<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number 0-28389
CONNECTICUT BANCSHARES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-1564613
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
923 Main Street, Manchester, Connecticut 06040
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(Address of principal executive offices) (Zip Code)
(860) 646-1700
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changes since
last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: the Issuer had 11,232,000
shares of common stock, par value $0.01 per share, outstanding as of November 9,
2000.
<PAGE>
CONNECTICUT BANCSHARES, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Condition as of
September 30, 2000 and December 31, 1999 (unaudited)................... 2
Condensed Consolidated Statements of Operations for the Three
Months Ended September 30, 2000 and 1999 (unaudited)................... 3
Condensed Consolidated Statements of Operations for the
Nine Months Ended September 30, 2000 and 1999 (unaudited).............. 4
Condensed Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months Ended September 30, 2000 (unaudited)........ 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999 (unaudited).............. 6
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk............. 24
PART II: OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 25
Item 2. Changes in Securities and Use of Proceeds.............................. 25
Item 3. Defaults Upon Senior Securities........................................ 25
Item 4. Submission of Matters to a Vote of Security Holders.................... 25
Item 5. Other Information...................................................... 26
Item 6. Exhibits and Reports on Form 8-K....................................... 26
SIGNATURES..................................................................... 27
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Condition
(In thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
---- ----
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 51,661 $ 26,678
Securities available for sale (cost of $272,970 at September 30, 2000
and $165,802 at December 31, 1999) 293,430 181,854
Securities held to maturity (market value of $44,998
at December 31, 1999) - 46,060
Loans held for sale 6 38
Loans, net 1,000,846 938,340
Federal Home Loan Bank stock, at cost 6,654 5,909
Premises and equipment, net 13,627 14,436
Accrued interest receivable 8,583 6,900
Other real estate owned 64 604
Excess of purchase price over fair value on branch acquisitions 2,074 2,398
Other assets 3,846 4,581
---------- ----------
Total assets $1,380,791 $1,227,798
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 904,188 $ 906,591
Short-term borrowed funds 109,088 95,814
Mortgagors' escrow accounts 4,501 8,674
Advances from Federal Home Loan Bank 124,000 84,000
Other liabilities 10,532 9,496
---------- ----------
Total liabilities 1,152,309 1,104,575
---------- ----------
Commitments and contingencies (Note 3)
Stockholders' equity:
Common stock ($.01 par value; 45,000,000 authorized shares;
11,232,000 shares issued and outstanding at September 30, 2000) 112 -
Additional paid-in capital 108,154 -
Retained earnings 115,372 112,308
ESOP unearned compensation (8,840) -
Accumulated other comprehensive income 13,684 10,915
---------- ----------
Total stockholders' equity 228,482 123,223
---------- ----------
Total liabilities and stockholders' equity $1,380,791 $1,227,798
========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
2
<PAGE>
CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Three Months Ended
September 30, September 30,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Interest and dividend income:
Interest income on loans $19,577 $16,881
Interest and dividends on investment securities 4,935 3,050
------- -------
Total interest and dividend income 24,512 19,931
------- -------
Interest expense:
Interest on deposits 8,439 7,832
Interest on borrowings 958 708
Interest on FHLB advances 1,884 925
------- -------
Total interest expense 11,281 9,465
------- -------
Net interest income 13,231 10,466
Provision for loan losses 375 650
------- -------
Net interest income after provision for loan losses 12,856 9,816
------- -------
Noninterest income:
Service charges and fees 2,037 1,352
Gains (losses) on sales of securities, net 794 (428)
Gains on mortgage loan sales, net 118 111
Other 468 315
------- -------
Total noninterest income 3,417 1,350
------- -------
Noninterest expense:
Salaries 4,005 3,621
Pension and other employee benefits 1,506 1,098
Occupancy, net 752 868
Fees and services 1,308 1,139
Furniture and equipment 722 751
Marketing 219 460
Foreclosed real estate expense 53 77
Losses (gains) on sales of other real estate owned, net 2 (3)
Other operating expenses 1,435 1,366
------- -------
Total noninterest expense 10,002 9,377
------- -------
Income before income taxes 6,271 1,789
Provision for income taxes 2,073 573
------- -------
Net income $ 4,198 $ 1,216
======= =======
Earnings per share:
Basic $ 0.40 N/A
Diluted $ 0.40 N/A
Weighted average shares outstanding:
Basic 10,370,880 N/A
Diluted 10,370,880 N/A
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
<PAGE>
CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Interest and dividend income:
Interest income on loans $56,311 $48,950
Interest and dividends on investment securities 13,668 9,164
------- -------
Total interest and dividend income 69,979 58,114
------- -------
Interest expense:
Interest on deposits 24,862 22,922
Interest on borrowings 2,746 1,904
Interest on FHLB advances 4,853 2,332
------- -------
Total interest expense 32,461 27,158
------- -------
Net interest income 37,518 30,956
Provision for loan losses 825 950
------- -------
Net interest income after provision for loan losses 36,693 30,006
------- -------
Noninterest income:
Service charges and fees 5,666 4,107
(Losses) gains on sales of securities, net (990) 115
Gains on mortgage loan sales, net 207 481
Other 1,475 1,167
------- -------
Total noninterest income 6,358 5,870
------- -------
Noninterest expense:
Salaries 11,985 10,652
Pension and other employee benefits 4,328 3,096
Occupancy, net 2,291 2,481
Fees and services 3,454 2,842
Furniture and equipment 2,209 2,278
Marketing 1,438 1,291
Foreclosed real estate expense 204 217
(Gains) losses on sales of other real estate owned, net (40) 41
Securities contributed to SBM Charitable Foundation, Inc. 8,316 -
Other operating expenses 4,282 3,616
------- -------
Total noninterest expense 38,467 26,514
------- -------
Income before income taxes 4,584 9,362
Provision for income taxes 1,520 2,997
------- -------
Net income $ 3,064 $ 6,365
======= =======
Earnings per share:
Basic N/A N/A
Diluted N/A N/A
Weighted average shares outstanding:
Basic N/A N/A
Diluted N/A N/A
</TABLE>
4
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
<PAGE>
CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statement of Changes in Stockholders' Equity
For the Nine Months Ended September 30, 2000 (unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional ESOP Other
Common Stock Paid-In Retained Unearned Comprehensive
Shares Amount Capital Earnings Compensation Income Total
---------- ------ ---------- --------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1999
(unaudited) - $ - $ - $ 112,308 $ - $ 10,915 $ 123,223
---------- ------ ---------- --------- ------------- ------------- ---------
Proceeds from issuance of
common stock in connection
with conversion, after expenses of
approximately $4,300 10,400,000 104 99,714 - (9,305) - 90,513
---------- ------ ---------- --------- ------------- ------------- ---------
Common stock issued to SBM
Charitable Foundation, Inc. 832,000 8 8,308 - - - 8,316
---------- ------ ---------- --------- ------------ ------------- --------
Change in ESOP unearned
compensation - - 132 - 465 - 597
Comprehensive income:
Net income - - - 3,064 - - 3,064
Change in unrealized gain on
securities available for sale,
net of taxes - - - - - 2,769 2,769
---------- ------ ---------- --------- ------------ ------------- --------
Total comprehensive income - - - 3,064 - 2,769 5,833
---------- ------ ---------- --------- ------------ ------------- --------
BALANCE, September 30, 2000
(unaudited) 11,232,000 $ 112 $ 108,154 $ 115,372 $ (8,840) $ 13,684 $228,482
========== ====== ========== ========= ============ ============= ========
</TABLE>
5
The accompanying notes are an integral part of this unaudited condensed
consolidated financial statements.
<PAGE>
CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,064 $ 6,365
Adjustments to reconcile net income to net cash
provided by operating activities:
Securities contributed to SBM Charitable Foundation, Inc. 8,316 -
Provision for loan losses 825 950
Depreciation 1,940 1,994
Amortization/accretion -
Premium on deposits 324 324
Premium on loans and bonds 191 471
Net (gains) losses on sales of other real estate owned (40) 41
Losses (gains) on sales of securities, net 990 (115)
Gains on mortgage loan sales, net (207) (481)
Change in ESOP unearned compensation 597 -
Changes in operating assets and liabilities -
Accrued interest receivable (1,683) (772)
Other assets 735 (985)
Other liabilities (433) (6,888)
--------- ---------
Net cash provided by operating activities 14,619 904
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations and purchases, net of repayments (69,031) (121,474)
Proceeds from sales of loans 4,848 17,024
Proceeds from maturities of held to maturity securities - 3,578
Proceeds from maturities of available for sale securities 27,729 20,375
Proceeds from sales of available for sale securities 86,209 5,507
Purchases of available for sale securities (182,814) (19,860)
Purchases of Federal Home Loan Bank stock (745) -
Purchases of held to maturity securities - (6,876)
Proceeds from principal payments of mortgage-
backed securities 7,469 10,570
Proceeds from sales of other real estate owned 620 1,085
Purchases of premises and equipment (1,133) (1,091)
--------- ---------
Net cash used in investing activities (126,848) (91,162)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 90,513 -
Net increase in savings, money market, NOW and 19,700 25,695
demand deposits
Net (decrease) increase in certificates of deposit (22,103) 1,832
Net increase in short-term borrowed funds 13,275 15,232
Decrease in mortgagors' escrow accounts (4,173) (2,061)
Increase in advances from Federal Home Loan Bank 40,000 42,896
--------- ---------
Net cash provided by financing activities 137,212 83,594
--------- ---------
Net increase (decrease) in cash and cash
equivalents 24,983 (6,664)
CASH AND CASH EQUIVALENTS, beginning of period 26,678 45,048
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 51,661 $ 38,384
========= =========
SUPPLEMENTAL INFORMATION:
Cash paid for -
Interest and dividends $ 32,811 $ 27,419
Income taxes 2,250 3,200
Non-cash transactions -
Transfers from loans to other real estate owned 79 326
</TABLE>
6
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
<PAGE>
CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statements Presentation
The accompanying condensed consolidated financial statements were prepared
in accordance with instructions to Form 10-Q, and therefore, do not include
information or notes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with
accounting principles generally accepted in the United States. However, all
normal recurring adjustments which, in the opinion of management, are
necessary for a fair presentation of the financial statements have been
included. These condensed consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and the
notes thereto for Connecticut Bankshares, M.H.C. (MHC) and subsidiary
included in Connecticut Bancshares, Inc.'s Form 10-K for the year ended
December 31, 1999. The results for the nine months ended September 30, 2000
are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000.
Principles of consolidation and presentation
The accompanying condensed consolidated financial statements include the
accounts of Connecticut Bancshares, Inc. (Connecticut Bancshares or the
Company), successor to MHC, and its wholly-owned subsidiary, The Savings
Bank of Manchester (SBM), and its wholly-owned subsidiaries (all
collectively, the Bank). All material intercompany balances and
transactions have been eliminated in consolidation.
Business
The Company does not transact any material business other than through the
Bank. The Company used 50% of the net proceeds from the conversion to buy
all of the common stock of SBM and retained the remaining 50% (see Note 3),
which primarily were invested in fixed income securities. The Bank, with
its main office located in Manchester, Connecticut, operates through
twenty-three branches located primarily in eastern Connecticut. The Bank's
primary source of income is interest received on loans to customers, which
include small and middle market businesses and individuals residing within
the Bank's service area. As discussed in Note 3, MHC adopted a Plan of
Conversion pursuant to which, in March 2000, MHC merged into SBM, with SBM
being the surviving corporation, and SBM continuing as a state-chartered
stock savings bank and a wholly-owned subsidiary of the Company.
Earnings per share
Basic earnings per share represents income available to stockholders
divided by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share reflects additional common shares
that would have been outstanding if dilutive potential shares had been
issued. For the three and nine months ended September 30, 2000, the Bank
had no outstanding dilutive securities. Earnings per share data is not
presented in these condensed consolidated financial statements for the nine
months ended September 30, 2000 or the three and nine months ended
September 30, 1999 since shares of common stock were not issued until March
1, 2000 and therefore per share information is not meaningful.
7
<PAGE>
The following table sets forth the calculation of basic and diluted
earnings per share for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Net income $ 4,198 N/A N/A N/A
Weighted average shares outstanding:
Weighted average shares outstanding 11,232,000 N/A N/A N/A
Less: unearned ESOP shares 861,120 N/A N/A N/A
-----------
Basic 10,370,880 N/A N/A N/A
-----------
Diluted 10,370,880 N/A N/A N/A
-----------
Earnings per share:
Basic $ 0.40 N/A N/A N/A
Diluted $ 0.40 N/A N/A N/A
</TABLE>
(2) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(SFAS No. 133). This statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value.
The statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the
statement of income and requires that an entity formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting.
The Bank early adopted SFAS No. 133, as amended by SFAS No. 137,
"Accounting for Derivatives and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 and SFAS No. 138, "Accounting for
Certain Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 - An Amendment of FASB Statement
No. 133", on January 1, 2000. In connection with the adoption, the Bank
reclassified all held to maturity investments to available for sale as
allowed by SFAS No. 133. In March 2000, the Bank realized approximately
$72,000 on the sale of an interest rate cap, which amount is included in
other noninterest income in the accompanying condensed consolidated
statement of operations for the nine months ended September 30, 2000. As of
September 30, 2000, the Bank did not have any other derivative instruments.
On December 3, 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." The guidelines set forth in SAB No. 101 stipulate that revenue
should not be recognized until it is realized or realizable and earned. The
Bank adopted SAB No. 101 on January 1, 2000 without effect on the Bank's
condensed consolidated financial condition or results of operations since
the Bank's previous revenue recognition policies complied with SAB No. 101.
(3) CONVERSION TO STOCK FORM OF OWNERSHIP
On August 30, 1999, the Boards of Directors of MHC and SBM adopted a Plan
of Conversion and, on October 6, 1999 and October 26, 1999, unanimously
amended the Plan of Conversion (as amended, the Plan), pursuant to which,
on March 1, 2000, MHC converted from the mutual holding company form to the
stock holding company form. All of the outstanding common stock of SBM was
sold to the Company which
8
<PAGE>
issued and sold its stock pursuant to the Plan. The net proceeds of the
offering were $90.5 million, after expenses of approximately $4.3 million.
All of the stock of the Company sold in the conversion was offered to
eligible account holders, employee benefit plans of the Bank and certain
other eligible subscribers in subscription and direct community offerings
pursuant to subscription rights in order of priority as set forth in the
Plan. Additionally, the Bank established an Employee Stock Ownership Plan
(ESOP) for the benefit of eligible employees, which became effective upon
the conversion. The ESOP borrowed $9,305,000 from the Company to fund the
purchase in the open market of 898,560 shares, or 8%, of the common stock
issued in the conversion. The Bank expects to make annual contributions
adequate to fund the repayment of the indebtedness of the ESOP.
The Plan provided for the establishment of an additional charitable
foundation, SBM Charitable Foundation, Inc. (the New Foundation) in
connection with the conversion. The New Foundation was funded with a
contribution of 832,000 common shares, or an amount equal to 8% of the common
stock sold in the conversion. This contribution resulted in the recognition
of an expense of $8.3 million in March 2000, related to the fair value of the
shares contributed, which is reflected as such in the accompanying condensed
consolidated statement of operations. The New Foundation is dedicated to
charitable purposes within the Bank's local community, including community
development activities.
In October 2000, the Bank established the Connecticut Bancshares, Inc. 2000
Stock-Based Incentive Plan (the Stock Plan) to attract and retain qualified
personnel in key positions and to provide employees with an interest in the
Company as an incentive to contribute to its success.
The Stock Plan authorizes the granting of options to purchase common stock of
the Company and awards of restricted shares of common stock. All employees
and non-employee directors of the Company are eligible to receive awards
under the Stock Plan. The Stock Plan will be administered by a committee (the
Committee). Subject to certain regulatory conditions, the Committee has the
authority to determine the amount of options granted to any individual and
the dates on which each option will become exercisable. The exercise price of
all options will be determined by the Committee but will be at least 100% of
the fair market value of the underlying common stock at the time of the
grant. In addition, subject to certain regulatory conditions, the Committee
has the authority to determine the amounts of restricted stock awards granted
to any individual and the dates on which restricted stock awards granted will
vest or any other conditions which must be satisfied before vesting. As of
November 9, 2000, the Company had not granted any options or restricted stock
awards under the Stock Plan.
Effective upon the conversion, the Company entered into employment and change
in control agreements with certain executives and certain eligible employees
of the Company and the Bank. The agreements include, among other things,
provisions for minimum annual compensation and certain lump-sum severance
payments in the event of a "change in control" of approximately $17.4
million.
The Bank's deposit accounts continue to be insured by the FDIC and were not
affected by the conversion. In accordance with the Plan, upon the completion
of the conversion, the Bank established a special "liquidation account" for
the benefit of eligible account holders and in an amount equal to the equity
capital of the Bank less any subordinated debt approved as bona fide capital
of the Bank, as of the date of its latest statement of condition contained in
the final prospectus used in connection with the conversion. Eligible account
holders continuing to maintain deposit accounts at the Bank are entitled, on
a complete liquidation of the Bank after the conversion, to an interest in
the liquidation account prior to any payment to the stockholders of the Bank.
The Bank's retained earnings are substantially restricted with respect to
payment of dividends to stockholders due to the liquidation account. The
liquidation account will terminate on the tenth anniversary of the
consummation date of the conversion.
The primary source of funds for the Company to pay dividends is in the form
of dividends received from SBM. Neither the Company nor SBM may declare or
pay dividends on, or repurchase any of its shares of common stock, if the
effect thereof would cause stockholders' equity to be reduced below either
the balance required for the liquidation account or applicable regulatory
capital maintenance requirements, or if such declaration, payment or
repurchase would otherwise violate regulatory requirements.
9
<PAGE>
(4) LOANS
Loans are summarized as follows (in thousands):
September 30, December 31,
2000 1999
---- ----
Residential mortgages $ 602,643 $549,950
Commercial real estate mortgages 186,524 190,885
Commercial business loans 144,746 134,550
Installment loans 78,494 73,572
---------- --------
Total loans 1,012,407 948,957
Less - Allowance for loan losses (11,561) (10,617)
---------- --------
Total loans, net $1,000,846 $938,340
========== ========
A summary of the allowance for loan losses is as follows (in thousands):
Nine
Months Ended Year Ended
September 30, December 31,
2000 1999
---------- --------
Balance, beginning of period $ 10,617 $ 10,585
Provision for loan losses 825 1,100
Loans charged off (126) (1,360)
Recoveries 245 292
---------- --------
Balance, end of period $ 11,561 $ 10,617
========== ========
Nonperforming assets were approximately $9.3 million and $12.1 million at
September 30, 2000 and December 31, 1999, respectively. During 1999, the
Bank added two large lending relationships totaling $10.0 million to
nonperforming loans. One of these lending relationships was a commercial
mortgage with an outstanding balance of $4.3 million. The Bank received
full repayment of the principal on this loan on April 25, 2000. The second
of these two relationships, the Bank's largest residential development
relationship, had an outstanding balance of $5.7 million as of December 31,
1999. During the first nine months of 2000, this loan was paid down by $1.5
million to $4.2 million.
(5) DEPOSITS
Deposits were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
(in thousands)
<S> <C> <C>
Certificates of Deposit:
One to twelve-month certificates $281,739 $210,597
One to five year certificates 91,520 179,261
Time certificates in denominations of $100,000 or more (1) 54,985 60,489
-------- --------
428,244 450,347
-------- --------
</TABLE>
10
<PAGE>
September 30, December 31,
2000 1999
---- ----
(in thousands)
Savings accounts 219,720 223,656
Money market accounts 75,932 68,532
NOW accounts 120,233 112,741
Demand deposits 60,059 51,315
-------- --------
Total deposits $904,188 $906,591
======== ========
(1) Deposit balances in excess of $100,000 are not federally insured.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations.
--------------
The following analysis discusses changes in the financial condition and
results of operations for the three and nine months ended September 30, 2000 and
1999, and should be read in conjunction with Connecticut Bancshares, Inc. and
subsidiary's condensed consolidated financial statements and the notes thereto,
appearing elsewhere herein.
Private Securities Litigation Reform Act Safe Harbor Statement
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Bank intends such forward-
looking statements to be covered by the safe harbor provisions for forward-
looking statements contained in the Private Securities Litigation Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Bank, are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Bank's ability
to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations of the Bank and its subsidiaries include, but are not limited to,
changes in: interest rates, general economic conditions, legislative/regulatory
changes, monetary and fiscal policies of the U.S. Government, including policies
of the U.S. Treasury and the Federal Reserve Board, the quality or composition
of the loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Bank's market area and
accounting principles and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information concerning the Bank and
its business, including additional factors that could materially affect the
Bank's financial results, is included in the Company's Form 10-K filing for the
year ended December 31, 1999.
The Bank does not undertake--and specifically disclaims any obligation--to
publicly release the result of any revisions which may be made to forward-
looking statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.
General
The Bank's results of operations depend primarily on net interest income,
which represents the difference between interest income earned on interest-
earning assets, such as loans and securities, and interest expense on interest-
bearing liabilities, such as deposits and borrowings. The Bank also generates
noninterest income primarily from fees charged on customers' accounts and fees
earned on activities such as investment services provided through a third party
registered broker-dealer. The Bank's noninterest
11
<PAGE>
expenses primarily consist of employee compensation and benefits, occupancy
expense, marketing and other operating expenses. The Bank's results of
operations are also affected by general economic and competitive conditions,
notably changes in market interest rates, government policies and regulations.
SBM exceeded all of its regulatory capital requirements at September 30, 2000.
Comparison of Financial Condition at September 30, 2000 and December 31, 1999
-----------------------------------------------------------------------------
Total assets increased $153.0 million, or 12.5%, to $1.38 billion at
September 30, 2000 as compared to $1.23 billion at December 31, 1999. The
increase was primarily due to a $25.0 million increase in cash and cash
equivalents, a $62.5 million increase in the loan portfolio and a $65.5 million
increase in the investment portfolio. The increase in cash and cash equivalents
and investments reflects the net proceeds from the public offering which were
temporarily invested in Federal funds (cash equivalents) and investments and a
program to reposition the Bank's investment portfolio by selling lower yielding
fixed income securities and replacing them with higher yielding securities to
improve future income. Loans increased due to continued loan demand in most
sectors of the loan portfolio, despite a higher interest rate environment. The
Bank continues to offer a broad array of loan products to an expanded market
area using aggressive marketing efforts such as media advertising and
application fee rebate programs. The growth in the loan portfolio was enhanced
by management's decision in 1999 to reduce the level of sales of fixed rate
residential mortgages to the secondary market. This decision reflects
management's reevaluation of the Bank's asset/liability position and desire for
fixed rate products, despite the inherent interest rate risk in a rising
interest rate environment. Sales of fixed rate loans were $4.8 million in the
first nine months of 2000 compared to $17.0 million for the first nine months of
1999. The growth in assets was funded by an increase in short-term borrowed
funds of $13.3 million, advances from Federal Home Loan Bank of $40.0 million
and net proceeds from the public offering of $90.5 million.
Commercial loans increased $5.9 million, or 1.8%, from $325.4 million at
December 31, 1999, to $331.3 million at September 30, 2000. As of September 30,
2000, commercial loans represented 32.7% of the Bank's loan portfolio.
Residential mortgages increased $52.6 million, or 9.6%, from $550.0 million to
$602.6 million due to continued loan demand and a reduction in the number of
loans that were paid off resulting from rising interest rates. Consumer
installment loans increased $4.9 million, or 6.7%, from $73.6 million to $78.5
million.
Deposits totaled $904.2 million at September 30, 2000, a decrease of $2.4
million, or 0.3%, compared to $906.6 million at December 31, 1999. The deposit
decrease reflects a decrease in certificates of deposit of $22.1 million, or
4.9%, from $450.3 million to $428.2 million, due to increasing rate competition,
offset by an increase of $7.4 million, or 10.8%, in money market accounts and a
$16.2 million, or 9.9%, increase in NOW accounts and demand deposits. Savings
accounts decreased $4.0 million, or 1.8%, from $223.7 million to $219.7 million.
The increases in money market, NOW, and demand deposit accounts reflect
aggressive marketing of both retail and commercial deposit accounts. In
addition, the Bank continues to market a short-term transactional repurchase
agreement (repo) account to commercial businesses and retail customers. These
repo accounts are shown as short-term borrowed funds in the accompanying
condensed consolidated statements of condition. Short-term borrowed funds
increased $13.3 million, or 13.9%, from $95.8 million to $109.1 million during
the first nine months of 2000. Advances from Federal Home Loan Bank increased
$40.0 million, or 47.6%, from $84.0 million to $124.0 million to fund loan
growth.
Nonperforming assets totaled $9.3 million at September 30, 2000, compared
to $12.1 million at December 31, 1999, a decrease of $2.8 million, or 23.1%. The
decrease was partially due to payments on the two large commercial real estate
relationships, which were placed on nonaccrual status during 1999. One of these
lending relationships was a commercial mortgage with an outstanding balance of
$4.3 million as of March 31, 2000. The Bank received full repayment of the
principal on this loan on April 25, 2000. The second of these two relationships,
the Bank's largest residential development relationship, had an outstanding
balance of $5.7 million as of December 31, 1999. During the first nine months of
2000, this relationship was
12
<PAGE>
paid down by $1.5 million to $4.2 million. The Bank obtained an appraisal of the
collateral as of December 1, 1999 which indicated that the amount outstanding as
of September 30, 2000 is realizable. During the quarter ended September 30,
2000, sales of units in the residential development were less than projected by
Bank management, and as a result, the Bank requested an updated appraisal for
the remaining collateral. As of November 9, 2000, Bank management believes the
loans are fully collectible. The Bank is in workout negotiations with the
borrower, and if these negotiations fail, the Bank's remaining course of action
would be to institute foreclosure proceedings, which could result in a loss to
the Bank. Other real estate owned declined $540,000 or 89.4%, from $604,000 to
$64,000 during the first nine months of 2000 due to the sale of several
properties.
While management believes that, based on information currently available,
the allowance for loan losses is sufficient to cover probable losses inherent in
its loan portfolio at this time, no assurances can be given that the Bank's
level of allowance for loan losses will be sufficient to cover loan losses
incurred by the Bank or that future adjustments to the allowance for loan losses
will not be necessary if economic and other conditions differ substantially from
the economic and other conditions used by management to determine the current
level of the allowance for loan losses.
The following table sets forth information regarding nonperforming loans
and other real estate owned (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Nonperforming loans:
Real estate:
One- to four-family............................... $ 363 $ 501
Commercial and multi-family real estate........... 4,218 10,513
Consumer.......................................... 82 17
Commercial........................................ 4,542 454
----------- -----------
Total nonperforming loans...................... 9,205 11,485
Other real estate owned................................. 64 604
----------- -----------
Total nonperforming assets..................... $ 9,269 $ 12,089
=========== ===========
Total nonperforming loans as a percentage of
total loans ........................................ 0.91% 1.21%
=========== ==========
Total nonperforming assets as a percentage
of total assets..................................... 0.67% 0.98%
=========== ==========
</TABLE>
Total stockholders' equity increased $105.3 million, or 85.4%, to $228.5
million at September 30, 2000 compared to $123.2 million on December 31, 1999.
The increase is due primarily to the net proceeds from the stock offering
completed on March 1, 2000. Net income of $3.1 million for the nine months ended
September 30, 2000 and an increase of $2.8 in accumulated other comprehensive
income related to unrealized gains on available for sale securities for the
period ended September 30, 2000 and were reflected in the net increase in
stockholders' equity.
Comparison of Operating Results for the Three Months Ended September 30, 2000
-----------------------------------------------------------------------------
and 1999
--------
Net Income. Net income for the quarter ended September 30, 2000 was $4.2
million compared to net income of $1.2 million for the third quarter of 1999.
The operating results for the quarter ended September 30, 2000 include a $2.8
million increase in net interest income, primarily due to an increase in
interest and dividend income on investment securities of $1.9 million, higher
average interest-earning assets
13
<PAGE>
and the increasing interest rate environment. Net income was also impacted by
higher service charge and fee income of $2.0 million and net realized securities
gains of $794,000, offset by higher operating expenses associated with salaries
and benefits of $5.5 million, an increase in fees and services paid of $1.3
million, and increased income taxes of $2.1 million.
The following table presents the amortized cost and fair value of the
Bank's securities, by type of security, at the dates indicated (in thousands):
<TABLE>
<CAPTION>
At September 30, 2000 At December 31, 1999
--------------------------- --------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ----- ---------- -----
<S> <C> <C> <C> <C>
Debt securities held to maturity:
Asset-backed securities................. $ - $ - $ 17,481 $ 17,418
U.S. Government and agency obligations.. - - - -
Other debt securities................... - - 3,105 2,950
----------- ---------- ----------- -----------
Total............................. - - 20,586 20,368
----------- ---------- ----------- -----------
Debt securities available for sale:
Asset-backed securities................. 33,440 34,042 - -
U.S. Government and agency obligations.. 77,872 78,817 82,486 81,328
Corporate securities.................... 57,990 58,551 33,870 33,345
----------- ---------- ----------- -----------
Total............................. 169,302 171,410 116,356 114,673
----------- ---------- ----------- -----------
Equity securities available for sale:
Marketable equity securities............ 34,776 52,957 32,273 50,545
Other equity securities................. 432 432 432 432
----------- ---------- ----------- -----------
Total............................. 35,208 53,389 32,705 50,977
----------- ---------- ----------- -----------
Total debt and equity securities.. 204,510 224,799 169,647 186,018
----------- ---------- ----------- -----------
Total mortgage-backed securities........... 68,460 68,631 42,215 40,834
----------- ---------- ----------- -----------
Total investment securities....... $ 272,970 $ 293,430 $ 211,862 $ 226,852
========= ========== =========== ===========
</TABLE>
Net Interest Income. Net interest income increased $2.7 million, or 25.7%,
to $13.2 million for the third quarter of 2000 compared to $10.5 million for the
third quarter of 1999. The increase was primarily a result of higher interest
income from an increase in average interest-earning assets and increasing
interest yields on loans and investments, partially offset by an increase in the
average cost of funds on interest bearing liabilities and increased short-term
borrowings and advances from Federal Home Loan Bank. Interest and dividend
income increased $4.6 million, or 23.1%, to $24.5 million for the third quarter
of 2000 from $19.9 million for 1999. The average yield on interest earning
assets increased 31 basis points to 7.33% for the three months ended September
30, 2000 from 7.02% for the three months ended September 30, 1999, due to the
higher interest rate environment. Interest income on loans increased $2.7
million, or 16.0%, to $19.6 million for the three months ended September 30,
2000 compared to $16.9 million for the three months ended September 30, 1999.
The increase was due to a $105.1 million increase in the average balance of
loans outstanding and a 31 basis point increase in the average yield on such
loans. Interest and dividend income from investment securities increased $1.9
million, or 63.3%, to $4.9 million for the three months ended September 30, 2000
compared to $3.0 million for the three months ended September 30, 1999. The
increase in interest and dividend income from investment securities was due to
an increase in the average balance of investment securities of $100.0 million,
or 44.0%, to $327.0 million for the quarter ended September 30,
14
<PAGE>
2000 and a 65 basis point increase in the average yield on investment securities
during the quarter ended September 30, 2000.
Interest expense increased $1.8 million, or 18.9%, to $11.3 million for the
three months ended September 30, 2000 from $9.5 million for the three months
ended September 30, 1999. The increase reflects an increase in interest expense
on short-term borrowed funds and on advances from Federal Home Loan Bank of $1.2
million, and increased interest expense of $607,000 on core deposits. Advances
from Federal Home Loan Bank increased from $87.9 million as of September 30,
1999 to $124.0 million at September 30, 2000. Short-term borrowed funds,
represented primarily by commercial transactional repurchase agreements,
increased to $109.1 million at September 30, 2000 from $94.8 million at
September 30, 1999. The average rate paid on advances from Federal Home Loan
Bank increased 68 basis points to 6.47% for the three months ended September 30,
2000 from 5.79% for the three months ended September 30, 1999 due to higher
rates paid on new advances. Interest on deposits increased $600,000, or 7.8%, to
$8.4 million for the three months ended September 30, 2000 from $7.8 million for
the three months ended September 30, 1999, reflecting a higher interest rate
environment for certificates of deposit and money market funds.
Average Balances, Interest and Average Yields/Cost. The following table
presents certain information for the periods indicated regarding average
balances of assets and liabilities, as well as the total dollar amounts of
interest income from average interest-earning assets and interest expense on
average interest-bearing liabilities and the resulting average yields and costs.
The yields and costs for the periods indicated are derived by dividing income or
expense by the average balances of assets or liabilities, respectively, for the
periods presented. The yields and rates include fees which are considered
adjustments to yields.
15
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
-----------------------------------------------------------------------------------
2000 1999
---------------------------------------- ----------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
----------- -------- ---------- ----------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1):
Real estate......................... $ 783,108 $ 14,698 7.47% $ 696,725 $ 12,597 7.17%
Consumer............................ 77,312 1,603 8.25 72,562 1,510 8.26
Commercial.......................... 143,513 3,276 9.08 129,466 2,774 8.50
----------- -------- ---- ----------- --------- ----
Total loans...................... 1,003,933 19,577 7.76 898,753 16,881 7.45
Mortgage-backed securities (2)......... 69,127 1,449 8.34 36,051 583 6.42
Investment securities (3):
U.S. Government and agency 87,301 1,374 6.26 68,291 1,116 6.48
obligations......................
Corporate securities................ 62,383 1,001 6.38 38,745 582 5.96
Marketable equity securities........ 52,604 252 1.91 43,382 203 1.86
Other equity securities............. 432 - - 432 - -
Asset-backed securities............. 34,214 525 6.10 19,467 301 6.13
Other interest-bearing assets:
Federal Home Loan Bank stock........ 6,654 124 7.41 5,909 96 6.45
Federal funds sold.................. 14,311 210 5.84 14,750 169 4.55
----------- -------- ---- ----------- --------- ----
Total interest-earning assets.... 1,330,959 $ 24,512 7.33 1,125,780 $ 19,931 7.02
======== =========
Noninterest-earning assets............. 36,704 45,215
----------- -----------
Total assets..................... $ 1,367,663 $ 1,170,995
=========== ===========
Interest-bearing liabilities:
Deposits:
NOW accounts........................ $ 116,619 $ 350 1.19% $ 109,124 $ 381 1.39%
Savings and money market accounts... 298,267 2,072 2.76 283,231 2,423 3.39
Certificates of deposit............. 425,679 5,986 5.59 445,084 4,998 4.46
Escrow deposits..................... 4,087 31 3.02 4,602 30 2.59
----------- -------- ---- ----------- --------- ----
Total interest-bearing deposits.. 844,652 8,439 3.97 842,041 7,832 3.69
Short-term borrowed funds.............. 114,128 958 3.34 94,640 708 2.97
Advances from FHLB..................... 115,847 1,884 6.47 63,423 925 5.79
----------- -------- ---- ----------- --------- ----
Total interest-bearing
liabilities..................... 1,074,627 $ 11,281 4.18 1,000,104 $ 9,465 3.75
======== =========
Non-interest bearing liabilities....... 69,721 53,198
----------- -----------
Total liabilities................ 1,144,348 1,053,302
Capital................................ 223,315 117,693
----------- -----------
Total liabilities and capital.... $ 1,367,663 $ 1,170,995
=========== ===========
Net interest-earning assets............ $ 256,332 $ 125,676
=========== ===========
Net interest income.................... $ 13,231 $ 10,466
======== =========
Interest rate spread (4)............... 3.15 3.27
Net interest margin (5)................ 3.95 3.69
Ratio of interest-earning assets to
interest-bearing liabilities........ 123.85 112.57
</TABLE>
----------------------------
(1) Balances are net of undisbursed proceeds of construction loans in process
and include nonperforming loans.
(2) Includes mortgage-backed securities available for sale and held to
maturity.
(3) Includes investment securities available for sale at market value and held
to maturity at amortized cost.
(4) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of interest-
bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
16
<PAGE>
Rate/Volume Analysis. The following table presents the effects of changing
rates and volumes on the interest income and interest expense of the Bank. The
rate column shows the effects attributable to changes in rate (changes in rate
multiplied by prior volume). The volume column shows the effects attributable to
changes in volume (changes in volume multiplied by prior rate). The net column
represents the sum of the prior columns. For purposes of this table, changes
attributable to changes in both rate and volume, which cannot be segregated,
have been allocated proportionately based on the absolute value of the change
due to rate and the change due to volume.
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000 Compared to
Three Months Ended September 30, 1999
-------------------------------------------------
Increase (Decrease) Due to
----------------------------
Rate Volume Net
---- ------ ---
<S> <C> <C> <C>
Interest-earning assets:
Loans:
Real estate................. $ 511 $1,590 $2,101
Consumer.................... (6) 99 93
Commercial.................. 192 310 502
------ ------ ------
Total loans............. 697 1,999 2,696
Mortgage-backed securities 253 613 866
Investment securities........ 131 888 1,019
------ ------ ------
Total interest-earning
assets.............. $1,081 $3,500 $4,581
====== ====== ======
Interest-bearing liabilities:
Deposits:
Demand accounts............. $ (55) $ 24 $ (31)
Savings..................... (462) 112 (350)
Certificates of deposit..... 1,233 (245) 988
------ ------ ------
Total deposits.......... 716 (109) 607
Advances from Federal
Home Loan Bank........... 150 809 959
Other borrowings.............. 95 155 250
------ ------ ------
Total interest-bearing
liabilities.......... $ 961 $ 855 $1,816
====== ====== ======
Increase (decrease) in net
interest income............. $ 120 $2,645 $2,765
====== ====== ======
</TABLE>
Provision for Loan Losses. The provision for loan losses was $375,000 for
the quarter ended September 30, 2000 compared to $650,000 for the quarter ended
September 30, 1999. During 1999, the allowance for loan losses was $150,000 per
quarter, with an additional $500,000 added during the quarter ended September
30, 1999 to reflect the addition of the two large lending relationships added to
nonperforming loans. For the quarter ended September 30, 2000, management
increased the provision by $150,000 to reflect the continued growth of the
Bank's loan portfolio. The allowance for loan losses was 1.14% of total loans
and 125.6% of nonperforming loans at September 30, 2000 compared to 1.17% and
77.2%, respectively, at September 30, 1999.
The allowance for loan losses is maintained at a level believed by
management to be adequate to absorb losses in the portfolio. Management's
determination of the adequacy of the allowance is based upon an evaluation of
individual loans and the overall risk characteristics of the loan portfolio, the
financial condition of borrowers and guarantors, past loss experience, current
real estate and economic conditions, the
17
<PAGE>
composition and size of the portfolio, credit risks, the value of underlying
collateral and other factors. Based on a review of these factors, management has
decided to increase future additions to the allowance by increasing the Bank's
quarterly provision for loan losses to $375,000 beginning in the quarter ending
September 30, 2000. While management believes that, based on information
currently available, the allowance for loan losses is sufficient to cover
probable losses inherent in its loan portfolio at this time, no assurances can
be given that the allowance for loan losses will be sufficient to cover loan
losses incurred by the Bank or that future adjustments to the allowance for loan
losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for loan losses.
Noninterest Income. Noninterest income totaled $3.4 million and $1.3
million for the three months ended September 30, 2000 and 1999, respectively.
The increase was due to increased fee income and gains on sales of securities in
the 2000 period and increased other fee income. Fee income from service charges
and account fees was $2.0 million for the three months ended September 30, 2000
compared to $1.4 million for the three months ended September 30, 1999. Income
from service charges and fees increased $235,000 due to growth in merchant
services operations, $247,000 from increased fees and the number of demand
deposit accounts, and increased loan fees of $171,000. Other fee income
increased from $315,000 for the three months ended September 30, 1999 to
$468,000 for the three months ended September 30, 2000 and reflects increased
fees earned from brokerage services and rental income.
Noninterest Expense. Noninterest expense increased $625,000, or 6.7%, for
the three months ended September 30, 2000 from $9.4 million for the three months
ended September 30, 1999 to $10.0 million for the three months ended September
30, 2000. The increase in noninterest expense for the quarter was partly due to
charges associated with the restructuring of the Company's compensation plans to
align them with other publicly-traded financial institutions and holding
companies, and to a lesser extent, additional expenses associated with general
business growth. Wages and compensation reflect merit and promotional awards,
increased staff and sales incentives related to sales production in the third
quarter of 2000. Benefits increased due to new compensation programs for non-
qualified pension plans and an Employee Stock Ownership Plan (ESOP) adopted in
conjunction with the formation of a public company. All other operating expenses
decreased $200,000, or 4.2%, from $4.7 million for the third quarter of 1999 to
$4.5 million in the third quarter of 2000.
Provision for Income Taxes. The effective tax rate was 33.1% for the three
months ended September 30, 2000 and 32.0% for the three months ended September
30, 1999.
Comparison of Operating Results for the Nine Months Ended September 30,
-----------------------------------------------------------------------
2000 and 1999
-------------
Net Income. Net income for the nine months ended September 30, 2000
decreased $3.3 million, or 51.6%, to $3.1 million compared to net income of $6.4
million for the nine months ended September 30, 1999. The operating results for
the nine months ended September 30, 2000 include a $8.3 million contribution to
fund SBM Charitable Foundation, Inc. with shares of Company stock, which was
recorded as an expense by the Company, expenses related to the restructuring of
the Company's compensation plans, securities losses realized to reposition the
investment portfolio and other related expenses which reflect the formation of a
publicly-traded financial institution, partially offset by a $6.6 million
increase in net interest income.
Net Interest Income. Net interest income increased $6.6 million, or 20.9%,
to $37.5 million for the nine months ended September 30, 2000 compared to $31.0
million for the nine months ended September 30, 1999. The increase was due to
increased average balance for loans and investments and higher yields on earning
assets, offset by increased interest expense on interest bearing deposits,
short-term borrowed funds, and advances from Federal Home Loan Bank. The average
rate on interest bearing liabilities increased 33 basis points primarily due to
a higher average cost on advances from Federal Home Loan Bank, short-term
18
<PAGE>
borrowings and certificates of deposit partially offset by a decrease in savings
and money market accounts. Interest and dividend income increased $11.9 million,
or 20.4%, to $70.0 million for the first nine months of 2000 from $58.1 million
for the 1999 period. The average yield on interest earning assets increased 11
basis points to 7.25% for the nine months ended September 30, 2000 from 7.14%
for the nine months ended September 30, 1999, due to rising interest rates.
Interest income on loans increased $7.4 million, or 15.1%, to $56.3 million for
the nine months ended September 30, 2000 compared to $48.9 million for the nine
months ended September 30, 1999. The increase was due to a $122.0 million
increase in the average balance of loans outstanding, and a 5 basis point
increase in the average yield on such loans. Interest and dividend income from
investment securities increased $4.5 million, or 48.9%, to $13.7 million for the
nine months ended September 30, 2000 compared to $9.2 million for the nine
months ended September 30, 1999. The increase in interest and dividend income
from investment securities was due to an increase in the average balance of
investment securities of $79.6 million, or 35.1%, to $306.8 million for the nine
months ended September 30, 2000, and a 56 basis point increase in the average
yield during the nine months ended September 30, 2000.
Interest expense increased $5.3 million, or 19.5%, to $32.5 million for the
nine months ended September 30, 2000 from $27.2 million for the nine months
ended September 30, 1999. The increase reflects an increase in interest expense
on short-term borrowed funds and on advances from Federal Home Loan Bank of $3.4
million and increased interest expense of $2.0 million on core deposits.
Advances from Federal Home Loan Bank increased from $87.9 million as of
September 30, 1999 to $124.0 million at September 30, 2000. Short-term borrowed
funds, represented primarily by commercial transactional repurchase agreements,
increased to $109.1 million at September 30, 2000 from $94.8 million at
September 30, 1999. The average rate paid on advances from Federal Home Loan
Bank increased 38 basis points to 6.34% for the nine months ended September 30,
2000 from 5.96% for the nine months ended September 30, 1999 reflecting higher
interest rates paid on new advances. Interest expense on deposits increased $2.0
million, or 8.5%, to $24.9 million for the nine months ended September 30, 2000
from $22.9 million for the nine months ended September 30, 1999, primarily
reflecting a higher interest rate environment for certificates of deposit.
Interest expense on short-term repurchase agreement borrowings increased
$800,000, or 42.1%, from $1.9 million for the nine months ended September 30,
1999, to $2.7 million for the nine months ended September 30, 2000.
Average Balances, Interest and Average Yields/Cost. The following table
presents certain information for the periods indicated regarding average
balances of assets and liabilities, as well as the total dollar amounts of
interest income from average interest-earning assets and interest expense on
average interest-bearing liabilities and the resulting average yields and costs.
The yields and costs for the periods indicated are derived by dividing income or
expense by the average balances of assets or liabilities, respectively, for the
periods presented. The yields and rates include fees which are considered
adjustments to yields.
19
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
----------------------------------------------------------------------------------
2000 1999
--------------------------------------- --------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
--------- -------- ---------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1):
Real estate............................ $ 766,915 $42,332 7.37% $ 667,640 $36,944 7.40%
Consumer............................... 75,785 4,625 8.15 71,367 4,156 7.79
Commercial............................. 140,351 9,354 8.90 122,060 7,850 8.60
---------- ------- ---- ---------- ------- ----
Total loans......................... 983,051 56,311 7.65 861,067 48,950 7.60
Mortgage-backed securities (2)............ 56,373 3,309 7.84 35,167 1,722 6.55
Investment securities (3):
U.S. Government and agency obligations 79,904 4,037 6.75 67,244 3,074 6.11
Corporate securities................... 51,988 2,577 6.62 40,157 1,814 6.04
Marketable equity securities........... 51,653 689 1.78 42,738 780 2.44
Other equity securities................ 432 - - 414 - -
Asset-backed securities................ 25,397 1,212 6.37 20,960 984 6.28
Other interest-bearing assets:
Federal Home Loan Bank stock........... 6,418 326 6.78 5,909 285 6.45
Federal funds sold..................... 34,604 1,518 5.86 14,541 505 4.64
---------- ------- ---- ---------- ------- ----
Total interest-earning assets....... 1,289,820 $69,979 7.25 1,088,197 $58,114 7.14
======= =======
Noninterest-earning assets................ 45,138 46,997
---------- ----------
Total assets........................ $1,334,958 $1,135,194
========== ==========
Interest-bearing liabilities:
Deposits:
NOW accounts........................... $ 115,804 $ 1,168 1.35% $ 108,670 $ 1,121 1.38%
Savings and money market accounts...... 297,937 6,191 2.78 273,036 6,084 2.98
Certificates of deposit................ 432,153 17,387 5.37 443,744 15,607 4.70
Escrow deposits........................ 5,613 116 2.76 5,028 110 2.93
---------- ------- ---- ---------- ------- ----
Total interest-bearing deposits..... 851,507 24,862 3.90 830,478 22,922 3.69
Short-term borrowed funds................. 110,456 2,746 3.32 87,022 1,904 2.92
Advances from FHLB........................ 102,221 4,853 6.34 52,369 2,332 5.96
---------- ------- ---- ---------- ------- ----
Total interest-bearing liabilities.. 1,064,184 $32,461 4.07 969,869 $27,158 3.74
======= =======
Non-interest bearing liabilities.......... 78,327 49,410
---------- ----------
Total liabilities................... 1,142,511 1,019,279
Capital................................... 192,447 115,915
---------- ----------
Total liabilities and capital....... $1,334,958 $1,135,194
========== ==========
Net interest-earning assets............... $ 225,636 $ 118,328
========== ==========
Net interest income....................... $37,518 $30,956
======= =======
Interest rate spread (4).................. 3.18 3.40
Net interest margin (5)................... 3.89 3.80
Ratio of interest-earning assets to
interest-bearing liabilities........... 121.20 112.20
</TABLE>
____________________________
(1) Balances are net of undisbursed proceeds of construction loans in process
and include nonperforming loans.
(2) Includes mortgage-backed securities available for sale and held to maturity.
(3) Includes investment securities available for sale at market value and held
to maturity at amortized cost.
(4) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of interest-
bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
20
<PAGE>
Rate/Volume Analysis. The following table presents the effects of changing
rates and volumes on the interest income and interest expense of the Bank. The
rate column shows the effects attributable to changes in rate (changes in rate
multiplied by prior volume). The volume column shows the effects attributable to
changes in volume (changes in volume multiplied by prior rate). The net column
represents the sum of the prior columns. For purposes of this table, changes
attributable to changes in both rate and volume, which cannot be segregated,
have been allocated proportionately based on the absolute value of the change
due to rate and the change due to volume.
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000 Compared to
Nine Months Ended September 30, 1999
--------------------------------------------------
Increase (Decrease) Due to
------------------------------------
Rate Volume Net
---- ------ ---
<S> <C> <C> <C>
Interest-earning assets:
Loans:
Real estate.................... $ (98) $ 5,485 $ 5,387
Consumer....................... 206 264 470
Commercial..................... 306 1,198 1,504
------ ------- -------
Total loans................ 414 6,947 7,361
Mortgage-backed securities 445 1,142 1,587
Investment securities........... 576 2,341 2,917
------ ------- -------
Total interest-earning
assets.................... $1,435 $10,430 $11,865
====== ======= =======
Interest-bearing liabilities:
Deposits:
Demand accounts................ $ (26) $ 73 $ 47
Savings........................ (436) 549 113
Certificates of deposit........ 2,217 (437) 1,780
------ ------- -------
Total deposits............. 1,755 185 1,940
Advances from Federal
Home Loan Bank.............. 228 2,293 2,521
Other borrowings................. 294 548 842
------ ------- -------
Total interest-bearing
liabilities............... $2,277 $ 3,026 $ 5,303
====== ======= =======
Increase (decrease) in net
interest income................ $ (842) $ 7,404 $ 6,562
====== ======= =======
</TABLE>
Provision for Loan Losses. The provision for loan losses was $825,000 for
the nine months ended September 30, 2000 compared to $950,000 for the nine
months ended September 30, 1999. The allowance for loan losses was 1.14% of
total loans and 125.6% of nonperforming loans at September 30, 2000 compared to
1.17% and 77.2%, respectively, at September 30, 1999.
The allowance for loan losses is maintained at a level believed by
management to be adequate to absorb losses in the portfolio. Management's
determination of the adequacy of the allowance is based upon an evaluation of
individual loans and the overall risk characteristics of the loan portfolio, the
financial condition of borrowers and guarantors, past loss experience, current
real estate and economic conditions, the composition and size of the portfolio,
credit risks, the value of underlying collateral and other factors. Based on a
review of these factors, management has decided to increase future additions to
the allowance by increasing the Bank's quarterly provision for loan losses to
$375,000 beginning in the quarter ending September 30, 2000. While management
believes that, based on information currently available, the
<PAGE>
allowance for loan losses is sufficient to cover probable losses inherent in its
loan portfolio at this time, no assurances can be given that the allowance for
loan losses will be sufficient to cover loan losses incurred by the Bank or that
future adjustments to the allowance for loan losses will not be necessary if
economic and other conditions differ substantially from the economic and other
conditions used by management to determine the current level of the allowance
for loan losses.
Noninterest Income. Noninterest income totaled $6.4 million and $5.9
million for the nine months ended September 30, 2000 and 1999, respectively. The
increase was due to the combined effect of increased fee income offset by losses
realized on sales of securities in a program to reposition the investment
portfolio and reduced gains from the sale of mortgages to the secondary market.
During the nine months ended September 30, 2000, the Bank realized investment
losses of $1.0 million compared to a $115,000 gain for the nine months ended
September 30, 1999. The decreased gains from the sale of mortgages to the
secondary market reflects management's decision to retain fixed-rate mortgages
in order to grow the loan portfolio. During the nine months ended September 30,
2000, the Bank sold $4.8 million of loans to the secondary market, realizing
gains of $207,000, compared to sales of $17.0 million in the nine months ended
September 30, 1999, which generated gains of $481,000. Fee income from service
charges and account fees was $5.7 million for the nine months ended September
30, 2000 compared with $4.1 million for the nine months ended September 30,
1999. Other fee income increased from $1.2 million for the nine months ended
September 30, 1999 to $1.5 million for the nine months ended September 30, 2000
and reflects increased fees earned from brokerage services and other fee income
from rental income.
Noninterest Expense. Noninterest expense increased $12.0 million, or 45.1%,
to $38.5 million for nine months ended September 30, 2000 from $26.5 million for
the nine months ended September 30, 1999. The increase in noninterest expense is
primarily due to the $8.3 million expense recorded by the Company to fund the
New Foundation with shares of Company stock. The increase in noninterest expense
for the first nine months of 2000 (exclusive of the contribution to the
charitable foundation) was primarily due to charges associated with the
restructuring of the Company's compensation plans to align them with other
publicly-traded financial institutions and holding companies, and to a lesser
extent, additional expenses associated with general business growth. The
increase in salaries of $1.3 million from $10.7 million to $12.0 million
reflects merit and promotional awards, increased staff and sales incentives
related to mortgage production in the first nine months of 2000. Pension and
employee benefits increased $1.2 million for the nine months ended September 30,
2000 from $3.1 million for the nine months ended September 30, 1999 to $4.3
million due to new benefit plans adopted and increased health insurance costs.
Fees and services paid increased $612,000 from $2.8 million for the nine months
ended September 30, 1999 to $3.5 million for the nine months ended September 30,
1999 due to expenses associated with becoming a public company. Higher marketing
expenses of $147,000 in the first nine months of 2000 reflects the development
of a new marketing campaign. Other operating expense increases were related to
costs associated with the Bank's new in-house check imaging system, Year 2000
expenses for armored car and automatic teller machines, increased loan servicing
expenses, and Merchant Service Center expenses.
Provision for Income Taxes. The effective tax rate was 33.2% for the
nine months ended September 30, 2000 and 32.0% for the nine months ended
September 30, 1999.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial
obligations of a short-term nature. The Company further defines liquidity as the
ability to respond to the needs of depositors and borrowers as well as
maintaining the flexibility to take advantage of investment opportunities.
Primary sources of funds consist of deposit inflows, loan repayments,
maturities, paydowns, sales of investment and mortgage-backed securities and
advances from Federal Home Loan Bank of Boston. While maturities and scheduled
22
<PAGE>
amortization of loans and securities are predictable sources of funds, deposit
outflows and mortgage prepayments are influenced by general interest rates,
economic conditions and competition.
The Bank's primary investing activities are (1) originating residential
one-to four-family mortgage loans and, to a lesser extent, commercial business
and real estate loans, multi-family loans, single-family construction loans,
home equity loans and lines of credit and consumer loans and (2) investing in
mortgage-backed securities, U.S. Government and agency obligations and corporate
equity securities and debt obligations. These activities are funded primarily by
principal and interest payments on loans, maturities of securities, deposit
growth and advances from Federal Home Loan Bank of Boston. During the nine
months ended September 30, 2000, the Bank's loan originations totaled $124.6
million. For the nine months ended September 30, 2000, the Bank purchased
investments in mortgage-backed securities, U.S. Government and agency
obligations and corporate securities and debt obligations totaling $182.8
million. The Bank experienced a net decrease in total deposits of $2.4 million
for the nine months ended September 30, 2000. Deposit flows are affected by the
overall level of interest rates, the interest rates and products offered by the
Bank and its local competitors and other factors. The Company closely monitors
its liquidity position on a daily basis. If the Company should require
additional funds, additional funds are available through advances from Federal
Home Loan Bank and through repurchase agreement borrowing facilities.
Outstanding commitments for all loans and unadvanced construction loans and
lines of credit totaled $152.6 million at September 30, 2000. Management of the
Bank anticipates that it will have sufficient funds available to meet its
current loan commitments. Certificates of deposit that are scheduled to mature
in one year or less from September 30, 2000 totaled $281.7 million. The Bank
relies primarily on competitive rates, customer service, and long-standing
relationships with customers to retain deposits. Occasionally, the Bank will
also offer special competitive promotions to its customers to increase retention
and promote deposit growth. Based upon the Bank's historical experience with
deposit retention, management believes that a significant portion of its
deposits will remain with the Bank.
SBM must satisfy various regulatory capital requirements administered by
the federal banking agencies including a risk-based capital measure. The risk-
based capital guidelines include both a definition of capital and a framework
for calculating risk-weighted assets by assigning balance sheet assets and off-
balance sheet items to broad risk categories. At September 30, 2000, SBM
exceeded all of its regulatory capital requirements with a leverage capital
level of $168.2 million, or 12.4% of average assets, which is above the required
level of $54.3 million, or 4.0%, and risk-based capital of $179.8 million, or
19.2% of risk weighted assets, which is above the required level of $74.8
million, or 8.0%. SBM is considered "well capitalized" under regulatory
guidelines.
Impact of Inflation and Changing Prices
The condensed consolidated financial statements and related data presented
in this report have been prepared in conformity with accounting principles
generally accepted in the United States, which require the measurement of
financial position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation. Unlike many industrial companies, substantially all of the assets and
liabilities of the Company are monetary in nature. As a result, interest rates
have a more significant impact on the Company's performance than the general
level of inflation. Over short periods of time, interest rates may not
necessarily move in the same direction or in the same magnitude as inflation.
Impact of New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
No. 133). This statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments
23
<PAGE>
embedded in other contracts) be recorded in the balance sheet as either an asset
or liability measured at its fair value. The statement requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the statement of income and requires that an entity formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting.
The Bank early adopted SFAS No. 133, as amended by SFAS No. 137,
"Accounting for Derivatives and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133 and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - An Amendment of FASB Statement No. 133", on January
1, 2000. In connection with the adoption, the Bank reclassified all held to
maturity investments to available for sale as allowed by SFAS No. 133. In March
2000, the Bank realized approximately $72,000 on the sale of an interest rate
cap, which amount is included in other noninterest income in the accompanying
condensed consolidated statement of operations for the nine months ended
September 30, 2000. As of September 30, 2000, the Bank did not have any other
derivative instruments.
On December 3, 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." The guidelines set forth in SAB No. 101 stipulate that revenue
should not be recognized until it is realized or realizable and earned. The Bank
adopted SAB No. 101 on January 1, 2000 without effect on the Bank's condensed
consolidated financial condition or results of operations since the Bank's
previous revenue recognition policies complied with SAB No. 101.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
-----------------------------------------------------------
At September 30, 2000, there have been no material changes in information
regarding quantitative and qualitative disclosure about market risk from the
information presented as of December 31, 1999 in the Company's Form 10-K.
24
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
Periodically, there have been various claims and lawsuits involving
the Company, such as claims to enforce liens, condemnation proceedings on
properties in which the Company holds security interests, claims involving the
making and servicing of real property loans and other issues incident to the
Company's business. The Company is not a party to any pending legal proceedings
that it believes would have a material adverse effect on the consolidated
financial condition or operations of the Company.
Item 2. Changes in Securities and Use of Proceeds.
-----------------------------------------
None.
Item 3. Defaults Upon Senior Securities.
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
(a) An annual meeting of shareholders of the Company was held on October 2,
2000 (the "Annual Meeting").
(b) Not applicable.
(c) There were 11,232,000 shares of Common Stock of the Company eligible to
be voted at the Annual Meeting and 9,854,592 shares were represented at
the meeting by the holders thereof, which constituted a quorum. The
items voted upon at the Annual Meeting and the vote for each proposal
were as follows:
(1) Election of directors for a three-year term
Director Nominees Elected
For Three-Year Term: For Withheld
------------------------- ------------- -----------------
A. Paul Berte 9,483,557 371,035
John D. LaBelle, Jr. 9,484,311 370,281
Jon L. Norris 9,485,556 369,036
Laurence P. Rubinow 9,499,312 355,280
Gregory S. Wolff 9,497,127 357,465
(2) The approval of the Connecticut Bancshares, Inc. 2000 Stock-Based
Incentive Plan.
For Against Abstain
----------- ------------- -----------------
7,030,573 741,061 122,451
25
<PAGE>
(3) The ratification of the appointment of Arthur Andersen LLP as
independent auditors of Connecticut Bancshares, Inc. for the fiscal
year ending December 31, 2000.
For Against Abstain
------------------ ------------- -----------------
8,569,576 211,790 73,226
Item 5. Other Information.
-----------------
On October 19, 2000, at a meeting of the Board of Directors, Thomas A
Bailey, Chairman of the Board of both Connecticut Bancshares, Inc. and
The Savings Bank of Manchester, retired after serving as a director
since 1974 and as Chairman of the Board since 1990. Laurence P.
Rubinow of Glastonbury, Connecticut, a principal in the Manchester,
Connecticut law firm of Woodhouse, Rubinow & Macht and a director
since 1996, was elected Chairman of Board of both Connecticut
Bancshares, Inc. and The Savings Bank of Manchester.
Effective November 9, 2000, Michael J. Hartl was appointed Chief
Financial Officer of both Connecticut Bancshares, Inc. and The Savings
Bank of Manchester.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
2.1 Amended Provisional Plan of Conversion for Connecticut Bankshares,
M.H.C. and The Savings Bank of Manchester (including the Amended and
Restated Stock Articles of Incorporation and Bylaws of The Savings
Bank of Manchester) (1)
3.1 Certificate of Incorporation of Connecticut Bancshares, Inc. (1)
3.2 Amended Bylaws of Connecticut Bancshares, Inc. (2)
10.1 Connecticut Bancshares, Inc. 2000 Stock-Based Incentive Plan (3)
27.0 Financial Data Schedule
-----------------------------
(1) Incorporated by reference into this document from the Exhibits filed
with the Registration Statement on Form S-1, and any amendments
thereto, Registration No. 333-90865.
(2) Incorporated by reference into this document from Quarterly Report on
Form 10-Q filed on August 14, 2000.
(3) Incorporated by reference into this document from the Registrant's
Proxy Statement dated August 18, 2000 and filed with the Securities
and Exchange Commission on August 18, 2000.
(b) Reports on Form 8-K
None.
26
<PAGE>
CONFORMED
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONNECTICUT BANCSHARES, INC.
Dated: November 14, 2000 By: /s/ Richard P. Meduski
---------------------------------------
Richard P. Meduski
President and Chief Executive Officer
(principal executive officer)
Dated: November 14, 2000 By: /s/ Michael J. Hartl
---------------------------------------
Michael J. Hartl
Senior Vice President and Chief Financial Officer
(principal financial and accounting officer)
27
