<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 June 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.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
--------------------------------------------------------------------------------
Delaware 06-1564613
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
--------------------------------------------------------------------------------
923 Main Street, Manchester, Connecticut 06040
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(860) 646-1700
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
--------------------------------------------------------------------------------
(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 August 10,
2000.
<PAGE>
CONNECTICUT BANCSHARES, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Condition as of
June 30, 2000 and December 31, 1999 (unaudited)........... 2
Condensed Consolidated Statements of Operations for the
Three Months Ended June 30, 2000 and 1999 (unaudited)..... 3
Condensed Consolidated Statements of Operations for the
Six Months Ended June 30, 2000 and 1999 (unaudited)....... 4
Condensed Consolidated Statement of Changes in
Stockholders' Equity for the Six Months Ended
June 30, 2000 (unaudited)................................. 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 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......................................... 25
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)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
---------- ----------
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 56,191 $ 26,678
Securities available for sale (cost of $295,504 at June 30, 2000
and $165,802 at December 31, 1999) 311,939 181,854
Securities held to maturity (market value of $44,998
at December 31, 1999) - 46,060
Loans held for sale 454 38
Loans, net 984,081 938,340
Federal Home Loan Bank stock, at cost 6,654 5,909
Premises and equipment, net 13,915 14,436
Accrued interest receivable 8,091 6,900
Other real estate owned 239 604
Excess of purchase price over fair value on branch acquisitions 2,183 2,398
Other assets 4,480 4,581
---------- ----------
Total assets $1,388,227 $1,227,798
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 918,751 $ 906,591
Short-term borrowed funds 114,778 95,814
Mortgagors' escrow accounts 10,132 8,674
Advances from Federal Home Loan Bank 114,000 84,000
Other liabilities 9,571 9,496
---------- ----------
Total liabilities 1,167,232 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 June 30, 2000) 112 -
Additional paid-in capital 108,022 -
Retained earnings 111,174 112,308
ESOP unearned compensation (9,305) -
Accumulated other comprehensive income 10,992 10,915
---------- ----------
Total stockholders' equity 220,995 123,223
---------- ----------
Total liabilities and stockholders' equity $1,388,227 $1,227,798
========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
2
<PAGE>
CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
June 30, June 30,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Interest and dividend income:
Interest income on loans $ 18,773 $16,160
Interest and dividends on investment securities 4,949 2,993
----------- -------
Total interest and dividend income 23,722 19,153
----------- -------
Interest expense:
Interest on deposits 9,173 8,265
Interest on borrowings 1,656 707
----------- -------
Total interest expense 10,829 8,972
----------- -------
Net interest income 12,893 10,181
Provision for loan losses 225 150
----------- -------
Net interest income after provision for loan losses 12,668 10,031
----------- -------
Noninterest income:
Service charges and fees 1,971 1,446
(Losses) gains on sales of securities, net (29) 97
Gains on mortgage loan sales, net 51 74
Other 431 471
----------- -------
Total noninterest income 2,424 2,088
----------- -------
Noninterest expense:
Salaries 3,972 3,878
Pension and other employee benefits 1,401 1,065
Occupancy, net 712 743
Fees and services 1,223 883
Furniture and equipment 717 738
Marketing 896 429
Foreclosed real estate expense 37 26
(Gains) losses on sales of other real estate owned, net (16) 4
Other operating expenses 1,317 1,620
----------- -------
Total noninterest expense 10,259 9,386
----------- -------
Income before income taxes 4,833 2,733
Provision for income taxes 1,599 875
----------- -------
Net income $ 3,234 $ 1,858
=========== =======
Earnings per share:
Basic $0.31 N/A
Diluted $0.31 N/A
Weighted average shares outstanding:
Basic 10,355,904 N/A
Diluted 10,355,904 N/A
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
3
<PAGE>
CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Interest and dividend income:
Interest income on loans $36,734 $32,071
Interest and dividends on investment securities 8,733 6,112
------- -------
Total interest and dividend income 45,467 38,183
------- -------
Interest expense:
Interest on deposits 18,212 16,286
Interest on borrowings 2,968 1,407
------- -------
Total interest expense 21,180 17,693
------- -------
Net interest income 24,287 20,490
Provision for loan losses 450 300
------- -------
Net interest income after provision for loan losses 23,837 20,190
------- -------
Noninterest income:
Service charges and fees 3,629 2,755
(Losses) gains on sales of securities, net (1,784) 543
Gains on mortgage loan sales, net 90 370
Other 1,007 852
------- -------
Total noninterest income 2,942 4,520
------- -------
Noninterest expense:
Salaries 7,979 7,030
Pension and other employee benefits 2,823 1,998
Occupancy, net 1,539 1,613
Fees and services 2,147 1,703
Furniture and equipment 1,487 1,528
Marketing 1,219 831
Foreclosed real estate expense 151 140
(Gains) losses on sales of other real estate owned, net (42) 44
Securities contributed to SBM Charitable Foundation, Inc. 8,316 -
Other operating expenses 2,847 2,250
------- -------
Total noninterest expense 28,466 17,137
------- -------
(Loss) income before income taxes (1,687) 7,573
Benefit from (provision for) income taxes 553 (2,424)
------- -------
Net (loss) income $(1,134) $ 5,149
======= =======
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>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
4
<PAGE>
CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Changes in Stockholders' Equity
For the Six Months Ended June 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
---------- ------ ---------- --------- ------------ ------------- --------
Comprehensive (loss) income:
Net loss - - - (1,134) - - (1,134)
Change in unrealized gain on
securities available for sale,
net of taxes - - - - - 77 77
---------- ------ ---------- --------- ------------ ------------- --------
Total comprehensive (loss) income - - - (1,134) - 77 (1,057)
---------- ------ ---------- --------- ------------ ------------- --------
BALANCE, June 30, 2000
(unaudited) 11,232,000 $112 $108,022 $111,174 $(9,305) $10,992 $220,995
========== ====== ========== ========= ============ ============= ========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
5
<PAGE>
CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
2000 1999
--------- --------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (1,134) $ 5,149
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Securities contributed to SBM Charitable Foundation, Inc. 8,316 -
Provision for loan losses 450 300
Depreciation 1,313 1,331
Amortization/accretion -
Premium on deposits 216 216
Premium on loans and bonds 131 382
Net (gains) losses on sales of other real estate owned (42) 44
Losses (gains) on sales of securities, net 1,784 (543)
Gains on mortgage loan sales, net (90) (370)
Changes in operating assets and liabilities -
Accrued interest receivable (1,191) (94)
Other assets 101 (551)
Other liabilities (2,007) 27
--------- --------
Net cash provided by operating activities 7,847 5,891
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations and purchases, net of repayments (50,588) (69,377)
Proceeds from sales of loans 2,799 13,414
Proceeds from maturities of held to maturity securities - 2,078
Proceeds from maturities of available for sale securities 6,010 17,100
Proceeds from sales of available for sale securities 80,461 3,312
Purchases of available for sale securities (175,967) (2,971)
Purchases of Federal Home Loan Bank stock (745) (18,748)
Proceeds from principal payments of mortgage-
backed securities 5,289 7,385
Proceeds from sales of other real estate owned 441 446
Purchases of premises and equipment (793) (672)
--------- --------
Net cash used in investing activities (133,094) (48,033)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 90,513 -
Net increase in savings, money market, NOW and
demand deposits 36,518 30,707
Net decrease in certificates of deposit (24,358) (10,140)
Net increase in short-term borrowed funds 18,964 12,259
Increase in mortgagors' escrow accounts 3,122 2,218
Increase in advances from Federal Home Loan Bank 30,000 -
--------- --------
Net cash provided by financing activities 154,759 35,044
--------- --------
Net increase (decrease) in cash and cash
equivalents 29,513 (7,098)
CASH AND CASH EQUIVALENTS, beginning of period 26,678 45,048
--------- --------
CASH AND CASH EQUIVALENTS, end of period $ 56,191 $ 37,950
========= ========
SUPPLEMENTAL INFORMATION:
Cash paid for -
Interest and dividends $ 21,475 $ 17,926
Income taxes 1,950 2,100
Non-cash transactions -
Transfers from loans to other real estate owned 183 79
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
6
<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 generally
accepted accounting principles. 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
six months ended June 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 retained 50% of the net proceeds from the conversion (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, the 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 common stock 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 six months ended June 30, 2000, the Bank had no
outstanding dilutive securities. Earnings per share data is not presented in
these condensed consolidated financial statements for the six months ended
June 30, 2000 and the three and six months ended June 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 Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
----------- -------- ---------------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Net income $ 3,234 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 (876,096) N/A N/A N/A
-----------
Basic 10,355,904 N/A N/A N/A
-----------
Diluted 10,355,904 N/A N/A N/A
-----------
Earnings per share:
Basic $ 0.31 N/A N/A N/A
Diluted $ 0.31 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 six
months ended June 30, 2000. As of June 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 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
8
<PAGE>
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 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.
Effective upon the conversion, the Company entered into employment and
change in control agreements with certain executives and certain eligible
employees of 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.
(4) LOANS
<TABLE>
<CAPTION>
Loans are summarized as follows (in thousands):
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
Residential mortgages $591,568 $549,950
Commercial real estate mortgages 184,429 190,885
Commercial business loans 142,363 134,550
Installment loans 76,879 73,572
-------- --------
Total loans 995,239 948,957
Less - Allowance for loan losses (11,158) (10,617)
-------- --------
Total loans, net $984,081 $938,340
======== ========
</TABLE>
9
<PAGE>
A summary of the allowance for loan losses is as follows (in thousands):
<TABLE>
<CAPTION>
Six
Months Ended Year Ended
June 30, December 31,
2000 1999
------- -------
<S> <C> <C>
Balance, beginning of period $10,617 $10,585
Provision for loan losses 450 1,100
Loans charged off (110) (1,360)
Recoveries 201 292
------- -------
Balance, end of period $11,158 $10,617
======= =======
</TABLE>
Nonperforming assets were approximately $8.9 million and $12.1 million at
June 30, 2000 and December 31, 1999, respectively. During 1999, the Bank
added two large lending relationships totaling $10.0 million to non-
performing 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 six months of 2000, this loan was paid down by $1.2
million to $4.5 million.
<TABLE>
<CAPTION>
(5) DEPOSITS
Deposits were as follows:
June 30, December 31,
2000 1999
-------- -----------
(in thousands)
<S> <C> <C>
Certificates of Deposit:
One to twelve-month certificates $275,995 $210,597
One to five year certificates 97,119 179,261
Time certificates in denominations of
$100,000 or more (1) 52,875 60,489
-------- --------
425,989 450,347
-------- --------
Savings accounts 226,823 223,656
Money market accounts 73,788 68,532
NOW accounts 132,495 112,741
Demand deposits 59,656 51,315
-------- --------
Total deposits $918,751 $906,591
======== ========
</TABLE>
(1) Deposit balances in excess of $100,000 are not federally insured.
10
<PAGE>
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 six months ended June 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 expenses primarily consist of
employee compensation and benefits, occupancy expense, advertising 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 June 30, 2000.
11
<PAGE>
Comparison of Financial Condition at June 30, 2000 and December 31, 1999
------------------------------------------------------------------------
Total assets increased $160.4 million, or 13.1%, to $1.39 billion at June
30, 2000 as compared to $1.23 billion at December 31, 1999. The increase was due
to a $29.5 million increase in cash and cash equivalents, a $46.3 million
increase in the loan portfolio, a $84.0 million increase in the investment
portfolio and a $600,000 increase in other assets. 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 $2.8 million in
the first six months of 2000 compared to $13.4 million for the first six months
of 1999. The growth in assets was funded by growth in deposits of $12.2 million,
growth in short-term borrowed funds of $19.0 million, advances from Federal Home
Loan Bank of $30.0 million and net proceeds from the public offering of $90.5
million.
Commercial loans increased $1.4 million, or 0.42%, from $325.4 million at
December 31, 1999, to $326.8 million at June 30, 2000. As of June 30, 2000,
commercial loans represented 32.8% of the Bank's loan portfolio. Residential
mortgages increased $41.6 million, or 7.6%, from $550.0 million to $591.6
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 $3.3 million, or 4.5%, from $73.6 million to $76.9 million.
Deposits totaled $918.8 million at June 30, 2000, an increase of $12.2
million, or 1.3%, compared to $906.6 million at December 31, 1999. The deposit
increase reflects a decrease in certificates of deposits of $24.4 million, or
5.4%, from $450.3 million to $426.0 million, due to increasing rate competition,
offset by an increase of $5.3 million, or 7.7%, in money market accounts and a
$28.1 million, or 17.1%, increase in NOW accounts and demand deposits. Savings
accounts increased $3.2 million, or 1.4%, from $223.7 million to $226.8 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 $19.0 million, or 19.8%, from $95.8 million to $114.8 million during
the quarter. Advances from the Federal Home Loan Bank increased $30.0 million,
or 35.7%, from $84.0 million to $114.0 million to fund loan growth.
Nonperforming assets totaled $8.9 million at June 30, 2000, compared to
$12.1 million at December 31, 1999, a decrease of $3.2 million, or 26.4%. 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. 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 six months of 2000, this relationship
was paid down by $1.2 million to $4.5 million. The Bank obtained an appraisal of
the collateral as of December 1, 1999 which indicates that the loans as of June
30, 2000 are realizable. During the quarter ended June 30, 2000, the sales of
units in the residential development were less than projected by management, and
as a result, the Bank has ordered an updated appraisal for the remaining
collateral. As of August 10, 2000, Bank management believes the loans are fully
collectible. The Bank is in workout negotiations with the borrower and if these
12
<PAGE>
negotiations fail, the Bank's remaining course of action would be to institute
foreclosure proceedings, which could result in a loss to the Bank.
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.
Other real estate owned declined $365,000 or 60.4%, from $604,000 to $239,000
during the first six months of 2000 due to the sale of several properties.
The following table sets forth information regarding nonperforming loans
and other real estate owned (dollars in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
Nonperforming loans:
Real estate:
One- to four-family........................ $ 294 $ 501
Commercial and multi-family real estate.... 4,996 10,513
Consumer................................... 63 17
Commercial................................. 3,301 454
------ -------
Total nonperforming loans............... 8,654 11,485
Other real estate owned.......................... 239 604
------ -------
Total nonperforming assets.............. $8,893 $12,089
====== =======
Total nonperforming loans as a percentage of
total loans.................................. 0.87% 1.21%
====== =======
Total nonperforming assets as a percentage
of total assets.............................. 0.64% 0.98%
====== =======
</TABLE>
Total stockholders' equity increased $97.8 million, or 79.3%, to $221.0
million at June 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. The loss of $1.1 million for the period and an increase of
$77,000 in accumulated other comprehensive income related to unrealized gains on
available for sale securities for the period ended June 30, 2000 were reflected
in the net increase in stockholders' equity.
Comparison of Operating Results for the Three Months Ended June 30, 2000 and
----------------------------------------------------------------------------
1999
----
Net Income. Net income for the quarter ended June 30, 2000 was $3.2 million
compared to net income of $1.9 million for the second quarter of 1999. The
operating results for the quarter ended June 30, 2000 include a $2.7 million
increase in net interest income, primarily due to an increase in interest and
dividend income on investment securities of $2.0 million, higher average
interest-earning assets and the increasing interest rate environment. Net income
was also impacted by higher service charge and fee income of $525,000 offset by
lower securities gains of $126,000, lower gains on the sale of mortgages of
$23,000, higher operating expenses associated with salaries and benefits of
$430,000, fees and services paid of $340,000 and a new marketing program of
$467,000, and increased income taxes of $724,000.
13
<PAGE>
The following table presents the amortized cost and fair value of the
Company's securities, by type of security, at the dates indicated (in
thousands):
<TABLE>
<CAPTION>
At June 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............ 34,184 34,457 - -
U.S. Government and agency
obligations..................... 89,698 89,294 82,486 81,328
Corporate securities............... 66,951 66,707 33,870 33,345
-------- -------- -------- --------
Total........................ 190,833 190,458 116,356 114,673
-------- -------- -------- --------
Equity securities available for sale:
Marketable equity securities....... 34,122 51,476 32,273 50,545
Other equity securities............ 432 432 432 432
-------- -------- -------- --------
Total........................ 34,554 51,908 32,705 50,977
-------- -------- -------- --------
Total debt and equity
securities.................. 225,387 242,366 169,647 186,018
-------- -------- -------- --------
Mortgage-backed securities:
Mortgage-backed securities held
to maturity:
Freddie Mac........................ - - 7,182 6,960
Fannie Mae......................... - - 6,077 5,807
Ginnie Mae......................... - - 12,215 11,863
-------- -------- -------- --------
Total mortgage-backed
securities held to
maturity................ - - 25,474 24,630
-------- -------- -------- --------
Mortgage-backed securities
available
for sale:
Freddie Mac........................ 5,966 5,837 2,099 2,080
Fannie Mae......................... 32,226 31,807 7,425 7,115
Ginnie Mae......................... 31,925 31,929 7,217 7,009
-------- -------- -------- --------
Total mortgage-backed
securities available
for sale............... 70,117 69,573 16,741 16,204
-------- -------- -------- --------
Total mortgage-backed
securities................ 70,117 69,573 42,215 40,834
-------- -------- -------- --------
Total investment securities.. $295,504 $311,939 $211,862 $226,852
======== ======== ======== ========
</TABLE>
14
<PAGE>
Net Interest Income. Net interest income increased $2.7 million, or 26.6%,
to $12.9 million for the second quarter of 2000 compared to $10.2 million for
the second 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 the Federal Home Loan Bank.
Interest and dividend income increased $4.6 million, or 23.9%, to $23.7 million
for the second quarter of 2000 from $19.2 million for 1999. The average yield on
interest earning assets increased 9 basis points to 7.26% for the three months
ended June 30, 2000 from 7.17% for the three months ended June 30, 1999, due to
the higher interest rate environment. Interest income on loans increased $2.6
million, or 16.2%, to $18.8 million for the three months ended June 30, 2000
compared to $16.2 million for the three months ended June 30, 1999. The increase
was due to a $132.2 million increase in the average balance of loans outstanding
and a 6 basis point increase in the average yield on such loans. Interest and
dividend income from investment securities increased $2.0 million, or 65.4%, to
$4.9 million for the three months ended June 30, 2000 compared to $3.0 million
for the three months ended June 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 $89.7 million, or 46.7%, to $281.8 million for the
quarter ended June 30, 2000 and a 56 basis point increase in the average yield
on investment securities during the quarter ended June 30, 2000.
Interest expense increased $1.9 million, or 20.7%, to $10.8 million for the
three months ended June 30, 2000 from $9.0 million for the three months ended
June 30, 1999. The increase reflects an increase in interest expense on short-
term borrowed funds and on advances from Federal Home Loan Bank of $949,000, and
increased interest expense of $908,000 on core deposits. Advances from Federal
Home Loan Bank increased from $45.0 million as of June 30, 1999 to $114.0
million at June 30, 2000. Short-term borrowed funds, represented primarily by
commercial transactional repurchase agreements, increased to $114.8 million at
June 30, 2000 from $91.8 million at June 30, 1999. The average rate paid on
Federal Home Loan Bank advances increased 11 basis points to 6.41% for the three
months ended June 30, 2000 from 6.30% for the three months ended June 30, 1999
due to higher rates paid on new advances. Interest on deposits increased $0.9
million, or 11.0%, to $9.2 million for the three months ended June 30, 2000 from
$8.3 million for the three months ended June 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 June 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........................... $ 768,536 $14,078 7.37% $ 663,541 $12,212 7.38%
Consumer.............................. 76,405 1,563 8.23 70,977 1,367 7.73
Commercial............................ 141,808 3,132 8.88 119,959 2,581 8.63
---------- ------- ---------- -------
Total loans........................ 986,749 18,773 7.65 854,477 16,160 7.59
Mortgage-backed securities (2)........... 62,369 1,185 7.64 35,054 590 6.75
Investment securities (3):
U.S. Government and agency
obligations........................ 81,888 1,436 7.05 65,343 915 5.62
Corporate securities.................. 59,701 996 6.71 39,872 584 5.88
Marketable equity securities.......... 51,565 216 1.68 30,494 223 2.93
Other equity securities............... 432 - - 414 - -
Asset-backed securities............... 25,832 427 6.65 20,969 330 6.31
Other interest-bearing assets:
Federal Home Loan Bank stock.......... 6,654 104 6.29 5,909 93 6.31
Federal funds sold.................... 39,487 585 5.96 19,500 258 5.31
---------- ------- ---------- -------
Total interest-earning assets...... 1,314,677 $23,722 7.26 1,072,032 $19,153 7.17
======= =======
Noninterest-earning assets............... 43,547 58,590
---------- ----------
Total assets....................... $1,358,224 $1,130,622
========== ==========
Interest-bearing liabilities:
Deposits:
NOW accounts.......................... $ 119,467 $ 424 1.43 $ 111,000 $ 388 1.40
Savings and money market accounts..... 299,789 2,013 2.70 274,573 1,680 2.45
Certificates of deposit............... 426,086 5,669 5.35 439,730 5,494 5.01
Escrow deposits....................... 7,857 54 2.76 7,835 51 2.61
---------- ------- ---------- -------
Total interest-bearing deposits.... 853,199 8,160 3.85 833,138 7,613 3.67
Short-term borrowed funds................ 118,432 1,013 3.44 86,814 652 3.01
Advances from FHLB....................... 103,890 1,656 6.41 45,000 707 6.30
---------- ------- ---------- -------
Total interest-bearing
liabilities...................... 1,075,521 $10,829 4.05 964,952 $ 8,972 3.73
======= =======
Non-interest bearing liabilities......... 63,775 49,439
---------- ----------
Total liabilities.................. 1,139,296 1,014,391
Capital.................................. 218,928 116,231
---------- ----------
Total liabilities and capital...... $1,358,224 $1,130,622
========== ==========
Net interest-earning assets.............. $ 239,156 $ 107,080
========== ==========
Net interest income...................... $12,893 $10,181
======= =======
Interest rate spread (4)................. 3.21 3.44
Net interest margin (5).................. 3.94 3.81
Ratio of interest-earning assets to
interest-bearing liabilities.......... 122.24 111.10
</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 June 30, 2000 Compared to
Three Months Ended June 30, 1999
--------------------------------------------------
Increase (Decrease) Due to
-------------------------------
Rate Volume Net
-------- --------- -----
<S> <C> <C> <C>
Interest-earning assets:
Loans:
Real estate................. $ (62) $1,928 $1,866
Consumer.................... 88 108 196
Commercial.................. 75 476 551
----- ------ ------
Total loans............. 101 2,512 2,613
Mortgage-backed securities... 106 489 595
Investment securities........ 225 1,136 1,361
----- ------ ------
Total interest-earning
assets.............. $ 432 $4,137 $4,569
===== ====== ======
Interest-bearing liabilities:
Deposits:
Demand accounts............. $ 6 $ 30 $ 36
Savings..................... 174 162 336
Certificates of deposit..... 351 (176) 175
----- ------ ------
Total deposits.......... 531 16 547
Advances from Federal
Home Loan Bank........... 17 932 949
Other borrowings............. 107 254 361
----- ------ ------
Total interest-bearing
liabilities.......... $ 655 $1,202 $1,857
===== ====== ======
Increase (decrease) in net
interest income............. $(223) $2,935 $2,712
===== ====== ======
</TABLE>
Provision for Loan Losses. The provision for loan losses was $225,000 for
June 30, 2000 compared to $150,000 for the quarter ended June 30, 1999. For the
quarter ended June 30, 2000, management increased the provision by $75,000 to
reflect the continued growth of the Bank's loan portfolio. The allowance for
loan losses was 1.12% of total loans and 128.9% of nonperforming loans at June
30, 2000 compared to 1.23% and 153.9%, respectively, at June 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 Company'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
17
<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 $2.4 million and $2.1
million for the three months ended June 30, 2000 and 1999, respectively. The
increase was due to increased fee income, partially offset by losses on sales of
securities in the 2000 period and reduced gains from the sale of mortgages to
the secondary market. During the quarter ended June 30, 2000, the Bank realized
investment losses of $29,000 compared to a $97,000 gain in three months ended
June 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, despite the inherent interest rate risk in a rising
interest rate environment. During the three months ended June 30, 2000, the Bank
sold $1.9 million of loans to the secondary market, realizing gains of $51,000,
compared to sales of $2.2 million in the three months ended June 30, 1999, which
generated gains of $74,000. Fee income from service charges and account fees was
$2.0 million for the three months ended June 30, 2000 compared to $1.4 million
for the three months ended June 30, 1999. Income from service charges and fees
increased $112,000 due to growth in merchant services operations, $232,000 from
increased fees and number of transaction accounts, and increased loan fees of
$47,000. Other fee income decreased from $471,000 for the three months ended
June 30, 1999 to $431,000 for the three months ended June 30, 2000 and reflects
decreased fees earned from brokerage services and rental income.
Noninterest Expense. Noninterest expense increased $873,000, or 9.3%, for
the three months ended June 30, 1999 from $9.4 million for the three months
ended June 30, 1999 to $10.3 million for the three months ended June 30, 2000.
The increase in noninterest expense for the quarter 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. Wages and compensation reflect merit and promotional awards, increased
staff and sales incentives related to mortgage production in the second quarter
of 2000. Benefits increased due to new benefit plans adopted and increased
health insurance costs. Other operating expense increases were related to costs
associated with the Bank's new in-house check imaging system and increased loan
servicing expenses.
Provision for Income Taxes. The effective tax rate was 33.1% for the three
months ended June 30, 2000 and 32.0% for the three months ended June 30, 1999.
Comparison of Operating Results for the Six Months Ended June 30, 2000 and
--------------------------------------------------------------------------
1999
----
Net Loss. The net loss for the six months ended June 30, 2000 was $1.1
million compared to net income of $5.2 million, a decrease of $6.3 million, or
122%. The operating results for the six months ended June 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 $3.8 million increase in net interest income.
Net Interest Income. Net interest income increased $3.8 million, or 18.5%,
to $24.3 million for the six months ended June 30, 2000 compared to $20.5
million for the six months ended June 30, 1999. The increase was due to
increased average balance for loans and investments, offset partially by lower
yields on earning assets, and 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 23 basis points due
to a lower average cost on Federal Home Loan Bank advances resulting from the
retirement of higher rate advances which matured during 1999. Interest and
dividend income increased $7.3 million,
18
<PAGE>
or 19.1%, to $45.5 million for the first six months of 2000 from $38.2 million
for 1999. The average yield on interest earning assets declined 16 basis points
to 7.15% for the six months ended June 30, 2000 from 7.31% for the six months
ended June 30, 1999, due to the competitive loan market. Interest income on
loans increased $4.7 million, or 14.5%, to $36.7 million for the six months
ended June 30, 2000 compared to $32.1 million for the six months ended June 30,
1999. The increase was due to a $131.2 million increase in the average balance
of loans outstanding, partially offset by a 9 basis point decrease in the
average yield on such loans. Interest and dividend income from investment
securities increased $2.6 million or 42.9%, to $8.7 million for the six months
ended June 30, 2000 compared to $6.1 million for the six months ended June 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 $60.0
million, or 30.9%, to $254.4 million for the six months ended June 30, 2000,
offset by a 9 basis point decrease in the average yield during the six months
ended June 30, 2000.
Interest expense increased $3.5 million, or 19.7%, to $21.2 million for the
six months ended June 30, 2000 from $17.7 million for the six months ended June
30, 1999. The increase reflects an increase in interest expense on short-term
borrowed funds and on advances from Federal Home Loan Bank of $1.6 million and
increased interest expense of $1.9 million on core deposits. Advances from
Federal Home Loan Bank increased from $45.0 million as of June 30, 1999 to
$114.0 million at June 30, 2000. Short-term borrowed funds, represented
primarily by commercial transactional repurchase agreements, increased to $114.8
million at June 30, 2000 from $91.8 million at June 30, 1999. The average rate
paid on Federal Home Loan Bank advances decreased 5 basis points to 6.26% for
the six months ended June 30, 2000 from 6.31% for the six months ended June 30,
1999 due to the repayment of several older long-term advances at higher rates.
Interest expense on deposits increased $1.9 million, or 11.8%, to $18.2 million
for the six months ended June 30, 2000 from $16.3 million for the six months
ended June 30, 1999, reflecting a higher interest rate environment for
certificates of deposits and borrowings.
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 Six Months Ended June 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........................... $ 758,729 $27,634 7.32% $ 652,284 $24,347 7.53%
Consumer.............................. 75,013 3,022 8.10 70,758 2,647 7.54
Commercial............................ 138,754 6,078 8.81 118,271 5,077 8.66
---------- ------- ---------- -------
Total loans........................ 972,496 36,734 7.60 841,313 32,071 7.69
Mortgage-backed securities (2)........... 50,985 1,860 7.34 34,866 1,139 6.59
Investment securities (3):
U.S. Government and agency
obligations........................ 81,795 2,663 6.55 66,498 1,956 5.93
Corporate securities.................. 48,532 1,576 6.53 40,757 1,231 6.09
Marketable equity securities.......... 51,400 436 1.71 30,107 577 3.86
Other equity securities............... 432 - - 406 - -
Asset-backed securities............... 21,214 687 6.51 21,700 683 6.35
Other interest-bearing assets:
Federal Home Loan Bank stock.......... 6,298 202 6.45 5,909 189 6.45
Federal funds sold.................... 44,864 1,309 5.87 11,286 337 6.02
---------- ------- ---------- -------
Total interest-earning assets...... 1,278,016 $45,467 7.15 1,052,842 $38,183 7.31
======= =======
Noninterest-earning assets............... 40,410 63,729
---------- -----------
Total assets....................... $1,318,426 $ 1,116,571
========== ===========
Interest-bearing liabilities:
Deposits:
NOW accounts.......................... $ 115,393 $ 818 1.43 $ 108,860 $ 740 1.37
Savings and money market accounts..... 313,070 4,121 2.65 268,552 3,180 2.39
Certificates of deposit............... 435,425 11,401 5.27 441,872 11,090 5.06
Escrow deposits....................... 6,280 85 2.72 6,679 80 2.42
---------- ------- ---------- -------
Total interest-bearing deposits.... 820,168 16,425 3.80 825,963 15,090 3.68
Short-term borrowed funds................ 108,600 1,787 3.31 83,353 1,196 2.89
Advances from FHLB....................... 95,333 2,968 6.26 45,000 1,407 6.31
---------- ------- ---------- -------
Total interest-bearing
liabilities...................... 1,074,101 $21,180 3.97 954,316 $17,693 3.74
======= =======
Non-interest bearing liabilities......... 66,150 47,091
---------- ----------
Total liabilities.................. 1,140,251 1,001,407
Capital.................................. 178,175 115,164
---------- -----------
Total liabilities and capital...... $1,318,426 $1,116,571
========== ===========
Net interest-earning assets.............. $ 203,915 $ 98,526
========== ===========
Net interest income...................... $24,287 $20,490
======= ========
Interest rate spread (4)................. 3.18 3.57
Net interest margin (5).................. 3.82 3.92
Ratio of interest-earning assets to
interest-bearing liabilities.......... 118.98 110.32
</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>
Six Months Ended June 30, 2000 Compared to
Six Months Ended June 30, 1999
----------------------------------------------
Increase (Decrease) Due to
-------------------------------
Rate Volume Net
------- --------- ------
<S> <C> <C> <C>
Interest-earning assets:
Loans:
Real estate.................... $ (638) $3,925 $3,287
Consumer....................... 210 165 375
Commercial..................... 112 889 1,001
------- ------ ------
Total loans................ (316) 4,979 4,663
Mortgage-backed securities...... 164 557 721
Investment securities........... (248) 2,148 1,900
------- ------ ------
Total interest-earning
assets.................... $ (400) $7,684 $7,284
======= ====== ======
Interest-bearing liabilities:
Deposits:
Demand accounts................ $ 33 $ 45 $ 78
Savings........................ 394 552 946
Certificates of deposit........ 476 (165) 311
------- ------ ------
Total deposits............. 903 432 1,335
Advances from Federal
Home Loan Bank.............. (9) 1,570 1,561
Other borrowings................ 202 389 591
------- ------ ------
Total interest-bearing
liabilities............... $ 1,096 $2,391 $3,487
======= ====== ======
Increase (decrease) in net
interest income................ $(1,496) $5,293 $3,797
======= ====== ======
</TABLE>
Provision for Loan Losses. The provision for loan losses was $450,000 for
the six months ended June 30, 2000 compared to $300,000 for the six months ended
June 30, 1999. For the six months ended June 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 as 1.12% of total loans and 128.9% of
nonperforming loans at June 30, 2000 compared to 1.23% and 153.9%, respectively,
at June 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 Company'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
21
<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 $2.9 million and $4.5
million for the six months ended June 30, 2000 and 1999, respectively. The
decrease was due to the combined effect of 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 six months ended
June 30, 2000, the Bank realized investment losses of $1.8 million compared to a
$543,000 gain for the six months ended June 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 six
months ended June 30, 2000, the Bank sold $2.8 million of loans to the secondary
market, realizing gains of $90,000, compared to sales of $13.4 million in the
six months ended June 30, 1999, which generated gains of $370,000. Fee income
from service charges and account fees was $3.6 million for the six months ended
June 30, 2000 compared with $2.8 million for the six months ended June 30, 1999.
Other fee income increased from $852,000 for the six months ended June 30, 1999
to $1.0 million for the six months ended June 30, 2000 and reflects increased
fees earned from brokerage services and other fee income from rental income.
Noninterest Expense. Noninterest expense increased $11.3 million, or 66.1%,
to $28.5 million for six months ended June 30, 2000 from $17.1 million for the
six months ended June 30, 1999. The increase in noninterest expense is primarily
due to the $8.3 million expense recorded by the Company to fund SBM Charitable
Foundation, Inc., with shares of Company stock. The increase in noninterest
expense for the first six 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 $900,000 from $7.0 million to $7.9 million reflects
merit and promotional awards, increased staff and sales incentives related to
mortgage production in the first half of 2000. Pension and employee benefits
increased $800,000 from $2.0 million to $2.8 million due to new benefit plans
adopted and increased health insurance costs. Fees and services paid increased
$400,000 from $1.7 million to $2.1 million due to expenses associated with
becoming a public company. Higher marketing expenses of $400,000 in the first
six 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 32.8% for the six
months ended June 30, 2000 and 32.0% for the six months ended June 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 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.
22
<PAGE>
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 Federal Home Loan Bank of Boston advances. During the six months
ended June 30, 2000, the Bank's loan originations totaled $79.9 million. For the
six months ended June 30, 2000, the Bank purchased investments in mortgage-
backed securities, U.S. Government and agency obligations and corporate
securities and debt obligations totaling $176.0 million. The Bank experienced a
net increase in total deposits of $12.2 million for the six months ended June
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 Federal Home Loan Bank advances and through repurchase
agreement borrowing facilities.
Outstanding commitments for all loans and unadvanced construction loans and
lines of credit totaled $167.0 million at June 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 June 30, 2000 totaled $276.0 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 June 30, 2000, SBM exceeded all
of its regulatory capital requirements with a leverage capital level of $164.2
million, or 12.3% of average assets, which is above the required level of $53.4
million, or 4.0%, and risk-based capital of $175.3 million, or 18.9% of risk
weighted assets, which is above the required level of $74.3 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
For a discussion of accounting standards, see Note 2 of Notes to Condensed
Consolidated Financial Statements (unaudited).
23
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
-----------------------------------------------------------
At June 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.
---------------------------------------------------
None.
Item 5. Other Information.
-----------------
None.
25
<PAGE>
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 and Restated Bylaws of Connecticut Bancshares, Inc.
10.1 Employment Agreement between The Savings Bank of Manchester and Richard
P. Meduski (2)
10.2 Employment Agreement between The Savings Bank of Manchester and Charles
L. Pike (2)
10.3 Employment Agreement between The Savings Bank of Manchester and Douglas
K. Anderson (2)
10.4 Employment Agreement between The Savings Bank of Manchester and Roger
A. Somerville (2)
10.5 Employment Agreement between The Savings Bank of Manchester and
Nicholas B. Mason (2)
10.6 Employment Agreement between Connecticut Bancshares, Inc. and Richard
P. Meduski (2)
10.7 Employment Agreement between Connecticut Bancshares, Inc. and Charles
L. Pike (2)
10.8 Employment Agreement between Connecticut Bancshares, Inc. and Douglas
K. Anderson (2)
10.9 Employment Agreement between Connecticut Bancshares, Inc. and Roger A.
Somerville (2)
10.10 Employment Agreement between Connecticut Bancshares, Inc. and Nicholas
B. Mason (2)
10.11 Employment Agreement between The Savings Bank of Manchester and
Thomas A. Bailey (2)
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 the 1999 Annual
Report on Form 10-K filed on March 30, 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: August 10, 2000 By: /s/ Richard P. Meduski
-------------------------------------------------
Richard P. Meduski
President and Chief Executive Officer
(principal executive officer)
Dated: August 10, 2000 By: /s/ Nicholas B. Mason
-------------------------------------------------
Nicholas B. Mason
Senior Vice President and Chief Financial Officer
(principal financial and accounting officer)
27
