P.A. has been Senior Vice President and Chief Financial Officer of the Bank since January 1994. He was appointed Treasurer in 1995. From 1988 through June 1993, he was Vice President in the Finance Division of People's Westchester Savings Bank and Senior Vice President in June 1993. ITEM 10. - -------- Management Compensation and Transactions Incorporated by reference to the definitive Proxy Statement under the caption "PROPOSAL TWO - ELECTION OF DIRECTORS --Compensation of Directors; Executive Compensation; Executive Compensation Pursuant to Plans; Compensation Committee Report on Executive Compensation; and Performance Graph." -105- PART IV. - -------- ITEM 11. - -------- Exhibits, Financial Statement Schedules and Reports on Form F-3 (a) (1) Financial Statements - see Item 8. (2) Financial Statement Schedules - Financial Statement Schedules are omitted due to inapplicability or because required information is shown in the Consolidated Financial Statements or the Notes thereto. See Item 8. (b) Reports on Form F-3 filed during the last quarter of the period covered by this report: None (c) Exhibits (3) Material Contracts* (a) Change of Control Agreement dated as of February 1, 1995 with Robert T. Judson (b) Howell (c) Dorney (d) Braverman (e) Amendment No. 2 dated as of March 1, 1995 of Employment Agreement with Braverman (f) Deferred Compensation Plan for Management Employees (g) Deferred Compensation Plan for Non-Employee Directors (h) 1995 Executive Incentive Plan (i) Amended 1994 Director Stock Option Plan (j) Amended 1994 Employee Stock Option Plan (k) Amendment No. 2 dated November 8, 1995 of Employment Agreements with Judson, Howell, and Dorney (l) Amendment No. 3 dated November 8, 1995 of Employment Agreement with Braverman * Previously Filed (9) List of Subsidiaries Subsidiary State of Incorporation ---------- ---------------------- NSS Realty Connecticut -106- Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Bank has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NORWALK SAVINGS SOCIETY Bank By: /s/ Donald St. John Date: March --, 1997 ------------------- --------------------- Donald St. John Chairman of the Board 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. By: /s/ Brian A. Fitzgerald Date: March --, 1997 ----------------------- --------------------- Brian A. Fitzgerald Director /s/ Charles F. Howell Date: March --, 1997 --------------------- --------------------- Charles F. Howell Director /s/ Herbert L. Jay Date: March --, 1997 ------------------ --------------------- Herbert L. Jay Director /s/ Dr. Edward J. Kelley Date: March --, 1997 ------------------------ --------------------- Dr. Edward J. Kelley Director /s/ John L. Segall Date: March --, 1997 ------------------ --------------------- John L. Segall Director /s/ Alan R. Staack Date: March --, 1997 ------------------ --------------------- Alan R. Staack Director -107- /s/ Robert T. Judson Date: March --, 1997 -------------------- --------------------- Robert T. Judson Director, President and Chief Executive Officer /s/ Marcus I. Braverman Date: March --, 1997 ----------------------- --------------------- Marcus I. Braverman Senior Vice President, Chief Financial Officer and Treasurer -108- SIGNATURES ---------- Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Bank has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NORWALK SAVINGS SOCIETY Bank By: Date: March --, 1997 ----------------------- --------------------- Donald St. John Chairman of the Board 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. By: Date: March --, 1997 ----------------------- --------------------- Brian A. Fitzgerald Director Date: March --, 1997 ----------------------- --------------------- Charles F. Howell Director Date: March --, 1997 ----------------------- --------------------- Herbert L. Jay Director Date: March --, 1997 ----------------------- --------------------- Dr. Edward J. Kelley Director Date: March --, 1997 ----------------------- --------------------- John L. Segall Director Date: March --, 1997 ----------------------- --------------------- Alan R. Staack Director -109- Date: March --, 1997 ----------------------- --------------------- Robert T. Judson Director, President and Chief Executive Officer Date: March --, 1997 ----------------------- --------------------- Marcus I. Braverman Senior Vice President, Chief Financial Officer and Treasurer -110- EX-99.2 28 FORM F-4 EXHIBIT 99.2 FEDERAL DEPOSIT INSURANCE CORPORATION WASHINGTON, DC 20429 FORM F-4 QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 1997 FDIC Insurance Certificate No. 17944 NORWALK SAVINGS SOCIETY ----------------------- (Exact name of bank as specified in its charter) 48 WALL STREET, NORWALK, CT 06852 --------------------------------- (Address of principal executive offices) CONNECTICUT ----------- State or other jurisdiction of incorporation or organization) 06-0475300 ---------- (I.R.S. Employer Identification Number) (203) 838-4545 -------------- (Bank's telephone number, including area code) Indicate by check mark whether the Bank (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Bank was required to file such reports), and (2) has been subject to such filing requirements for the past 90 day. Yes X No___ --- Indicate the number of shares outstanding of each of the Bank's classes of common stock, as of the latest practicable date: 2,442,129 shares of Common Stock, par value $.01 per shares as may 12, 1997 TABLE OF CONTENTS
I CONSOLIDATED FINANCIAL STATEMENTS Page A. Statement of Financial Condition 1 B. Statement of Operations 2 C. Statement of Shareholders' Equity 3 D. Statement of Cash Flows 4 E. Notes to Financial Statements 6 II. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 III. SIGNATURES 28 Exhibit A 29
NORWALK SAVINGS SOCIETY CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
March 31, December 31, 1997 1997 ---------- ------------ (Unaudited) (in thousands) ASSETS Cash and due from banks $ 10,435 $ 14,978 Interest bearing deposits in other banks 5,265 2,373 Federal funds sold 500 1,500 Securities Trading, at fair value 1,463 3,292 Available for sale, at fair value 154,698 136,809 Loans receivable, net of allowance for credit losses of $7,344 as of March 31, 1997 & 7,334 as of December 31, 1996, respectively) 424,246 410,766 Accrued interest receivable 5,532 4,034 Investment in Federal Home Loan Bank Stock, at cost 6,184 6,184 Other real estate owned, net 631 858 Bank premises and equipment, net 3,333 3,151 Deferred income tax asset, net 2,819 2,574 Goodwill 1,769 1,754 Other assets 492 1,315 ---------- ---------- Total assets $617,367 $589,589 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Non interest bearing $ 24,343 $ 22,479 Savings, money market and NOW accounts 158,818 156,684 Time accounts 238,539 244,127 ---------- ---------- Total deposits 421,700 423,290 Borrowed funds 144,377 114,043 Accrued expenses and other liabilities 1,558 2,903 ---------- ---------- Total liabilities 567,635 540,236 SHAREHOLDERS' EQUITY Preferred stock ($.01 par value, 500,000 shares authorized, none outstanding) -- -- Common stock ($.01 par value, 7,000,000 shares authorized, 2,442,129 issues; outstanding 2,403,638 as of March 31, and 2,397,312 as of December 31) 24 24 Additional paid-in capital 23,609 23,545 Retained earnings 27,261 26,339 Net unrealized (loss) on securities available for sale (799) (106) ---------- ---------- 50,095 49,802 Less: unearned ESOP shares 363 449 ---------- ---------- Total shareholders' equity 49,732 49,353 ---------- ---------- Total liabilities and shareholders' equity $617,367 $589,589 ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 NORWALK SAVINGS SOCIETY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended ($ in thousands, except shares and per share data) March 31, ------------------------- 1997 1996 INTEREST AND DIVIDEND INCOME Loans, including fees $7,963 $6,860 Investment securities and other Taxable interest 2,574 2,124 Dividends 308 91 --------- --------- Total 10,845 9,075 --------- --------- INTEREST EXPENSE Deposits 4,215 3,785 Borrowed funds 1,970 1,191 --------- --------- Total 6,185 4,976 --------- --------- NET INTEREST INCOME 4,660 4,099 Provision for credit losses - 400 --------- --------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 4,660 3,699 --------- --------- NON-INTEREST INCOME Customer service fees 201 170 Loan servicing fees 116 92 Trust department fees 141 130 Net gain on sale of securities 25 125 Credit card fees 284 - Other 83 104 --------- --------- Total non-interest income 860 621 --------- --------- NON-INTEREST EXPENSE Compensation and benefits 1,872 1,754 Occupancy, equipment & data processing 672 554 Regulatory assessments 15 4 OREO holding costs and expenses 84 128 Sale of OREO, (gains) losses, net (180) 138 Credit card expense 247 - Goodwill amortization 81 - Other 994 818 --------- --------- Total non-interest expense 3,785 3,396 --------- --------- EARNINGS BEFORE INCOME TAXES 1,735 924 Current tax provision 691 5 --------- --------- NET EARNINGS $1,044 $ 919 ========= ========= EARNINGS PER SHARE $ 0.43 $ 0.39 ========= ========= Weighted average shares outstanding (excluding shares committed to ESOP) 2,400,436 2,368,040
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2 NORWALK SAVINGS SOCIETY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
Unrealized Additional Gains Unearned Total Common Paid-in Retained (Losses) on ESOP Shareholders' Shares Stock Capital Earnings Securities Shares Equity ------------ -------- ------------- ------------ ---------------- ------------------------- ($ in thousands) Balance - December 31, 1994 2,329,670 $24 $22,838 $16,225 ($603) ($971) $37,513 Net Earnings 4,778 4,778 ESOP shares committed for release 26,556 168 266 434 Stock options exercised 8,494 127 127 Adjustment of unrealized gains, net 743 743 --------- -------- ------------ ---------- ----------- --------- --------- Balance - December 31, 1995 2,364,720 $24 $23,133 $21,003 $140 ($705) $43,595 --------- -------- ------------ ---------- ----------- --------- --------- Net Earnings 5,702 5,702 Adjustment of unrealized gains (losses), net (246) (246) Stock options exercised 6,665 103 103 Shares distributed to Advisory Board 230 5 5 Dividends paid (366) (366) ESOP shares committed to be released 25,697 304 256 560 ---------- -------- ----------- ---------- ----------- --------- --------- Balance - December 31, 1996 2,397,312 $24 $23,545 $26,339 ($106) ($449) $49,353 ---------- -------- ----------- ---------- ----------- --------- --------- Net Earnings 1,044 1,044 Adjustment of Unrealized gains (losses), net (1,246) (1,246) Tax effect of AFS 553 553 Dividends paid (122) (122) ESOP shares committed to be released 6,326 64 86 150 ---------- -------- ----------- ---------- ----------- --------- --------- Balance - March 31, 1997 2,403,638 $24 $23,809 $27,261 ($799) ($363) $49,732 =========== ======== =========== ========== =========== ========= ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended: March 31 ------------------------------ 1997 1996 ------------- ----------- ($ in thousands) Cash Flows from Operating Activities - ------------------------------------ Net Earnings $ 1,044 $ 918 ----- --- Adjustments to Reconcile net earnings to cash provided (used) by operating activities - --------------------------------------------- Provision for Credit Losses - 400 Provision for Estimated OREO Losses - - Deferred Income Tax 234 - Provision for ESOP Benefit Cost 45 - Depreciation and Amortization 149 130 Goodwill Amortization 81 - Net Amortization (Accretion) of Discounts and Premiums on Securities 149 68 Net (Gains) Losses on Sale of Loans & Investments 74 (125) Net (Gains) Losses on Sales of OREO (180) 138 Net Decrease in Trading Securities 1,629 - (Increase) in Accrued Interest Receivable (348) (456) (Increase) Decrease in Other Assets 37 (158) Increase (Decrease) in Accrued Expense and Other Liabilities (897) 618 --- --- Total Adjustments 1,175 615 ----- --- Net Cash Provided By (Applied to) Operating Activities 2,219 1,533 ----- ----- Cash Flows from Investing Activities - ------------------------------------ Proceeds from: Sales of Loans, Investments & Mortgage Backed Securities 20,485 16,649 Maturities of Investments & Mortgage Backed Securities 4,923 7,982 Sales of Other Real Estate Owned 356 1,751 Purchases of Investment & Mortgage Backed Securities (44,693) (43,610) Net Increase in Loans (13,709) (13,556) Additions to OREO - - Additions to Goodwill (95) - Additions to Bank Premises & Equipment (417) (111) --- --- Net Cash Provided by (Applied to) Investing Activities (33,150) (30,895) ------ ------ Cash Flows from Financing Activities - ------------------------------------ Net (Decrease) in Deposits (1,933) (5,212) Repayments of ESOP borrowing (61) (61) Cash Dividends (122) - Securities Sold under Repurchase Agreements 13,500 22,450 Repayments of Repurchase Agreements (16,600) - Advances from FHLB of Boston 62,487 (29,750) Repayments of Advances from FHLB of Boston (28,993) (20,643) ------ ------ Net Cash Provided by (Applied to) Financing Activities 28,278 26,284 ------ ------ Increase (Decrease) in Cash and Cash Equivalents (2,652) (3,077) Cash and Cash Equivalents - Beginning 18,851 18,628 ------ ------ Cash and Cash Equivalents - Ending $ 16,199 $ 15,551 ------ ------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4 NORWALK SAVINGS SOCIETY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended: March 31, ---------------------- 1997 1996 ---------- ---------- ($ in thousands) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash Paid During the Period For: Interest $ 6,161 $ 3,785 ========== ========== Income Taxes $ 691 $ 5 ========== ========== Non-Cash Investing and Financing Activities: Transfer from Loans to OREO $ 246 $ 4 ========== ========== Loans originated in connection with sale of OREO $ 298 - ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 NORWALK SAVINGS SOCIETY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1997 (unaudited) and December 31, 1996 NOTE 1 - NATURE OF BUSINESS AND REGULATIONS - ------------------------------------------- The Norwalk Savings Society (Bank) provides a full range of banking services to its local area customers. The Bank is subject to competition from various other financial institutions, and is also subject to the regulations of certain federal and state agencies and undergoes periodic examination by those regulatory authorities. The following summarizes the Bank's capital ratios at March 31, 1997, and December 31, 1996:
Actual ------------ March 31, Dec 31, Required 1997 1996 -------- ---- ---- Tier 1 risk-based capital 4.0% 14.7% 15.7% Total risk-based capital 8.0% 15.9% 17.0% Tier 1 leverage capital 4.0%-5.0% 8.0% 7.9%
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - ---------------------------------------- The condensed consolidated financial statements in this report have not been audited, with the exception of the information derived from the Consolidated Statement of Financial Condition as of December 31, 1996, which information should be read in conjunction with the Bank's audited financial statements and footnotes thereto included in the Bank's Annual Report to Shareholders for the year ended December 31, 1996. The consolidated financial statements include the accounts of the Bank and its wholly owned subsidiary, NSS Realty Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments necessary for a fair presentation of financial position and results of operations for the interim periods presented have been made, and all such adjustments are of a normal recurring nature. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the report amounts of assets and liabilities as of the date of the consolidated statement of financial condition and income and expenses for the periods presented. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term related to the determination of the allowance for credit losses and the valuation of other real estate owned ("OREO"). In addition, various regulatory agencies, as an integral part of their examination process, periodically review the 6 Bank's allowances for losses. Such agencies may require the Bank to recognize additions to the allowances based on their judgment of information available to them at the time of their examination. Effective January 1, 1993, the Bank adopted SFAS 109, "Accounting for Income Taxes", without applying its provisions to prior years. There was no impact on the Bank's consolidated statement of operations for the year ended December 31, 1993 from the cumulative effect of the change in the method of accounting for income taxes, due primarily to the Bank's net operating loss carryforward position. During the years 1993 and 1994, the Bank reflected a full valuation allowance against its net deferred tax assets due to significant net operating loss carryovers and uncertainty over the Bank's ability to generate sufficient and consistent future taxable income to be able to support recognition of any portion of its net deferred tax assets. During the first calender quarter of the year ended December 31, 1995, management reviewed its current projections for future profitability and estimated that a portion of the Bank's net deferred income tax assets as of December 31, 1994 could be recognized in the amount of $1.2 million. The amount was recognized through a partial adjustment of the valuation allowance for the portion of the net deferred income tax asset attributable to a net operating loss carry-forward benefit which management was of the opinion was realizable during the year ended December 31, 1995. At December 31, 1995, management again reviewed its current projections of future profitability and determined that $1.2 million of net deferred income tax asset was more likely than not realizable in the future. During the fourth quarter of 1996, management reviewed the Bank's estimated profitability for the year ended December 31, 1996 and, on a projected basis, for the year ending December 31, 1997. Based on this review, management determined that it was more likely than not that the Bank's net deferred tax assets, including available future net operating loss benefits of approximately $1.1 million, as of December 31, 1996 were realizable, and therefore, reversed the existing valuation allowance against net deferred tax assets. Realization of the Bank's net deferred tax assets is dependent, however, on various factors and is not assured. Effective January 1, 1994, the Bank applied the provisions of SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities". Under this pronouncement, investment securities are classified into one of three categories: held to maturity, available-for-sale or trading. The classification is based upon management's intended holding period and, in the case of held-to- maturity, the ability to hold the securities to maturity, Investments classified as held-to-maturity are carried at amortized cost. Investments classified as available for sale are carried at fair value with unrealized gain or loss reported as a separate component of retained earnings, net of applicable income tax. Trading securities are carried at fair value with unrealized gains or losses included in earnings. The Financial Accounting Standards Board issued a "Special Report" in November 1995. "A Guide to Implementation of SFAS 115". This guide provided additional guidance as to the criteria for the financial statement classifications prescribed in SFAS 115. As a result of this additional guidance, the Bank could reassess the appropriateness of the classification of all its securities held. In December 1995, the Bank reclassified securities Held-to-Maturity with an aggregate amortized cost approximately $37.0 million to the classification of Available-for-Sale at a fair value approximating $36.6 million. During the year ended December 31, 1996, the Bank transferred securities Available-for-sale with a carrying basis of approximately $2.2 million to the classification of Trading and securities Held-to-Maturity with an amortized cost of approximately $30.5 million to the classification of Available-for-sale at their fair value of approximately $30.6 7 million. The transfer of securities Held-to-maturity to the classification of Available-for-sale was the result of management's assessment that there was no longer a positive intent to hold these securities to maturity based on management's revised asset/liability management strategies. The gain or loss on investments sold is computed by the specific identification method. Effective January 1, 1995, the Bank implemented the provisions of SFAS Nos. 114/118, "Accounting by Creditors for Impairment of a Loan" (SFAS 114/118). The basic provisions of these statements eliminate the financial statement classification of in-substance foreclosed assets as OREO, resulting in the classification of such assets and related specific allowance for credit losses as Loans receivable. Additionally, these statements address the accounting for loans considered impaired and the recognition of impairment. A loan is considered impaired when, in management's judgment, current information and events indicate it is probable that collection of all amounts due according to the contractual terms of the loan agreement will not be met. The provisions of these statements are prospective, with any adjustments resulting from initial application reflected as an adjustment to the provision for credit losses. Insubstance foreclosed assets prior to January 1, 1995 have been reclassified to Loans receivable for comparability purposes. The effect on the accompanying Consolidated Financial Statements of adopting SFAS 114/118 was not significant. Effective January 1, 1996, the Bank has implemented the provisions of SFAS Nos. 121 and 122, which implementation had no significant effect on the Bank's financial condition or results of operations at and for the three month periods ended March 31, 1997 and 1996, or at and for the year ended December 31, 1996. NOTE 3 - SUPPLEMENTAL DISCLOSURES - --------------------------------- Additional information and supporting disclosures as to investment securities, loans, other real estate owned and related allowances for losses are included in Management's Discussion and Analysis. NOTE 4 - OTHER SIGNIFICANT MATTERS - ---------------------------------- On February 23, 1994, the Board of Directors unanimously adopted and approved the Bank's plan of Conversion (Conversion) to convert from a Connecticut- chartered mutual to a Connecticut-chartered capital stock saving bank through amendment of its mutual charter and the sale of common stock to the Bank's depositors and others. The Bank commenced its subscription offering on May 4, 1994, and concluded the offering on June 9, 1994. A total of 2,426,740 shares were issued on June 15, 1994, the effective issuance date of the securities. As part of the Conversion, the Board of Directors adopted a tax-qualified employee stock ownership plan (ESOP). The ESOP Trustee borrowed the funds to purchase Conversion stock in an amount equal to 5% of the total number of shares issued in the Conversion. The Trustee for the ESOP acquired 121,337 shares in connection with the stock conversion through the subscription offering. The shares were purchased with a loan obtained from a third party, guaranteed by the Bank, reflected as "Other Borrowings" on the Consolidated Statement of Financial Condition. 8 In addition, the Board adopted stock option plans for the benefit of the employees and directors of the Bank (Plans). The stock option plans became effective as a result of the approval by the Bank's stockholders on April 25, 1995. The number of shares reserved for the plans was 169,872 for the Employee Plan and 72,802 for the Director Plan as of March 31, 1996. At the April 1996 Annual Meeting shareholders approved an amendment of the 1994 Employee Stock Option Plan to increase the number of shares of common stock subject to the Plan by 100,000 from 169,872 to 269,872 shares. In addition, the shareholders approved an amendment to the 1994 Director Stock Option Plan to (i) increase the number of option shares granted to each director per year from 1,000 shares to 2,000 shares (effective immediately) following the 1996 Annual Meeting and (ii) increase the total number of shares subject to the Plan by 50,000 from 72,802 to 122,802 shares. At the time of Conversion, the Bank established a liquidation account in an amount equal to its Retained Earnings as of that date. The liquidation account will be maintained for a period of ten years from the date of the Conversion for the benefit of eligible account holders who continue to maintain their accounts in the Bank after Conversion. In the event of a complete liquidation (and only in such an unlikely event), each eligible account holder would be entitled to receive a liquidation equal to the current amount in their subaccount balance. The Bank may not declare or pay dividends on its stock if such declaration and payment would violate statutory or regulatory requirements. In the event transactions resulting from the Conversion or from future events unrelated to the Conversion occur, causing an "ownership change", as defined by the Internal Revenue Code, the Bank's ability to realize all of the deferred tax assets attributable to net operating loss carryforwards may be limited. On April 24, 1997, the NSS Board of Directors declared a cash dividend of ten cents ($.10) per share to common shareholders of record May 14, 1997 and payable on May 29, 1997. NOTE 5 - NEW BRANCH - ------------------- THe Bank has recently announced plans to open a full service branch office at 1089 Post Road in Darien, Connecticut. The branch is scheduled to open towards the end of May, 1997. NOTE 6 - PROPOSED HOLDING COMPANY - --------------------------------- In January 1997 the Bank's Board of Directors authorized management to pursue the formation of a holding company. Stockholders will be voting on this matter at the Annual Meeting on May 20, 1997. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OVERVIEW -------- Norwalk Savings Society reported first quarter 1997 net earnings of $1.0 million or $0.43 per share. The Bank declared a quarterly dividend of ten cents ($.10) per share, payable to shareholders of record as of the close of business on May 14, 1997. The tier one leverage capital ratio was 8.0% as of March 31, 1997, continuing to qualify the Bank as "well capitalized" according to standards established by the Federal Deposit Insurance Corporation ("FDIC"). Asset quality continued on a steady course of improvement as of the end of the first quarter. Non-performing assets, comprised of non-accrual and restructured loans (collectively "non-performing loans"), and other real estate owned, were $12.5 million or 2.0% of total assets. RESULTS OF OPERATIONS --------------------- COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED ----------------------------------------------------------- MARCH 31, 1997 AND 1996 ----------------------- OPERATIONS - ---------- The net earnings for the three months ended March 31, 1997 were $1.0 million or $0.43 per share compared to $919,000 or $0.39 per share for the comparable period in 1996, a 13% increase in net earnings. NET INTEREST INCOME - ------------------- Net interest income, which is the primary source of income for the Bank, is the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. Net interest income was $4.7 million for the three months ended March 31, 1997 compared to $4.1 million for the same period last year. The increase in net interest income of $0.6 million for the three months ended March 31, 1997 compared to the three months ended March 31, 1996 resulted from a $1.8 million increase in interest income offset by a $1.2 million increase in interest expense. The improvement in interest income is primarily a result of the increased level of earning assets, particularly in the loan portfolio. To a much lesser extent, the benefit was also derived from higher interest rates. Average interest- earning assets improved to $587.8 million for the three months ended March 31, 1997, compared to 10 $499.7 million for the same period in 1996. The continued growth of interest- earning assets was attributable primarily to loan growth funded by deposit growth and increased levels of Federal Home Loan Bank and other borrowings. In addition to net loan growth was the increase in marketable equity securities. Purchases of preferred stocks with a callable feature which converts the initial fixed rate to an adjustable rate after a period of five to seven years on average; and in addition, these securities carry a dividend equalization feature which will adjust the dividend rate higher to equalize the effect of any reduction in the dividend received deduction in the present tax law. The average interest rate on earning assets for the three months ended March 31, 1997 was 7.38% compared to 7.26% for the same period a year ago. Interest expense increased to $6.2 million for the three months ended March 31, 1997 from $5.0 million for the comparable period last year. The $1.2 million increase was primarily a result of the higher balances of interest bearing liabilities. The Bank's cost of funds increased 30 basis points to the first quarter's level of 4.66% from 4.36% last year. The cost of funds associated with deposits increased while the cost of funds associated with borrowings showed a modest decline. The "market" for borrowings or wholesale funding is extremely competitive and the reduced rate is reflective of that environment even though maturities have been extended. Overall, the Bank's net interest margin declined modestly to 3.17% for the three months ended March 31, 1997 compared to 3.28% for the comparable period in 1996. Table 1 summarizes the Bank's net interest income and net yield on average interest-earning assets. Non-accruing loans for the purpose of this analysis are included in average loans outstanding during the periods indicated. For the purpose of this computation, daily average amounts were used to compute average balances. 11 Table 1 Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
($ thousands) 1997 1996 - ---------------------------------------------------------------------------------- ----------------------------------------------- Average Average Average Average balance Interest rate balance Interest rate - ---------------------------------------------------------------------------------- ----------------------------------------------- Interest-earning assets Loans receivable $421,715 $ 7,963 7.55 % $ 363,232 $ 6,660 7.55 % Investment securities 39,865 729 7.31 26,417 445 6.74 Mortgage backed securities 95,875 1,736 7.24 96,643 1,633 6.76 Short term investments 11,975 196 6.55 7,143 104 5.82 Marketable equity investments 18,407 221 4.80 6,242 33 2.11 ---------- ------- ---------- ------- Total interest-earning assets 587,837 10,845 7.38 % 499,677 9,075 7.26 % ---------- ------- ----- ---------- ------- ---- Non-interest-earning assets Cash and cash equivalents 9,288 12,590 Accrued income receivable 3,874 3,574 Premises and equipment 3,208 3,288 Other 9,017 2,699 Less: Allowance for credit losses (7,371) (4,347) ---------- ---------- Total non-interest-earning assets 18,018 17,804 ---------- ---------- Total assets $605,853 $517,481 ========== ========== Interest-bearing liabilities Deposits Regular savings & NOW $ 57,487 $ 221 1.54 % $ 54,759 $ 212 1.55 % Super savings & money market 93,808 729 3.11 112,812 821 2.91 Time 240,587 3,242 5.39 205,446 2,732 5.32 ---------- ------- ---------- ------- Total deposits 391,882 4,192 4.28 373,017 3,765 4.04 Borrowings 135,918 1,970 5.60 80,826 1,191 5.89 Mortgage escrow deposits 3,282 23 2.80 3,024 20 2.65 ---------- ------- ---------- ------- Total interest-bearing liabilities 531,082 6,185 4.66 % 456,867 4,978 4.36 % ---------- ------- ----- ---------- ------- ---- Non-interest-bearing liabilities Non-interest-bearing deposits 21,562 16,616 Other liabilities 2,329 578 ---------- ---------- Total non-interest-bearing liabilities 23,891 17,194 ---------- ---------- Shareholder's equity 50,880 43,420 ---------- ---------- Total liabilities & shareholders' equity $605,853 $517,481 ========== ========== Net interest-earning assets and interest rate spread $ 56,755 2.72 % $ 42,810 2.90 % ========== ===== ========= ==== Net interest income & net yield on average interest-earning assets $ 4,660 3.17 % $ 4,099 3.28 % ======= ===== ======= ====
RATE/VOLUME ANALYSIS - -------------------- Table 2 presents the changes in interest and dividend income and the changes in interest expense attributable to changes in interest rates or changes in volume of interest-bearing assets and interest-bearing liabilities during the periods indicated. Changes which are attributable to both rate and volume have been allocated proportionately. 13 Table 2 Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
RATE VOLUME NET (in thousands) CHANGE INTEREST INCOME: Loans receivable $75 $1,028 $1,103 Mortgage-backed securities 116 (13) 103 Short term investments 14 78 92 Investment securities 115 357 472 --- --- --- Total 320 1,450 1,770 --- ----- ----- INTEREST EXPENSE: Deposits Savings & NOW 1 (10) (9) Super savings & money market (53) 145 92 Time (37) (473) (510) --- ---- ---- Total deposits (89) (338) (427) Borrowings 18 (797) (779) Mortgage escrow deposits (1) (2) (3) -- -- -- TOTAL (72) (1,137) (1,209) --- ------ ------ NET INTEREST INCOME $248 $313 $561
PROVISION FOR CREDIT LOSSES - --------------------------- There was no provision for credit losses for the three months ended March 31, 1997 compared to $400,000 for the comparable period in 1996. The balance in the allowance for credit losses account as of March 31, 1997 was $7.3 million providing 61.7% coverage of non-performing loans and 1.7% of total loans. In comparison, the allowance for credit losses account balance at March 31, 1996 was $4.5 million, providing a coverage ratio of 33.7% of non-performing loans and 1.2% of total loans. Although there was no provision for credit losses for the three months ended March 31, 1997, it is management's opinion that the allowance for credit losses is adequate based upon its review of the asset mix, the level of delinquencies, reduced levels of chargeoff, significant levels of recoveries, and the coverage of nonperforming loans. NON-INTEREST INCOME - ------------------- Non-Interest income consists of service charges and fees, fees derived from servicing of loans, net realized gains on sale of securities, as well as fees derived from the Bank's Trust Department, and, since the acquisition of Fairfield First Bank and Trust in July 1996, credit card fees. Non-Interest income for the three months ended March 31, 1997 was $860,000, compared to $621,000 for the comparable period of 1996. Increases to the "core" elements of non-interest income such as the fees from deposit accounts, Trust Department relationships, and the servicing of loans were up a total of $66,000 or 16.8% in the current quarter, compared to a year ago as the Bank continues to concentrate on the generation of fee income. Fees from credit card services, which primarily derived from the merchant credit card business, are new since July of 1996 and have continually increased since the Bank acquired the business and introduced this new service to existing customers. NON-INTEREST EXPENSE - -------------------- Non-Interest expense is comprised of general and administrative expenses incurred in managing the business of the Bank and costs associated with managing and selling OREO properties. 15 The following table indicates the elements of non-interest expense including OREO related expense which is directly related to the level of non-performing assets.
NON-INTEREST EXPENSE Three months ended; - -------------------- ------------------- March 31, 1997 1996 ---- ---- (in thousands) Compensation $1,351 $1,333 Employee benefits 521 421 Occupancy, Equipment & Data Processing 672 554 Regulatory assessments 15 4 Marketing 106 124 Goodwill amortization 81 -- Legal & professional 205 144 Office supplies 137 180 Insurance 30 67 Credit card expenses 247 -- Other 516 303 ------ ------ Total operating expenses 3,881 3,130 ------ ------ Net OREO holding costs & expenses 84 128 Sale of OREO, (gains) losses, net (180) 138 ------ ------ Total OREO related expense (96) 266 ------ ------ Total non-interest expenses $3,785 $3,396 ------ ------
Non-interest expenses amounted to $3.8 million compared to $3.4 million for the three months ended March 31, 1997 and 1996, respectively. The increase of $389,000 or 11.5% is a result of the combination of increased expenses directly associated with higher operating costs in the data processing and credit card functions and partially offset by holding the line on "back office" expenses. Non-interest expense for the three months ended March 31, 1997 including $81,000 from the amortization of goodwill associated with the acquisition of Fairfield First Bank & Trust Company in July, 1996. Total OREO related costs declined substantially as a result of the lower balance and number of properties in the OREO portfolio. Holding costs and expenses were down 34% from the prior year and gains of $180,000 compared to a loss of $138,000 on the disposition of OREO property during the first three months of 1997 and 1996, respectively. 16 PROVISION FOR INCOME TAXES - -------------------------- The current provision for income taxes during the three months ended March 31, 1997 represents estimated taxes owed based on taxable earnings subject to taxation at a combined state and federal rate of approximately 40%. The provision for income taxes for the three months ended March 31, 1996 represented estimated minimum state income tax requirements as both federal and state tax liabilities were offset by loss carryforwards. As of December 31, 1996, the Bank recognized all of its available net operating loss carryforwards. 17 FINANCIAL CONDITION ------------------- GENERAL - ------- Total assets were $617.4 million as of March 31, 1997 compared to $589.6 million as of December 31, 1996, representing an increase of $27.8 million. Total loans, net of allowance for loan losses, were $424.2 million, an increase of $13.4 million from the $410.8 million as of December 31, 1996. Total deposits were $421.7 million compared to $423.3 million, a decrease of $1.6 million from December 31, 1996. Shareholders' equity as of March 31, 1997 was $49.7 million compared to $49.4 million at December 31, 1996. The tier one leverage capital ratio was 8.0% as of March 31, 1997 and 7.9% at December 31, 1996. INVESTMENTS SECURITIES - ---------------------- Total securities amounted to $156.2 million and $140.1 million as of March 31, 1997 and December 31, 1996, respectively. The $16.1 million increase represented the net effect of sales of lower yielding securities, monthly amortization (pay- downs) of the mortgage backed securities portfolio and purchases of $44.7 million of various investments, primarily callable preferred stocks that have dividend received deduction protection. The Bank continued with its investment philosophy of purchasing mortgage backed securities as a supplement to the mortgage lending program. In total, security gains for the first three months of 1997 were $25,000 compared to $125,000 for the comparable period in 1996. The following table presents a summary of the investments and other securities portfolios as of March 31, 1997 and December 31, 1996, fair values and unrealized gains and losses as of those dates. 18
INVESTMENT & OTHER SECURITIES MARCH 31,1997 ------------------------------------------------------- Amortized Unrealized Holding Fair Cost Gains Losses Value ------------- --------- ---------- ---------- Available for sale ------------------- U.S. Government & Federal Agency Obligations $38,432 $25 $777 $37,680 Mortgage Backed Securities 85,505 313 710 86,108 Equity Securities 29,113 93 296 28,910 ------ -- --- ------ Total Available for Sale $156,050 $431 $1,783 $154,698 Trading ------- Equity Securities $1,492 $349 $378 $1,463
December 31, 1996 ------------------------------------------------- Amortized Unrealized Holding Fair Cost Gains Losses Value ---------- ------------ --------- -------- Available for Sale ------------------ U.S. Government & Federal Agency Obligations $ 42,436 $145 $461 $ 42,120 Mortgage Backed Securities 92,443 382 372 92,453 Equity Securities 2,110 138 12 2,236 ------- --- --- ------- Total Available for Sale $136,989 $665 $845 $136,809 Trading ------- Equity Securities $ 3,353 $ 48 $107 $ 3,292
19 LOANS - ----- Total loans, before reductions for deferred credits, fees and the allowance for credit losses amounted to $432.3 million, representing a $13.5 million or 3.2% increase over the December 31, 1996 level of $418.8 million. Demand for new residential mortgage loans continued at a good pace for the first three months of the year. The Bank continues to focus on residential loans with emphasis on adjustable rate products as its primary lending vehicle. As indicated by the following table, more than 80% of NSS's loan portfolio is in first mortgage residential loans, with 62.3% of the portfolio in adjustable rate first mortgage loans. There were no significant sales or securitizations during the first three months of 1997. 20 Table 4 LOAN PORTFOLIO $ thousands
March 31, 1997 December 31, 1996 -------------- ----------------- Real Estate Loans - ----------------- 1 to 4 family adjustable rate $269,221 62.3% $257,459 61.5% 1 to 4 family fixed rate 77,550 17.9% 77,160 18.4% Multi-family 7,034 1.6% 7,450 1.8% Commercial 48,502 11.2% 46,272 11.0% Home equity lines of credit 7,270 1.7% 7,127 1.7% Home improvement & second mortgages 2,556 0.6% 2,568 0.6% Land 823 0.2% 828 0.2% Construction 1,553 0.4% 1,227 0.3% ----- ---- ----- ---- Total Real Estate Loans 414,509 95.9% 400,091 95.5% ------- ----- ------- ----- Commercial Loans 7,987 1.8% 8,425 2.0% - ---------------- ----- ---- ----- ---- Consumer Loans - -------------- Passbook 1,577 0.4% 1,510 0.4% Automobile loans 2,485 0.6% 2,619 0.6% Automobile leases 3,061 0.7% 3,149 0.8% Credit cards 936 0.2% 991 0.2% All other 1,743 0.4% 2,033 0.5% ----- ---- ----- ---- Total Consumer Loans 9,802 2.3% 10,302 2.5% ----- ---- ------ ---- Total Loans, gross 432,298 100% 418,818 100% Deferred fees & credits (708) (718) --- --- 431,590 418,100 Allowance for Credit Losses (7,344) (7,334) ------- ------- Total Loans, net $424,246 $410,766 -------- --------
21 NON-PERFORMING ASSETS/ASSET QUALITY - ----------------------------------- The Bank's level of non-performing assets stood at $12.5 million or 2.0% of assets as of March 31, 1997 compared to $11.3 million or 1.9% of assets as of December 31, 1996. The $1.2 million increase in non-performing assets was primarily attributable to 7 loans secured by one- to four-family residential real estate slipping into the non accrual category. Management has reviewed the present status of the loans and no relationship or trend is evident. Sales of 3 OREO properties amounted to a reduction of $474,000 in the carrying value of OREO during the first three months of 1997. There were no troubled debt restructures included in non-performing loans as of March 31, 1997 or December 31, 1996. The allowance for credit losses amounted to $7.3 million at March 31, 1997, representing coverage of 61.7% of non-performing loans compared to $7.3 million as of December 31, 1996, representing coverage of 70.2% of non-performing loans. Through its credit rating system, the Bank has identified $8.7 million of watchlist loans at March 31, 1997 compared to $8.5 million at December 31, 1996. Details of the Bank's asset quality are shown in the analysis provided by the table on the following page. 22 Table 5 ASSET QUALITY
AT DECEMBER 31, --------- --------- ----------------------------------- March 31, March 31, 1996 1995 1994 1997 1996 Non-performing assets - --------------------- Non-accrual loans $11,910 $13,175 $10,441 $12,598 $9,489 Restructured loans - 138 - 472 487 ------- ------- ------- ------- ------- Total non-performing loans 11,910 13,313 10,441 13,070 9,976 ------- ------- ------- ------- ------- Foreclosed assets 631 2,382 858 4,267 11,622 Allowance for estimated OREO losses - - - - (802) ------- ------- ------- ------- ------- Total OREO 631 2,382 858 4,267 10,820 ------- ------- ------- ------- ------- Total non-performing assets $12,541 $15,695 $11,299 $17,337 $20,795 ======= ======= ======= ======= ======= Allowance for credit losses - --------------------------- Balance at beginning of period $7,334 $4,170 $4,170 $4,827 $2,532 Provision for credit losses - 400 4,415 1,005 3,790 Addition to the reserve through goodwill - - 1,000 - - Charge-offs (346) (97) (2,488) (1,799) (1,589) Recoveries 358 9 237 137 94 --- - --- --- -- Net Charge-offs 10 (88) (2,251) (1,662) (1,495) -- --- ------ ------ ------ Balance at end of period $7,344 $4,482 $7,334 $4,170 $4,827 Allowance for estimated OREO losses - ----------------------------------- Balance at beginning of period $0 $0 $0 $802 $194 Provision for estimated OREO losses - - $459 460 2,894 Charge-offs - - ($459) (1,262) (2,288) ----- ------ ------ Balance at end of period $0 $0 $0 $0 $802 Loans, receivable, net End of period 424,246 373,944 410,766 355,796 284,885 Average 421,715 367,579 403,207 313,072 265,581 Assets, end of period 617,367 541,702 589,589 515,267 464,901 Ratios Allowance for credit losses to total loans 1.73% 1.20% 1.79% 1.17% 1.69% Net charge-offs to average loans - 0.02% 0.56% 0.53% 0.56% Non-performing loans to total loans 2.81% 3.56% 2.54% 3.67% 3.50% Non-performing assets to total assets 2.03% 2.90% 1.92% 3.36% 4.47% Allowance for credit losses to non-performing loans 61.66% 33.67% 70.24% 31.91% 46.39%
DEPOSITS - -------- Total deposits at March 31, 1997 were $421.7 million compared to $423.3 million as of December 31, 1996 representing a decrease of $1.6 million or less than one-half of one percent. In terms of deposit mix, non-interest bearing accounts as well as savings and money market deposit gains partially offset the decline in time accounts. The Bank continues to focus on the total business deposit relationship. The Bank's goal is to attract small business customers and capture the majority of the business banking relationships through its commercial lending function. The Bank continues to aggressively seek time deposits and all other types of consumer deposits, but the best product to stimulate the Bank's net interest margin is the non-interest bearing checking account. The Bank does not solicit nor does it accept brokered deposits. The following table presents a summary of deposits as of March 31, 1997 and December 31, 1996. 24 Table 6 DEPOSITS
March 31, 1997 December 31, 1996 ($ in thousands) Demand deposits $ 24,434 5.8% $ 22,479 5.3% Savings Regular savings 27,544 6.5% 28,096 6.6% Super savings 47,035 11.2% 45,404 10.7% NOW 31,546 7.5% 30,262 7.2% Money market 49,525 11.7% 47,957 11.3% Escrow deposits 3,077 0.7% 4,965 1.2% Certificates Certificate accounts 197,710 46.9% 197,204 46.6% Money market certificates 40,829 9.7% 46,923 11.1% -------- ----- -------- ----- Total Deposits $421,700 100.0% $423,290 100.0% -------- ----- -------- -----
25 FEDERAL HOME LOAN BANK OF BOSTON, ADVANCES AND OTHER BORROWINGS - --------------------------------------------------------------- The Bank continues to utilize the FHLB as an alternative source of funds to the traditional deposit account relationship. As of March 31, 1997, borrowings from the FHLB amounted to $115.7 million at a weighted average rate of 5.75% and a weighted average maturity of 1.3 years compared to $82.2 million at a weighted average rate of 5.78% and a weighted average maturity of 1.3 years as of December 31, 1996. In addition to borrowing from the FHLB, the Bank utilizes the "REPO" market from time to time. There was $28.3 million outstanding in securities sold under agreements to repurchase as of March 31, 1997 at a weighted average rate of 5.93% and a weighted average maturity of 1.6 years. The comparable data as of December 31, 1996 was $31.4 million at 5.73% for approximately one year. SHAREHOLDERS' EQUITY - -------------------- The Bank's Shareholders' equity at March 31, 1997 was $49.7 million compared to $49.4 million as of December 31, 1996. The Tier 1 leverage capital ratios were 8.0% and 7.9% at March 31, 1997 and December 31, 1996, respectively. The following table indicates required and actual levels of regulatory capital as of March 31, 1997 and December 31, 1996.
Required Actual -------- ------ Mar. 31, Dec. 31, 1997 1996 ------- ------- Tier 1 risk-based capital.................................. 4.0% 14.7% 15.7% Total risk-based capital................................... 8.0% 15.9% 17.0% Tier 1 leverage capital.................................... 4.0% - 5.0% 8.0% 7.9%
ASSET AND LIABILITY MANAGEMENT - ------------------------------ In accordance with the Asset and Liability Management policy of Norwalk Savings Society, senior management postures the Bank towards an acceptable level of interest rate risk in turn producing a stable net interest income in ever changing interest rate environments. On a continual basis, at its monthly asset and liability committee meeting and more frequently, if necessary, the level of interest-earning assets is monitored and measured in relation to interest-bearing liabilities, utilizing the "gap" schedule (Exhibit A) in conjunction with other supporting documents and systems providing relevant information. Certain assumptions are made during this process, and the applicable assumptions to the gap schedule are indicated at the bottom of the page at Exhibit A. These assumptions may or may not be indicative of future withdrawals of deposits or loan repayments. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Liquidity is the ability of the Bank to meet its cash flow requirements arising from fluctuations in loans, securities, deposits, and other borrowings. At March 31, 1997, the Bank's primary liquidity consisting of cash, 26 cash equivalents and marketable securities (with maturities of one year or less) was $44.7 million or 7.2% of total assets, compared to $30.6 million or 5.2% of total assets at December 31, 1996. The Bank's primary source of funds is deposits and other borrowings, primarily from the FHLB. The Bank monitors its liquidity in accordance with policy guidelines established by the Asset and Liability Management Policy and regulatory standards, administered by the Asset and Liability Management Committee of the Bank. As of March 31, 1997, the Bank had approved loan commitments outstanding for one- to four-family loans of $4.0 million. In addition, there was $8.2 million available unused credit under the home equity line of credit facility and $0.9 million available unused credit under the overdraft protection credit line facility. The unadvanced portion of residential construction loans amounted to $1.8 million as of March 31, 1997. There was $1.9 million in approved loan commitments in the Commercial Lending Department as of March 31, 1997, $1.6 million unused lines of credit, and $0.7 million in commercial letters of credit. There was $1.1 million available unused credit in the credit card program. Management believes that the Bank's liquidity position is currently adequate to meet normal operating needs. To meet unexpected demands, the Bank maintains a line of credit with the FHLB. At March 31, 1997, this line of credit was $10.3 million of which no amount was outstanding. Management also believes that the Bank's capital position is currently adequate to meet anticipated growth and does not currently have plans to raise capital from external sources in the near future. MARKET PRICE OF COMMON STOCK - ---------------------------- Norwalk Savings Society trades on the (NASDAQ) National Market under the symbol "NSSY". The following table sets forth the high/low price range of "NSSY" common stock as reported by NASDAQ and dividends declared for the periods indicated:
1997 1996 High Low Dividend High Low Dividend ----------------------------------------------------------- First Quarter $26.25 $22.94 $.05 $22.00 $18.75 -- Second Quarter 22.25 17.94 $.05 Third Quarter 23.13 20.88 .05 Fourth Quarter 24.88 22.75 .05
27 NORWALK SAVINGS SOCIETY ----------------------- (Registrant) Date: May 14, 1997 By /s/ Robert T. Judson --------------------------------- Robert T. Judson President & CEO Date: May 14, 1997 By /s/ Marcus I. Braverman --------------------------------- Marcus I. Braverman Senior Vice President Treasurer & CFO 28 EXHIBIT A --------- The following table presents the interest Rate Risk Exposure ("GAP") as of March 31, 1997.
Repricing Repricing after one Repricing Total Percent within and within over amount of total one year five years five years - ------------------------------------------------------------------------------------------------------------------- Assets Loans (1) Fixed rate by maturity $105,706 17.12% $5,448 $16,662 $83,596 Floating rate by maturity 314,682 50.97% 176,853 117,419 20,410 Securities Governments & agencies 37,680 6.10% 0 0 37,680 Mortgage-backed securities (1) 88,505 14.34% 23,641 2,674 62,190 Equity securities / FHLB stock 35,297 5.72% 8,312 26,985 Short term investments 5,765 0.93% 5.765 - ------------------------------------------------------------------------------------------------------------------- Total rate sensitive assets 587,635 95.18% $220,019 $136,755 $230,861 - ------------------------------------------------------------------------------------------------------------------- Cumulative rate sensitive assets $220,019 $356,774 $567,635 - ------------------------------------------------------------------------------------------------------------------- Other assets (2) 29,732 4.82% - ------------------------------------------------------------------------------------------------------------------- Total assets 617,367 100.00% - ------------------------------------------------------------------------------------------------------------------- Liabilities and shareholders' equity Deposits Savings 27,544 4.46% 27,544 Super savings 47,035 7.62% 47,035 NOW 31,546 5.11% 31,546 Money market 49,525 8.02% 49,525 Escrow 3,077 0.50% 3,077 Certificates 238,539 38.64% 184,351 54,188 - ------------------------------------------------------------------------------------------------------------------- Total deposits 397,266 64.35% 343,078 54,188 - ------------------------------------------------------------------------------------------------------------------- Borrowings 144,377 23.39% 88,246 54,703 1,428 - ------------------------------------------------------------------------------------------------------------------- Total rate sensitive liabilities 541,643 87.73% 431,324 108,891 1,428 - ------------------------------------------------------------------------------------------------------------------- Cumulative rate sensitive liabilities $431,324 $540,215 $541,643 - ------------------------------------------------------------------------------------------------------------------- Other liabilities 25,992 4.21% Shareholders' equity 49,732 8.06% - ------------------------------------------------------------------------------------------------------------------- Total liabilities & shareholders's equity 617,367 100.00% - ------------------------------------------------------------------------------------------------------------------- Net position of assets (liabilities) (211,305) 27,864 229,433 - ------------------------------------------------------------------------------------------------------------------- Adjustments (3), (4) ($120,509) $64,373 $56,136 - ------------------------------------------------------------------------------------------------------------------- Adjusted Gap ($90,796) ($36,509) $173,288 - ------------------------------------------------------------------------------------------------------------------- Cumulative repricing difference (cummulative Gap) ($90,796) ($127,306) $45,992 - ------------------------------------------------------------------------------------------------------------------- Cumulative GAP to total assets -14.7% -20.62% 7.45% - -------------------------------------------------------------------------------------------------------------------
Note: (1) Included in the one year period are regularly scheduled monthly payments to be received on Loans and Mortgage-backed securities. (2) Not included above, as interest rate sensitive are $11.9 million in non-accruing loans and $0.6 million in OREO property. (3) 95% of savings and NOW accounts were reclassified to the over five year period. (4) Money market and super savings were divided 1/3, 2/3, respectively in each of the first two periods. 29 -----END PRIVACY-ENHANCED MESSAGE-----