UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission File Number 34-0-25158
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BANCORP CONNECTICUT, INC.
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(Exact name of registrant as specified in its charter)
Delaware 061394443
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
121 Main Street, Southington, CT 06489
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(Address of principal executive offices) (zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 860-628-0351
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange on which registered
Not applicable Not applicable
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $1.00 per share
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(Title of class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of Bancorp Connecticut, Inc. (4,798,556 shares) totaled $64,780,506 (based upon
the closing price of $13.50 per share as quoted on the Nasdaq National Market
tier of The Nasdaq Stock Market) on March 24, 1999.
5,193,948 shares of Bancorp Connecticut, Inc. Common Stock were
outstanding at March 24, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents and information are incorporated by reference
herein to the extent indicated under the appropriate item:
(1) The annual report to shareholders of Bancorp Connecticut, Inc.,
for the fiscal year ended December 31, 1998 (hereinafter referred
to as the "1998 Annual Report"); and
(2) Management's definitive proxy statement in connection with the
1999 annual meeting of the shareholders of Bancorp Connecticut,
Inc. (hereinafter referred to as the "1999 Proxy Statement").
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PART I
ITEM 1 - BUSINESS.
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The main office of Bancorp Connecticut, Inc. (the "Company") and of
Southington Savings Bank (the "Bank") is located at 121 Main Street,
Southington, Connecticut 06489. The telephone number is 860-628-0351.
The Company was incorporated under the laws of the State of Delaware on
March 31, 1994, to operate principally as the bank holding company of the Bank.
The Company acquired all of the Bank's outstanding common stock on November 17,
1994, in a one-for-one exchange with the Bank's existing shareholders. The Bank
is the sole subsidiary of the Company and its principal asset.
GENERAL
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The Bank is a Connecticut chartered capital stock savings bank. The
Bank was organized in 1860, and in 1986 it converted from a mutual to a capital
stock savings bank. The Bank is subject to supervision, examination and
regulation by the Connecticut Banking Commissioner. The Bank's deposits are
insured by the Federal Deposit Insurance Corporation (the "FDIC"), which also
has supervisory and regulatory authority over the Bank. The Bank is a member of
the Federal Home Loan Bank (the "FHLB") of Boston. The Company is subject to
regulation by the Federal Reserve Board as the registered bank holding company
of the Bank.
The Bank's primary market area consists of the Town of Southington,
Connecticut and, to a lesser extent, the contiguous Towns of Bristol, Cheshire
and Plainville. In addition, the Bank extended its market to the Wallingford
area when it opened a branch office in Wallingford on August 3, 1998.
Southington is located approximately 18 miles from Hartford, 25 miles from New
Haven and 9 miles from Waterbury. Wallingford is contiguous to the City of
Meriden, which borders Southington to the south.
The Bank's principal business consists of attracting and accepting
deposits from the general public and investing those deposits, together with
funds generated by fees and other income, in various types of loans and
investments, including residential loans, consumer loans, commercial loans and
securities.
The Bank's business strategy is to operate primarily as an innovative
full-service community financial institution, offering a wide range of consumer
and commercial services. These services include checking accounts, NOW accounts,
regular savings accounts, money market accounts, individual retirement accounts,
savings certificates, commercial demand deposit accounts, residential real
estate loans, home equity loans and lines of credit, consumer loans, secured and
unsecured commercial loans and lines of credit, letters of credit, credit card
services and cash management services. The Bank makes available Savings Bank
Life Insurance ("SBLI"). The Bank has a trust department that provides trust
services for families and individuals, as well as corporate pension and employee
benefits administration. The Bank
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provides investment brokerage and insurance services through Infinex Financial
Group, Inc. and its affiliates. Investment products such as mutual funds, tax
exempt securities and individual stocks and bonds are provided through Infinex
Investment Group, an independent broker-dealer. Insurance products such as
annuities are provided through Infinex Insurance Group, an independently
licensed insurance agency.
The main focus of the Bank's lending activities is the origination of
commercial and industrial loans, consumer loans and residential mortgage loans.
The Bank also makes auto loans and student loans. In recent years, the Bank has
concentrated its efforts on increasing the percentage of commercial and consumer
loans within its loan portfolio. Commercial loans consist primarily of lines of
credit with interest rates tied to the prime rate and fixed rate, fixed term
loans. Commercial real estate loans are primarily first mortgage loans with
adjustable rates. Consumer loan originations have been primarily fixed rate home
equity loans with maximum terms of 10 years or less. The Bank also offers home
equity lines of credit that have interest rates tied to the prime lending rate.
Within the last three years, the Bank's primary residential mortgage product has
been a loan with a rate fixed for an initial term of 3, 5, 7, or 10 years which
adjusts annually thereafter. In the future, the Bank expects to place a greater
emphasis on the growth of its commercial loan portfolio.
The Bank has procedures in place to sell selected fixed rate
residential mortgages into the secondary mortgage market. The sale of fixed rate
mortgages allows the Bank to generate both a higher volume of fixed rate
mortgages without impairing its asset/liability management and provide
additional fee income. During 1998, the Bank continued to supplement its own
loan originations by purchasing automobile loans from BCIF Financial Corporation
("BCIFC"), a majority-owned subsidiary of the Bank that was formed on March 9,
1998 to originate indirect automobile loans for sale to the Bank and other
financial institutions. In addition, the Bank continued to purchase the
guaranteed portion of Small Business Administration loans.
The principal sources of funds for the Bank's activities are deposit
accounts, amortization and prepayment of loans, borrowings from the FHLB of
Boston, reverse repurchase agreements and funds provided from operations. The
Bank's principal sources of income are interest on loans and interest and
dividends on investment securities. In recent years, the Bank also has realized
income from the sale of loans and investment securities. To a lesser extent, the
Bank realizes other non-interest income, including income from service charges
on deposit accounts, income from trust and brokerage services and income from
SBLI sales.
The Bank conducts its banking operations through four full service
offices, one limited purpose branch, one drive-in center, and one mortgage
origination office. All of the foregoing offices and branches are located in
Southington, except for one branch that is located in Wallingford. As of
February 28, 1999, the Bank had 101 full-time employees and 52 part-time
employees. The Company has no paid employees.
The Bank has not obtained a material portion of its deposits from a
single person or small group of persons. No material portion of the Bank's loans
is concentrated within a single industry or group of industries.
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The Bank primarily makes commercial, residential and consumer loans to
customers located within its primary market area in the State of Connecticut.
The majority of the Bank's loan portfolio is collateralized by residential real
estate.
The Bank has not engaged in material research activities relating to
the development of new services or the improvement of existing banking services
during the past two years. However, during that time, the Bank's officers and
employees continually have engaged in marketing activities, including evaluation
and development of new services. During 1998, the Bank made investments in its
new Wallingford branch office and BCIFC. The Bank's initial investments in the
Wallingford branch and in BCIFC were approximately $151,000 and $200,000,
respectively. The investment in Wallingford consisted of leasehold improvements
and equipment and the initial investment of $200,000 in BCIFC represented an 80%
ownership interest.
In 1998, the Bank moved its core processing system "in house" rather
than continue the service bureau environment it had been operating on. The new
system is expected to provide operating efficiencies, expand management
reporting and enhance new product development. The cost of the new software and
hardware, which included the replacement of all teller terminals, was
approximately $1,440,000. This cost is being capitalized and depreciated over
the useful life of the equipment. The annual cost of operating the new core
system is approximately the same as the prior outsourcing arrangement.
In 1998, the Bank formed a passive investment company, SSB Mortgage
Corporation, to take advantage of changes in Connecticut state tax statutes,
which will serve to lower the Company's effective tax rate beginning in 1999.
The Bank's business is not seasonal. Based upon the Bank's present
business activities, compliance with Federal, State and local provisions
regulating the discharge of materials into the environment will not materially
affect the Bank's or the Company's capital expenditures, earnings or competitive
position.
COMPETITION
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The banking business in Southington and in the other markets the Bank
serves, and in Connecticut generally, is highly competitive. Intense market
demands, economic pressures, fluctuating interest rates and increased customer
awareness of product and service differences among financial institutions have
forced such institutions to continue to diversify their services, increase
returns on deposits and become more cost effective.
The Bank experiences substantial competition in attracting and
retaining deposits and in making loans of all types. The Bank competes for
deposit accounts with other savings banks, commercial banks, savings and loan
associations, credit unions, insurance companies, securities brokerage houses
and money market mutual funds. Competition for deposits includes competition not
only from other deposit accounts, but also competition with various other
investment vehicles, such as corporate and governmental securities and mutual
funds, which may offer higher rates of return. Interest rates, convenience of
office locations, service and marketing
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are all significant factors in the Bank's competition for deposits. From time to
time, competing financial institutions set rates higher than market rates to
attract or retain deposits, a fact which may cause upward pressure on the Bank's
rate structure or a loss of deposits.
Competition for loans comes from other savings banks, commercial banks,
savings and loan associations, insurance companies, consumer finance companies,
mortgage companies, credit unions and other lending institutions located
throughout the United States. Recent proposed and completed banking combinations
in New England have increased and will increase the resources of several major
banks and other financial institutions that operate many offices over a wide
geographic area, including the Bank's primary market area. Because of their
greater capitalization, these other institutions have substantially higher
lending limits than the Bank. The Bank competes for loan originations through
the interest rates and loan fees it charges and the efficiency and quality of
services it provides. Competition is affected by the general availability of
lendable funds, general and local economic conditions, current interest rate
levels and other factors that are not readily predictable.
The Bank's market area is served by a significant number of financial
institutions, with eight offices (not including the Bank's three offices) of
banking institutions and credit unions in Southington alone. At December 31,
1998, there were approximately forty-one mortgage lenders operating in the towns
of Southington, Bristol, Cheshire, Plainville and Wallingford.
In addition, recent Federal and Connecticut legislation likely will
further increase competition for deposits and loans in the Bank's primary market
area. Effective June 1, 1997, unless a state prohibited before such date all
interstate mergers, Federal law generally permits interstate mergers between
banks. States may also have "opted-in" and permitted such mergers prior to June
1, 1997. Finally, Federal law permits banks to branch into other states if a
state "opts-in" to this arrangement. In 1997, a Federal law was enacted which
provides that an insured state bank that establishes a branch in a host state
may conduct any activity at such branch that is permissible under the laws of
the home state of such bank, to the extent such activity is permissible either
for a bank chartered by the host state or for a branch in the host state of an
out-of-state national bank.
In 1995, Connecticut affirmatively "opted-in" to permit interstate
mergers and acquisitions, the establishment of Connecticut chartered banks by
foreign bank holding companies and interstate de novo branching, subject to
certain reciprocity requirements. As permitted by Federal law, Connecticut law
places a minimum permissible age of 5 years on the target bank and a 30% limit
on concentration of deposits in both interstate and intrastate acquisitions.
This legislation may result in increased competition.
Legislation is also currently pending in the U.S. Congress that would
allow broad new affiliations among banks, securities companies and insurance
firms. If passed and signed into law by the President, such legislation is
likely to significantly increase competition among firms in the financial
services industry.
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REGULATION AND SUPERVISION
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GENERAL
As a Connecticut-chartered capital stock savings bank, the deposits of
which are insured by the FDIC, the Bank is subject to extensive regulation and
supervision by both the Connecticut Banking Commissioner and the FDIC. The
Company also is subject to certain regulations of the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). This governmental
regulation is intended primarily to protect depositors and the FDIC's Bank
Insurance Fund, not the Company's shareholders.
CONNECTICUT REGULATION
The Connecticut Banking Commissioner regulates the Bank's internal
organization as well as its deposit, lending and investment activities. The
approval of the Connecticut Banking Commissioner is required, among other
things, for the establishment of branch offices and business combination
transactions. The Connecticut Banking Commissioner conducts periodic
examinations of the Bank. The FDIC also regulates many of the areas regulated by
the Connecticut Banking Commissioner.
Connecticut banking laws grant banks broad lending authority. Subject
to certain limited exceptions, however, total secured and unsecured loans made
to any one obligor pursuant to this statutory authority may not exceed 25% of
the Bank's equity capital and reserves for loan and lease losses.
Connecticut banking law prohibits the Bank from paying dividends in
certain situations. For a further description of this limitation, see Item 5
below.
Under Connecticut banking law, no person may acquire beneficial
ownership of more than 10% of any class of voting securities of a
Connecticut-chartered bank, or any bank holding company of such a bank, without
prior notification of, and lack of disapproval by, the Connecticut Banking
Commissioner. Similar restrictions apply to any person who holds in excess of
10% of any such class and desires to increase its holdings to 25% or more of
such class.
Any Connecticut-chartered bank meeting certain statutory requirements
may, with the Connecticut Banking Commissioner's approval, establish and operate
branches in any town or towns within the state. In 1996, legislation was enacted
which permits banks to establish mobile branches with the Banking Commissioner's
approval.
Connecticut law presently permits Connecticut banks to engage in stock
acquisitions of, and mergers with, depository institutions in other states with
reciprocal legislation. Many other states have enacted reciprocal legislation.
Several interstate mergers and acquisitions have been completed which involve
Connecticut bank holding companies or banks with offices in the Bank's primary
market area and bank holding companies or banks headquartered in other states.
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As noted above, in 1995, Connecticut affirmatively "opted-in" to permit
interstate mergers and acquisitions, the establishment of Connecticut chartered
banks by foreign bank holding companies and interstate de novo branching,
subject to certain reciprocity requirements. Connecticut law also places a
minimum permissible age of 5 years on the target bank and a 30% limit on
concentration of deposits in both interstate and intrastate acquisitions.
Legislation was enacted in 1996 which expressly permits an out-of-state bank to
merge or consolidate with or acquire a branch of another out-of-state bank which
has a branch in Connecticut. This legislation may result in further increased
competition.
In 1996, legislation was enacted which requires the board of directors
of each Connecticut bank to adopt annually and to periodically review an
investment policy governing investments by such bank, which policy must
establish standards for the making of prudent investments. In addition,
Connecticut law now permits Connecticut banks to sell fixed and variable rate
annuities if licensed to do so by the Connecticut Insurance Commissioner.
Further, legislation was enacted in 1996 which expands the ability of
Connecticut banks to invest in debt and equity securities. Prior to the
legislation, Connecticut banks could invest in debt securities without regard to
any other liability to the Connecticut bank of the maker or issuer of the debt
securities, if the securities were rated in the three highest rating categories
or otherwise deemed to be a prudent investment, and so long as the total amount
of such debt securities did not exceed 15% of the bank's total equity capital
and reserves for loan and lease losses and 15% of its assets. In 1996, these
percentages each were increased to 25%. In addition, prior to 1996, the
percentage limitation described above also applied to certain government and
agency obligations. As a result of the 1996 legislation, this limitation was
deleted for such obligations.
The 1996 legislation also expanded the ability of Connecticut banks to
invest in equity securities. Connecticut banks now may invest in such securities
without regard to any other liability to the Connecticut bank of the issuer of
such securities, so long as the total amount of equity securities of any one
issuer does not exceed 25% of the bank's total equity capital and reserves for
loan and lease losses and 25% of its assets. Prior to the enactment of this
legislation, Connecticut banks could invest up to 15% of their assets in the
equity securities of corporations incorporated and doing a major portion of
their business in the U.S., and only if the investment security was within the
top three rating categories or otherwise deemed to be a prudent investment by
the bank.
Legislation enacted in 1997 and 1998 (i) permits, subject to certain
limitations, Connecticut banks to sell insurance, directly or indirectly; (ii)
allows the organization of community banks with a minimum equity capital of $3
million (as opposed to the current $5 million for other Connecticut banks); and
(iii) permits out-of-state trust companies to establish and maintain offices in
Connecticut with the approval of the Banking Commissioner, provided there is
reciprocity in the home state's laws.
Connecticut legislation proposed in 1999 would (i) eliminate the
requirement of a community reinvestment plan as part of the branching
application process for certain banks
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which are well-capitalized and meet other requirements; (ii) authorize a new
form of Connecticut bank to be known as an uninsured bank (i.e., one that does
not accept retail deposits and for which insurance of deposits by the FDIC is
not required); and (iii) authorize Connecticut banks to engage in certain
closely related activities and activities permitted under federal law for
federally chartered banks.
FDIC REGULATION
The Bank's deposit accounts are insured by the FDIC, generally, to a
maximum of $100,000 for each insured depositor. As with all state-chartered,
FDIC insured banks, the Bank is subject to extensive supervision and examination
by the FDIC. FDIC insured banks also are subject to FDIC regulations governing
many aspects of their business and operations, including types of deposit
instruments offered and permissible methods of acquisition of funds.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), in September 1992, the FDIC implemented a system of
risk-related deposit insurance assessments. Under this system, for the first six
months and the second six months of 1998, insurance premiums for all banks
varied between 0.0% and .27% of total deposits, depending upon the capital level
and supervisory rating of the institution. The FDIC has stated that it will
reevaluate the adequacy of its assessment schedule every six months, and the
FDIC may increase or decrease premium levels by up to 5 basis points each six
months.
The Deposit Insurance Funds Act of 1996 also authorizes the Financing
Corporation ("FICO") to levy assessments on Bank Insurance Fund ("BIF")
- -assessable deposits and stipulates that, from 1997 to 1999, the rate must equal
one-fifth the FICO assessment rate that is applied to deposits assessable by the
Savings Association Insurance Fund. The FICO rate for the Bank is not tied to
FDIC risk classification. The FICO BIF annual rate for the first half of 1999 is
1.22 basis points.
Under the FDIC's risk-based capital requirements, each FDIC-insured
bank is required to maintain minimum levels of "capital" based on the
institution's total "risk-weighted assets." For purposes of these requirements,
"capital" is comprised of Tier 1 capital and Tier 2 capital. Tier 1 capital
consists primarily of common stock and limited amounts of perpetual preferred
stock. Tier 2 capital consists primarily of the allowance for loan losses
(subject to certain limitations), unrealized gains on certain equity securities
(subject to certain limitations), and certain preferred stock, subordinated debt
and convertible securities. In determining total capital, the amount of Tier 2
capital may not exceed the amount of Tier 1 capital. A bank's total
"risk-weighted assets" are determined by assigning the bank's assets and
off-balance sheet items (e.g., letters of credit) to one of four risk categories
based upon their relative credit risk. Under the FDIC regulations, the greater
the risk associated with an asset, the greater the amount of such assets that
will be subject to the capital requirements. Effective January 1, 1998, those
banks whose trading activities equal 10% or more of total assets or $1 billion
or more must incorporate capital charges for certain market risks into the
risk-based capital ratio. All FDIC-insured banks are required to maintain their
capital at or above certain minimum ratios. At December 31, 1998, the Bank's
capital exceeded these minimums. See "Management's Discussion and
Analysis-Liquidity and
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Capital Resources" in the 1998 Annual Report for a more detailed description of
these requirements and the Bank's capital position at December 31, 1998.
In addition, FDICIA categorizes banks based on five separate capital
levels and triggers certain mandatory and discretionary federal banking agency
responses for institutions that fall below certain capital levels. These
categories range from "well capitalized" for the most highly capitalized
institutions to "critically undercapitalized" for the least capitalized
institutions. Under regulatory definitions, an institution is considered "well
capitalized" (the highest rating) if its leverage capital ratio is 5% or higher,
its Tier 1 risk-based capital ratio is 6% or higher, its total risk-based
capital ratio is 10% or higher and it is not subject to certain regulatory
orders. On December 31, 1998, the Bank had a leverage capital ratio of 9.5%, a
Tier 1 risk-based capital ratio of 16.0% and a total risk-based capital ratio of
17.3%. At December 31, 1998, the Bank was not subject to any regulatory order.
FDICIA also limits the ability of FDIC-insured banks, such as the Bank,
to acquire and retain equity investments. Generally, state banks may hold equity
securities only to the extent permitted for national banks. However, FDICIA also
permits certain state banks to acquire or retain equity investments in an amount
up to 100% of Tier 1 capital in either (1) common or preferred stock listed on a
national securities exchange, or (2) shares of a registered investment company.
The Bank applied for and was granted this exception.
Additionally, FDICIA generally prohibits a FDIC-insured bank from
making investments of more than 15% of its total capital in money market
preferred stocks and adjustable rate preferred stocks. On December 29, 1995, the
FDIC granted the Bank permission to make such investments in amounts up to 100%
of its Tier 1 leverage capital.
The FDIC regulations that implement FDICIA generally require an insured
state bank to obtain the FDIC's prior consent before directly, or indirectly
through a majority-owned subsidiary, engaging "as principal" in any activity
that is not permissible for a national bank unless one of the exceptions
contained in the regulation applies. The Company does not believe that this
regulation has had or will have a material impact on the business of the Bank.
Effective January 1, 1999, the FDIC regulations governing the
activities and investments of insured state banks were substantially revised and
updated. The new regulations provide the framework for which certain
state-chartered banks or their majority-owned subsidiaries may engage in
activities that are not permissible for national banks or their subsidiaries.
All contemplated activities must still be permitted by state law. However, if an
activity or equity investment is permissible under state law, the new
regulations allow the FDIC to move more expeditiously on requests. Subject to
appropriate separations and limitations, the activities that may be conducted
through a majority-owned subsidiary under the expedited notice processing
criteria are real estate investment and securities underwriting.
Pursuant to FDICIA, the federal bank regulatory agencies have issued
rules establishing standards for safety and soundness at FDIC-insured
institutions and their holding companies. These standards formalize in
regulation the fundamental standards used by the federal bank regulatory
agencies to assess the operational and managerial qualities of an institution.
The rules
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establish operational, managerial, asset quality and earnings standards for
FDIC-insured banks and their holding companies and standards that prohibit as an
unsafe and unsound practice the payment of compensation that is excessive or
could lead to material financial loss to such institutions. These standards are
designed to identify potential safety and soundness concerns and ensure that
action is taken to address those concerns before they pose a risk to the deposit
insurance funds.
The FDIC may terminate FDIC insurance of the Bank's deposits after
notice and a hearing upon a finding by the FDIC that the Bank has engaged in
unsafe or unsound practices or is in an unsafe and unsound condition to continue
operations or has violated any applicable law, regulation, rule or order of, or
conditions imposed by, the FDIC. The Bank is not aware of any practice,
condition or violation that might lead to termination of its deposit insurance.
FEDERAL RESERVE SYSTEM REGULATION
Under the regulations of the Federal Reserve System, depository
institutions such as the Bank are required to maintain reserves against their
transaction accounts. During 1998, these regulations generally required the
maintenance of reserves of 3.0% against transaction accounts of $47.8 million or
less and 10.0% of the amount of such accounts in excess of such amount. In
December 1998, the Federal Reserve Board decreased the amount of transaction
accounts subject to the reserve requirement ratio of 3% from $47.8 million to
$46.5 million. These amounts and percentages are subject to further adjustment
by the Federal Reserve Board.
The Company is subject to regulation by the Federal Reserve Board as a
registered bank holding company. The Federal Bank Holding Company Act of 1956,
as amended (the "BHCA"), under which the Company registered, limits the types of
companies which the Company may acquire or organize and the activities in which
they may engage. In general, a bank holding company and its subsidiaries are
prohibited from engaging in or acquiring direct control of any company engaged
in non-banking activities unless such activities are so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
The Federal Reserve Board has established capital adequacy guidelines
for bank holding companies that are similar to the FDIC's capital requirements
described above. As of December 31, 1998, the Company was in full compliance
with all applicable capital requirements, and management believes that the
Company will maintain such compliance.
The BHCA requires, with certain exceptions, a bank holding company to
obtain the Federal Reserve Board's approval prior to acquiring more than 5% of
the outstanding voting stock of any bank or bank holding company, acquiring all
or substantially all of the assets of a bank or merging or consolidating with
another bank holding company.
Effective April 21, 1997, the Federal Reserve Board adopted
comprehensive changes to certain banking regulations (the "1997 Amendments").
The 1997 Amendments include amendments to Regulation Y, which implements the
BHCA's prior approval requirements. The changes are intended to improve the
competitiveness of bank holding companies by eliminating unnecessary regulatory
burdens and operating restrictions and by streamlining the
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application/notice process. Among other changes, the 1997 Amendments incorporate
a streamlined and expedited review process for bank acquisition proposals by
well-run bank holding companies; eliminate certain notice and approval
requirements and streamline others that involve non-banking proposals by
well-run bank holding companies; and reorganize and expand the list of
permissible non-banking activities.
As described above, Connecticut law specifically permits Connecticut
bank holding companies and banks to acquire or be acquired by banks or bank
holding companies in other states with reciprocal merger and acquisition laws.
As also described above, recent federal and Connecticut legislation is likely to
increase competition. Federal antitrust laws place limitations on the
acquisition of banks and other businesses.
Under the BHCA, the Company, the Bank and any other subsidiaries
generally are prohibited from engaging in certain reciprocal arrangements in
connection with any extension of credit or provision of any property or
services. The 1997 Amendments contain significant amendments to the Federal
Reserve Board's rules regarding tying arrangements. The 1997 Amendments remove
certain Federal Reserve Board-imposed tying restrictions on bank holding
companies and their non-bank subsidiaries and create exceptions from the
statutory restrictions on bank tying arrangements to allow banks greater
flexibility to package products with their affiliates. These changes contained
in the 1997 Amendments are designed to enhance competitiveness in banking and
non-banking products.
The Bank is subject to certain restrictions imposed by the Federal
Reserve Act on making any investments in the stock or other securities of the
Company or any of the Company's subsidiaries, and the taking of such stock or
securities as collateral for loans to any borrower.
The Bank also is subject to certain restrictions imposed by the Federal
Reserve Act on the amount of loans it can make to the Company or its other
affiliates. Such loans must be collateralized as provided by the Federal Reserve
Act. The amount of such loans may not exceed (when aggregated with certain other
transactions between the Bank and the Company) 10% of the capital stock and
surplus of the Bank. Since formation of the Company, there have been no loans
made by the Bank to the Company.
The BHCA requires the Company to file reports of operations annually
with the Federal Reserve Board. The Company, the Bank and any other subsidiaries
of the Company also are subject to examination by the Federal Reserve Board. In
addition, the Company is registered as a bank holding company with the
Connecticut Banking Commissioner under the Connecticut Bank Holding Company and
Bank Acquisition Act.
EFFECT OF GOVERNMENTAL POLICY
Banking is a business that depends on interest rate differentials. One
of the most significant factors affecting the Company's and the Bank's earnings
is the difference between (1) the interest rates paid by the Bank on its
deposits and its other borrowings and (2) the interest rates received by the
Bank on loans extended to its customers and securities held in the Bank's
investment portfolio. The value and yields of the Bank's assets and the rates
paid on its liabilities
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are sensitive to changes in prevailing market rates of interest. Thus, the
earnings and growth of the Bank will be influenced by general economic
conditions, the monetary and fiscal policies of the Federal government and the
policies of regulatory agencies, particularly the Federal Reserve Board, that
implement national monetary policy. The nature and impact of any future changes
in monetary policies cannot be predicted.
Effective January 1, 1995, Connecticut's banking laws were recodified.
The recodification generally combined and made uniform numerous provisions
concerning the organization, administration and powers of the various types of
Connecticut-chartered banks. In so doing, it permitted, for the first time,
interstate mergers and asset acquisitions between state-chartered commercial
banks. It also liberalized the ability of out-of-state banks to make loans in
Connecticut. The recodification has increased competition.
The present bank regulatory climate is undergoing significant change,
both as it affects the banking industry itself and as it affects competition
between banks and non-banking financial institutions. There has been significant
regulatory change in the regulation and operations of savings associations, in
the bank merger and acquisition area, in the products and services banks can
offer, and in the non-banking activities in which bank holding companies can
engage. Partly as a result of these changes, banks are competing actively with
other types of depository institutions and with non-bank financial institutions,
such as money market funds, brokerage firms, insurance companies and other
financial service enterprises. The impact of these changes in the regulatory
climate ultimately has resulted in downward pressure on the Bank's net interest
margin, the magnitude of which is not possible to assess. Although the decline
in interest rates and the flattening of the yield curve have negatively impacted
the Bank's net interest margin, the heightened competition, due in part to the
changes in regulation, has hastened the decline in the yields on earning assets,
particularly loans, while the rates paid on certain deposits have increased or
not fallen as fast as earning asset yields.
Moreover, certain legislative and regulatory proposals that could
affect the Bank and/or the Company and/or the banking business in general are
pending, or may be introduced, before the United States Congress, the
Connecticut General Assembly and various governmental agencies. These proposals
include measures that may alter further the structure, regulation and
competitive relationship of financial institutions and proposals that may
subject the Bank and/or the Company to increased regulation, disclosure and
reporting requirements. In addition, the various banking regulatory agencies
frequently propose rules and regulations to implement and enforce existing
legislation. It cannot be predicted whether or in what form any legislation or
regulations will be enacted or the extent to which the business of the Bank
and/or the Company will be affected thereby.
REGIONAL ECONOMY
----------------
In 1998, the state of Connecticut had modest economic growth. The
relatively flat U.S. Treasury yield curve and increased competition for both
commercial and consumer loans placed downward pressure on net interest margins,
partially offsetting a modest increase in loan growth and fee income. Currently,
the flat yield curve and heightened competition is expected to place
- 11 -
<PAGE>
downward pressure on net interest margins. In addition, banking institutions
must deal with continued business consolidation in the Connecticut market and
continued strict bank regulation.
ITEM 2 - PROPERTIES.
- --------------------
The following table sets forth the location of the Bank's branch
offices and other related information:
OFFICE LOCATION STATUS
- ------ -------- ------
Main Office 121 Main St., Southington, CT Owned
Queen Corner Office 900 Queen St., Southington, CT Owned
South End Office 921 Meriden Waterbury Tpke., Southington, CT Owned
Drive-In Center 30 Berlin Ave., Southington, CT Owned
Wallingford Office 950 North Colony Road, Wallingford, CT Leased
The Bank leases approximately 1,580 square feet at 950 North Colony
Road, Wallingford, Connecticut to house its new Wallingford branch office. The
lease has an expiration date of March 31, 2008, with an option to extend the
lease for five years.
Since January 1995, the Bank has operated a limited purpose branch
banking facility at Southington High School, which is located at 720 Pleasant
Street, Southington, Connecticut. The High School Branch processes only deposits
and withdrawals and is open only during school hours. This branch is operated on
a cooperative basis: the Bank supplies management and equipment, the Town of
Southington provides the required space, and students staff the branch. The Bank
believes that the High School Branch is the only branch bank of its kind in the
State of Connecticut.
The Bank leases approximately 6,591 square feet at 98 Main Street in
Southington to house the administrative offices of its audit, human resources,
marketing, finance, managed assets, consumer banking, deposit services, and
information systems divisions. The lease had an original expiration date of
December 31, 1997, with an option to extend the lease for four 6-month periods.
The Bank has exercised its option to extend the lease until June 30, 1999.
The Bank leases approximately 1,200 square feet at 188 North Main
Street in Southington for its residential mortgage origination function. The
lease has an expiration date of October 31, 1998, with an option to extend the
lease for three one-year periods. The Bank has exercised its option to extend
the lease until October 31, 1999.
The Bank leases sufficient space at 55 Meriden Avenue in Southington
(Bradley Memorial Hospital) to support a free standing automatic teller machine.
The lease has an expiration date of July 31, 2000, with no option to extend the
lease.
- 12 -
<PAGE>
The Bank owns an approximately 35,000 square foot lot located at 918
Meriden-Waterbury Turnpike, which is adjacent to the Bank's South End office.
The lot is undeveloped.
The Bank also owns and is holding for future expansion two separate
properties both located adjacent to its Main Office parking facilities. The
properties consist of a residential home on an approximately 10,500 square foot
lot located at 50 Berlin Avenue, and an approximately 14,800 square foot
undeveloped lot located at 31 Vermont Avenue. The Bank uses the residential home
at 50 Berlin Avenue as a storage facility for office supplies.
In the first quarter of 1998, the Bank sold a two-family residential
home on an approximately 11,600 square foot lot located at 43-45 Vermont Avenue
that was originally purchased for future expansion.
ITEM 3 - LEGAL PROCEEDINGS.
- ---------------------------
Neither the Company nor the Bank is presently a party to any legal
proceedings the adverse outcome of which would likely have, in management's
belief, a material effect on the Company's or the Bank's financial condition,
results of operations or cash flows.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -------------------------------------------------------------
During the fourth quarter of 1998, no matter was submitted to a vote of
shareholders of the Company.
- 13 -
<PAGE>
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
- -------------------------------------------------------------------------------
The Company's Common Stock has been issued and outstanding since
November 17, 1994, when the Company acquired all of the Bank's outstanding
common stock in a one-for-one exchange with the Bank's existing shareholders. As
of March 24, 1999, 5,193,948 shares of Common Stock were issued and outstanding
and were held by approximately 1,790 shareholders of record.
The Company's Common Stock is traded in the over-the-counter market and
is quoted on the National Market tier of The National Association of Securities
Dealers Automated Quotation ("Nasdaq") Stock Market under the symbol "BKCT."
Quarterly high and low bid prices for 1997 and 1998 are included in the 1998
Annual Report under the heading "Market Price and Dividends" and are
incorporated herein by reference. Such bid prices reflect inter-dealer prices,
without retail mark-up, markdown or commission and may not necessarily represent
actual transactions.
For the foreseeable future, the only substantial source of funds
available to the Company for the declaration of dividends will be dividends
declared and paid by the Bank on Bank common stock. As the holder of Bank common
stock, the Company is entitled to receive dividends when, as and if declared by
the Bank board of directors out of funds legally available therefor. The Bank
may pay cash dividends out of the Bank's net profits. For purposes of this
restriction, "net profits" means the remainder of all earnings from operations.
Further, the total of all dividends declared by the Bank in any calendar year
may not exceed the sum of the Bank's net profits for the year in question
combined with its retained net profits from the preceding two calendar years.
Additionally, earnings appropriated to reserves for loan losses and deducted for
federal income tax purposes are not available for cash dividends without the
payment of taxes at the then current income tax rates on the amount used. The
Connecticut Banking Commissioner and/or the FDIC may limit the Bank's ability to
pay dividends.
The Bank has paid consecutive quarterly cash dividends since the
quarter ended December 31, 1992. The Company paid its first quarterly dividend
during the quarter ended March 31, 1995. No assurances can be given that further
dividends will be paid or approved. Dividend history for the Company from
January 1, 1997 through December 31, 1998 is included in the 1998 Annual Report
under the heading "Market Price and Dividends" and is incorporated herein by
reference. The Bank also paid a 20% stock dividend on June 1, 1993, a 6-for-5
stock split effected in the form of a stock dividend on June 19, 1996, and a
2-for-1 stock split effected in the form of a stock dividend on December 1,
1997.
ITEM 6 - SELECTED FINANCIAL DATA.
- ---------------------------------
The required information is included in the 1998 Annual Report under
the heading "Selected Consolidated Financial Data," and is incorporated herein
by reference.
- 14 -
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS.
- --------------
The required information is included in the 1998 Annual Report under
the heading "Management's Discussion and Analysis" and is incorporated herein by
reference.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- ---------------------------------------------------------------------
The required information is included in the 1998 Annual Report under
the heading "Management's Discussion and Analysis - Asset/Liability Management
and Market Risk" and is incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- -----------------------------------------------------
The report of the Company's independent accountants and the Company's
Consolidated Statements of Condition at December 31, 1998 and 1997, and the
related Consolidated Statements of Income, Shareholders' Equity and Cash Flows
for each of the three years in the period ended December 31, 1998, and the Notes
to Consolidated Financial Statements appear in the 1998 Annual Report and are
incorporated herein by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- ---------------------
Not applicable.
- 15 -
<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------------------------------------------------------------
The required information is included in the 1999 Proxy Statement under
the heading "Election of Directors" and is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION.
- ---------------------------------
The required information is included in the 1999 Proxy Statement under
the heading "Election of Directors - Executive Compensation" and is incorporated
herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------------------------------------------------------------------------
As of February 28, 1999, there were no persons or groups (as that term
is used in Section 13(d)(3) of the Exchange Act) known to the Company who may be
deemed to own beneficially more than 5% of the Common Stock.
Certain other required information under this item is included in the
1999 Proxy Statement under the heading "Election of Directors - Stock Ownership
of Directors and Officers" and is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ---------------------------------------------------------
The required information is included in the 1999 Proxy Statement under
the headings "Election of Directors - Transactions With Management", "- Certain
Business Relationships", "Indebtedness of Management and Others" and
"- Compensation Committee Interlocks and Insider Participation" and is
incorporated herein by reference.
- 16 -
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- ---------------------------------------------------------------------------
(a) The following documents are filed as part of this report.
(1) Financial Statements
--------------------
The following documents filed as part of this report are
incorporated herein by reference from the indicated pages of
the 1998 Annual Report.
Financial Statement Page or Pages
------------------- -------------
Report of Independent Accountants 21
Consolidated Statements of Condition 22
Consolidated Statements of Income 23
Consolidated Statements of Shareholders' Equity 24
Consolidated Statements of Cash Flows 25
Notes to Consolidated Financial Statements 26-39
(2) Financial Statement Schedules
-----------------------------
Information required to be included in all schedules to the
Company's Consolidated Financial Statements is included in the
1998 Annual Report or is not required under the related
instructions or is inapplicable and therefore has been
omitted.
(3) Exhibits
--------
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation of Registrant
(Incorporated by reference to Exhibit 3.1 to
the Registrant's Registration Statement on
Form S-4 (Registration No. 33-77696) (the
"Registration Statement"))
3.2 Bylaws of Registrant (Incorporated by
reference to Exhibit 3.2 to the Registration
Statement)
3.3 Certificate of Amendment of Certificate of
Incorporation dated May 20, 1996
(Incorporated by reference to Exhibit 3.3 to
the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30,
1996)
- 17 -
<PAGE>
4.1 Instruments defining the rights of security
holders (Included in Exhibits 3.1 and 3.2)
4.2 Form of Stock Certificate (Incorporated by
reference to Exhibit 4.5 to the Registrant's
Registration Statement on Form S-8
(Registration No. 33-333-2638))
10.1* Employment Agreement dated as of January 1,
1997, by and between the Bank and Robert D.
Morton (Incorporated by reference to Exhibit
10.1 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December
31, 1996)
10.2* Southington Savings Bank 1986 Stock Option
Plan (Incorporated by reference to Exhibit
10.2 to the Registration Statement)
10.3* Southington Savings Bank 1993 Stock Option
Plan (Incorporated by reference to Exhibit
10.3 to the Registration Statement)
10.4* Pension Plan of Southington Savings Bank, as
amended (Incorporated by reference to Exhibit
10.4 to the Registration Statement)
10.5* Southington Savings Bank Supplemental
Retirement Plan (Incorporated by reference to
Exhibit 10.5 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period
ended September 30, 1996)
10.6* Bancorp Connecticut, Inc. 1997 Stock Option
Plan (Incorporated by reference to Exhibit
10.6 to the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended June
30, 1997)
10.7* Southington Savings Bank Supplemental
Executive Retirement Plan (effective December
21, 1998)
13.1 Annual Report to Security Holders
21 Subsidiaries of Registrant
24 Power of Attorney
- 18 -
<PAGE>
27 1998 Financial Data Schedule
99 1999 Proxy Statement
- ------------------------
* Management contract or compensatory plan or arrangement.
THE COMPANY WILL PROVIDE A COPY OF ANY EXHIBIT LISTED ABOVE TO
ANY SHAREHOLDER UPON THE WRITTEN REQUEST OF SUCH SHAREHOLDER
AND UPON THE PAYMENT OF A REASONABLE FEE LIMITED TO THE
COMPANY'S EXPENSES INCURRED IN FURNISHING SUCH EXHIBIT.
REQUESTS SHOULD BE ADDRESSED TO LESLEY A. DEANGELO, BANCORP
CONNECTICUT, INC., 121 MAIN STREET, SOUTHINGTON, CONNECTICUT
06489.
(b) The Company did not file any Report on Form 8-K during the last quarter of
1998.
(c) The exhibits required by Item 601 of Regulation S-K are filed as a separate
part of this report.
- 19 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BANCORP CONNECTICUT, INC.
--------------------------------
(Registrant)
Date: March 30, 1999 By: /s/ Robert D. Morton
----------------------------
Robert D. Morton
Its President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Robert D. Morton President, March 30, 1999
- ------------------------- Chief Executive
Robert D. Morton Officer and Director
(Principal Executive Officer)
/s/ Wayne F. Patenaude Treasurer and March 30, 1999
- ------------------------- Secretary (Principal
Wayne F. Patenaude Financial Officer and
Principal Accounting Officer)
Norbert H. Beauchemin* Director March 30, 1999
- -------------------------
Norbert H. Beauchemin
Walter J. Hushak* Director March 30, 1999
- -------------------------
Walter J. Hushak
Michael J. Karabin* Director March 30, 1999
- -------------------------
Michael J. Karabin
- 20 -
<PAGE>
David P. Kelley* Director March 30, 1999
- -------------------------
David P. Kelley
Frederick E. Kuhr* Director March 30, 1999
- -------------------------
Frederick E. Kuhr
Joseph J. Laporte* Director March 30, 1999
- -------------------------
Joseph J. LaPorte
Director
- -------------------------
Ralph G. Mann
Andrew J. Meade* Director March 30, 1999
- -------------------------
Andrew J. Meade
Frank R. Miller* Director March 30, 1999
- -------------------------
Frank R. Miller
Anthony S. Pizzitola* Director March 30, 1999
- -------------------------
Anthony S. Pizzitola
Dennis J. Stanek* Director March 30, 1999
- -------------------------
Dennis J. Stanek
*By: /s/ Robert D. Morton
------------------------
Robert D. Morton
Attorney-in-fact
- 21 -
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Certificate of Incorporation of Registrant
(Incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-4
(Registration No. 33-77696) (the "Registration
Statement"))
3.2 Bylaws of Registrant (Incorporated by reference to
Exhibit 3.2 to the Registration Statement)
3.3 Certificate of Amendment of Certificate of
Incorporation dated May 20, 1996 (Incorporated by
reference to Exhibit 3.3 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June
30, 1996)
4.1 Instruments defining the rights of security holders
(Included in Exhibits 3.1 and 3.2)
4.2 Form of Stock Certificate (Incorporated by reference to
Exhibit 4.5 to the Registrant's Registration Statement
on Form S-8 (Registration No. 33-333-2638))
10.1* Employment Agreement dated as of January 1, 1997, by
and between the Bank and Robert D. Morton (Incorporated
by reference to Exhibit 10.1 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1996)
10.2* Southington Savings Bank 1986 Stock Option Plan
(Incorporated by reference to Exhibit 10.2 to the
Registration Statement)
10.3* Southington Savings Bank 1993 Stock Option Plan
(Incorporated by reference to Exhibit 10.3 to the
Registration Statement)
- 22 -
<PAGE>
10.4* Pension Plan of Southington Savings Bank, as amended
(Incorporated by reference to Exhibit 10.4 to the
Registration Statement)
10.5* Southington Savings Bank Supplemental Retirement Plan
(Incorporated by reference to Exhibit 10.5 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1996)
10.6* Bancorp Connecticut, Inc. 1997 Stock Option Plan
(Incorporated by reference to Exhibit 10.6 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997)
10.7* Southington Savings Bank Supplemental Executive
Retirement Plan (effective December 21, 1998)
13.1 Annual Report to Security Holders
21 Subsidiaries of Registrant
24 Power of Attorney
27 1998 Financial Data Schedule
99 1999 Proxy Statement
- ----------------------
* Management contract or compensatory plan or arrangement.
Exhibit 10.7
SOUTHINGTON SAVINGS BANK
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(Effective December 21, 1998)
<PAGE>
SOUTHINGTON SAVINGS BANK
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
--------------------------------------
TABLE OF CONTENTS
-----------------
ARTICLE PAGE
- ------- ----
1 PURPOSE..................................................................1
2 DEFINITIONS..............................................................1
3 PARTICIPATION............................................................5
4 TARGET BENEFIT...........................................................5
5 PAYMENT OF TARGET BENEFIT................................................7
6 PRE-RETIREMENT DEATH BENEFIT.............................................9
7 VESTING.................................................................10
8 FUNDING.................................................................12
9 ADMINISTRATION..........................................................13
10 CLAIM PROCEDURE.........................................................14
11 ADOPTION BY EMPLOYER; OBLIGATIONS OF EMPLOYER...........................14
12 MISCELLANEOUS...........................................................15
- i -
<PAGE>
SOUTHINGTON SAVINGS BANK
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
--------------------------------------
ARTICLE 1
PURPOSE
-------
The purpose of the Southington Savings Bank Supplemental Executive
Retirement Plan (the "Plan") is to provide certain designated executives with a
supplemental retirement benefit in addition to the sum of (a) their retirement
benefits provided under the Southington Savings Bank Defined Benefit Pension
Plan ("Pension Plan") and the Southington Savings Bank Supplemental Retirement
Plan, and (b) their Social Security benefits. The Plan is not intended or
designed to meet the qualification requirements of Section 401 of the Internal
Revenue Code. As of the Effective Date, Robert D. Morton is the only person
eligible to participate in the Plan.
ARTICLE 2
DEFINITIONS
-----------
When used herein with initial capital letters, each of the following terms
shall have the corresponding meaning set forth below unless a different meaning
is plainly required by the context in which the term is used:
SECTION 2.01. "Administrator" shall mean the Plan
1
<PAGE>
Administrator under the Pension Plan.
SECTION 2.02. "Board" shall mean the Board of Directors of Southington
Savings Bank or Bancorp Connecticut, Inc., as applicable.
SECTION 2.03. "Change in Control" shall have the same meaning as provided
in the Participant's employment agreement with the Employer.
SECTION 2.04. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
SECTION 2.05. "Committee" shall mean the Compensation Committee of the
Board, or any subsequent committee of the Board that has primary responsibility
for compensation policies. In the absence of such a committee, "Committee" shall
mean the Board or any committee of the Board designated by the Board to perform
the functions of the Committee under the Plan.
SECTION 2.06. "Compensation" shall have the same meaning as provided in the
Pension Plan, except that bonuses and other incentive payments shall be included
as Compensation under this Plan, and the dollar maximum set by section
401(a)(17) of the Code, as amended, or any other Code section which replaces, or
into which, such Code section is amended, shall not apply to this Plan.
2
<PAGE>
SECTION 2.07. "Disability" shall have the same meaning as provided in the
Pension Plan.
SECTION 2.08. "Early Retirement Date" shall have the same meaning as
provided in the Pension Plan.
SECTION 2.09. "Effective Date" means December 21, 1998.
SECTION 2.10. "Employer" includes, individually and/or collectively as the
context requires, Southington Savings Bank ("Bank"), Bancorp Connecticut, Inc.
("Bancorp"), and all other entities in which the Bank or Bancorp holds, directly
or indirectly, more than a 50-percent ownership interest and that have approved
and adopted this Plan pursuant to Article 11, whether or not an individual
Employer directly compensates the Participant or the Participant appears on the
payroll of such Employer.
SECTION 2.11. "Final Average Compensation" shall mean a Participant's
highest average twelve-month Compensation earned during any 60 consecutive
months (or lesser actual period of receiving Compensation) of employment
preceding the calendar month in which the Participant's employment ends. In
determining a Participant's 60 consecutive months of highest average annual
Compensation, periods during which the Participant was not receiving
Compensation shall be disregarded.
3
<PAGE>
SECTION 2.12. "Participant" shall mean an employee of the Employer who is
eligible to participate in the Plan pursuant to Article 3.
SECTION 2.13. "Target Benefit" shall mean the benefit described in Article
4.
SECTION 2.14. "Years of Vesting Service" shall be the Participant's Years
of Vesting Service under the Pension Plan.
4
<PAGE>
ARTICLE 3
PARTICIPATION
-------------
Each employee of the Employer specifically named and designated by the
Board to be eligible to participate in the Plan shall be a Participant in the
Plan. As of the Effective Date, Robert D. Morton is the sole Participant in the
Plan.
ARTICLE 4
TARGET BENEFIT
--------------
SECTION 4.01. The Target Benefit a Participant shall be entitled to receive
from the Employer under this Plan shall have a value equal to the excess, if
any, of (a) over (b), where:
(a) Equals a lifetime benefit in an annual amount equal to sixty (60)
percent of the Participant's Final Average Compensation, which benefit shall be
reduced, if payment of the Target Benefit shall commence prior to the
Participant's attainment of age 65, in accordance with the actuarial factors set
forth in the Pension Plan applicable to retirement benefits of employees
retiring on an Early Retirement Date, provided that no benefit reduction shall
occur if payment is made on account of a Change in Control;
(b) equals the sum of (i) the annual benefit payable to the
5
<PAGE>
Participant under the Pension Plan, expressed in the normal form of benefit
applicable to the Participant pursuant to the terms of the Pension Plan (whether
or not such benefit is actually paid in such form) commencing at the same time
as benefits hereunder, plus (ii) the annual benefit payable to the Participant
under the Southington Savings Bank Supplemental Retirement Plan, as determined
under Section 2 of that plan, without any actuarial adjustment in the event
benefits are paid in a form other than the applicable normal form of benefit
under the Pension Plan, plus (iii) the annual Social Security benefit payable to
the Participant by the federal government which commences at the same time as
benefits hereunder.
SECTION 4.02. Notwithstanding the foregoing, if a Participant's employment
terminates on account of his or her disability for which benefits are payable
under the Employer's long-term disability plan, no Target Benefit shall be owing
under this Plan to such Participant until such time that benefits to the
Participant have ceased under the long-term disability plan.
SECTION 4.03. An eligible spouse, if any, of such Participant shall be
entitled to receive a continuation of such benefit only to the extent provided
in Articles 5 or 6. No beneficiary under the Plan shall be permitted other than
a surviving eligible spouse.
6
<PAGE>
ARTICLE 5
PAYMENT OF TARGET BENEFIT
-------------------------
SECTION 5.01. A Participant's Target Benefit payments shall commence on the
first day of the month following the LATER of (a) the date the Participant is
vested in such Target Benefit pursuant to Article 7 of this Plan, and (b) the
latest of the month in which the Participant's employment ends, the last month
the Participant is paid liquidated damages provided for under the Participant's
employment agreement with the Employer, and the last month in which the
Participant receives severance payments from the Bank payable for any reason,
including but not limited to a Change in Control, as required by the
Participant's employment agreement with the Employer, unless the Participant and
the Administrator agree that such benefit shall commence at a later time. In no
event will a Participant or Beneficiary have a right to receive any Target
Benefit payment nor shall the Employer have any obligation to make any such
payment hereunder until the Participant becomes vested in the Target Benefit in
accordance with Article 7 of the Plan.
SECTION 5.02. The normal form in which a Target Benefit shall be paid is,
for a Participant who is unmarried on the date on which benefit payments are to
commence as determined above, monthly payments on the first day of each month
for the life of the Participant only, and for a Participant who is married at
such time, monthly payments on the first day of each month for
7
<PAGE>
the life of the Participant and after the Participant's death, monthly payments
on the first day of each month to the Participant's surviving spouse for life
(or until remarried, if earlier), each in an amount equal to 50 percent of the
Participant's monthly payment. To be entitled to a Target Benefit under the
Plan, a spouse must be married to the Participant both on the date Target
Benefit payments to the Participant commence and on the Participant's date of
death (hereinafter referred to as a "Surviving Spouse"). The annual Target
Benefit payable to a married Participant, while living, shall be equal to the
annual Target Benefit that would be payable to such Participant if unmarried.
SECTION 5.03. Instead of the normal forms of benefit in Section 5.02, a
Participant may elect to receive payment of his or her Target Benefit under the
Plan in one of the optional forms of benefit available under the Pension Plan;
provided, however, that any such optional form of benefit shall be the
"Actuarial Equivalent," as such term is defined in the Pension Plan, of the
Target Benefit that would be payable to the Participant in normal form if
unmarried. A Participant who is married on the date on which Target Benefit
payments commence shall not be required to obtain the consent of his or her
spouse to have his or her Target Benefit paid in a form of benefit other than
the normal form. Notwithstanding the foregoing, the Administrator shall have the
discretion to pay Target Benefits on a quarterly or annual basis if, in the
Administrator's opinion, the amount of a Participant's
8
<PAGE>
or a surviving Spouse's monthly Target Benefit would be insufficient to merit a
monthly payment.
ARTICLE 6
PRE-RETIREMENT DEATH BENEFIT
----------------------------
SECTION 6.01. If a Participant in the Plan with respect to the Target
Benefit should die after having become vested with respect to a Target Benefit
but prior to the commencement of Target Benefit payments, in accordance with
Article 5, and if such Participant's spouse is entitled to a death benefit under
the Pension Plan, said spouse shall be entitled to receive from the Employer a
death benefit in the form of monthly payments commencing on the first day of the
month following the date of death and lasting for the spouse's life (or until
remarried, if earlier). The amount of such death benefit shall be determined
solely with respect to the Participant's Target Benefit (without reduction for
any payments made to the Participant on account of disability), and shall be
equal to the Target Benefit that would have been payable in the normal form
under Section 5.02 to such spouse as a Surviving Spouse if the Participant had
retired on the day prior to his or her death.
SECTION 6.02. No death benefit with respect to a Target Benefit other than
that set forth above shall be payable under this Plan if a Participant dies
prior to the commencement of benefit payments hereunder.
9
<PAGE>
ARTICLE 7
VESTING
-------
SECTION 7.01. Except to the extent Section 7.02 otherwise provides, a
Participant shall be vested and shall have a nonforfeitable right with respect
to the Target Benefit upon the earliest to occur of the following:
(a) The Participant's death while an employee of the Employer;
(b) The Participant's disability while an employee of the Employer;
(c) The Participant's satisfying the definition of Early Retirement Date
under the Pension Plan;
(d) A Change in Control after a Participant has completed five (5) Years of
Vesting Service.
SECTION 7.02. Notwithstanding Section 7.01 above, if a Participant shall be
terminated for cause, as defined in the Participant's employment agreement with
the Employer, or otherwise performs acts of willful misconduct or gross
negligence in a matter of material importance to the Employer, payments of
10
<PAGE>
the Target Benefit that thereafter would have been payable to the Participant or
such Participant's spouse may, at the sole discretion of the Committee, be
forfeited, and the Employer shall have no further obligation under this Plan to
the Participant or such Participant's spouse.
11
<PAGE>
ARTICLE 8
FUNDING
-------
Benefits payable under this Plan shall be "unfunded," as that term is used
in Sections 201(2), 301(a)(3), 401(a)(1) and 4021(b)(6) of the Employee
Retirement Income Security Act of 1974, as amended, with respect to unfunded
plans maintained primarily for the purpose of providing deferred compensation to
a select group of management of highly compensated employees, and the
Administrator shall administer this Plan in a manner that will ensure that
benefits are unfunded and that Participants will not be considered to have
received a taxable economic benefit prior to the time at which benefits are
actually payable hereunder. Accordingly, the Employer shall not be required to
segregate or earmark any of its assets for the benefit of Participants or their
spouses or other beneficiaries, and each such person shall have only a
contractual right against the Employer for benefits hereunder. The rights and
interests of a Participant under this Plan shall not be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge or encumbrance by a
Participant or any person claiming under or through a Participant, nor shall
they be subject to the debts, contracts, liabilities or torts of a Participant
or anyone else prior to payment.
The Employer may, but need not, set aside or invest funds, or establish a
trust of any type, to meet its liability to a
12
<PAGE>
Participant under this Plan. Title to and beneficial ownership of any assets,
whether cash, investments, or otherwise, which the Employer may designate to pay
the benefits described hereunder, shall at all times remain in the Employer, or
with a trustee, and a Participant shall have no property interest whatsoever in
any specific assets of the Employer or trustee. Nothing contained in this Plan
and no action taken pursuant to the provisions of this Plan shall create or be
construed to create a fiduciary relationship between the Employer and a
Participant. To the extent a Participant has a right to receive a payment or
payments under this Plan, such right shall be no greater than the right of any
unsecured general creditor of the Employer.
ARTICLE 9
ADMINISTRATION
--------------
The Plan shall be operated under the direction of the Committee and
administered by the Administrator. The calculation of all benefits payable under
the Plan shall be performed at the direction of the Administrator, subject to
the review of the Committee in its discretion, and such calculations and the
Committee's decisions in all other matters involving the interpretation or
application of the Plan shall be final and binding on all persons.
13
<PAGE>
ARTICLE 10
CLAIM PROCEDURE
---------------
All claims for benefits under this Plan shall be determined under the
claims procedure in effect under the Pension Plan on the date that such claims
are submitted, except that the Administrator shall make initial determinations
with respect to claims hereunder and the Committee shall decide appeals of such
determinations.
ARTICLE 11
ADOPTION BY EMPLOYER; OBLIGATIONS OF EMPLOYER
---------------------------------------------
Benefits under this Plan shall, in the first instance, be paid and
satisfied by the Bank. If the Bank shall be dissolved or for any other reason
shall fail to pay and satisfy such benefits, then Bancorp shall pay the benefits
under the Plan. If Bancorp shall be dissolved or for any other reason shall fail
to pay and satisfy such benefits, then each other adopting Employer shall be
jointly and severally liable for paying all of the benefits under the Plan.
14
<PAGE>
ARTICLE 12
MISCELLANEOUS
-------------
SECTION 12.01. AMENDMENT OR TERMINATION. The Board may amend or discontinue
the Plan at any time; provided, however, that no amendment or discontinuation
shall diminish the Employer's obligation to provide any benefits accrued to the
date of such amendment or discontinuation. For purposes of the foregoing
"benefits accrued" shall mean the value of a Participant's benefit under the
Plan, as of the date of amendment or discontinuation of the Plan, with respect
to the Target Benefit, based upon the Participant's Final Average Compensation,
Years of Credited Service, pension plan benefit and projected Social Security
benefits as of such date. A Participant with an accrued but unvested benefit
under the Plan as of the date of amendment or discontinuation of the Plan shall
become vested with respect to such benefit upon such Participant's satisfaction
of the requirements of Article 4, as the case may be.
SECTION 12.02. PENSION PLAN BENEFIT ADJUSTMENTS. Any amendment to a
Participant's benefit under the Pension Plan after the payment of benefits
commences under this Plan shall not affect the amount of the benefits under this
Plan. Furthermore, the provision of any additional benefits under the Pension
Plan shall in no way result in any adjustment with respect to the benefits under
this Plan.
SECTION 12.03. NO RIGHT TO CONTINUED EMPLOYMENT.
(a) Adoption of the Plan, the provisions of the Plan, and any action
of the Board or Committee with respect to the Plan,
15
<PAGE>
shall not be held or construed to confer upon any Participant any right to
continuation of employment by the Employer.
(b) The Employer reserves the right to terminate or otherwise discipline
any Participant, or otherwise deal with any Participant, to the same extent as
though the Plan had not been adopted.
SECTION 12.04. TAXES.
(a) The Bank or any other entity making a payment under the Plan shall
have the right to deduct from all amounts distributed any taxes required by law
to be withheld.
(b) A Participant should consult his or her own tax advisors concerning the
personal tax consequences of being eligible for the Plan, and the tax treatment
of distributions received under the Plan.
SECTION 12.05. HEADINGS. Headings are included in the Plan for convenience
only and are not substantive provisions of the Plan.
SECTION 12.06. APPLICABLE LAW. The interpretation of the provisions and the
administration of the Plan shall be governed by the laws of the state of
Connecticut.
Dated this 25th day of March, 1999, at Southington, Connecticut.
16
<PAGE>
SOUTHINGTON SAVINGS BANK
Witness: By /s/ Walter J. Hushak
---------------------
/s/ Judy Smith Walter J. Hushak
- ----------------------- Its Chairman
Judy Smith
BANCORP CONNECTICUT, INC.
Witness: By /s/ Walter J. Hushak
---------------------
Walter J. Hushak
/s/ Judy Smith Its Chairman
- -----------------------
Judy Smith
Exhibit 13.1
Investing in the Future
---------------
[IMAGE OMITTED]
---------------
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
-------------
1998
Annual Report
-------------
<PAGE>
CORPORATE PROFILE
Bancorp Connecticut's wholly owned subsidiary, Southington Savings Bank ("SSB")
is a community-based full-service financial institution serving the central
Connecticut market with retail and commercial banking, money management and
brokerage services through offices in Southington and Wallingford. SSB also owns
an indirect auto finance subsidiary, BCI Financial Corporation ("BCIF"). BCIF,
through its car dealer relationships throughout Connecticut, offers auto loan
financing to customers of those dealerships.
[BAR GRAPH OMITTED -- DATA BELOW]
Net Income (dollars in thousands)
---------------------------------
'94 '95 '96 '97 '98
----- ----- ----- ----- -----
3,748 4,296 5,024 5,896 6,345*
Dividend Growth** (dollars per share)
-------------------------------------
'94 '95 '96 '97 '98
----- ----- ----- ----- -----
0.21 0.30 0.37 0.46 0.54
* Includes a $337,000 charge to earnings attributed to the formation of a
passive investment company. Excluding this charge, net income would have
been $6,682,000. This passive investment company was formed to lower the
Company's effective tax rate in future years.
** Per share data has been restated to reflect a 6-for-5 stock split effected
in the form of a stock dividend on June 19, 1996, and a 2-for-1 stock split
effected in the form of a stock dividend on December 1, 1997.
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED
FINANCIAL DATA
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF CONDITION DATA:*
Assets $521,376 $444,863 $419,398 $383,978 $357,180
Securities 217,333 166,712 149,612 130,549 124,372
Loans, net 278,440 255,448 246,274 230,706 213,457
Deposits 345,563 317,299 309,827 294,835 279,392
FHLB of Boston advances 40,630 20,630 21,000 19,990 22,299
Federal funds purchased and securities
sold under agreements to repurchase 80,516 55,368 41,879 22,227 15,027
Shareholders' equity 49,916 46,947 42,731 43,210 37,357
STATEMENT OF INCOME DATA:*
Net interest income $ 16,840 $ 15,677 $ 14,754 $ 13,896 $ 12,975
Provision for loan losses 268 600 435 180 242
Net gain on sale of securities 1,272 839 344 150 46
Other income 2,191 1,484 1,315 1,093 737
Other expenses 10,398 8,701 8,573 8,625 7,879
Income taxes** 3,292 2,803 2,381 2,038 1,889
- ------------------------------------------------------------------------------------------------------------------------
Net income** $ 6,345 $ 5,896 $ 5,024 $ 4,296 $ 3,748
========================================================================================================================
PER SHARE DATA:***
Earnings -- diluted $1.14 $1.08 $0.89 $0.77 $0.68
Cash dividends 0.54 0.46 0.37 0.30 0.21
Book value 9.72 9.22 8.31 7.95 6.93
SELECTED STATISTICAL DATA:
Return on average assets 1.29% 1.39% 1.26% 1.17% 1.11%
Return on average equity 13.07 13.48 11.69 10.67 10.11
Average equity to average assets 9.85 10.34 10.71 10.95 10.99
Net interest spread (tax equivalent basis) 3.18 3.50 3.48 3.53 3.63
Net interest margin (tax equivalent basis) 3.80 4.13 4.10 4.15 4.14
Dividend payout ratio 43.15 39.95 39.63 37.01 30.15
* Certain prior year amounts have been reclassified to conform with the 1998 presentation. These reclassifications
had no impact on net income.
** Includes a $337,000 charge to 1998 earnings attributed to the formation of a passive investment company. Excluding
this charge, net income would have been $6,682,000. This passive investment company was formed to lower the
Company's effective tax rate in future years.
*** Per share data has been restated to reflect a 6-for-5 stock split effected in the form of a stock dividend on June
19, 1996, and a 2-for-1 stock split effected in the form of a stock dividend on December 1, 1997.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
TABLE OF CONTENTS
Selected Consolidated Financial Data .............................. 1
Letter to Shareholders ............................................ 2
Growth and Expansion .............................................. 5
Technology ........................................................ 6
BCI Financial Corporation ......................................... 7
Brokerage ......................................................... 8
Management's Discussion and Analysis .............................. 9
Report of Independent Accountants ................................. 21
Consolidated Statements of Condition .............................. 22
Consolidated Statements of Income ................................. 23
Consolidated Statements of Shareholders' Equity ................... 24
Consolidated Statements of Cash Flows ............................. 25
Notes to Consolidated Financial Statements ........................ 26
Shareholder Information ........................................... 40
Bancorp Connecticut, Inc. Directors and Officers .................. 41
SSB Directors and Officers ........................................ 42
1
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
TO OUR
SHAREHOLDERS:
- ---------------------------
[IMAGE OMITTED]
Robert D. Morton
President and
Chief Executive Officer
of BancorpConnecticut, Inc.
- ---------------------------
Bancorp Connecticut, Inc. and its subsidiary SSB had another challenging and
exciting year. Net income for 1998 amounted to $6,345,000, or $1.14 per diluted
share, compared to $5,896,000, or $1.08 per diluted share in 1997. Excluding a
one-time write-down of $337,000 recorded in the fourth quarter of 1998, net
income would have been $6,682,000, or $1.20 per diluted share--up 13.3% for the
year. This write-down of a previously recorded deferred tax asset was the result
of the formation of a passive investment company (SSB Mortgage Corporation) that
will enable the Company to reduce its effective tax rate in 1999 and thereafter.
We expect to recover this write-down in less than one year through tax savings
on pretax income. Many other initiatives were undertaken in 1998 to strengthen
the Company and grow our franchise. These include the August 1998 opening of a
new branch office on Route 5 in Wallingford, the formation of BCI Financial
Corporation (an indirect auto-finance subsidiary of SSB), and the midyear
conversion of virtually every computer system in the Bank. All in all, we had a
good year.
At the same time, the price action of our stock in 1998 was somewhat
disappointing--particularly in light of the many things that we accomplished to
make your Company better. For example, for the sixth consecutive year, Bancorp
Connecticut, Inc. set all-time records in total assets, loans, deposits, equity
capital and net income. In addition, the Company had solid growth in noninterest
income and increased its cash dividends paid. It also performed quite well
relative to its peer group. Nevertheless, financial performance and share-price
performance have at times seemed unrelated over the past four or five quarters.
In my judgement, this was due to a number of unique circumstances. For instance,
in late 1997, as regional bank-merger activity approached a crescendo, our
Company split its common shares 2 for 1--simultaneously driving our share price
to an all-time high. This localized speculative fever in bank stocks eventually
broke, which we knew it would. In addition, late in the third quarter of last
year, severe international turmoil affected the entire equity market and
particularly bank stocks. There was a worldwide liquidity crisis that, even
recently, has had lingering effects on the domestic stock market. This has been
particularly the case with New England bank stocks. The smaller the company, the
smaller the market capitalization and the less liquid its common shares. We are
very aware of this situation, which has nothing whatsoever to do with financial
performance. In fact, one could easily make the case that the Company's share
price is undervalued. It is worth noting too that patience and long-term
thinking has its rewards.
2
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
-----------------------
OVER FIVE YEARS,
BANCORP HAS SPLIT ITS
SHARE PRICE THREE
TIMES, UNDERTAKEN A
SIGNIFICANT STOCK
REPURCHASE PROGRAM,
INSTITUTED A DIVIDEND
REINVESTMENT PROGRAM
AND RAISED OUR CASH
DIVIDEND EACH YEAR.
-----------------------
The Company continues to be well positioned for the new millennium. In 1998, we
invested heavily for the future. Our new Wallingford office opened in late
summer and is off to an excellent start. In addition to Wallingford, the Meriden
and Cheshire market areas are an important part of our business plan in the
years ahead. At midyear, we converted the Bank's entire computer operating
system to an in-house, client-server-based mode that will improve customer
service and is compliant with Year 2000 readiness requirements. Late in the
second quarter of last year, the Bank formed a subsidiary, BCI Financial
Corporation. This company has been primarily involved in the indirect
auto-finance business which we think holds great potential for generating
consumer loan volume for SSB and fee income through the sale of loan production
to other financial institutions. It, in fact, will play an important role in our
business plan as we look to the future.
We continue to grow and develop our extensive menu of products and services. For
instance, commercial-relationship banking has assumed a more important role in
the Company's plans as the Bank strives to take on a more commercially-oriented
focus. Toward this end, the introduction of comprehensive PC-based,
cash-management services will provide a new source of fee income and enable us
to serve our existing customers better and attract commercial business in all
areas of the state. In addition, the Financial Services area is an important
source of fee income as well. At year-end, trust customer assets under
investment management had grown to almost $83 million while our full-service
brokerage unit (offering products through Infinex Financial Group) produced
record results. The brokerage unit is primarily responsible for the sale of
mutual funds, annuities and other selected insurance products to our customers.
In 1999, the Bank intends to broaden its product offerings of other insurance
products through a strategic alliance with one or more established vendors.
Our banking subsidiary, SSB, continued to do very well on both the consumer and
commercial banking fronts. For example, transaction-based deposit accounts
increased more than 50% on a year-to-year basis while commercial loans (which
now represent 30% of all loans) rose 11.7% as compared to year-end 1997. Local
decision making, "reasonable" banking fees, and great customer service have made
this success possible. As we reaffirm our commitment to community banking
excellence, SSB is focusing even more intently on providing superior customer
service. Being more responsive to our customers in terms of problem resolution,
accuracy and promptness is a particularly critical ingredient in our business
plan. Toward this end, in the first quarter of 1999, the Bank designated Richard
Fracasso, a senior executive officer of SSB and head of Consumer Banking, to be
responsible for bank-wide customer service.
3
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
The competitive nature of our business also continues to change and, in some
cases, quite dramatically. As the national and regional economies strengthened
and the level of market interest rates declined markedly, the level of price
competition for loans and deposits intensified--not unlike the late 1980s--while
non-bank financial institutions such as brokerage firms, mortgage companies and
credit unions continued to compete aggressively without the regulatory mandates
imposed on the banking industry. Despite this intense competition, we have
managed to stay ahead of our peers in terms of financial performance and plan to
continue to do so.
We also continue to analyze and review opportunities to grow our franchise. For
instance, a few larger regional banks may well divest some of their smaller or
medium-sized branch offices and this eventuality may work to our benefit. At
this point, one or two strategically placed offices to develop
commercial-related business might be of interest to us. In addition, we have not
ruled out small bank acquisitions or mergers, but the remaining small banks that
are publicly owned in Connecticut are few. Recent acquisition prices still
remain high relative to either our share price or multiples of earnings paid.
Nonbank subsidiaries, similar to our auto-finance unit, are more attractive
because of their ability to generate both loan volume and noninterest income
quickly.
Clearly, the Company is ready for the Year 2000, or Y2K as the issue is known.
As we mentioned previously, the Bank converted its entire operating system and
all of its components to a Year 2000 certified vendor in mid-1998. Banks are
probably the most well prepared industry in the nation, owing to the persistent
oversight of government regulators since early 1998. SSB, as part of a
bank-holding company, is subject to examination by the Federal Reserve Bank, the
FDIC and the Connecticut State Banking Department. Except for some isolated
testing, we will be prepared for Y2K before you read this report. We are looking
forward to measurable productivity improvements with our new operating system,
as well as the introduction of new products and services in the first half of
1999. Most notably, they will include Internet banking and bill-paying services.
As a Company, we are still very much focused on improving shareholder value.
Over the past five years, Bancorp Connecticut has split its share price three
times, undertaken a significant stock repurchase program, instituted a dividend
reinvestment program and raised our cash dividend each year. During this period,
we have also continued to produce record earnings each year. As discussed
previously, liquidity of our stock remains an issue and one which we hope to
improve over time. First and foremost, however, is the execution of our
aggressive business plan for 1999. We plan to be around for the millennium,
which will mark the Bank's 140th anniversary. At the same time, as a publicly
owned company, we are very aware of and continue to review all of our strategic
options.
The directors, officers, and staff are grateful for your continued interest and
support.
Sincerely,
/s/ Robert D. Morton
- ------------------------
Robert D. Morton
President and Chief Executive Officer
4
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
GROWTH AND EXPANSION
--------------------
- ------------------------- --------------------------
OUR SUCCESS HAS NOT BEEN [IMAGE OMITTED]
LIMITED TO THE COMMERCIAL Ray Jannelli and Donna
AREA -- CONSUMER LOAN AND Ierardi, Branch Manager of
DEPOSIT ACTIVITY ALSO the Wallingford Office.
EXCEEDED PROJECTIONS. --------------------------
- -------------------------
IN AUGUST 1998, SSB ESTABLISHED A BRANCH OFFICE IN WALLINGFORD, CONNECTICUT AT
950 NORTH COLONY ROAD, EXPANDING ITS MARKET AREA AND EXTENDING ITS BRANCH
NETWORK BEYOND SOUTHINGTON.
----------
Wallingford was selected as our first out-of-town branch to capitalize on the
consolidation in the banking industry and address the needs of businesses that
desire more personal attention. Recognizing this as a key success factor, we
staffed the branch with experienced professionals like Ray Jannelli, Vice
President, who directs our commercial business efforts. Local decision making
and our timely entry into the Wallingford market resulted in loan and deposit
activity exceeding projections.
Overall, the bank's growth in deposits continued to reflect more transaction
accounts, including growth in our business accounts as well as our popular Money
Fund Max Account, a consumer checking account, paying a money market rate. Loan
growth reflected our continued emphasis on meeting the banking needs of
businesses and professional organizations.
5
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
TECHNOLOGY
----------
--------------------
---------------------------- THE BANKING INDUSTRY
[IMAGE OMITTED] HAS BEEN CITED AS ONE
Lynndel Bartulis, Vice OF THE MOST PREPARED
President, chairs the Bank's INDUSTRIES IN THE
Year 2000 Compliance and NATION.
Readiness Team. --------------------
----------------------------
TECHNOLOGY IMPROVEMENTS PLAYED A MAJOR ROLE AT SSB THROUGHOUT THE YEAR AND WILL
CONTINUE TO BE AN IMPORTANT FACTOR IN THE NEW MILLENNIUM.
----------
- ------------------
[IMAGE OMITTED]
SSB's new in-house
computer system.
- ------------------
In July, we installed a new in-house computer system to position SSB to better
meet customer demand for new and enhanced products and services such as home
banking and bill paying services. This new system is Year 2000 compliant,
further supporting our decision to upgrade to this state-of-the-art technology.
As with all industries, Year 2000 readiness is a top priority in 1999. The
banking industry has been cited as one of the most prepared industries in the
nation. The bank's progress in preparing for the Year 2000 is regulated,
examined and monitored by three regulatory agencies: the FDIC, the Connecticut
State Banking Department and the Federal Reserve Bank.
In 1997, SSB established an internal committee to address Year 2000 issues,
including the system upgrade mentioned, the testing of all systems and the
review of all operating procedures. All that remains are a few isolated testing
routines that will be completed in the second quarter of 1999. SSB will be ready
for the Year 2000.
- -----------------------------
[IMAGE OMITTED]
Fran LaPila, teller, utilizes
SSB's new computer system to
assist a customer.
- -----------------------------
6
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
BCI FINANCIAL CORPORATION
-------------------------
---------------------
WITH FAST TURNAROUND
OF LOAN APPLICATIONS,
COMPETITIVE RATES AND
SUPERIOR CUSTOMER
SERVICE, THE COMPANY
EXCEEDED ITS LOAN
PRODUCTION OBJECTIVE
FOR THE YEAR.
---------------------
FORMED AS A SUBSIDIARY OF SSB IN MID-1998, BCI FINANCIAL PROVIDES THE BANK WITH
AN EFFECTIVE DELIVERY CHANNEL FOR AUTO LOAN FINANCING.
----------
With consumers increasingly receiving their financing directly from the
dealership, BCIF's team of experienced professionals provides quick turnaround
of loan applications, competitive rates and superior customer service.
In 1999, BCIF will expand to work with more dealerships throughout the state of
Connecticut and establish relationships with other financial institutions for
the sale of loan production. This expansion of production and sales channels
will provide a growing stream of loan volume and a new source of noninterest
income to the bank.
------------------------------
[IMAGE OMITTED]
Tim Rourke, President of BCIF
with customer, Robert Winner,
Finance Manager for Richard
Chevrolet in Cheshire, CT.
------------------------------
7
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
BROKERAGE
---------
---------------------
SSB'S BROKERAGE
SERVICES UNIT,
OFFERED THROUGH
INFINEX FINANCIAL
GROUP, PERFORMED VERY
WELL IN 1998.
---------------------
SSB's brokerage services unit (with products offered through Infinex Financial
Group) had an outstanding year in assisting our customers with their financial
planning needs. Managed by David Smith, Investment Executive, this unit provides
convenient access to:
o Mutual funds
o Fixed, indexed and variable annuities
o Individual stocks and bonds
o Retirement plans/IRA's
o Life insurance products
o Long-term care insurance
David works closely with his clients by helping them understand and select the
best products to meet their financial goals. Developing plans for retirement or
college education are just some of the ways David and his staff have provided
sound financial advice to our customers.
---------------
[IMAGE OMITTED]
---------------
8
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
GENERAL
The following discussion and analysis presents a review of the financial
condition and results of Bancorp Connecticut, Inc. (the "Corporation"). Since
Southington Savings Bank (the "Bank") is the sole subsidiary of the Corporation,
the Corporation's earnings and financial condition are predicated almost
entirely on the performance of the Bank. This review should be read in
conjunction with the consolidated financial statements and other financial data
presented elsewhere herein.
The Bank's results of operations depend primarily upon the difference between
the interest, dividends and fees earned on its loan and investment portfolios
and the interest paid on its deposits and borrowings. In addition, the Bank's
income is affected by the provision for loan losses, the fees it charges for its
financial services, security gains and losses, administrative expenses, other
real estate expenses and income taxes.
The Bank has two subsidiaries. BCI Financial Corporation ("BCIF"), an indirect
auto finance sales company, commenced operations April 23, 1998. During the
fourth quarter of 1998, the Bank formed a passive investment company, SSB
Mortgage Corporation, to take advantage of changes in Connecticut state tax
statutes, which will serve to lower the Corporation's effective tax rate
beginning in 1999.
INVESTMENTS
On December 31, 1998, investment securities totaled $217,333,000 as compared to
$166,712,000 at year-end 1997, an increase of 30.4% primarily due to the
implementation of a strategy to purchase approximately $43 million of U.S.
Government and agency obligations, including mortgage participation
certificates. The investments were funded by broker repurchase agreements and
Federal Home Loan Bank borrowings to provide a positive net interest spread. An
increase of $5.2 million in retail repurchase agreements from December 31, 1997
was also primarily invested in these securities as well as capital trust
preferred securities. Investments in U.S. Government and agency obligations,
mortgage-backed securities and capital trust preferred securities increased
$20,138,000, $27,635,000 and $8,914,000, respectively, from December 31, 1997.
Net unrealized gains within the investment portfolio at December 31, 1998 were
$1,251,000 as compared to $3,146,000 at year-end 1997.
On December 31, 1998, approximately 69.6% or $41,200,000 of the marketable
equities securities portfolio was comprised of money market preferred stocks.
These securities are highly liquid, reprice every 49 days and are subject to the
tax advantages of the Federal and state dividends received deductions.
The following table sets forth the carrying amount of investment securities at
the dates indicated:
December 31,
------------------------------------
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Held-to-maturity (at cost):
United States Government and
agency obligations $ -- $ -- $ 22,651
Municipal bonds -- -- 3,252
Mortgage-backed securities -- -- 18,194
- --------------------------------------------------------------------------------
TOTAL HELD-TO-MATURITY $ -- $ -- $ 44,097
================================================================================
Available-for-sale (at market):
United States Government and
agency obligations $ 47,755 $ 27,617 $ 15,067
Municipal bonds 3,683 3,432 --
Capital trust preferreds 12,966 4,052 --
Mortgage-backed securities 93,131 65,496 26,216
Marketable equity securities 59,204 61,815 56,531
Mutual funds 594 4,300 7,701
- --------------------------------------------------------------------------------
TOTAL AVAILABLE-FOR-SALE $217,333 $166,712 $105,515
================================================================================
9
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
LOANS
-----
Loans increased $22,992,000 or 9.0% to $278,440,000 at December 31, 1998 from
$255,448,000 at December 31, 1997 primarily due to a higher volume of commercial
and commercial real estate loan originations and loans closed by BCIF, the
Bank's auto loan financing subsidiary. Commercial loans increased $5,565,000 or
14.9% and represented 15.0% of the loan portfolio at December 31, 1998.
Commercial real estate mortgages increased $3,365,000 or 8.6%, representing
approximately 14.9% of total loans. Consumer loans increased $10,688,000 or
22.3% primarily due to loans closed by BCIF. At December 31, 1998, the consumer
loan portfolio of $58,560,000 consisted of 57.4% of home equity loans and lines
of credit, 32.3% automobile loans and 10.3% other consumer loans.
At year-end 1998, loans collateralized by residential real estate, including
home equity loans and lines of credit, represented 60.8% of the total loan
portfolio.
The following table shows the Bank's loan portfolio at the end of the last five
years.
December 31,
----------------------------------------------------
(in thousands) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Residential real estate $137,326 $134,494 $134,000 $132,566 $125,833
Commercial real estate 42,408 39,043 35,472 34,598 33,660
Real estate construction 3,689 3,003 6,234 2,463 2,233
Commercial 42,857 37,292 37,050 31,971 25,753
Consumer 58,560 47,872 39,388 35,556 33,063
- --------------------------------------------------------------------------------
TOTAL LOANS $284,840 $261,704 $252,144 $237,154 $220,542
================================================================================
The following table shows the maturity and repricing of loans (excluding
commercial and residential real estate mortgages and consumer loans outstanding)
as of December 31, 1998. Also provided are the amounts due after one year
classified according to the sensitivity to changes in interest rates.
Maturing or Repricing
-------------------------------------------
Within After one After
one but within five
(in thousands) year five years years Total
- --------------------------------------------------------------------------------
Real estate construction $ 3,689 $ -- $ -- $ 3,689
Commercial 31,961 10,025 871 42,857
- --------------------------------------------------------------------------------
TOTAL $35,650 $10,025 $ 871 $46,546
================================================================================
Loans maturing/repricing after one year with:
Fixed interest rates $ 6,560 $871
Variable interest rates 3,465 --
- --------------------------------------------------------------------
TOTAL $10,025 $871
====================================================================
NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Nonperforming assets declined to $1,599,000 at year-end 1998 as compared to
$4,039,000 at year-end 1997. Nonperforming loans decreased to $1,265,000 or 0.4%
of total loans as compared to $2,861,000 or 1.1% at December 31, 1997.
Foreclosed real estate at year-end 1998 declined to $334,000 from $1,178,000 at
year-end 1997 primarily from the sale of 5 lots of a 17-lot residential
subdivision at a net gain of $113,000. At year-end 1998, the unsold lots in the
subdivision represented 69.6% of total foreclosed real estate.
10
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
The following table shows the Bank's nonperforming assets at the end of the last
five years.
December 31,
-----------------------------------------------
(dollars in thousands) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Nonaccrual loans
Residential real estate $ 705 $1,988 $2,060 $3,650 $3,392
Commercial real estate 402 258 337 1,134 1,465
Commercial 60 387 306 1,062 1,030
Consumer 98 228 236 410 340
- --------------------------------------------------------------------------------
Total nonaccrual loans 1,265 2,861 2,939 6,256 6,227
Accruing loans past due 90
days or more -- -- -- -- --
- --------------------------------------------------------------------------------
Total nonperforming loans 1,265 2,861 2,939 6,256 6,227
Foreclosed real estate 334 1,178 1,367 872 641
- --------------------------------------------------------------------------------
Total nonperforming assets $1,599 $4,039 $4,306 $7,128 $6,868
================================================================================
Nonperforming loans as a
percentage of total loans 0.44% 1.09% 1.17% 2.64% 2.82%
================================================================================
Nonperforming assets as a
percentage of total assets 0.31% 0.91% 1.03% 1.86% 1.92%
================================================================================
Restructured loans in
compliance with modified
terms not included above -- -- -- -- --
================================================================================
The Bank classifies loans as being on nonaccrual status when they become 90 days
or more past due. Interest income is then reversed and not recognized until
received. Interest income that would have been recorded during 1998, 1997 and
1996 on all nonaccrual loans under the original loan terms was approximately
$203,000, $335,000 and $354,000, respectively. Actual income collected on these
loans during 1998, 1997 and 1996 was $90,000, $201,000 and $228,000,
respectively.
Management reviews the loan portfolio on a quarterly basis to identify loans
that are impaired. A loan is considered impaired if, based on current
information and events, it is probable that the Bank will be unable to collect
the scheduled payments of principal and interest when due, according to the
contractual terms of the loan agreement. Generally, nonaccrual loans as well as
classified loans past due greater than 60 days are reviewed for impairment as
well as other loans that are monitored internally due to possible credit risk.
Smaller-balance homogeneous loans which consist of residential mortgages and
consumer loans are evaluated collectively and reserves established based on
historical loss experience. The measurement of impairment is based on the fair
value of collateral for collateral-dependant loans or the present value of
future cash flows for other loans.
The following table illustrates the amount of loans identified as impaired and
the basis used for measuring impairment as of December 31, 1998.
Basis of measurement
-------------------------------------------
Present value
of expected
Fair value future
(in thousands) of collateral cash flow Total
- --------------------------------------------------------------------------------
Commercial real estate $1,301 $ -- $1,301
Commercial 532 113 645
- --------------------------------------------------------------------------------
Total impaired loans $1,833 $113 $1,946
================================================================================
11
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
The Bank also has $5,380,000 in real estate loans and $569,000 in other loans
that are current or less than 90 days past due. These loans were not deemed
impaired but were considered potential problem loans. A loan is considered a
potential problem loan if it is risk-rated substandard or doubtful in accordance
with regulatory definitions or has demonstrated a pattern of past due payments
and/or deterioration of collateral value. A decline in Connecticut's economy and
local real estate values as well as the impact of higher interest rates on
adjustable rate notes could hasten the movement of loans from potential problem
loan status to nonperforming loans and negatively impact earnings. Management is
constantly monitoring the status of these loans and reviews their classification
quarterly.
The allowance for loan losses is maintained at a level that management believes
is prudent and adequate to absorb losses within the loan portfolio. As of
December 31, 1998, the allowance was $5,549,000 or 438.7% of nonperforming loans
as compared to $5,306,000 or 185.5% of nonperforming loans on December 31, 1997.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 5,306 $ 4,875 $ 5,488 $ 6,136 $ 6,447
Charge-offs:
Residential real estate (29) (219) (264) (341) (238)
Commercial real estate -- -- (169) (161) (172)
Commercial -- (94) (446) (227) (225)
Consumer (126) (76) (334) (312) (141)
- -----------------------------------------------------------------------------------------------------
Total (155) (389) (1,213) (1,041) (776)
- -----------------------------------------------------------------------------------------------------
Recoveries:
Residential real estate 35 14 8 2 1
Commercial real estate -- 18 20 -- 1
Commercial 30 96 51 98 89
Consumer 65 92 86 113 132
- -----------------------------------------------------------------------------------------------------
Total 130 220 165 213 223
- -----------------------------------------------------------------------------------------------------
Net charge-offs (25) (169) (1,048) (828) (553)
Provision for loan losses 268 600 435 180 242
- -----------------------------------------------------------------------------------------------------
Balance at end of year $ 5,549 $ 5,306 $ 4,875 $ 5,488 $ 6,136
=====================================================================================================
Ratio of net charge-offs to
average loans outstanding 0.01% 0.07% 0.43% 0.36% 0.26%
=====================================================================================================
</TABLE>
The following table illustrates the allocation of the allowance for loan losses
to each loan category for the last five years. Actual losses from loans of any
type, however, may be charged against the total amount of the allowance
regardless of the allocations.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
(dollars in thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate $ 559 48% $ 652 51% $ 659 53% $ 367 56% $ 479 57%
Commercial real estate 847 15 804 15 752 14 803 15 1,129 15
Real estate construction 48 1 38 1 83 2 35 1 33 1
Commercial 1,343 15 1,194 15 1,162 15 1,209 13 1,069 12
Consumer 962 21 756 18 620 16 541 15 565 15
Unallocated 1,790 -- 1,862 -- 1,599 -- 2,533 -- 2,861 --
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL $5,549 100% $5,306 100% $4,875 100% $5,488 100% $6,136 100%
================================================================================================================================
</TABLE>
12
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
DEPOSITS
Total deposits increased $28,264,000 or 8.9% for 1998 as compared to year-end
1997. NOW account deposits increased $17,629,000 or 70.8% for 1998 as compared
to year-end 1997 primarily due to the promotion of the Bank's money fund
checking product that pays a rate of interest comparable to rates paid on money
market mutual funds. Also during 1998, noninterest-bearing demand deposits,
which provide both a low cost of funding and a source of service fee income,
increased $8,610,000 or 33.4% from year-end 1997 primarily as a result of the
opening of the Wallingford branch and an increased emphasis on relationship
banking with the Bank's commercial customers.
Time certificates of deposit, which range from terms of 3 months to 5 years,
declined $8,828,000 or 5.2% at year-end 1998 as compared to 1997. On December
31, 1998, approximately 73.6% of the certificates of deposit either mature or
reprice within one year. At this time, the Bank does not utilize brokered
deposits as a funding source.
The average daily amount of deposits and rates paid on such deposits for the
past three years are summarized in the following table.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 29,633 0.00% $ 22,248 0.00% $ 19,662 0.00%
NOW accounts 32,846 2.94 19,301 2.35 14,495 1.76
Regular savings 65,778 2.07 61,650 2.25 61,690 2.25
Money market savings 36,555 3.54 33,950 3.34 35,952 3.36
Certificates of deposit 163,196 5.33 171,471 5.48 167,399 5.54
Club accounts 435 2.99 426 3.29 420 3.33
- ------------------------------------------------- -------- --------
TOTAL $328,443 $309,046 $299,618
================================================= ======== ========
</TABLE>
Maturities of time certificates of deposit in amounts of $100,000 or more
outstanding at December 31, 1998 are summarized as follows:
(in thousands)
--------------------------------------------------
3 months or less $ 3,653
Over 3 months through 6 months 4,178
Over 6 months through 12 months 3,142
Over 12 months 7,304
--------------------------------------------------
TOTAL $18,277
==================================================
BORROWINGS
Federal funds purchased and securities sold under agreements to repurchase
increased $25,148,000 or 45.4% to $80,516,000 at year-end 1998 as compared to
year-end 1997. Repurchase agreements involve the sale of securities to either
broker/dealers or retail customers under agreements to repurchase the identical
securities at a future date. The Bank uses broker/dealer repurchase agreements
to fund specific investment securities transactions. Such repurchase agreements
have maturities of up to 10 years; however, those with terms of three years or
greater may be callable two years after issuance by the broker/dealer. Retail
repurchase agreements are offered primarily to commercial customers as a method
of providing collateral for funds that exceed the maximum regulatory insurance
coverage. As of December 31, 1998, broker/dealer repurchase agreements and
retail repurchase agreements totaled $62,560,000 and $16,181,000, respectively.
The Bank also uses the Federal Home Loan Bank of Boston (the "FHLB") as a source
of funds. Advances (i.e. borrowings) are used primarily to match certain loan
originations and securities purchases as well as to manage the maturities of
interest-bearing liabilities as part of the Bank's overall asset/liability
management strategy. FHLB advances totaled $40,630,000 at year-end 1998 as
compared to $20,630,000 at year-end 1997.
13
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
ASSET/LIABILITY MANAGEMENT AND INTEREST RATE RISK
The Bank's assets and liabilities are managed to maximize net interest income
while maintaining a level of interest rate risk that is prudent and manageable.
Interest rate risk is the sensitivity of net interest income to fluctuations in
interest rates over both short-term and long-term time horizons. Management
establishes overall policy and interest rate risk tolerance levels which are
administered by the Bank's Asset/Liability Committee on a monthly basis.
Interest rate risk is measured through the use of a static interest rate
sensitivity report and a dynamic simulation model.
The interest-rate sensitivity report measures the difference between
interest-earning assets that reprice or mature within various time horizons and
interest-bearing liabilities that reprice or mature within the same time
horizons. Assumptions are also made on the rate of prepayment of principal on
loans and mortgage-backed securities and an estimate, based on historic trends,
that regular savings deposits will transfer to higher yielding deposits at an
annual decay rate of 3.5%. To limit exposure to fluctuating interest rates, it
is the policy of the Bank to maintain the difference (GAP) between interest
rate-sensitive assets and interest rate-sensitive liabilities within a range of
+/- 10% of total assets in the one-year time frame. At December 31, 1998,
rate-sensitive assets exceeded rate-sensitive liabilities in a one-year time
frame by $9,046,000 or 2.0% of total assets.
Although the rate sensitivity analysis indicates how well matched maturing or
repricing assets and liabilities are in a given time frame, it does not measure
the asymmetrical movement of asset and liability yields. The Bank utilizes a
simulation model to measure the potential change in net interest income due to
an immediate increase or decrease in market interest rates of up to 200 basis
points. Various assumptions regarding the shape of the yield curve, the pricing
characteristics of loan and deposit products and borrowings and prepayments of
loans and investments are built into the model. The following table indicates
that the estimated percentage change in net interest income for the next twelve
months from a change in interest rates of 200 basis points is within the 10%
tolerance limit set by management.
Change in Rate % Change in Net Interest Income
- --------------------------------------------------
+200 bp -2.71%
- -200 bp -0.95%
Due to the numerous assumptions built into the simulation model, actual results
may differ from estimated results. Factors other than changes in interest rates
could also impact net interest income. For example, the majority of the Bank's
deposit base is composed of local retail customers who tend to be less sensitive
to interest rate changes than other funding sources. In addition, an increase in
competitive pricing could cause loan yields to decline and deposit costs to
rise.
Both the rate sensitivity analysis and simulation model indicate that a rise in
interest rates would negatively impact earnings. Strategies for maintaining risk
limits may include but are not limited to the purchase and sale of loans,
borrowing from the Federal Home Loan Bank of Boston, the purchase and sale of
available-for-sale securities and a change in the composition of deposits.
Although not utilized in 1998, interest rate swaps may be used to correct
interest rate mismatches. Strategies utilized in 1998 include the sale of fixed
rate newly originated 30-year mortgages into the secondary mortgage market with
servicing released, the addition of intermediate term fixed rate home equity and
automobile loans and the promotion of the Bank's money fund checking product. In
addition, to increase net interest income, the Bank purchased $43 million of
U.S. Government and agency obligations, including mortgage participation
certificates, which were funded by repurchase agreements and Federal Home Loan
Bank borrowings.
The Bank maintains a trading account, designated as trading securities, for the
purpose of generating gains on short-term fluctuations in the market price of
bond and equity securities. The Bank's Board of Directors approves trading
policy limits, which include the type of securities that can be purchased as
well as maximum size and maturity limits. In addition, they also establish
monthly and quarterly net trading loss limits. If the monthly or quarter-to-date
net trading losses exceed the predetermined loss limit, trading activity will
cease and will not resume until the Board approves continuance.
14
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------------------------
(dollars in thousands) 1-3 months 4-6 months 7-12 months 1-5 years 5+ years Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS SUBJECT TO INTEREST RATE ADJUSTMENT:
Short-term investments $ 172 $ -- $ -- $ -- $ -- $ 172
Investment securities 50,491 7,874 10,004 57,730 94,066 220,165
Adjustable rate mortgages 25,572 15,919 32,124 40,669 -- 114,284
Fixed rate mortgages 6,063 4,305 8,053 36,978 19,987 75,386
Consumer and commercial loans 26,452 3,623 8,067 37,637 19,391 95,170
- -------------------------------------------------------------------------------------------------------------------------
TOTAL RATE-SENSITIVE ASSETS $108,750 $ 31,721 $58,248 $173,014 $ 133,444 $505,177
=========================================================================================================================
LIABILITIES SUBJECT TO INTEREST RATE ADJUSTMENT:
NOW accounts $ 20,823 $ -- $ -- $ -- $ 21,705 $ 42,528
Regular savings 604 604 1,208 9,326 57,287 69,029
Federal funds purchased and
repurchase agreements 19,836 -- 2,800 32,880 25,000 80,516
Money market deposits 22,965 -- -- -- 16,353 39,318
Certificates of deposit 40,847 35,675 41,511 42,246 -- 160,279
Advances from FHLB 2,000 -- 800 830 37,000 40,630
- -------------------------------------------------------------------------------------------------------------------------
TOTAL RATE-SENSITIVE LIABILITIES $107,075 $ 36,279 $46,319 $ 85,282 $ 157,345 $432,300
=========================================================================================================================
Excess (deficiency) of rate-sensitive assets
over rate-sensitive liabilities $ 1,675 $ (4,558) $11,929 $ 87,732 $ (23,901) $ 72,877
- -------------------------------------------------------------------------------------------------------------------------
Cumulative excess (deficiency) $ 1,675 $ (2,883) $ 9,046 $ 96,778 $ 72,877
=========================================================================================================================
Cumulative rate-sensitive assets as a
percentage of rate-sensitive liabilities 101.6% 98.0% 104.8% 135.2% 116.9%
Cumulative excess (deficiency) as a
percentage of total assets 0.4% (0.7)% 2.0% 21.8% 16.4%
=============================================================================================================
Excluding regular savings:
Excess (deficiency) of rate-sensitive assets
over rate-sensitive liabilities $ 2,279 $ (3,954) $13,137 $ 97,058 $ 33,386 $141,906
- -------------------------------------------------------------------------------------------------------------------------
Cumulative excess (deficiency) $ 2,279 $ (1,675) $11,462 $108,520 $ 141,906
=========================================================================================================================
Cumulative rate-sensitive assets as a
percentage of rate-sensitive liabilities 102.1% 98.8% 106.1% 141.2% 139.1%
Cumulative excess (deficiency) as a
percentage of total assets 0.5% (0.4)% 2.6% 24.5% 32.0%
=============================================================================================================
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity represents the ability of the Bank to meet customer loan demand,
depositor requests for withdrawals and pay operating expenses. The Bank's
sources of funding are from deposit growth, loan repayments, borrowings,
maturities, prepayment and sales of its securities and income generated from
operations.
The Bank also has the capacity to borrow funds from the Federal Home Loan Bank
of Boston, of which it is a member. The Bank is eligible to borrow against its
assets in an amount not to exceed collateral as defined by the FHLB. As of
December 31, 1998, qualified collateral totaled $129,059,000. The Bank's actual
borrowings on that date were $40,630,000.
As of December 31, 1998, the Bank had liquid assets consisting of cash, Federal
funds sold, money market preferred stock and unpledged U.S. Government and
agency obligations totaling $86,978,000 or 16.7% of total assets, indicating an
acceptable level of liquid assets and within the Bank's policy limits. The Bank
also had additional marketable equity securities with a market value of
$18,598,000 that could be converted to cash if necessary. At December 31, 1998,
commitments to extend credit totaled $33,683,000 as compared to $47,489,000 at
December 31, 1997.
The Corporation's improvement in earnings during 1998 led to an increase in
dividend payments to shareholders. Dividends paid in 1998 totaled $2,773,000 or
$0.54 per share as compared to $2,355,000 or $0.46 per share in 1997 (reflecting
an adjustment per share for a two-for-one stock split on December 1, 1997 which
was effected in the form of a stock dividend). See Note 10 to the Corporation's
Consolidated Financial Statements for a description of the applicable
restrictions on the Corporation's ability to pay dividends.
15
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
Shareholders' equity at year-end 1998 increased to $49,916,000 as compared to
$46,947,000 as of the prior year-end. Under regulatory definitions, an
institution is considered well capitalized (the highest rating) if its leverage
capital ratio is 5% or higher, its Tier 1 risk-based capital ratio is 6% or
higher and its total risk-based capital ratio is 10% or higher. On December 31,
1998, the Corporation had a leverage capital ratio of 9.5%, a Tier 1 risk-based
capital ratio of 16.0% and a total risk-based capital ratio of 17.3% as compared
to 10.4%, 15.9% and 17.2% for 1997, respectively.
YEAR 2000
- ---------
PROJECT PLAN
Management recognizes the major impact the Year 2000 computer chip problem will
have on all corporations doing business. The following plan has been implemented
to identify critical systems that must be modified to avoid any disruption of
daily business. Several of the phases are ongoing concurrently.
AWARENESS PHASE: Management created a Year 2000 project team to develop an
overall Year 2000 strategy, provide education to employees and to establish
corporate accountability. The awareness phase was completed February 28, 1998.
RISK ASSESSMENT PHASE: Beginning in March 1998, an assessment of all hardware,
software, networks and other processing platforms was performed. Year 2000
problems have been identified and mission critical applications prioritized. In
July 1998, the Bank completed the conversion to a new core processing system
utilizing Jack Henry & Associates software and IBM AS400 hardware, both of which
have been certified Year 2000 compliant. This new data processing solution
addresses many of the Bank's mission critical applications. The risk assessment
phase includes the development of contingency plans for all mission critical
applications. The development of contingency plans lagged behind the original
target date because of the need to reevaluate the risk assessments as a result
of the bankwide effort to convert to the new core processing system. The risk
assessment phase was completed on December 31, 1998.
RENOVATION PHASE: Management established a December 31, 1998 target date for
replacement or modification of the Bank's mission critical internal applications
to allow for a full year of testing. This phase was essentially completed ahead
of time with the replacement of the core data processing system.
VALIDATION PHASE: This phase provides for the testing of hardware, software,
interfaces and integration with other systems. It also includes testing and
certifying third parties for Year 2000 readiness. The Bank's new core processing
system has been certified Year 2000 compliant by its manufacturer. However, the
Bank intends to perform its own independent tests rather than utilize proxy
testing results from the vendor. In addition, the Bank intends to retain the
services of an independent party to review overall plan effectiveness and the
results of testing. Management expects to complete the validation phase on all
critical systems by June 30, 1999.
IMPLEMENTATION PHASE: As applications become certified they will be considered
to be placed into service. Management will assess the impact of any system
failing the certification tests and will implement the contingency plan
developed for that application. The Bank's primary internal technological
systems including core processing system, teller equipment and local area
network have already been placed in service. Management expects implementation
of all critical systems by June 30, 1999.
COSTS
In 1997, the Bank completed an extensive analysis of its data processing systems
and decided to bring its core processing system in-house rather than continue in
a service bureau relationship environment. The decision to move to an in-house
solution was primarily based on the improved operating effectiveness, enhanced
new product development and expanded management reporting the new system could
provide. However, the additional benefit of the decision was the purchase of a
mainframe computer, banking software and peripheral devices that have already
been certified Year 2000 compliant. The cost of the new software and hardware
(which includes all new teller equipment) acquired for the July 1998 conversion
totaled $1,991,000. The cost has been capitalized and is being depreciated over
the useful lives of the assets, approximately $437,000 per year.
The Corporation does not separately track the internal costs associated with its
Year 2000 readiness project, and such costs are primarily the portion of an
employee's time spent on Year 2000 related issues.
Due to the recent conversion, the Bank does not expect to incur any additional
significant Year 2000 costs for further equipment replacement. Management
expects to incur Year 2000 readiness costs primarily from labor costs in the
testing and validation of systems, professional consulting costs and marketing
costs to keep customers informed of Year 2000 progress. Management has budgeted
$100,000 for those costs.
16
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
RISKS AND CONTINGENCIES
Based upon a self-assessment of its current Year 2000 readiness, management
believes that the greatest Year 2000 uncertainties and exposures are not within
its own technological systems but within its third-party vendor relationships
and its commercial borrowers.
As of year-end 1998, the Bank has devoted the majority of its efforts to convert
to the new core processing system. By June 30, 1999, when the validation phase
of the Year 2000 will be completed, significant third-party vender exposures
will be identified and contingency plans developed to reduce those exposures.
The Bank has completed mailings to its larger commercial borrowers. These
mailings included Year 2000 thought provoking information and a questionnaire to
be completed by the borrower so that the Bank could analyze individual responses
to critical issues. In addition, the Bank has completed the process of randomly
selecting and contacting an appropriate number of borrowers with smaller overall
relationships. This has addressed a mixture of various sized relationships
within the entire commercial portfolio. Risk data as to what the borrower is
doing to ensure Year 2000 compliance has been collected and includes the
following assessments: technological capabilities, external vendors,
communications equipment, disaster recovery plans and other operating systems.
The Bank is also subject to the safety and soundness standards for Year 2000
readiness established by the Federal Deposit Insurance Corporation and the State
of Connecticut Banking Department and has completed the Limited Phase 2
examinations by these agencies to date. Management believes it will be able to
comply with all standards set forth by the regulatory agencies.
COMPARISONS OF YEARS ENDED DECEMBER 31, 1998 AND 1997
- -----------------------------------------------------
OVERALL
For 1998, the Corporation had net income of $6,345,000 as compared to $5,896,000
in 1997, an increase of 7.6%. The increase was primarily due to higher net
interest income and net security gains partially offset by increases in
noninterest expenses and establishment of a valuation allowance against a state
deferred tax asset as a result of creating a passive investment company (see
"Income Taxes" and Note 12). Net income generated an annual return on average
assets of 1.29% for 1998 as compared to 1.39% for 1997. Return on average equity
for 1998 was 13.07% as compared to 13.48% for 1997.
INTEREST INCOME
Interest income increased $3,441,000 or 10.8% to $35,345,000 in 1998 as compared
to $31,904,000 in 1997. This increase was attributed to a 15.7% increase in
average interest-earning assets partially offset by lower yields on taxable
investment securities, resulting in the tax equivalent yield on total
interest-earning assets decreasing to 7.67% for 1998 as compared to 8.06% for
1997.
INTEREST EXPENSE
Interest expense increased $2,279,000 or 14.0% to $18,506,000 in 1998 as
compared to $16,227,000 for 1997. The rise in interest expense was largely due
to a 15.7% increase in average interest-bearing liabilities, partially offset by
a reduction in the rates paid primarily resulting from a decline in the general
level of interest rates. In addition, a greater utilization of repurchase
agreements and FHLB borrowings as a funding source caused the cost of funds to
decrease slightly to 4.49% for 1998 as compared to 4.56% for 1997 as the average
rates on these borrowings declined 4 basis points and 9 basis points,
respectively, from 1997 average rates.
NET INTEREST INCOME
Net interest income increased $1,162,000 or 7.4% in 1998 as compared to 1997.
The tax equivalent net interest margin for 1998 was 3.80%, down from 4.13% in
1997.
PROVISION FOR LOAN LOSSES
The provision for loan losses for 1998 was $268,000 as compared to $600,000 in
1997, a decrease of 55.3%. Management determines the provision for loan losses
based upon an evaluation of the credit risk associated with the portfolio,
current market conditions and the level of the allowance for loan losses as
compared to nonperforming loans. The decrease in the provision for 1998 is
commensurate with the reduction in nonperforming loans to $1,265,000 at December
31, 1998 from $2,861,000 at December 31, 1997, representing 0.44% and 1.09% of
total loans, respectively. Net charge-offs for 1998 declined to $25,000 as
compared to $169,000 for 1997. As of December 31, 1998, the ratio of loan loss
reserves to nonperforming loans was 438.7% as compared to 185.5% for year-end
1997.
OTHER INCOME
Noninterest income increased $1,140,000 or 49.1% to $3,463,000 in 1998 as
compared to $2,323,000 for 1997. The increase was primarily the result of a
$433,000 or 51.6% increase in investment securities gains partially offset by a
$190,000 or 182.7% decrease in net trading account gains. Favorable market
conditions and a strategic shift in the mix of securities contributed to the
higher level of net realized security gains. A higher level of assets under
management and an increase in
17
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
estate settlement fees resulted in trust fees increasing $134,000 or 27.5% from
the prior year. Brokerage fees increased $272,000 or 191.5% for 1998 as compared
to 1997 due to higher sales volume and greater fee retention.
OTHER EXPENSES
Noninterest expenses increased $1,697,000 or 19.5% in 1998 as compared to 1997.
Salaries and benefits rose $859,000 or 17.9% primarily from higher brokerage
commissions attributed to higher sales volume, staff additions from the start-up
of BCIF and the new Wallingford branch facility and temporary employee cost
associated with the conversion process. Furniture and equipment expense
increased $284,000 or 55.3% due to higher depreciation charges and the write-off
of data processing equipment as a result of the Bank's installation of the new
in-house core processing system. Data processing expense rose to $691,000, an
increase of $123,000 or 21.7%, due to the conversion to and outsourcing of check
image processing and proof of deposit. Advertising expense increased $99,000 or
26.9% as compared to 1997 due to the promotion of the Bank's demand deposit
image statements, money fund checking product and new branch facility. Other
noninterest expense increased $456,000 or 27.1%, reflecting increased fees for
professional services, printing and forms supplies, telephone expense, postage
and a number of miscellaneous expense categories. The increases in these expense
categories are largely associated with BCIF, the Wallingford facility and data
processing. Noninterest expenses in 1998 benefited from a reduction of $124,000
or 263.8% in foreclosed real estate expenses, resulting from fewer properties
under management and gains on sales of foreclosed properties.
INCOME TAXES
The provision for income taxes increased to $3,292,000 in 1998 from $2,803,000
in 1997. The increase was primarily due to the generation of income before taxes
of $9,636,000 in 1998 as compared to $8,698,000 earned in 1997 and a $337,000
charge related to state deferred tax assets to establish a passive investment
company as discussed below. As a result, the effective income tax rates for 1998
and 1997 were 34.2% and 32.2%, respectively, and were lower than the expected
statutory rate due to the Federal and state dividends received deduction and the
Federal tax-exempt status of the Bank's municipal bond investments.
As of December 31, 1998, the Corporation had a net deferred tax asset of
$1,901,000 which was comprised of two separate components. A deferred tax
liability based on the tax effect of the net unrealized holding gains in the
Corporation's available-for-sale investment portfolio totaled $425,000. The
change in this component directly impacts shareholders' equity. In addition, a
deferred asset representing the net effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
those for income tax purposes amounted to $2,326,000. The change in this
component directly impacts earnings. As of year-end, the Corporation has
recorded no valuation allowance against Federal deferred tax assets. A valuation
allowance is not considered necessary for Federal purposes based on sufficient
available Federal taxable income in the carryback period.
On May 19, 1998, the Connecticut state legislature enacted legislation which
permits financial services companies which maintain an office in Connecticut,
and have a minimum of five employees, the authority to create a limited passive
investment company ("PIC") for the purpose of holding for investment loans
collateralized by real estate free from Connecticut corporation business tax.
The regulation is effective for income tax years beginning January 1, 1999.
During the fourth quarter of 1998, the Bank formed a passive investment company,
SSB Mortgage Corporation. The creation of the PIC required the recording of a
valuation allowance of $477,000 against the Bank's deferred Connecticut tax
asset and a related increase in income tax expense of $337,000 for the fourth
quarter of 1998. Subsequently, for tax years beginning January 1, 1999, the
Corporation's effective state tax rate will be eliminated.
COMPARISONS OF YEARS ENDED DECEMBER 31, 1997 AND 1996
- -----------------------------------------------------
OVERALL
For 1997, the Corporation had net income of $5,896,000 as compared to $5,024,000
in 1996, an increase of 17.4%. The increase was primarily due to higher net
interest income and net security gains, supported by a modest increase in other
expenses. Net income for 1997 represents an annual return on average assets of
1.39% as compared to 1.26% for 1996. Return on average equity for 1997 rose to
13.48% from 11.69% for 1996.
INTEREST INCOME
Interest income increased $1,996,000 or 6.7% to $31,923,000 in 1997 as compared
to $29,927,000 in 1996. The increase is primarily attributed to a 5.9% increase
in average interest-earning assets. In addition, higher yields on taxable
investment securities caused the tax equivalent yield on total interest-earning
assets to rise to 8.06% for 1997 as compared to 7.99% for 1996.
INTEREST EXPENSE
Interest expense increased $1,053,000 or 6.94% to $16,227,000 in 1997 as
compared to $15,173,000 for 1996. The primary reason for the rise in interest
expense was a 5.9% increase in interest-bearing liabilities. In
18
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
addition, a greater utilization of repurchase agreements and FHLB borrowings as
a funding source caused the cost of funds to rise slightly to 4.56% for 1997 as
compared to 4.51% for 1996.
NET INTEREST INCOME
Net interest income increased $943,000 or 6.4% in 1997 as compared to 1996. The
tax equivalent net interest margin for 1997 was 4.14%, a slight increase from
4.10% in 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses for 1997 was $600,000 as compared to $435,000 in
1996, an increase of 37.9%. Management determines the provision for loan losses
based upon an evaluation of the credit risk associated with the portfolio,
current market conditions and the level of the allowance for loan losses as
compared to nonperforming loans. The increase in the provision for 1997 was
primarily generated by a rise in nonperforming loans from $2,939,000 at December
31, 1996 to $4,149,000 at June 30, 1997. Management's success in reducing
problem loans, particularly in the fourth quarter of 1997, resulted in a decline
in nonperforming loans at year-end 1997 to $2,861,000 or 1.09% of total loans as
compared to 1.17% at year-end 1996. Net charge-offs for 1997 declined to
$169,000 as compared to $1,048,000 for 1996. As of December 31, 1997, the ratio
of loan loss reserves to nonperforming loans totaled 185.5% compared to 165.9%
for year-end 1996.
OTHER INCOME
Noninterest income increased $618,000 or 36.7% to $2,303,000 in 1997 as compared
to $1,685,000 in 1996. The increase of $495,000 or 144% was primarily the result
of an increase in investment security gains and an $83,000 or a 400% increase in
net gains on securities trading activity. An increase in the volume of
investment securities as compared to 1996 as well as favorable market conditions
both contributed to the higher volume of realized securities gains. A higher
volume of assets under management also resulted in trust fees increasing $30,000
or 6.5% from the prior year. Brokerage fees increased $87,000 or 160.5% in 1997
as compared to 1996 due to an increase in sales volume.
OTHER EXPENSES
Noninterest expenses increased a modest $103,000 or 1.2% for 1997 as compared to
1996. Salaries and benefits rose $188,000 or 4.1% primarily from annual merit
increases and an increase in incentive compensation related to the Corporation's
financial performance. Advertising expense increased $50,000 or 15.6% primarily
from the promotion of a new money fund checking product introduced during 1997.
Data processing costs increased $50,000 or 8.0% primarily from an increase in
the services provided by the Corporation's computer servicer. Noninterest
expenses in 1997 were favorably impacted by a $138,000 or 74.4% reduction in
foreclosed real estate expenses from 1996, resulting from a smaller volume of
properties under management and gains on the sales of OREO properties. Legal
expenses in 1997 also declined $115,000 or 42.4% primarily from lower costs
incurred in administering nonperforming assets in 1997. In addition, legal
expenses for 1996 were higher due to the settlement of a lawsuit.
INCOME TAXES
The provision for income taxes increased to $2,803,000 in 1997 as compared to
$2,381,000 in 1996. The increase was primarily due to the generation of income
before taxes of $8,698,000 in 1997 as compared to $7,405,000 in 1996. The
effective income tax rate for 1997 and 1996 was 32.2% and is lower than the
expected statutory rate due to the Federal and state dividends received
deduction and the Federal tax-exempt status of the Bank's municipal bond
securities.
As of December 31, 1997, the Corporation had a total deferred tax asset of
$1,512,000, which was comprised of two separate components. A deferred tax
liability based on the tax effect of the net unrealized holding gains in the
Corporation's available-for-sale investment portfolio totaled $1,267,000. The
change in this component directly impacts shareholders' equity. In addition, a
deferred asset representing the net effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
those for income tax purposes amounted to $2,779,000. The change in this
component directly impacts earnings. As of year-end, the Corporation has
recorded no valuation allowance against deferred tax assets.
IMPACT OF INFLATION
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles which require the
measurements of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time and due to inflation. Virtually all assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates
typically have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Inflation, however,
may impact a creditor's ability to service debt if the loan is variable in
nature or if the creditor's income stream were to be adversely affected due to
inflationary cycles. In addition, the effects of deflation on real estate values
in Connecticut has a negative impact on a creditor's ability to recover the
principal amount loaned on properties subsequently foreclosed upon. The impact
19
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
of inflationary/deflationary pressures are considered in the Bank's allowance
for loan losses. See Nonperforming Assets and Allowance for Loan Losses.
ACCOUNTING PRONOUNCEMENTS
On June 15, 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 is effective for all fiscal years beginning after June 15, 1999
(January 1, 2000 for the Corporation). SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of the derivative instruments are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. Management anticipates that, since it does not use derivative
instruments, the adoption of SFAS 133 will not have a significant effect on the
Corporation's results of operations or its financial position.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY: INTEREST RATES AND
INTEREST DIFFERENTIAL
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate (c) Balance Interest Rate (c) Balance Interest Rate (c)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans (a)(b) $265,319 $ 22,617 8.52% $256,944 $ 22,255 8.66% $244,298 $ 21,123 8.65%
Taxable investment securities
(at cost) (c) 201,542 13,372 6.63 146,263 10,469 7.16 135,457 9,461 6.98
Municipal bonds (c) 3,446 243 7.05 3,287 232 7.06 3,150 226 7.17
Federal funds sold 5,028 267 5.31 3,859 207 5.36 4,616 240 5.20
Other interest-earning assets 3,006 182 6.05 2,917 145 4.97 2,648 131 4.95
- -------------------------------------------------------------- ------------------ ------------------
Total interest-earning assets 478,341 36,681 7.67 413,270 33,308 8.06 390,169 31,181 7.99
- -------------------------------------------------------------- ------------------ ------------------
Noninterest-earning assets 14,381 11,967 9,697
- ---------------------------------------------------- -------- --------
TOTAL ASSETS $492,722 $425,237 $399,866
==================================================== ======== ========
LIABILITIES AND EQUITY
Interest-bearing liabilities:
NOW and savings deposits $135,179 3,625 2.68% $116,009 3,008 2.59% $113,215 2,882 2.55%
Time deposits 163,631 8,703 5.32 171,897 9,356 5.44 167,819 9,293 5.54
FHLB of Boston advances 32,525 1,795 5.52 24,805 1,491 6.01 18,097 1,029 5.69
Federal funds purchased and
securities sold under
agreements to repurchase 80,592 4,383 5.44 43,244 2,371 5.48 37,124 1,969 5.30
- -------------------------------------------------------------- ------------------ ------------------
Total interest-bearing liabilities 411,927 18,506 4.49 355,955 16,226 4.56 336,255 15,173 4.51
- -------------------------------------------------------------- ------------------ ------------------
Noninterest-bearing liabilities:
Demand deposits 29,633 22,233 19,662
Other 2,628 3,308 1,109
Shareholders' equity 48,534 43,741 42,840
- ---------------------------------------------------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $492,722 $425,237 $399,866
==================================================== ======== ========
Net interest income before
Federal tax equivalent adjustment 18,175 17,082 16,008
Federal tax equivalent adjustment (1,336) (1,405) (1,254)
- -------------------------------------------------------------- -------- --------
Net interest income $ 16,839 $ 15,677 $ 14,754
============================================================== ======== ========
Net interest spread (tax equivalent basis) 3.18% 3.50% 3.48%
====================================================================== ==== ====
Net interest margin (tax equivalent basis) 3.80% 4.13% 4.10%
====================================================================== ==== ====
</TABLE>
(a) Nonaccruing loans are included in the average loans balance outstanding.
(b) Included in interest income are loan fees of $454,000, $387,000 and
$379,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
(c) Yields/Rates are computed on a tax equivalent basis using a Federal income
tax rate of 34% and state income tax rates of 9.5%, 10.5% and 10.75%,
respectively, for the three years ended December 31, 1998.
20
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
NET INTEREST INCOME; RATE/VOLUME ANALYSIS
- -----------------------------------------
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
----------------------------------------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
- -------------------------------------------------------------------------------------------------------------------
(in thousands) Volume Rate Net (1) Volume Rate Net (1)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans $ 718 $ (356) $ 362 $ 1,095 $ 37 $ 1,132
Taxable investment securities 3,714 (811) 2,903 769 239 1,008
Municipal bonds 11 -- 11 10 (4) 6
Federal funds sold 62 (2) 60 (40) 7 (33)
Other interest-earning assets 5 32 37 13 1 14
- -------------------------------------------------------------------------------------------------------------------
4,510 (1,137) 3,373 1,847 280 2,127
- -------------------------------------------------------------------------------------------------------------------
Interest paid on:
NOW and savings deposits 511 106 617 72 54 126
Time deposits (443) (210) (653) 224 (161) 63
FHLB of Boston advances 434 (130) 304 400 62 462
Federal funds purchased and securities
sold under agreements to repurchase 2,031 (19) 2,012 334 68 402
- -------------------------------------------------------------------------------------------------------------------
2,533 (253) 2,280 1,030 23 1,053
- -------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 1,977 $ (884) $ 1,093 $ 817 $ 257 $ 1,074
===================================================================================================================
</TABLE>
(1) The change in interest income due to both tax equivalent rate and volume
has been allocated to volume and tax equivalent rate changes in proportion
to the relationship of the absolute dollar amounts of the change in each.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Shareholders of Bancorp Connecticut, Inc.:
In our opinion, the accompanying consolidated statements of condition and the
related consolidated statements of income, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Bancorp
Connecticut, Inc. and subsidiary at December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
- -------------------------------
PricewaterhouseCoopers LLP
Hartford, Connecticut
March 1, 1999
21
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CONDITION
------------------------------------
December 31,
-------------------------------
1998 1997
- --------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 11,178,208 $ 9,217,128
Federal funds sold -- 1,500,000
- --------------------------------------------------------------------------------
Cash and cash equivalents 11,178,208 10,717,128
- --------------------------------------------------------------------------------
Securities available-for-sale
(at market value) 217,333,173 166,711,703
Trading account securities 172,312 612,444
Federal Home Loan Bank stock 2,831,500 2,094,400
Loans 284,839,529 261,703,647
Less:
Deferred loan fees (850,394) (949,694)
Allowance for loan losses (5,548,638) (5,306,096)
- --------------------------------------------------------------------------------
Net loans 278,440,497 255,447,857
- --------------------------------------------------------------------------------
Premises and equipment 4,524,190 3,151,052
Accrued income receivable 3,076,956 2,759,537
Foreclosed real estate, net 333,647 1,178,418
Deferred taxes 1,901,283 1,511,908
Other assets 1,584,619 678,061
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 521,376,385 $ 444,862,508
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits $ 345,563,143 $ 317,298,944
Advances from Federal
Home Loan Bank of Boston 40,630,000 20,630,000
Federal funds purchased and
securities sold under agreements
to repurchase 80,515,666 55,368,188
Accrued taxes, expenses and other
liabilities 4,751,741 4,618,647
- --------------------------------------------------------------------------------
471,460,550 397,915,779
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY:
Preferred stock, no par value:
authorized 1,000,000 shares;
none issued and outstanding -- --
Common stock, $1.00 par value:
authorized 7,000,000 shares;
issued and outstanding 5,653,406
shares at December 31, 1998 and
5,611,586 shares at December 31, 1997 5,653,406 5,611,586
Additional paid-in capital 17,420,340 17,050,743
Retained earnings 31,760,805 28,149,253
Accumulated other comprehensive income 825,346 1,879,209
Treasury stock, at cost: 519,498 shares
at December 31, 1998 and 1997 (5,744,062) (5,744,062)
- --------------------------------------------------------------------------------
49,915,835 46,946,729
- --------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 521,376,385 $ 444,862,508
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
For the Years Ended December 31,
-----------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
INTEREST INCOME:
Interest on loans, including fees $ 22,617,207 $ 22,254,341 $ 21,123,052
- --------------------------------------------------------------------------------
Interest and dividends on
investment securities:
Interest income 9,073,906 6,128,089 5,627,447
Dividend income 3,215,341 3,147,380 2,779,739
Interest on trading account 12,241 30,405 25,824
- --------------------------------------------------------------------------------
12,301,488 9,305,874 8,433,010
- --------------------------------------------------------------------------------
Interest on Federal funds sold 267,147 207,017 240,231
Other interest and dividends 159,377 136,310 130,697
- --------------------------------------------------------------------------------
TOTAL INTEREST INCOME 35,345,219 31,903,542 29,926,990
- --------------------------------------------------------------------------------
INTEREST EXPENSE:
Savings deposits 2,657,602 2,553,314 2,628,068
Time deposits 8,704,196 9,356,542 9,292,756
NOW accounts 965,871 454,367 254,754
- --------------------------------------------------------------------------------
12,327,669 12,364,223 12,175,578
Interest on borrowed money 6,178,135 3,862,337 2,997,846
- --------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 18,505,804 16,226,560 15,173,424
- --------------------------------------------------------------------------------
NET INTEREST INCOME 16,839,415 15,676,982 14,753,566
Provision for loan losses 267,500 600,000 435,000
- --------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 16,571,915 15,076,982 14,318,566
- --------------------------------------------------------------------------------
OTHER INCOME:
Net securities gains 1,271,638 838,634 343,730
Net trading account (losses) gains (86,234) 103,776 20,754
Trust fees 620,551 487,377 457,732
Service charges on deposit accounts 685,738 555,020 551,227
Brokerage fees 413,840 141,646 54,366
Other 556,973 196,160 231,222
- --------------------------------------------------------------------------------
3,462,506 2,322,613 1,659,031
- --------------------------------------------------------------------------------
OTHER EXPENSES:
Salaries and employee benefits 5,648,031 4,788,534 4,601,019
Occupancy expense, net 525,389 536,522 529,638
Furniture and equipment expense 798,483 514,406 425,282
Data processing expense 690,967 567,695 529,671
FDIC assessments 38,678 38,155 2,000
Legal expense 167,707 156,903 272,331
Foreclosed real estate (recoveries)
provision and expense, net (76,719) 47,462 185,320
Advertising expense 466,853 368,339 318,646
Other 2,138,589 1,683,117 1,708,486
- --------------------------------------------------------------------------------
10,397,978 8,701,133 8,572,393
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 9,636,443 8,698,462 7,405,204
Provision for income taxes 3,291,840 2,802,511 2,380,841
- --------------------------------------------------------------------------------
NET INCOME $ 6,344,603 $ 5,895,951 $ 5,024,363
================================================================================
PER SHARE DATA:
Basic earnings per share $ 1.24 $ 1.16 $ 0.94
================================================================================
Diluted earnings per share $ 1.14 $ 1.08 $ 0.89
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31, 1998, 1997 and 1996
---------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive
Additional Income Total
Common Paid-In Retained Unrealized Treasury Shareholders'
Stock Capital Earnings Gains (Losses) Stock Equity
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1995 $2,263,313 $ 18,861,973 $ 21,575,723 $ 508,560 $ -- $ 43,209,569
------------
Net income -- -- 5,024,363 -- -- 5,024,363
Decrease in net unrealized gain on
securities available-for-sale -- -- -- (4,680) -- (4,680)
------------
Total comprehensive income -- -- -- -- -- 5,019,683
------------
Stock options exercised 63,046 503,748 -- -- -- 566,794
Cash dividends declared --
$0.37 per share -- -- (1,991,391) -- -- (1,991,391)
6-for-5 stock split effected in the
form of a stock dividend 441,790 (441,790) -- -- -- --
Treasury stock purchased -- -- -- -- (4,338,798) (4,338,798)
Tax benefits related to common
stock options exercised -- 265,263 -- -- -- 265,263
- -------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1996 2,768,149 19,189,194 24,608,695 503,880 (4,338,798) 42,731,120
------------
Net income -- -- 5,895,951 -- -- 5,895,951
Increase in unrealized gain on
securities available-for-sale -- -- -- 1,375,329 -- 1,375,329
------------
Total comprehensive income -- -- -- -- -- 7,271,280
------------
Stock options exercised 40,560 474,434 -- -- -- 514,994
Cash dividends declared --
$0.4625 per share -- -- (2,355,393) -- -- (2,355,393)
2-for-1 stock split effected in the
form of a stock dividend 2,802,877 (2,802,877) -- -- -- --
Treasury stock purchased -- -- -- -- (1,405,264) (1,405,264)
Tax benefits related to common
stock options exercised -- 189,992 -- -- -- 189,992
- -------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1997 5,611,586 17,050,743 28,149,253 1,879,209 (5,744,062) 46,946,729
------------
Net income -- -- 6,344,603 -- -- 6,344,603
Decrease in net unrealized gain on
securities available-for-sale -- -- -- (1,053,863) -- (1,053,863)
------------
Total comprehensive income -- -- -- -- -- 5,290,740
------------
Stock options exercised 41,820 259,676 -- -- -- 301,496
Cash dividends declared --
$0.535 per share -- -- (2,733,051) -- -- (2,733,051)
Tax benefits related to common
stock options exercised -- 109,921 -- -- -- 109,921
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 1998 $5,653,406 $ 17,420,340 $ 31,760,805 $ 825,346 $(5,744,062) $ 49,915,835
===============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
24
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,344,603 $ 5,895,951 $ 5,024,363
- -------------------------------------------------------------------------------------------------
Adjustments to reconcile net income
to net cash provided by operating activities:
Deferred income tax provision (credit) 452,409 (231,114) 232,147
Write-down of premises and equipment -- 13,690 --
Net accretion and amortization of bond
premiums and discounts (572,692) 78,087 123,801
Provision for loan losses 267,500 600,000 435,000
Provision for foreclosed real estate losses 52,750 139,687 201,730
Gain on sale of foreclosed real estate (209,928) (195,697) (175,323)
Gain on sale of loans (78,954) (41,724) (15,762)
Amortization of deferred loan points (218,116) (139,328) (177,448)
Realized investment security gains (1,185,404) (942,410) (364,485)
Depreciation expense 569,938 453,811 457,818
Decrease (increase) in trading account 353,898 1,921,097 (2,018,535)
Increase in accrued income receivable (317,419) (42,913) (196,419)
Increase in other assets (878,775) (225,876) (60,645)
Addition of mortgage servicing rights -- -- (27,783)
Increase in accrued expenses payable and
other liabilities 15,673 2,543,167 477,644
- -------------------------------------------------------------------------------------------------
TOTAL ADJUSTMENTS (1,749,120) 3,930,477 (1,108,260)
- -------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,595,483 9,826,428 3,916,103
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held-to-maturity -- (19,495,531) (26,496,387)
Purchases of securities available-for-sale (177,015,986) (76,217,966) (45,396,922)
Proceeds from sales of securities
available-for-sale 83,146,669 50,352,816 24,642,498
Proceeds from maturities of securities 23,623,368 23,759,233 18,000,000
Paydowns on mortgage-backed securities 19,844,802 7,552,526 10,400,772
Purchases of Federal Home Loan Bank stock (737,100) (54,700) (61,400)
Proceeds from sale of loans 5,172,304 1,653,217 3,620,834
Net increase in loans (28,309,918) (11,693,004) (22,067,707)
Purchases of premises and equipment, net (1,943,076) (494,937) (114,128)
Proceeds from sales of foreclosed real estate, net 1,104,412 715,328 2,116,117
- -------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (75,114,525) (23,923,018) (35,356,323)
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in time deposits (8,815,694) (6,276,948) 14,671,325
Net increase in other deposits 37,079,893 12,062,281 353,932
Proceeds from borrowings 116,268,748 35,351,000 42,028,000
Repayment of borrowings (96,268,748) (35,721,000) (41,018,000)
Net increase in Federal funds purchased and
repurchase agreements 25,147,478 13,489,478 19,651,222
Proceeds from exercise of stock options 301,496 514,994 566,794
Repurchase of common stock -- (1,405,264) (4,338,798)
Cash dividends paid (2,733,051) (2,355,393) (1,991,391)
- -------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 70,980,122 15,659,148 29,923,084
- -------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 461,080 1,562,558 (1,517,136)
Cash and cash equivalents at beginning of year 10,717,128 9,154,570 10,671,706
- -------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 11,178,208 $ 10,717,128 $ 9,154,570
=================================================================================================
NONCASH INVESTING AND FINANCING ACTIVITIES
Change in net unrealized loss on securities
available-for-sale, net of $425,179, $915,432
and $3,266 of deferred taxes in 1998,
1997 and 1996, respectively $ (1,053,863) $ 1,375,329 $ (4,680)
Transfer of loans to foreclosed real estate 174,543 682,333 3,259,676
Transfer of held-to-maturity securities to
available-for-sale securities -- 53,454,786 --
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
25
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 1998 and 1997
1. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Bancorp Connecticut, Inc. (the
"Corporation") include the accounts of its wholly owned subsidiary, Southington
Savings Bank (the "Bank"). The Bank operates four branches and a mortgage
lending center in Southington, Connecticut, one branch in Wallingford,
Connecticut and BCI Financial Corporation, an indirect auto finance subsidiary
located in Southington, Connecticut. During the fourth quarter of 1998, the Bank
formed a passive investment company, SSB Mortgage Corporation, to take advantage
of changes in Connecticut state tax statutes (see Note 12). The Bank's primary
source of revenue is providing loans to customers, who are either small and
middle-market businesses or individuals. All significant intercompany balances
and transactions have been eliminated in consolidation.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. In preparing the financial statements,
management is required to make extensive use of estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the
statements of condition and revenues and expenses for the period. Actual results
could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the valuation of investments and the determination of
the allowance for loan losses and valuation of real estate acquired in
connection with foreclosures. In connection with the determination of the
allowance for loan losses and valuation of foreclosed real estate, management
obtains independent appraisals for significant properties. A substantial portion
of the Bank's loans are collateralized by real estate in Connecticut.
Accordingly, the ultimate collectibility of a substantial portion of the Bank's
loan portfolio is particularly susceptible to changes in market conditions in
Connecticut.
Management believes that the allowance for loan losses and valuation of
foreclosed real estate are adequate. While management uses available information
to recognize losses on loans and foreclosed real estate, future additions to the
allowance or write-downs may be necessary based on changes in economic
conditions, particularly in Connecticut. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses and valuation of foreclosed real estate.
Such agencies may require the Bank to recognize additions to the allowance or
additional write-downs on foreclosed real estate based on their judgements of
information available to them at the time of their examination.
INVESTMENTS
Securities that the Corporation has the ability and positive intent to hold to
maturity are classified as held-to-maturity and carried at amortized cost.
Securities that may be sold as part of the Corporation's asset/liability or
liquidity management or in response to or in anticipation of changes in interest
rates and resulting prepayment risk, or for other similar factors, are
classified as available-for-sale and carried at fair market value. Unrealized
gains and losses on such securities are reported net of tax, as a separate
component of shareholders' equity. The Corporation classifies a security as a
trading security when the intent is to sell the security in the near future to
generate profits. Any unrealized gains or losses in trading securities are
included in income. Realized gains and losses on the sales of all securities are
reported in earnings and computed using the specific identification cost basis.
INTEREST AND FEES ON LOANS
Interest on loans is included in income monthly as earned based on rates applied
to principal amounts outstanding, except that interest on loans 90 or more days
past due or impaired loans is not recognized as income until received. Loan
origination fees and certain direct loan origination costs are deferred and the
net amount amortized as an adjustment to the related loan's yield over the life
of the loan or taken into income when the related loan is sold.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at principal balance and are net of unearned interest income.
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio, past loan loss experience, current economic
conditions, volume, growth and composition of the loan portfolio and other
relevant factors. The allowance is increased by provisions for loan losses
charged against income. When a loan or portion of a loan is determined to be
uncollectible, the portion deemed uncollectible is charged against the allowance
and subsequent recoveries, if any, are credited to the allowance.
Management considers a loan impaired if, based on current information and
events, it is probable that the Corporation will be unable to collect the
scheduled payments of
26
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
principal and interest when due, according to the contractual terms of the loan
agreement. The measurement of impaired loans and the related allowance for loan
losses is generally based on the present value of expected future cash flows
discounted at the historical effective interest rate, except that all
collateral-dependent loans are measured for impairment based on the fair value
of the collateral. Smaller-balance homogeneous loans consisting of residential
mortgages and consumer loans are evaluated for reserves collectively based on
historical loss experience.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation,
computed on the straight-line and declining-balance methods at rates based on
estimated useful lives of the assets.
FORECLOSED REAL ESTATE
Foreclosed real estate consists of properties acquired through mortgage loan
foreclosure proceedings. These properties are recorded at the lower of the
carrying value of the related loans, including costs of foreclosure, or
estimated fair value, less estimated costs to sell, of the real estate acquired
or repossessed. An allowance for losses on foreclosed real estate is maintained
for subsequent valuation adjustments on a specific-property basis.
INCOME TAXES
Deferred income taxes and tax benefits are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The Corporation provides
deferred taxes for the estimated future tax effects attributable to temporary
differences and carryforwards when realization is more likely than not.
Deferred tax expense is based on items of income and expense that are reported
in different years in the consolidated financial statements and tax returns and
are measured at the tax rate in effect the year the difference originated.
EARNINGS PER SHARE
Effective December 31, 1997, the Corporation adopted the provisions of Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 establishes standards for computing and presenting earnings per share
("EPS"). It replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures.
This statement was effective for financial statements issued for periods ending
after December 15, 1997 and has been applied for all periods presented.
Basic earnings per share is computed using the weighted-average common shares
outstanding during the year. The computation of diluted earnings per share is
similar to the computation of basic earnings per share except the denominator is
increased to include the number of additional common shares that would have been
outstanding if dilutive potential common shares had been issued. The shares used
in the computations for the three years ended December 31, 1998 were as follows:
1998 1997 1996
----------------------------------------------------------------------
Basic 5,110,191 5,093,588 5,372,760
Effect of dilutive
stock options 438,085 384,783 268,476
----------------------------------------------------------------------
Diluted 5,548,276 5,478,371 5,641,236
======================================================================
The number of common shares used in the calculation have been restated for all
periods presented to reflect a 6-for-5 stock split effected in the form of a
stock dividend on June 19, 1996, and a 2-for-1 stock split effected in the form
of a stock dividend on December 1, 1997.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires public
companies to report financial and descriptive information about operating
segments in annual financial statements and requires selected information about
operating segments to be reported in interim financial reports issued to
shareholders. Operating segment financial information is required to be reported
on the basis that it is used internally for evaluating segment performance and
allocation of resources. SFAS 131 is effective for financial statements for
periods beginning after December 15, 1997 and requires presentation of
comparative information for prior periods presented. The Corporation does not
have any operating segments, as defined by SFAS 131, and therefore, has not
disclosed the additional information.
CASH FLOWS
Cash and cash equivalents include cash, interest and non-interest-bearing
deposits due from banks and Federal funds sold. The Bank paid interest of
$19,268,824, $16,105,588 and $15,018,515 on deposits and borrowings in 1998,
1997 and 1996, respectively.
RECLASSIFICATION
Certain 1997 and 1996 amounts have been reclassified to conform with the 1998
presentation. These reclassifications had no impact on net income and no
material impact on the statements of condition.
27
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
2. RESTRICTION ON CASH AND DUE FROM BANKS
--------------------------------------
The Bank is required to maintain reserves against certain deposit transaction
accounts. At December 31, 1998, the Bank was required to have cash and liquid
assets of approximately $3,202,000 to meet these requirements.
3. INVESTMENT SECURITIES
---------------------
The amortized cost, gross unrealized gains and losses and estimated market
values as of December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Available-for-Sale
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States Government
and agency obligations $ 47,547,262 $ 277,317 $ (69,188) $ 47,755,391
Municipal bonds 3,583,749 100,468 (1,553) 3,682,664
Mortgage-backed securities 93,033,513 167,865 (70,296) 93,131,082
Capital trust preferreds 13,174,358 130,000 (338,358) 12,966,000
Marketable equity securities 58,141,396 1,924,678 (862,538) 59,203,536
Mutual funds 602,370 15,367 (23,237) 594,500
- --------------------------------------------------------------------------------------
$216,082,648 $2,615,695 $(1,365,170) $217,333,173
======================================================================================
</TABLE>
The amortized cost, gross unrealized gains and losses and estimated market
values as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Available-for-Sale
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States Government
and agency obligations $ 27,577,121 $ 106,714 $ (67,358) $ 27,616,477
Municipal bonds 3,342,276 90,871 (949) 3,432,198
Mortgage-backed securities 64,987,756 573,547 (65,415) 65,495,888
Capital trust preferreds 3,750,000 302,500 -- 4,052,500
Marketable equity securities 59,594,575 2,319,331 (99,115) 61,814,791
Mutual funds 4,313,803 9,400 (23,354) 4,299,849
- --------------------------------------------------------------------------------------
$163,565,531 $3,402,363 $ (256,191) $166,711,703
======================================================================================
</TABLE>
The amortized cost and estimated market value of debt securities at December 31,
1998, by contractual maturity, are shown below. Actual maturities will differ
from contractual maturities because borrowers may have the right to call or
repay obligations with or without call or prepayment penalties:
1998
Available-For-Sale
---------------------------
Estimated
Amortized Market
Cost Value
----------------------------------------------------------------------
Due in one year or less $ 6,433,339 $ 6,445,278
Due after one year
through five years 17,890,236 18,196,322
Due after five years
through ten years 7,241,222 7,265,485
Due after ten years 32,740,572 32,496,970
----------------------------------------------------------------------
64,305,369 64,404,055
Mortgage-backed securities 93,033,513 93,131,082
----------------------------------------------------------------------
$157,338,882 $157,535,137
======================================================================
Proceeds from sales of securities available-for-sale were $83,146,669,
$50,352,816 and $24,642,498 in 1998, 1997 and 1996, respectively. There were no
sales of securities held-to-maturity in 1998, 1997 or 1996. Gross gains of
$1,759,629, $1,226,509 and $634,399 and gross losses of $487,991, $387,875 and
$290,669 were realized on sales of securities available-for-sale in 1998, 1997
and 1996, respectively. During 1997, the entire securities held-to-maturity
portfolio, which totaled $53,454,786, was transferred to the securities
available-for-sale portfolio. The transfer was performed by the Corporation to
provide the flexibility to manage the investment portfolio for optimal return
and to execute risk management strategies. The transfer resulted in a gross
unrealized gain of $162,930.
At December 31, 1998, investment securities with a carrying amount of
$97,654,971 were pledged as collateral to secure public deposits and for other
purposes.
28
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
4. LOANS AND THE ALLOWANCE FOR LOAN LOSSES
----------------------------------------
Loans consisted of the following as of December 31:
1998 1997
- --------------------------------------------------------------------------------
Residential real estate $ 137,325,931 $ 134,493,679
Commercial real estate 42,407,709 39,043,167
Real estate construction 3,688,515 3,002,551
Commercial 42,857,465 37,291,728
Consumer 58,559,909 47,872,522
- --------------------------------------------------------------------------------
284,839,529 261,703,647
Less: Deferred loan fees (850,394) (949,694)
Allowance for loan losses (5,548,638) (5,306,096)
- --------------------------------------------------------------------------------
$ 278,440,497 $ 255,447,857
================================================================================
Activity in the allowance for loan losses was as follows:
Year Ended December 31,
------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Balance at beginning of year $ 5,306,096 $ 4,875,308 $ 5,487,801
Provision for loan losses 267,500 600,000 435,000
Charge-offs (154,955) (388,794) (1,212,490)
Recoveries 129,997 219,582 164,997
- --------------------------------------------------------------------------------
Balance at end of year $ 5,548,638 $ 5,306,096 $ 4,875,308
================================================================================
Information, with respect to impaired loans, consisting primarily of commercial
real estate and commercial loans, was as follows:
December 31,
-------------------------
1998 1997
- --------------------------------------------------------------------------------
Investment in impaired loans $1,946,363 $2,125,923
Impaired loans with no valuation allowance 1,374,857 2,088,300
Impaired loans with a valuation allowance 571,506 37,623
Valuation allowance 91,648 6,500
Average recorded investment in impaired loans 2,010,395 2,477,185
Commitments to lend additional funds for
loans considered impaired -- --
Year Ended December 31,
-------------------------
1998 1997
- --------------------------------------------------------------------------------
Interest income, recognized on a cash basis $195,144 $222,415
Information with respect to nonaccrual loans is as follows:
December 31,
-------------------------
1998 1997
- --------------------------------------------------------------------------------
Nonaccrual loans $1,264,732 $2,860,528
Year Ended December 31,
--------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Interest income that would have been
recorded under original terms $202,703 $335,244 $353,572
Interest income recorded during
the period 90,164 201,358 228,389
Information regarding capitalized originated loan servicing assets is as
follows:
December 31,
---------------------------
1998 1997
- --------------------------------------------------------------------------------
Balance at beginning of year $ 22,873 $ 27,783
Additions -- --
Amortization (4,539) (4,910)
- --------------------------------------------------------------------------------
Balance at end of year $ 18,334 $ 22,873
================================================================================
As of December 31, 1998 and 1997, the fair value of the capitalized loan
servicing assets approximated cost.
5. FORECLOSED REAL ESTATE
----------------------
Changes in the allowance for foreclosed real estate losses were as follows:
Year Ended December 31,
---------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Balance at beginning of year $ 25,000 $ -- $ 35,000
Provision for losses 52,750 139,687 201,730
Charge-offs, net (27,750) (114,687) (236,730)
- --------------------------------------------------------------------------------
Balance at end of year $ 50,000 $ 25,000 $ --
================================================================================
6. PREMISES AND EQUIPMENT
----------------------
Cost and accumulated depreciation of the various categories of premises and
equipment consisted of the following:
December 31, 1998 December 31, 1997
---------------------------------------------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
- --------------------------------------------------------------------------------
Land $ 589,127 $ -- $ 594,725 $ --
Buildings 3,141,186 1,751,423 3,059,290 1,672,355
Furniture and equipment 3,808,041 1,262,741 2,441,638 1,272,246
- --------------------------------------------------------------------------------
$7,538,354 $3,014,164 $6,095,653 $2,944,601
================================================================================
At December 31, 1998, the Bank was obligated under several noncancelable
operating leases for office space which expire on various dates through 2008.
The leases contain rent escalation clauses for real estate taxes and other
operating expenses and renewal option clauses calling for increased rents.
Future minimum rental payments required under operating leases at December 31,
1998 were as follows:
29
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
Year Amount
----------------------------------------------------------------------
1999 $ 83,118
2000 45,000
2001 45,000
2002 45,000
2003 52,506
After 293,760
----------------------------------------------------------------------
Total minimum lease payments $564,384
======================================================================
Total net rental expense amounted to $114,812, $88,536 and $75,768 in 1998, 1997
and 1996, respectively.
7. DEPOSITS
--------
Deposits consisted of the following as of December 31:
1998 1997
- --------------------------------------------------------------------------------
Noninterest-bearing demand deposits $ 34,408,824 $ 25,798,915
NOW accounts 42,528,062 24,899,327
Regular savings 69,028,793 63,611,111
Money market savings 39,318,069 33,894,502
Certificates of deposit 160,018,431 168,846,130
Club accounts 260,964 248,959
- --------------------------------------------------------------------------------
$345,563,143 $317,298,944
================================================================================
The amount of individual certificates of deposit in excess of $100,000 included
in certificates of deposit at December 31, 1998 and 1997 was $18,276,703 and
$16,753,636, respectively.
8. ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON
----------------------------------------------
Advances from Federal Home Loan Bank of Boston consisted of the following as of
December 31:
1998 1997
- --------------------------------------------------------------------------------
6.05% due January 26, 1998 $ -- $ 2,000,000
5.68% due March 4, 1998 -- 1,000,000
5.93% due March 20, 1998 -- 1,000,000
6.31% due July 20, 1998 -- 2,000,000
6.08% due July 30, 1998 -- 1,000,000
6.42% due September 8, 1998 -- 1,000,000
5.76% due September 25, 1998 -- 2,000,000
6.43% due September 30, 1998 -- 1,000,000
5.99% due October 8, 1998 -- 2,000,000
5.87% due October 19, 1998 -- 2,000,000
5.07% due October 21, 1998 -- 1,000,000
5.95% due February 4, 1999 2,000,000 2,000,000
6.03% due February 16, 1999 -- 1,000,000
5.95% due August 20, 1999 800,000 800,000
6.70% due June 11, 2001 830,000 830,000
5.44% due April 24, 2005 2,000,000 --
4.99% due January 14, 2008 5,000,000 --
5.09% due July 7, 2008 5,000,000 --
4.99% due September 1, 2008 10,000,000 --
4.59% due September 15, 2008 5,000,000 --
4.99% due June 18, 2013 10,000,000 --
- --------------------------------------------------------------------------------
$40,630,000 $20,630,000
================================================================================
As a member of the Federal Home Loan Bank of Boston ("FHLB"), and in accordance
with an agreement with them, the Bank is required to maintain qualified
collateral, as defined in the FHLB Statement of Credit Policy, free and clear of
liens, pledges and encumbrances as collateral for the advances. The Bank
maintains qualified collateral as defined by the FHLB in excess of the amount
required to collateralize the outstanding advances at December 31, 1998. The
Bank also participates in the IDEAL Way Line of Credit Program with the FHLB.
These advances are one-day variable rate loans with automatic rollover. The Bank
has a preapproved line up to 2% of total assets.
9. OTHER BORROWINGS
----------------
Other borrowings consist of Federal funds purchased, repurchase agreements with
major brokerage firms and repurchase agreements directly with certain customers.
The following table summarizes borrowings by contractual maturity:
1998 1997 1996
- --------------------------------------------------------------------------------
Federal funds purchased:
Overnight $ 1,775,000 $ 1,040,000 $ 1,875,000
Within 30 days -- 1,000,000 --
60-90 days -- 1,000,000 --
- --------------------------------------------------------------------------------
1,775,000 3,040,000 1,875,000
- --------------------------------------------------------------------------------
Repurchase agreements
with brokers/dealers:
Within 30 days 12,880,000 -- 13,203,750
30-90 days 29,680,000 5,880,000 18,575,000
Over 90 days 20,000,000 34,630,000 --
- --------------------------------------------------------------------------------
62,560,000 40,510,000 31,778,750
- --------------------------------------------------------------------------------
Repurchase agreements
with customers:
Overnight 6,480,934 7,324,753 5,049,204
Within 30 days 7,579,790 1,646,051 2,899,281
30-90 days 2,119,942 2,847,384 276,475
- --------------------------------------------------------------------------------
16,180,666 11,818,188 8,224,960
- --------------------------------------------------------------------------------
Total short-term
borrowings $80,515,666 $55,368,188 $41,878,710
================================================================================
The following table summarizes average outstandings, maximum month-end
outstandings, daily average interest rates and average interest rates on
year-end balances. Average interest rates during the year were computed by
dividing total interest expense by the average amount outstanding.
(dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Average outstanding $80,592 $43,244 $37,124
Maximum outstanding at any month-end 89,739 57,137 47,008
Average interest rate during the year 5.44% 5.48% 5.30%
Interest rate at year-end 5.35% 5.54% 5.35%
30
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
The following table summarizes repurchase agreements outstanding with
brokers/dealers:
1998 1997 1996
- --------------------------------------------------------------------------------
Morgan Stanley $15,680,000 $ 7,650,000 $ --
Salomon Brothers 46,880,000 30,860,000 17,460,000
Merrill Lynch -- 2,000,000 14,318,750
- --------------------------------------------------------------------------------
$62,560,000 $40,510,000 $31,778,750
================================================================================
Securities sold under agreements to repurchase are generally U.S. Government
Agency obligations and mortgage-backed securities. The market value of
securities exceeds the face value of the repurchase agreements.
Accrued interest payable on short-term borrowings was $396,771 and $313,188 at
December 31, 1998 and 1997, respectively.
10. SHAREHOLDERS' EQUITY
The Corporation's ability to pay dividends is dependent on the Bank's ability to
pay dividends to the Corporation. There are certain restrictions on the payment
of dividends and other payments by the Bank to the Corporation. Under
Connecticut law, the Bank is prohibited from declaring a cash dividend on its
common stock except from its net earnings for the current year and retained net
profits for the preceding two years. In some instances, further restrictions on
dividends may be imposed on the Bank by the Federal Reserve Bank. At December
31, 1998, approximately $4,733,799 of the Bank's retained net profits was
available for dividends.
In February 1996, the Corporation announced that it planned to repurchase up to
15% (788,000) of its outstanding common shares over the next eighteen months.
During the eighteen-month period ended August 1997, the Corporation repurchased
519,498 shares. These shares were repurchased at an average price of $11.05 per
share.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for reporting and display of comprehensive income, which is defined as
the change in net equity of a business enterprise during a period from non-owner
sources. The Corporation adopted SFAS 130 as of January 1, 1998. The
Corporation's one source of comprehensive income is the unrealized gain or loss
on investment securities.
The following table presents the components and related tax effects allocated to
other comprehensive income for the year ended December 31, 1998.
Before Tax Net
Tax (Benefit) of Tax
Amount Expense Amount
- --------------------------------------------------------------------------------
Net unrealized losses
on securities arising
during the period $ (624,009) $(329,695) $ (294,314)
Less: reclassification
adjustment for gains
realized in net income 1,271,638 512,089 759,549
- --------------------------------------------------------------------------------
Net unrealized losses
on securities $(1,895,647) $(841,784) $(1,053,863)
================================================================================
The following table presents the components and related tax effects allocated to
other comprehensive income for the year ended December 31, 1997.
Before Tax Net
Tax (Benefit) of Tax
Amount Expense Amount
- --------------------------------------------------------------------------------
Net unrealized gains
on securities arising
during the period $3,129,395 $1,258,685 $1,870,710
Less: reclassification
adjustment for gains
realized in net income 838,634 343,253 495,381
- --------------------------------------------------------------------------------
Net unrealized gains
on securities $2,290,761 $ 915,432 $1,375,329
================================================================================
11. EMPLOYEE BENEFIT PLANS
----------------------
In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS 132"). SFAS 132 standardizes the disclosure requirements for
pensions and other postretirement benefits by requiring additional information
to facilitate financial analysis and eliminate certain disclosures that are
considered no longer useful. SFAS 132 supersedes the disclosure requirements of
SFAS Nos. 87, 88 and 106. This Statement is effective for fiscal years beginning
after December 15, 1997. Restatement of disclosures for earlier periods provided
for comparative purposes is required unless the information is not readily
available. The Corporation adopted SFAS 132 as of January 1, 1998.
The Corporation has a noncontributory defined benefit retirement plan under an
immediate participation guarantee contract covering all employees eligible as to
age and length of service. Benefits are based on a covered employee's final
average compensation, primary Social Security benefit and credited service. The
Corporation's funding policy is to contribute amounts to the plan sufficient to
meet the Employee Retirement Income Security Act's minimum funding requirements.
31
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
The following table sets forth information regarding the plan's funded status
and amounts recognized in the financial statements at December 31:
1998 1997
- --------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 3,512,966 $ 3,201,593
Service cost 233,097 214,970
Interest cost 257,047 242,043
Plan participants' contributions -- --
Actuarial gain 418,908 5,761
Benefits paid (173,379) (151,401)
- --------------------------------------------------------------------------------
Benefit obligation at end of year 4,248,639 3,512,966
- --------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 4,792,961 3,929,650
Actual return on plan assets (134,572) 877,052
Employer contribution -- 137,660
Plan participants' contributions -- --
Benefits paid (173,379) (151,401)
- --------------------------------------------------------------------------------
Fair value of plan assets at end of year 4,485,010 4,792,961
- --------------------------------------------------------------------------------
Funded status 236,371 1,279,995
Unrecognized net actuarial loss (711,603) (1,645,153)
Unrecognized prior service cost 140,172 163,832
Unrecognized transition (asset) obligation 20,862 24,633
- --------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ (314,198) $ (176,693)
================================================================================
1998 1997 1996
- --------------------------------------------------------------------------------
Weighted-average assumptions
as of December 31:
Discount rate 6.50% 7.50% 7.75%
Expected return on plan assets 8.50% 8.50% 8.50%
Rate of compensation increase 4.00% 5.00% 5.00%
Components of net periodic
benefit cost:
Service cost $ 233,097 $ 214,970 $ 208,308
Interest cost 257,047 242,043 224,362
Expected return on plan assets 134,572 (877,052) (449,628)
Recognized net actuarial loss (487,211) 589,972 199,921
- --------------------------------------------------------------------------------
Net periodic benefit cost $ 137,505 $ 169,933 $ 182,963
================================================================================
Employees who have completed one year of service and have attained the age of 21
are eligible to participate in the Corporation's defined contribution savings
plan (401k plan). Eligible employees may contribute up to 15% of their
compensation. The Corporation may make a matching contribution of up to 6% of
the participant's compensation. Contributions by the Corporation for the years
ended December 31, 1998, 1997 and 1996 were $86,435, $80,124 and $76,062,
respectively.
The Corporation does not offer any postretirement or postemployment benefits
other than pensions.
12. FEDERAL AND STATE TAXES ON INCOME
---------------------------------
Significant components of the provision for income taxes are as follows:
1998 1997 1996
- --------------------------------------------------------------------------------
Current:
Federal $ 2,377,458 $ 2,255,348 $1,588,727
State 461,973 778,277 559,967
- --------------------------------------------------------------------------------
Total current 2,839,431 3,033,625 2,148,694
- --------------------------------------------------------------------------------
Deferred:
Federal (205,544) (230,219) 158,308
State 657,953 (895) 73,839
- --------------------------------------------------------------------------------
Total deferred 452,409 (231,114) 232,147
- --------------------------------------------------------------------------------
$ 3,291,840 $ 2,802,511 $2,380,841
================================================================================
Following is a reconcilement of the statutory Federal income tax rate applied to
pretax accounting income with the income tax provisions in the statements of
operations:
1998 1997 1996
- --------------------------------------------------------------------------------
Income tax at statutory rate $ 3,276,363 $ 2,957,477 $ 2,517,769
Increase (decrease) resulting from:
Dividends received deduction (623,877) (636,011) (550,719)
Connecticut corporation tax,
net of Federal tax benefit 401,859 513,072 418,312
Impact of establishment of
Connecticut Passive
Investment Company 337,292 -- --
Other items, net (145,168) (73,352) (20,982)
Impact of state tax rate change 45,371 41,325 16,461
- --------------------------------------------------------------------------------
Provision for income taxes $ 3,291,840 $ 2,802,511 $ 2,380,841
================================================================================
32
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
The components of net deferred tax assets at December 31 are as follows:
1998 1997
---------------------------------------------
Federal State Federal State
- --------------------------------------------------------------------------------
Deferred tax assets:
Loan loss provisions $1,886,537 $ 471,634 $1,632,685 $504,079
Reserve - other real
estate owned 17,000 4,250 7,693 2,375
Basis difference on other
real estate owned -- -- 21,326 6,584
Net mortgage origination fees 149,908 37,477 162,774 50,255
Accrued interest payable 324,014 81,004 321,623 99,299
Other 246,534 63,794 220,815 68,175
- --------------------------------------------------------------------------------
Total deferred tax assets 2,623,993 658,159 2,366,916 730,767
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Tax loan loss reserve in
excess of base year 84,165 21,041 101,559 31,356
SFAS 115 mark-to-market 425,179 106,295 968,077 298,886
Other 213,366 53,342 144,439 41,458
- --------------------------------------------------------------------------------
Total deferred tax liabilities 722,710 180,678 1,214,075 371,700
- --------------------------------------------------------------------------------
Deferred tax assets 1,901,283 477,481 1,152,841 359,067
Valuation allowance -- (477,481) -- --
- --------------------------------------------------------------------------------
Net deferred tax assets $1,901,283 $ -- $1,152,841 $359,067
================================================================================
The allocation of deferred tax involving items charged to current year income
and items charged directly to shareholders' equity for the year ended December
31, are as follows:
1998 1997
----------------------------------------------
Federal State Federal State
- --------------------------------------------------------------------------------
Deferred tax (benefit) allocated
to shareholders' equity $(542,898) $(298,886) $ 708,503 $ 206,929
Deferred tax (benefit) allocated
to income (205,544) 657,953 (230,219) (895)
- --------------------------------------------------------------------------------
Total deferred tax $(748,442) $ 359,067 $ 478,284 $ 206,034
================================================================================
The Corporation will only recognize a deferred tax asset when, based upon
available evidence, realization is more likely than not. Accordingly, at
December 31, 1998, the Corporation has recorded no Federal valuation allowance
against deferred tax assets based on sufficient available Federal taxable income
in the carryback period.
During 1998, the Corporation recorded a valuation allowance of $477,481 against
its state deferred tax asset in connection with the creation of SSB Mortgage
Corp. which will qualify and operate as a Connecticut passive investment company
pursuant to legislation enacted in May 1998. Because it is expected to earn
sufficient income from the passive investment company subsidiary and its
dividends to the parent are exempt from Connecticut Corporation Business Tax,
the Corporation no longer expects to recognize its state deferred tax assets.
The Corporation made Federal and state income tax payments of $2,912,000,
$2,848,158 and $1,729,533 in 1998, 1997 and 1996, respectively.
The Corporation has not provided deferred taxes for the tax reserve for bad
debts of approximately $1.2 million, that arose in tax years beginning before
1988 because it is expected that the requirements of Internal Revenue Code
Section 593, as amended by the Small Business Protection Act of 1996, will be
met in the foreseeable future.
13. LOANS TO RELATED PARTIES
------------------------
Certain directors and executive officers of the Corporation, including their
immediate families and companies in which they are principal owners, were loan
customers of the Bank during 1998 and 1997. Loans to such parties were made in
the ordinary course of business at the Bank's normal credit terms, including
interest rate and collateralization, and did not represent more than a normal
risk of collection. Such loans at December 31, 1998 and 1997 amounted to
$3,911,381 and $5,643,496, respectively. New loans of $235,168 were made, and
repayments totaled $1,967,283 during 1998. In addition, unused lines of credit
to related parties as of December 31, 1998 were $645,379.
33
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
14. STOCK OPTION PLAN
-----------------
The Corporation has a stock option plan offered to employees and directors of
the Bank (the "Plan"). A total of 1,444,416 shares can be issued to participants
at an exercise price equal to the market price of the Corporation's stock on the
date of grant with a maximum term of ten years. Options are granted upon the
approval of the Board and vest 100% in one year. As of December 31, 1998, a
total of 288,620 shares remain for issue.
On January 1, 1996, the Corporation adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). As
permitted by SFAS 123, the Corporation has chosen to apply APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its Plan. Accordingly, no compensation cost
has been recognized for options granted under the Plan. Had compensation cost
for the Corporation's Plan been determined based on the fair value at the grant
dates for awards under the Plan consistent with the method of SFAS 123, the
Corporation's net income and net income per share would have been reduced to the
pro forma amounts indicated below.
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------------------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $6,344,603 $5,596,884 $5,895,951 $5,510,219 $5,024,363 $4,588,413
Net income per share--
diluted 1.14 1.01 1.08 1.01 0.89 0.81
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants:
1998 1997 1996
- --------------------------------------------------------------------------------
Dividend yield 3.60% 3.75% 3.75%
Expected volatility 40.75 35.00 34.84
Risk-free interest rate 4.67 6.26 6.16
Expected lives 7 years 7 years 7 years
A summary of the status of the Corporation's Plan as of December 31, 1998, 1997
and 1996 and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,042,296 $ 9.53 890,616 $ 6.97 780,908 $ 5.29
Granted 116,000 15.625 237,000 18.30 237,000 11.18
Exercised (41,820) 7.22 (76,320) 7.32 (126,092) 4.49
Forfeited (2,500) 19.375 (9,000) 11.16 (1,200) 7.40
- ---------------------------------------------- --------- --------
Outstanding at end of year 1,113,976 $ 10.23 1,042,296 $ 9.53 890,616 $ 6.97
=============================================================================================================
Options exercisable at year-end 998,976 836,796 733,616
Weighted-average fair value of
options granted during the year $ 5.39 $ 5.76 $ 3.53
</TABLE>
The following table summarizes information about the Plan's stock options at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------------
Weighted-
Average Weighted- Number Weighted-
Number Remaining Average Exercisable Average
Range of Outstanding Contractual Exercise at Exercise
Exercise Prices at 12/31/98 Life Price 12/31/98 Price
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.00 - $ 7.50 552,976 5.1 $ 5.32 552,976 $ 5.32
7.50 - 15.00 242,000 7.9 11.16 242,000 11.16
15.00 - 22.50 319,000 9.3 18.02 204,000 19.38
- ----------------------------------------------------------------------------
1,113,976 998,976
============================================================================
</TABLE>
34
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
-------------------------------------------------
The Bank is party to financial instruments with off-balance-sheet credit risk in
the normal course of business to meet the financing needs of its customers.
These instruments expose the Bank to credit risk in excess of the amount
recognized in the statement of condition.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Bank uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
Total credit exposure related to those items is summarized as follows:
1998 1997
- --------------------------------------------------------------------------------
Loan commitments
Approved loan commitments $ 2,310,950 $ 4,484,000
Unadvanced portion of
construction loans 5,399,502 3,281,819
Unused home equity
lines of credit 10,977,136 11,510,930
Unused commercial
lines of credit 11,688,379 24,418,641
Standby letters of credit 3,307,306 3,793,939
- --------------------------------------------------------------------------------
$33,683,273 $47,489,329
================================================================================
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Bank upon extension of credit is based on management's
credit evaluation of the counterparty. Collateral held is primarily residential
property. Interest rates on home equity lines of credit are variable and are
available for terms of 10 or 15 years. All other commitments are a combination
of fixed and variable interest rates with maturities of one year or more.
16. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
On June 15, 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 is effective for fiscal years beginning after June 15, 1999
(January 1, 2000 for the Corporation) and requires all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivative instruments are to be recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
Management anticipates that the adoption of SFAS 133 will not have a significant
effect on the Corporation's results of operations or its financial position
because the Corporation presently does not hold or utilize any derivative
instruments.
17. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
-----------------------------------------------
The Bank primarily grants residential, commercial and consumer loans to
customers located within its primary market area in the State of Connecticut.
The majority of the Bank's loan portfolio is collateralized by residential real
estate.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
FASB Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments" ("SFAS 107"), requires disclosure of fair value
information about financial instruments, whether or not recognized in the
statement of condition, for which it is practicable to estimate that value. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.
SFAS 107 excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amounts reported in the statement of condition for cash and
short-term instruments approximate those assets' fair values.
TRADING ACCOUNT ASSETS
Fair values for the Bank's trading account assets, which also are the amounts
recognized in the consolidated statement of condition, are based on quoted
market prices where available.
SECURITIES AVAILABLE-FOR-SALE
Fair values for securities available-for-sale are based on quoted market prices,
where available.
35
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
FEDERAL HOME LOAN BANK STOCK
The carrying value of Federal Home Loan Bank stock approximates its fair value.
LOANS RECEIVABLE
The fair values for loans (excluding non-accrual loans) are estimated using
discounted cash flow analyses, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality. The Bank does
not believe an estimate of the fair value of non-accrual loans can be made
without incurring excessive cost.
ACCRUED INTEREST RECEIVABLE
The carrying amount of accrued interest approximates its fair value.
OFF-BALANCE-SHEET INSTRUMENTS
Fair values for the Bank's off-balance-sheet instruments (primarily lending
commitments) are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing (guarantees, loan commitments).
DEPOSIT LIABILITIES
The fair values disclosed for demand deposits (e.g., interest and non-interest
checking, regular savings and certain types of money market accounts) are, by
definition, equal to the amount payable on demand at the reporting date (i.e.,
their carrying amounts). The carrying amounts for variable-rate, fixed-term
money market accounts and certificates of deposit approximate their fair values
at the reporting date. Fair values for fixed rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
SFAS 107 defines the fair value of demand deposits as the amount payable on
demand, and prohibits adjusting fair value for any value derived from retaining
those deposits for an expected future period of time. That component is commonly
referred to as a deposit base intangible. This intangible asset is neither
considered in the fair value amounts nor is it recorded as an intangible asset
in the statement of condition. The Corporation has not performed the
calculations to estimate the amount of this intangible asset due to the absence
of certain information required and the complexity of the computation.
ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON
The fair values of the Bank's borrowings from the Federal Home Loan Bank of
Boston are estimated using discounted cash flow analyses, based on the Bank's
current incremental borrowing rates for similar types of borrowing arrangements.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The fair values for securities sold under agreements to repurchase are estimated
using discounted cash flow analyses, using interest rates currently being
offered for similar instruments.
The following table presents a comparison of the carrying value and estimated
fair value of the Corporation's financial instruments at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 11,178,208 $ 11,178,208 $ 9,217,128 $ 9,217,128
Federal funds sold -- -- 1,500,000 1,500,000
Trading account 172,312 172,312 612,444 612,444
Securities available-for-sale 217,333,173 217,333,173 166,711,703 166,711,703
Federal Home Loan Bank stock 2,831,500 2,831,500 2,094,400 2,094,400
Loans, gross (excluding non-accrual loans) 283,574,797 285,540,749 258,843,119 258,852,151
Accrued income receivable 3,076,956 3,076,956 2,759,537 2,759,537
Financial liabilities:
Deposits:
Noninterest-bearing demand deposits $ 34,408,824 $ 34,408,824 $ 25,798,915 $ 25,798,915
Regular savings 69,028,793 69,028,793 63,611,111 63,611,111
Money market savings 39,318,069 39,318,069 33,894,502 33,894,502
Certificates of deposit 160,018,431 161,902,349 168,846,130 169,545,765
NOW accounts 42,528,062 42,528,062 24,899,327 24,899,327
Club accounts 260,964 260,964 248,959 248,959
Advances from the Federal Home Loan
Bank of Boston 40,630,000 38,096,085 20,630,000 20,641,311
Securities sold under agreements to repurchase 80,515,666 81,159,919 55,368,188 55,368,188
Unrecognized financial instruments:
Commitments to extend credit -- 303,760 -- 437,971
Letters of credit -- 33,073 -- 37,939
</TABLE>
36
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
19. CONTINGENCIES
-------------
The Corporation and its subsidiaries are defendants in proceedings arising out
of, and incidental to, activities conducted in the normal course of business. In
the opinion of management, resolution of these matters will not have a material
effect on the Corporation's financial condition or results of operations.
20. REGULATORY MATTERS
------------------
The Bank is subject to various regulatory capital requirements administered by
the Federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory -- and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to quantitative judgements by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Bank's actual capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
To be Well Capitalized
Under Prompt Corrective
Actual Action Provisions
--------------------------------------------------
(dollars in thousands) Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk-Weighted Assets) $52,942 17.27% >/=$30,648 >/=10.0%
Tier I Capital (to Risk-Weighted Assets) 49,090 16.02 >/= 18,389 >/= 6.0
Tier I Capital (to Average Assets) 49,090 9.48 >/= 25,878 >/= 5.0
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets) $48,550 17.16% >/=$28,999 >/=10.0%
Tier I Capital (to Risk-Weighted Assets) 44,991 15.90 >/= 16,979 >/= 6.0
Tier I Capital (to Average Assets) 44,991 10.41 >/= 21,560 >/= 5.0
</TABLE>
21. PARENT COMPANY ONLY FINANCIAL STATEMENTS
----------------------------------------
The financial statements of Bancorp Connecticut, Inc. are as follows:
December 31,
--------------------------
1998 1997
- --------------------------------------------------------------------------------
Statement of condition:
Assets:
Marketable equity securities $ 1,525,150 $ 358,853
Investment in Southington Savings Bank 48,151,051 45,809,297
Repurchase agreement 155,611 575,000
Organization costs 36,444 76,200
Due from Southington Savings Bank 118,274 134,693
Other assets 15,163 4,481
- --------------------------------------------------------------------------------
Total assets $50,001,693 $46,958,524
================================================================================
Liabilities and shareholders' equity:
Accrued expenses $ 85,858 $ 11,795
Shareholders' equity 49,915,835 46,946,729
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $50,001,693 $46,958,524
- --------------------------------------------------------------------------------
37
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
The financial statements of Bancorp Connecticut, Inc. (continued)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statement of income:
Dividends from subsidiary $ 3,167,217 $ 3,594,005 $ 6,334,433
Other income 32,726 29,676 34,940
- -------------------------------------------------------------------------------------------
Total income 3,199,943 3,623,681 6,369,373
Operating expenses 360,847 288,813 318,693
Income tax (credit) (119,311) (87,487) (100,108)
- -------------------------------------------------------------------------------------------
Income before equity in undistributed
net income of subsidiary 2,958,407 3,422,355 6,150,788
Equity in undistributed net income
of subsidiary 3,386,196 2,473,596 (1,126,425)
- -------------------------------------------------------------------------------------------
Net income $ 6,344,603 $ 5,895,951 $ 5,024,363
===========================================================================================
Statement of cash flows:
Operating activities:
Net income $ 6,344,603 $ 5,895,951 $ 5,024,363
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income
of subsidiary (3,386,196) (2,473,596) 1,126,425
Amortization of organization costs 39,757 39,757 39,757
Increase) decrease in other assets (10,682) 5,215 (725)
Increase (decrease) in accrued expenses 8,265 (3,343) (39,434)
- -------------------------------------------------------------------------------------------
Net cash (used in) provided by
operating activities (3,348,856) (2,431,967) 1,126,023
Investing activities:
Purchase of securities available-for-sale (1,000,000) (47,595) --
Decrease (increase) in advances to subsidiaries 16,419 (20,726) 38,009
- -------------------------------------------------------------------------------------------
Net cash (used in) provided by
investing activities (983,581) (68,321) 38,009
- -------------------------------------------------------------------------------------------
Financing activities:
Dividends paid (2,733,051) (2,355,393) (1,991,391)
Net decrease (increase) in repurchase agreements 419,389 (150,000) (425,000)
Repurchase of common stock -- (1,405,264) (4,338,798)
Issuance of common stock 301,496 514,994 566,794
- -------------------------------------------------------------------------------------------
Net cash used in financing activities (2,012,166) (3,395,663) (6,188,395)
- -------------------------------------------------------------------------------------------
Net decrease in cash -- -- --
Cash at beginning of year -- -- --
- -------------------------------------------------------------------------------------------
Cash at end of year $ -- $ -- $ --
===========================================================================================
</TABLE>
38
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
------------------------------------
Three Months Ended
--------------------------------------
(dollars in thousands, except
per share data) March 31 June 30 Sept. 30 Dec. 30
- --------------------------------------------------------------------------------
FISCAL 1998
Interest income $8,589 $8,661 $8,942 $9,153
Interest expense 4,487 4,475 4,764 4,780
- --------------------------------------------------------------------------------
Net interest income 4,102 4,186 4,178 4,373
Provision for loan losses 100 68 50 50
Net securities gains 474 338 354 106
Other income 520 624 424 624
Other expenses 2,310 2,477 2,852 2,759
Income taxes 941 852 525 974
- --------------------------------------------------------------------------------
Net income $1,745 $1,751 $1,529 $1,320
================================================================================
Net income per diluted share $ 0.31 $ 0.31 $ 0.28 $ 0.24
================================================================================
Fiscal 1997
Interest income $7,709 $8,009 $8,010 $8,176
Interest expense 3,961 4,056 4,053 4,157
- --------------------------------------------------------------------------------
Net interest income 3,748 3,953 3,957 4,019
Provision for loan losses 150 200 150 100
Net securities gains 161 175 268 235
Other income 323 376 312 473
Other expenses 1,979 2,120 2,184 2,418
Income taxes 688 690 697 728
- --------------------------------------------------------------------------------
Net income $1,415 $1,494 $1,506 $1,481
================================================================================
Net income per diluted share $ 0.26 $ 0.28 $ 0.27 $ 0.27
================================================================================
Income per share calculations for each of the quarters is based on the weighted
average number of shares outstanding, including common stock equivalents for
each period and the sum of the quarters may not necessarily be equal to the full
year income per share amount. Net income per common and common equivalent share
has been restated for all periods presented to reflect a 2-for-1 stock split
effected in the form of a stock dividend on December 1, 1997.
39
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
-----------------------
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 2:00 p.m. on Wednesday, May
19, 1999 at:
The Aqua Turf Club
556 Mulberry Street
Southington, Connecticut 06489
FORM 10-K REPORT
A copy of the Corporation's 1998 Annual Report to the Securities and Exchange
Commission on Form 10-K may be obtained without charge by any shareholder upon
written request to:
Lesley DeAngelo
Bancorp Connecticut, Inc.
121 Main Street
Southington, Connecticut 06489-2533
STOCK TRANSFER AGENT:
American Stock Transfer & Trust Company
40 Wall Street - 46th Floor
New York, New York 10005
1-800-937-5449
INDEPENDENT ACCOUNTANTS:
PricewaterhouseCoopers LLP
100 Pearl Street
Hartford, Connecticut 06103
MARKET MAKERS
The following companies have generally been market makers in the trading of
Bancorp Connecticut, Inc. stock as of December 31, 1998:
Advest, Inc.
Keefe, Bruyette & Woods, Inc.
Sandler O'Neill & Partners
Tucker Anthony Incorporated
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
For more information contact:
American Stock Transfer & Trust Company
Dividend Reinvestment Dept.
40 Wall Street - 46th Floor
New York, New York 10005
1-800-278-4353
BANCORPCONNECTICUT, INC. INTERNET ADDRESS:
www.bkct.com
MARKET PRICE AND DIVIDENDS
The Corporation's common stock trades on the Nasdaq National Market tier of the
Nasdaq Stock Market under the symbol BKCT. There were approximately 1,787
shareholders of record on February 26, 1999. The high and low bid prices and
cash dividends per share for each quarter during the last two calendar years
were as follows:
Dividend
Quarter Ended High Low per Share
- --------------------------------------------------------------------------------
3/31/97 (a) $ 12.13 $ 10.75 $ 0.103
6/30/97 (a) 13.25 10.88 0.110
9/30/97 (a) 18.50 12.00 0.125
12/31/97 (a) 26.00 19.00 0.125
3/31/98 21.88 17.25 0.130
6/30/98 21.50 19.25 0.135
9/30/98 19.75 14.94 0.135
12/31/98 17.88 14.75 0.135
(a) Data has been restated to reflect a 2-for-1 stock split effected in the
form of a stock dividend on December 1, 1997.
SSB OFFICE LOCATIONS:
SOUTHINGTON OFFICES:
MAIN OFFICE
121 Main Street
MAIN OFFICE DRIVE-IN CENTER
Berlin Avenue behind Main Office
QUEEN CORNER OFFICE
900 Queen Street
SOUTH END OFFICE
921 Meriden-Waterbury Turnpike
SOUTHINGTON HIGH SCHOOL TRAINING BRANCH
720 Pleasant Street
BRADLEY MEMORIAL HOSPITAL ATM FACILITY
81 Meriden Avenue
MORTGAGE CENTER
188 North Main Street
WALLINGFORD OFFICE:
950 North Colony Road
SSB INTERNET ADDRESS:
www.ssbonline.com
40
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
BANCORP CONNECTICUT, INC. DIRECTORS & OFFICERS
----------------------------------------------
BOARD OF DIRECTORS
Walter J. Hushak
Chairman,
Southington Savings Bank
Retired Senior Vice President,
Janazzo Services, Inc.
Andrew J. Meade
Vice Chairman,
Southington Savings Bank
President, International Security
Products, Inc. dba Lori Lock
(Manufacturer of Security Products)
Norbert H. Beauchemin
Vice President
Dudzik & Beauchemin, P.C.
(Certified Public Accountants)
Michael J. Karabin
President,
Acme-Monaco Spring Corporation
(Manufacturer of springs, stampings, forms, orthodontic hardware and medical
assemblies)
David P. Kelley
Counsel, Southington Savings Bank
Partner, Kelley, Crispino & Kania (Attorneys at Law)
Frederick E. Kuhr
President and
controlling shareholder,
Evergreen Nursery, Inc.
Joseph J. LaPorte
Retired Manufacturers Representative,
B.C.S. Company
(Distributor of industrial metal
finishing chemicals and equipment)
Ralph G. Mann
Retired President,
Southington Savings Bank
Frank R. Miller
Managing Partner, Miller,
Moriarty and Company, L.L.C.
(Certified Public Accountants)
Robert D. Morton
President and
Chief Executive Officer,
Bancorp Connecticut, Inc.
Anthony S. Pizzitola
Retired President and Treasurer, Pizzitola Electric Co., Inc.
Dennis J. Stanek
Senior Vice President -
Investments
Tucker Anthony Incorporated
(Investment Banking Firm)
OFFICERS
Robert D. Morton
President and Chief Executive Officer
Wayne F. Patenaude
Treasurer/Secretary
Steven F. Nyren
Assistant Secretary
41
<PAGE>
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
SSB DIRECTORS AND OFFICERS
--------------------------
BOARD OF DIRECTORS
Walter J. Hushak
Chairman
Andrew J. Meade
Vice Chairman
Norbert H. Beauchemin
Michael J. Karabin
David P. Kelley
Frederick E. Kuhr
Joseph J. LaPorte
Ralph G. Mann
Frank R. Miller
Robert D. Morton
Anthony S. Pizzitola
Dennis J. Stanek
EXECUTIVE OFFICERS
Robert D. Morton
President and Chief Executive Officer
Richard A. Fracasso
Senior Vice President
Consumer Banking
Wayne F. Patenaude
Treasurer/Chief Financial Officer
William Taylor
Senior Vice President
Commercial Banking
OFFICERS
ACCOUNTING AND FINANCE:
Kathleen H. Demers
Senior Financial Analyst
Carl H. Schmidt
Controller
Stephen M. Settino
Director of Asset/Liability Management and Planning
ADVERTISING AND PUBLIC RELATIONS:
Cynthia K. Barker
Advertising and
Public Relations Manager
COMMERCIAL LENDING:
Daniel R. DeRosa
Vice President
Raymond D. Jannelli
Vice President
Anthony Palmieri, Jr.
Vice President
Duane L. Beale
Assistant Vice President
CONSUMER BANKING:
Paul E. MacDonald
Vice President
Retirement Plans Manager
Richard P. Dextraze
Assistant Vice President
Consumer Loan Manager
Community Reinvestment
Act Officer
Sue A. Kasek
Assistant Vice President
Consumer Loan
Kenneth G. Penfield, Jr.
Assistant Vice President
Residential Loan Manager
Donna M. Ierardi
Assistant Vice President
Manager, Wallingford Office
Claudia A. Crooker
Assistant Treasurer
Manager, Queen Corner Office
Carol Vreeland
Assistant Treasurer
Manager, Main Office
Christine S. Matteo
Consumer Loan
Joan E. Morelli
Manager, South End Office
Elizabeth M. Paradis
Assistant Manager
South End Office
CREDIT ADMINISTRATION:
Charles J. DeSimone, Jr.
Chief Credit Officer
Vincent L. Ruggiero
Vice President
Managed Assets
Diane L. Hoadley
Assistant Vice President
Credit & Loan Review
Diane McCoy
Commercial Loan
Documentation
HUMAN RESOURCES:
Donna M. Schaefer
Vice President
Director of Human Resources
OPERATIONS AND INFORMATION SYSTEMS:
Barry J. Abramowitz
Chief Operating and
Information Officer
Lynndel M. Bartulis
Vice President
Alternative Delivery Systems
Donna M. Glatz
Vice President
Branch and Deposit Operations
Susan M. Dobratz
Assistant Vice President
Call Center
Therese G. Kelly
Assistant Vice President
Trainer/Analyst
Annette D. Petruzzi
Loan Operations Manager
INVESTMENT SERVICES:
Robert P Vocelli
Financial Services Manager
Steven F. Nyren
Trust and Employee Benefits
NEW BUSINESS DEVELOPMENT:
William DellaVecchia
Senior Vice President
BCI FINANCIAL CORPORATION:
Timothy W. Rourke
President and
Chief Executive Officer
Joseph M. DeAngelo
Vice President
Operations
Carol M. Montagna
Lending
42
<PAGE>
[LOGO]
BancorpConnecticut, Inc.
- --------------------------------------------------------------------------------
121 Main Street
Southington, Connecticut 06489-2533
Subsidiary of Registrant State of Incorporation D/B/A'S
- ------------------------ ---------------------- -------
Southington Savings Bank Connecticut None
Subsidiaries of Southington
Savings Bank State of Incorporation D/B/A'S
- --------------------------- ---------------------- -------
BCIF Financial
Corporation Connecticut None
SSB Mortgage Corp. Connecticut None
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned directors and
officers of Bancorp Connecticut, Inc., a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"), hereby constitute
and appoint Robert D. Morton and Wayne F. Patenaude, their true and lawful
attorneys and agents to do any and all acts and things and execute any and all
instruments and documents which said attorneys and agents, or any of them, may
deem necessary or advisable or may be required to enable the Corporation to
comply with the Securities Exchange Act of 1934, as amended, and any rules,
regulations or requirements of the Securities and Exchange Commission in respect
thereof, in connection with the preparation and filing as required by said Act
of the Corporation's 1998 Annual Report to Shareholders, Annual Report on Form
10-K for the year ended December 31, 1998 (the "10-K"), and Proxy Statement and
Proxy Card to be issued in connection with the Corporation's 1999 Annual
Meeting; including specifically, but without limiting the generality of the
foregoing, power and authority to sign the names of the undersigned directors
and officers thereof in the capacities indicated below to the 10-K and all
amendments and supplements thereto, or any other appropriate form about to be or
heretofore or hereafter filed with the Securities and Exchange Commission in
respect of said Annual Report to Shareholders, 10-K, Proxy Statement, Proxy Card
or Annual Meeting and all instruments or documents filed as a part thereof or in
connection therewith; and each of the undersigned hereby ratifies and confirms
all that said attorneys, agents, or any of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has subscribed these
presents as of March 17, 1999.
SIGNATURE TITLE DATE
/S/ ROBERT D. MORTON President and Director March 17, 1999
Robert D. Morton (Principal Executive Officer)
/S/ WAYNE F. PATENAUDE Treasurer and Secretary March 17, 1999
- ------------------------- (Chief Financial and
Wayne F. Patenaude Accounting Officer)
/S/ NORBERT H. BEAUCHEMIN Director March 17, 1999
- --------------------------
Norbert H. Beauchemin
/S/ WALTER J. HUSHAK Director March 17, 1999
- -------------------------
Walter J. Hushak
<PAGE>
/S/ MICHAEL J. KARABIN Director March 17, 1999
- ---------------------------
Michael J. Karabin
/S/ DAVID P. KELLEY Director March 17, 1999
- --------------------------
David P. Kelley
/S/ FREDERICK E. KUHR Director March 17, 1999
- --------------------------
Frederick E. Kuhr
/S/ JOSEPH J. LAPORTE Director March 17, 1999
- --------------------------
Joseph J. LaPorte
Director
- --------------------------
Ralph G. Mann
/S/ ANDREW J. MEADE Director March 17, 1999
- --------------------------
Andrew J. Meade
/S/ FRANK R. MILLER Director March 17, 1999
- --------------------------
Frank R. Miller
/S/ ANTHONY S. PIZZITOLA Director March 17, 1999
- ------------------------
Anthony S. Pizzitola
/S/ DENNIS J. STANEK Director March 17, 1999
- --------------------------
Dennis J. Stanek
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 11,178
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 172
<INVESTMENTS-HELD-FOR-SALE> 217,333
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 284,840
<ALLOWANCE> (5,549)
<TOTAL-ASSETS> 521,376
<DEPOSITS> 345,563
<SHORT-TERM> 80,516
<LIABILITIES-OTHER> 4,752
<LONG-TERM> 40,630
0
0
<COMMON> 5,653
<OTHER-SE> 44,263
<TOTAL-LIABILITIES-AND-EQUITY> 521,376
<INTEREST-LOAN> 22,617
<INTEREST-INVEST> 12,301
<INTEREST-OTHER> 427
<INTEREST-TOTAL> 35,345
<INTEREST-DEPOSIT> 12,328
<INTEREST-EXPENSE> 18,506
<INTEREST-INCOME-NET> 16,839
<LOAN-LOSSES> 268
<SECURITIES-GAINS> 1,185
<EXPENSE-OTHER> 10,398
<INCOME-PRETAX> 9,636
<INCOME-PRE-EXTRAORDINARY> 9,636
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,345
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.14
<YIELD-ACTUAL> 7.39
<LOANS-NON> 1,265
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,949
<ALLOWANCE-OPEN> 5,306
<CHARGE-OFFS> 155
<RECOVERIES> 130
<ALLOWANCE-CLOSE> 5,549
<ALLOWANCE-DOMESTIC> 3,759
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,790
</TABLE>
Dear Shareholder:
You are cordially invited to attend the 1999 Annual Meeting of the
Shareholders of Bancorp Connecticut, Inc. (the "Company") to be held on
Wednesday, May 19, 1999. Matters scheduled for consideration at the Meeting are
the election of directors, and the ratification of the appointment of the
Company's independent accountants for 1999.
Please give the enclosed Proxy Statement your prompt and careful
attention. A copy of the Company's 1998 Annual Report to Shareholders also is
enclosed. If you need an additional copy of the Company's Annual Report, please
call Lesley A. DeAngelo at 860-620-5295.
It is important that your shares be represented at the Meeting. To
ensure that your shares will be represented, please sign and promptly return the
enclosed proxy in the envelope provided, regardless of whether you plan to
attend the Meeting. If you attend the Meeting, you may vote in person even if
you previously have mailed in your proxy.
Sincerely,
/s/ ROBERT D. MORTON
------------------------
ROBERT D. MORTON
President
<PAGE>
BANCORP CONNECTICUT, INC.
121 MAIN STREET
SOUTHINGTON, CONNECTICUT 06489
NOTICE OF THE ANNUAL MEETING OF SHAREHOLDERS OF
BANCORP CONNECTICUT, INC.
TO BE HELD MAY 19, 1999
TO THE SHAREHOLDERS OF BANCORP CONNECTICUT, INC.:
Notice is hereby given that the 1999 Annual Meeting of the Shareholders
(the "Meeting") of Bancorp Connecticut, Inc. (the "Company") will be held at
2:00 p.m. on Wednesday, May 19, 1999, at The Aqua Turf Club, 556 Mulberry
Street, Southington, Connecticut, for the following purposes:
(1) To elect four directors to serve until the 2002 annual meeting of
shareholders and until their successors are elected and have qualified;
(2) To ratify the appointment of PricewaterhouseCoopers LLP as the
Company's independent accountants for the fiscal year ending December 31,
1999; and
(3) To transact such other business as may properly come before the
Meeting or any adjournment thereof.
Only shareholders of record of outstanding shares of Common Stock of the
Company at the close of business on March 24, 1999, are entitled to notice of,
and to vote at, the Meeting or any adjournment or postponement thereof.
A list of the Company's shareholders will be open to the examination of any
shareholder, for any purpose germane to the Meeting, during ordinary business
hours, for at least 10 days prior to the Meeting, at the offices of the Company.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Wayne F. Patenaude
---------------------------
Wayne F. Patenaude
Secretary
Southington, Connecticut
April 16, 1999
YOUR VOTE IS IMPORTANT. TO VOTE YOUR SHARES, PLEASE MARK, SIGN, DATE
AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE WHETHER OR NOT YOU
PLAN TO ATTEND THE MEETING IN PERSON. IF YOU ATTEND THE MEETING, YOU MAY THEN
REVOKE YOUR PROXY AND VOTE IN PERSON.
<PAGE>
BANCORP CONNECTICUT, INC.
121 MAIN STREET
SOUTHINGTON, CONNECTICUT 06489
(860) 628-0351
------------------------------
PROXY STATEMENT
FOR ANNUAL MEETING
TO BE HELD MAY 19, 1999
-----------------------------------
INTRODUCTION
This Proxy Statement is furnished to shareholders of Bancorp Connecticut,
Inc., a Delaware corporation (the "Company"), in connection with the
solicitation of proxies by the Board of Directors of the Company (the "Board")
for use at the Annual Meeting of Shareholders of the Company to be held on
Wednesday, May 19, 1999, at 2:00 p.m., local time, at The Aqua Turf Club, 556
Mulberry Street, Southington, Connecticut 06489 and any adjournment or
postponement thereof (the "Meeting"). The Company is the holding company for
Southington Savings Bank, a Connecticut-chartered capital stock savings bank
(the "Bank").
At the Meeting, shareholders will be asked to consider and vote upon two
proposals: (1) the election of four directors to serve as directors of the
Company until the 2002 annual meeting of shareholders ("Proposal Number One");
and (2) the ratification of the appointment of PricewaterhouseCoopers LLP as the
Company's independent accountants for the fiscal year ending December 31, 1999
("Proposal Number Two").
This Proxy Statement is dated April 16, 1999, and is first being mailed to
shareholders along with the related form of proxy on or about April 16, 1999.
If a proxy in the accompanying form is properly executed and returned to
the Company in time for the Meeting and is not revoked prior to the time it is
exercised, the shares represented by the proxy will be voted in accordance with
the directions specified therein for the matters listed on the proxy card.
Unless the proxy specifies that it is to be voted against or voting authority is
to be withheld on a listed proposal, such proxy will be voted FOR each nominee
listed in Proposal Number One and FOR Proposal Number Two, and otherwise in the
discretion of the proxy holders as to any other matter that may come before the
Meeting.
Voting by those present during the Meeting will be by ballot. Votes will be
counted by tellers of the election. These tellers will canvas the shareholders
present at the Meeting, count their votes and count the votes represented by
proxies presented. Abstentions and broker nonvotes are counted for purposes of
determining the number of shares represented at the Meeting, but are deemed not
to have voted on the applicable proposal. Abstentions and broker nonvotes will
therefore have the same effect as a negative vote. Broker nonvotes occur when a
broker nominee, holding shares in street name for the beneficial owner thereof,
has not received voting instructions from the beneficial owner and does not have
discretionary authority to vote such shares.
<PAGE>
REVOCABILITY OF PROXY
Any shareholder of the Company who has given a proxy may revoke such proxy
at any time before it is voted by either (i) filing a written revocation or a
duly executed proxy bearing a later date with Wayne F. Patenaude, Secretary of
the Company, at Bancorp Connecticut, Inc., 121 Main Street, Southington,
Connecticut 06489, or (ii) attending the Meeting and voting in person before the
proxy is voted. Attendance at the Meeting will not in and of itself constitute
the revocation of a proxy.
RECORD DATE, OUTSTANDING SECURITIES AND VOTES REQUIRED
The Board has fixed the close of business on March 24, 1999 as the record
date (the "Record Date") for determining holders of outstanding shares of the
Company's Common Stock, par value $1.00 per share ("Common Stock") who are
entitled to notice of and to vote at the Meeting. As of the Record Date,
5,193,948 shares of Common Stock were issued and outstanding. Each share of
Common Stock is entitled to one vote, and a majority of the outstanding shares
of Common Stock will constitute a quorum for the transaction of business at the
Meeting. No other class of securities of the Company is outstanding or entitled
to vote at the Meeting.
The election of each nominee listed in Proposal Number One as a director of
the Company requires the affirmative vote of a plurality of the shares of Common
Stock which are present or represented at the Meeting. The approval of Proposal
Number Two requires the affirmative vote of a majority of the shares of Common
Stock which are present or represented at the Meeting.
The Company expects that the officers and directors of the Company will
vote the shares of Common Stock held by them (representing approximately 7.61%
of the shares of Common Stock issued and outstanding) in favor of each nominee
listed in Proposal Number One and in favor of Proposal Number Two.
PRINCIPAL SHAREHOLDERS
As of the Record Date, there were no persons or groups (as that term is
used in Section 13(d)(3) of the Securities Exchange Act of 1934) known to the
Company who own or may be deemed to own beneficially more than five percent of
the outstanding Common Stock.
PROPOSAL NUMBER ONE
ELECTION OF DIRECTORS
The Company's Certificate of Incorporation (the "Certificate") provides for
a Board of Directors of not less than seven and not more than fifteen members,
as fixed from time to time by the Board pursuant to the Company's Bylaws. The
Certificate also provides that the Board is divided into three classes, as
nearly equal in number as the then total number of directors constituting the
entire Board permits, with the term of office of one class expiring each year at
the annual meeting. Each class of directors is elected for a term of three years
except in the case of elections to fill vacancies or newly created
directorships.
<PAGE>
The Board presently consists of the twelve persons indicated below as
either nominee for director or continuing directors. Four individuals are to be
elected to serve for a term of three years and until the election and
qualification of their successors. Unless a shareholder WITHHOLDS AUTHORITY, the
holders of proxies representing shares of Common Stock will vote FOR the
election of Michael J. Karabin, David P. Kelley, Ralph G. Mann, and Anthony S.
Pizzitola as directors to serve until the Company's 2002 annual meeting and
until their successors are elected and have qualified. The Board has no reason
to believe that any of the nominees will decline or be unable to serve as a
director of the Company. However, if any such nominee shall be unavailable for
any reason, then proxies will be voted for the election of such person or
persons as may be recommended by the Board.
The following tables set forth, as of February 28, 1999, certain
information about each nominee director, each director continuing in office and
each executive officer of the Company and the Bank who is not a director. Unless
otherwise stated, all nominees, directors continuing in office and executive
officers have held the positions described for the past five years. The
Company's executive officers serve at the pleasure of the Board. Each nominee
and continuing director also serves as a director of the Bank.
NOMINEES AGE DIRECTOR SINCE TERM EXPIRING*
- -------- --- -------------- -------------
Michael J. Karabin 52 1994 2002
David P. Kelley 57 1994 2002
Ralph G. Mann 69 1994 2002
Anthony S. Pizzitola 68 1994 2002
CONTINUING DIRECTORS AGE DIRECTOR SINCE TERM EXPIRING
- -------------------- --- -------------- -------------
Andrew J. Meade 60 1994 2000
Frank R. Miller 60 1994 2000
Robert D. Morton 58 1994 2000
Dennis J. Stanek 56 1994 2000
Norbert H. Beauchemin 62 1995 2001
Walter J. Hushak 75 1994 2001
Frederick E. Kuhr 61 1994 2001
Joseph J. LaPorte 65 1994 2001
* Assumes election at the Meeting.
NORBERT H. BEAUCHEMIN, CPA, is Vice President of the accounting firm of
Dudzik & Beauchemin, P.C., CPAs, located in Southington, Connecticut.
WALTER J. HUSHAK has served as Chairman of the Board of Directors of the
Bank (the "Bank Board") since May 1994 and prior to that as Vice Chairman of the
Bank Board since 1982. He retired in April 1998 as Senior Vice President of
Janazzo Services, Inc., which is located in Southington, Connecticut.
MICHAEL J. KARABIN is President of Acme-Monaco Spring Corporation, a
manufacturer of springs, stampings, wire forms, orthodontic hardware and medical
assemblies located in New Britain, Connecticut.
DAVID P. KELLEY is a partner in the law firm of Kelley, Crispino & Kania,
Southington, Connecticut. He has been the Southington Town Attorney since
November 1993. He is also Counsel to the Bank.
FREDERICK E. KUHR is President and controlling shareholder of Evergreen
Nursery, Inc., Southington, Connecticut.
<PAGE>
JOSEPH J. LAPORTE retired in 1996 as a Manufacturers Representative of the
BCS Company, a distributor of industrial metal finishing chemicals and
equipment, located in Thompson, Connecticut. From 1992 to 1998, he was President
of JNF Associates, Inc., developers of real estate.
RALPH G. MANN retired as President and Chief Executive Officer of the Bank
on December 31, 1991. He was associated with the Bank as an officer or employee
for 37 years, including 10 years as Chief Executive Officer.
ANDREW J. MEADE has served as Vice Chairman of the Bank Board since May
1994. He is President of International Security Products, Inc. (doing business
as Lori Lock), a manufacturer of security products located in Southington,
Connecticut. He also is President of Delta Controls, a subsidiary of
International Security Products. Mr. Meade also has been the Chairman of the
Southington Town Council since 1993.
FRANK R. MILLER, CPA, is the Managing Partner of the accounting firm of
Miller, Moriarty and Company, L.L.C., located in New Britain, Connecticut.
ROBERT D. MORTON has been the President of the Company since its formation
on March 31, 1994. Mr. Morton has also been President and Chief Executive
Officer of the Bank since January 1992.
ANTHONY S. PIZZITOLA retired in October 1994 as President and Treasurer of
Pizzitola Electric Co., Inc., an electrical contractor located in Southington,
Connecticut.
DENNIS J. STANEK is Senior Vice President-Investments of Tucker Anthony
Incorporated, an investment banking firm. Mr. Stanek is based in such firm's
Hartford, Connecticut office.
COMPANY EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Mr. Wayne F. Patenaude is the Company's only executive officer other than
Mr. Morton.
NAME AGE POSITION
---- --- --------
Wayne F. Patenaude 38 Secretary and Treasurer of the Company;
Treasurer and Chief Financial Officer of
the Bank
WAYNE F. PATENAUDE has been the Treasurer and Secretary of the Company
since January 1, 1999 and March 17, 1999, respectively, and Chief Financial
Officer and Treasurer of the Bank since January 1, 1999. Prior to joining the
Bank, he served as Senior Vice President and Chief Financial Officer of
Glastonbury Bank and Trust Company. He has been a Chartered Financial Analyst
since 1994.
THE BOARD OF DIRECTORS AND CERTAIN OF ITS COMMITTEES
The Board has a standing Audit and Compliance Committee whose members are
appointed annually. The Audit and Compliance Committee currently consists of
Messrs. Beauchemin, Hushak, Karabin, Kelley, Meade and Miller. The Audit and
Compliance Committee reviews the report of the Company's internal audit function
and compliance function, recommends annually to the Board the appointment of the
independent certified public accountants for the Company, reviews the scope and
the cost of the prospective annual audit and reviews the results thereof with
the Company's independent certified public accountants, reviews management's
procedures and policies relative to the adequacy of the Company's internal
accounting controls, and reviews compliance with federal and state laws relating
to accounting practices. The members of the Audit and Compliance Committee are
also members of the Bank's Audit and Compliance Committee.
<PAGE>
The Board has a Compensation Committee that meets jointly with the
Compensation Committee of the Bank Board because the Company has no paid
employees. The Compensation Committee is responsible for developing the
Company's overall compensation philosophy and recommending the compensation of
the Bank's executive officers to the Bank Board and the Company Board. Mr.
Morton does not participate in any Board or Bank Board discussions concerning
his compensation. The Compensation Committee currently consists of Messrs.
Hushak, Karabin, Kelley, LaPorte, Meade, Miller, and Pizzitola. See
"Compensation Committee Report on Executive Compensation" for a more detailed
description of the Compensation Committee's function.
The Board has not established a standing nominating committee. The Board as
a whole operates as a nominating committee. A shareholder's right to nominate
individuals for election to the Board is set forth in the Company's Bylaws.
Pursuant to the Bylaws, a shareholder must deliver written notice of such
shareholder's intent to make such a nomination to, or mail such notice so that
it is received by, the Company's Secretary at the Company's principal executive
offices not less than 20 days nor more than 130 days prior to the applicable
meeting. The Bylaws further require that the written notice set forth (1) as to
each person whom the shareholder proposes to nominate (a) such person's name,
age, business address and residence address, (b) such person's principal
occupation or employment, (c) the class and number of shares of the Company such
person beneficially owns, and (d) any other information required by law; and (2)
as to the shareholder giving such notice (a) such shareholder's name and address
as they appear on the Company's records, (b) the class and number of shares of
the Company such shareholder beneficially owns, (c) a representation that the
shareholder is a holder of record of stock of the Company entitled to vote at
the applicable meeting and intends to appear in person or by proxy at such
meeting to nominate the person or persons specified in the notice, and (d) a
description of all arrangements or understandings between the shareholder and
each nominee specified in the notice and any other person or persons (naming
such other person or persons) pursuant to which the shareholder will make such
nomination or nominations. A copy of the Company's Bylaws will be provided
without charge to any shareholder of the Company upon such shareholder's written
request to Lesley A. DeAngelo, Bancorp Connecticut, Inc., 121 Main Street,
Southington, Connecticut 06489.
During 1998, the Board held 16 meetings, the Audit and Compliance
Committee held 1 meeting, and the Compensation Committee held 5 meetings. During
1998, each director of the Company attended at least 75% of the meetings of the
Board and all committees upon which he served, except Mr. Pizzitola who attended
57% of such meetings.
<PAGE>
STOCK OWNERSHIP OF DIRECTORS AND OFFICERS
The following table sets forth as of February 28, 1999, the number of
shares of Common Stock beneficially owned by (a) each director, nominee for
director and the individuals named in the Summary Compensation Table of the
Company; and (b) all directors, nominees and executive officers of the Company
as a group.
Name of Beneficial Amount and Nature of Percent of
Owner Beneficial Ownership (1) Class (2)
- --------------------- ------------------------ ---------
Robert D. Morton 200,420 (3) 3.27%
Walter J. Hushak 88,062 (4) 1.44%
Anthony S. Pizzitola 70,984 (5) 1.16%
Anthony Priore, Jr. 67,456 (6) 1.10%
Joseph J. LaPorte 67,414 (7) 1.10%
Ralph G. Mann 65,066 (8) 1.06%
Andrew J. Meade 62,592 (9) 1.02%
Norbert H. Beauchemin 59,271 (10) *
Michael J. Karabin 58,184 (11) *
Frederick E. Kuhr 55,788 (12) *
David P. Kelley 46,082 (13) *
Dennis J. Stanek 38,868 (14) *
Frank R. Miller 31,725 (15) *
All directors, nominees and executive 912,212 (16) 14.87%
officers as a group (14 persons)
* LESS THAN ONE PERCENT.
- ----------------------------------------------
(1) Except as otherwise noted, each person named in the table has sole voting
and investment power over the number of shares of Common Stock listed
opposite his name. The Company's directors and principal officers hold
options to purchase shares of Common Stock pursuant to the Company's Stock
Option Plans. For the purpose of the table, shares subject to those options
which may be exercised within the next 60 days ("currently exercisable
options") are deemed beneficially owned by the individuals holding such
options. Until such time as the options are exercised, no person will have
voting or investment power over the shares subject to the options.
(2) For the purpose of computing the percentage of outstanding Common Stock
owned by each person named in the table, shares subject to currently
exercisable options held by such person pursuant to the Company's Stock
Option Plans are deemed to be outstanding.
(3) Includes beneficial ownership of 53,490 shares purchased by Mr. Morton for
himself; and 9,250 shares purchased by Mr. Morton's wife over which Mr.
Morton has no voting or investment power and of which Mr. Morton disclaims
beneficial ownership. Includes 137,680 shares issuable upon the exercise of
currently exercisable options.
<PAGE>
(4) Includes 24,900 shares issuable upon exercise of currently exercisable
options.
(5) Includes beneficial ownership of 30,376 shares purchased by Mr. Pizzitola
for himself and 10,028 shares purchased by Mr. Pizzitola's wife over which
Mr. Pizzitola has no voting or investment power. Includes 30,580 shares
issuable upon the exercise of currently exercisable options.
(6) Includes 56,800 shares issuable upon exercise of currently exercisable
options.
(7) Includes 33,474 shares purchased jointly by Mr. LaPorte and his wife over
which Mr. LaPorte has shared voting and investment power. Includes 33,940
shares issuable upon exercise of currently exercisable options.
(8) Includes 36,586 shares purchased jointly by Mr. Mann and his wife over
which Mr. Mann has shared voting and investment power. Includes 28,480
shares issuable upon the exercise of currently exercisable options.
(9) Includes beneficial ownership of 11,959 shares purchased by Mr. Meade for
himself; 991 shares purchased by Mr. Meade's wife; 10,495 shares purchased
by Mr. Meade for the Meade Trust; and 5,207 shares purchased jointly by Mr.
Meade and his wife. Includes 33,940 shares issuable upon the exercise of
currently exercisable options.
(10) Includes 4,023 shares purchased by Mr. Beauchemin for himself; 3,636 shares
purchased by Mr. Beauchemin's wife over which Mr. Beauchemin has no voting
or investment power and of which Mr. Beauchemin disclaims beneficial
ownership; 28,680 shares purchased by Dudzik & Beauchemin, P.C. CPA's
Profit Sharing Trust over which Mr. Beauchemin has no voting or investment
power and of which Mr. Beauchemin disclaims beneficial ownership; and 432
shares purchased by Dudzik & Beauchemin, P.C. CPA's over which Mr.
Beauchemin has no voting or investment power and of which Mr. Beauchemin
disclaims beneficial ownership. Includes 22,500 shares issuable upon
exercise of currently exercisable options.
(11) Includes beneficial ownership of 4,612 shares purchased by Mr. Karabin for
himself; 2,570 shares purchased by Mr. Karabin's wife for their daughters
over which Mr. Karabin has no voting or investment power, and of which Mr.
Karabin disclaims beneficial ownership of 1,528 shares; 2,002 shares
purchased by Mr. Karabin's wife for their sons over which Mr. Karabin has
no voting or investment power; and 22,920 shares purchased by Acme-Monaco
Spring Corporation (Profit Sharing), of which Mr. Karabin is President,
over which Mr. Karabin has shared voting and investment power. Includes
26,080 shares issuable upon the exercise of currently exercisable options.
(12) Includes beneficial ownership of 21,848 shares purchased jointly by Mr.
Kuhr and his wife over which Mr. Kuhr has shared voting and investment
power. Includes 33,940 shares issuable upon the exercise of currently
exercisable options.
(13) Includes 33,940 shares issuable upon exercise of currently exercisable
options.
(14) Includes 33,940 shares issuable upon exercise of currently exercisable
options.
<PAGE>
(15) Includes beneficial ownership of 11,521 shares purchased by Mr. Miller for
himself; and 104 shares purchased by Mr. Miller's wife as custodian for an
unrelated third party over which Mr. Miller has no voting or investment
power and of which Mr. Miller disclaims beneficial ownership. Includes
20,100 shares issuable upon the exercise of currently exercisable options.
(16) Includes 516,820 shares issuable upon the exercise of currently exercisable
options.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of its Common
Stock, to file reports of ownership and changes in ownership with the Securities
and Exchange Commission (the "Commission") and the National Association of
Securities Dealers, Inc. Officers, directors and greater than ten percent
shareholders are required by the Commission to furnish the Company with copies
of all Section 16(a) forms that they file. The Company is not aware of any
person or group that owns in excess of five percent of the outstanding Common
Stock. See "Principal Shareholders."
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no reports on Form 5
were required for those persons, the Company believes that during 1998 all
filing requirements applicable to its officers and directors were complied with,
except that Mr. Stanek filed one late report of beneficial ownership on Form 4
regarding one transfer of securities.
EXECUTIVE COMPENSATION
The following tables set forth information with respect to Mr. Morton's and
Mr. Anthony Priore, Jr.'s compensation. Mr. Morton is the Company's Chief
Executive Officer and Mr. Priore was the Company's Treasurer and Secretary in
1998 and they are the only officers of the Company whose salary and bonus
exceeded $100,000 in 1998. All amounts listed below were paid by the Bank to Mr.
Morton in his capacity as the Bank's President and Chief Executive Officer and
to Mr. Priore in his capacity as the Bank's Senior Vice President and Chief
Financial Officer.
SUMMARY COMPENSATION TABLE
- -------------------------------------------------------------------------------
Annual Compensation Long-Term
Compensation
-------------------- ---------------
Awards
---------------
Securities
Name Underlying All Other
and Salary Bonus(1) Options/SARs(2) Compensation
Principal Position Year ($) ($) (#) ($)
- --------------------------------------------------------------------------------
Robert D. Morton, 1998 $181,617 $0 7,500 $10,062 (3)
President 1997 $163,028 $40,000 25,000 $ 4,750 (4)
1996 $156,180 $30,000 12,500 $ 4,500 (4)
- -------------------------------------------------------------------------------
Anthony Priore, Jr., 1998 $ 90,058 $10,000 0 $ 3,302 (5)
Treasurer and 1997 $ 83,558 $20,000 8,000 $ 3,017 (5)
Secretary * 1996 $ 81,000 $17,000 4,000 $ 2,850 (5)
- --------------------------------------------------------------------------------
(1) Consists of cash distributions under the Bank's profit sharing plan.
(2) Consists only of securities underlying options. Neither the Company nor the
Bank has any plan pursuant to which Stock Appreciation Rights ("SARs") may
be granted to any person.
(3) Includes aggregate contributions of $4,800 made by the Bank to the Bank's
savings plan for Mr. Morton's benefit and $5,262 for automobile allowance.
<PAGE>
(4) Includes aggregate contributions made by the Bank to the Bank's savings
plan for Mr. Morton's benefit.
(5) Consists of contributions made by the Bank to the Bank's savings plan for
Mr. Priore's benefit.
* Mr. Priore resigned from his positions on December 31, 1998 and left the Bank
on February 12, 1999.
STOCK OPTIONS GRANTED IN 1998.
- -----------------------------
The following table sets forth certain information regarding stock options
granted to the individuals named in the Summary Compensation Table during 1998.
In addition, in accordance with the Commission's rules, the table also shows a
hypothetical potential realizable value of such options based on assumed rates
of annual compounded stock price appreciation of 5% and 10% from the date the
options were granted over the full option term. The assumed rates of growth were
selected by the Company for illustration purposes only, and are not intended to
predict future stock prices, which will depend upon market conditions and the
Company's future performance and prospects. Based upon the closing stock price
and the number of common shares outstanding at the end of 1998, an assumed
annual stock price appreciation of 10% would produce a corresponding aggregate
pretax gain over the full option term of approximately $122.7 million for the
Company's common shareholders.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR (1)
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation For Option
Individual Grants Term(2)
- ----------------------------------------------------------------------------------------------------------------------------
Number of Percent of
Securities Total
underlying Options/
Options/SARs SARs Granted Exercise or
Granted to Employees Base Price Expiration 5% 10%
Name (#) in Fiscal Year ($/Sh) Date (3) ($) ($)
- ------------------ ----------------- --------------- --------------- --------------------- ---------------- ----------------
Robert D. Morton, 7,500 23% 15.625 12/21/08 76,753 191,630
President
- ------------------ ----------------- --------------- --------------- --------------------- ---------------- ----------------
Anthony -0- -0- N/A N/A N/A N/A
Priore, Jr.,
Treasurer
- ------------------ ----------------- --------------- --------------- --------------------- ---------------- ----------------
</TABLE>
(1) Neither the Company nor the Bank has any plan pursuant to which SARs may be
granted to any person.
<PAGE>
(2) Potential Realizable Value is based on the assumed annual growth rates for
each of the grants shown over their ten-year option term. Actual gains, if
any, on stock option exercises are dependent on the future performance of
the Company's Common Stock. There can be no assurance that the amounts
reflected in this table will be achieved.
(3) The options granted to Mr. Morton cannot be exercised until December 21,
1999.
AGGREGATED OPTION EXERCISES IN 1998 AND OPTION VALUES AT DECEMBER 31, 1998.
The following table sets forth certain information concerning stock option
exercises by the individuals named in the Summary Compensation Table during
1998, including the aggregate value of gains on the date of exercise. In
addition, this table includes the number of shares covered by both exercisable
and non-exercisable stock options as of December 31, 1998. Also reported are the
values for "in-the-money" options that represent the positive spread between the
exercise price of any such existing stock options and the closing market price
of the Common Stock at December 31, 1998.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES (1)
- ------------------------------------------------------------------------------------------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised in-the-Money
Shares Acquired Options/SARs at Fiscal Options/SARs at Fiscal Year-End
on Exercise Value Realized Year-End (#) ($)
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- -------------------- ---------------- ---------------- ------------------------- ---------------------------------
Robert D. Morton, 0 0 160,720/7,500 1,202,516/0
President
- -------------------- ---------------- ---------------- ------------------------- ---------------------------------
Anthony Priore, Jr. 0 0 56,800/0 441,588/0
Treasurer
- -------------------- ---------------- ---------------- ------------------------- ---------------------------------
</TABLE>
(1) Mr. Morton and Mr. Priore do not hold any SARs.
PENSION PLAN
The Bank maintains a noncontributory defined benefit pension plan that has
been qualified under the Internal Revenue Code of 1986, as amended (the "Code"),
and the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
The pension plan covers full-time employees of the Bank who have attained the
age of 21 and have completed at least one year of service with the Bank. In
general, the pension plan provides for monthly payments to or on behalf of each
covered employee upon such employee's normal retirement date after the later of
reaching the age of 65 or the fifth anniversary of the employee's participation
in the plan. The plan also provides the option of receiving early retirement
benefits, provided that the participant has reached the age of 55 and has at
least 10 years of service with the Bank.
Effective for benefits earned after June 30, 1989, benefit payments to a
participant are based upon (i) the employee's number of years of credited
service (up to a maximum of 30), (ii) his average cash compensation (excluding
bonuses and other special pay) for the 60 consecutive calendar months of highest
earnings during the last 120 consecutive calendar months preceding the
employee's retirement date, and (iii) his Social Security covered compensation.
A participant may choose from a variety of monthly payment options, including
payments for the participant's lifetime only, or for the participant's lifetime
and the lifetime of his surviving spouse.
<PAGE>
Under the pension plan, the Bank makes an annual contribution for the
benefit of eligible employees to meet the funding requirements of the Code and
ERISA. Such contributions are computed on an actuarial basis. All of the
contributions to and all of the expenses involved in administering the pension
plan are paid entirely by the Bank. Although the Bank's employees no longer
contribute to the pension plan to help fund their benefits, they have previously
made such contributions.
<TABLE>
<CAPTION>
SOUTHINGTON SAVINGS BANK
DEFINED BENEFIT PENSION PLAN
ANNUAL PENSION BENEFITS
BASED ON YEARS OF SERVICE
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Years of Service
- -------------------------------------------------------------------------------------------------------------
Final
Average
Earnings 10 15 20 25 30 35
- ------------ ------------- ---------------- --------------- ---------------- ---------------- ---------------
$ 20,000 $ 3,000 $ 4,500 $ 6,000 $ 7,500 $ 9,000 $ 9,000
- ------------ ------------- ---------------- --------------- ---------------- ---------------- ---------------
25,000 3,750 5,625 7,500 9,375 11,250 11,250
- ------------ ------------- ---------------- --------------- ---------------- ---------------- ---------------
35,000 5,536 8,304 11,072 13,840 16,608 16,608
- ------------ ------------- ---------------- --------------- ---------------- ---------------- ---------------
50,000 8,761 13,142 17,522 21,903 26,283 26,283
- ------------ ------------- ---------------- --------------- ---------------- ---------------- ---------------
75,000 14,136 21,204 28,272 35,340 42,408 42,408
- ------------ ------------- ---------------- --------------- ---------------- ---------------- ---------------
100,000 19,511 29,267 39,022 48,778 58,533 58,533
- ------------ ------------- ---------------- --------------- ---------------- ---------------- ---------------
125,000 24,886 37,329 49,772 62,215 74,658 74,658
- ------------ ------------- ---------------- --------------- ---------------- ---------------- ---------------
150,000 30,261 45,392 60,522 75,653 90,783 90,783
- ------------ ------------- ---------------- --------------- ---------------- ---------------- ---------------
175,000* 32,411 48,617 64,822 81,028 97,233 97,233
- ------------ ------------- ---------------- --------------- ---------------- ---------------- ---------------
200,000* 32,411 48,617 64,822 81,028 97,233 97,233
- ------------ ------------- ---------------- --------------- ---------------- ---------------- ---------------
</TABLE>
* Compensation limited to $160,000
The above table reflects the benefit formula that is currently in effect for
those earning benefits after June 30, 1989. Effective for benefits earned on and
after June 30, 1994, the limit on an individual's compensation is $150,000, with
future indexing, under Section 401(a)(17) of the Code. The limit for 1995 and
1996 was $150,000. The limit for 1997 and 1998 was $160,000. The limit for 1999
is indexed at $160,000.
The pension plan covers a participant's cash compensation (excluding
bonuses and other special pay), which is approximately equivalent to the annual
compensation reported in the column entitled "Salary" in the "Summary
Compensation Table" above. The above table illustrates annual pension benefits
for an employee who retired at age 65 in 1998 and elects to have equal payments
paid over his lifetime, with no continuation to a spouse. The benefits listed in
the table are not subject to a deduction for Social Security or any other offset
amount. For the purposes of the pension plan, at June 30, 1998, Mr. Morton had 7
years of service and Mr. Priore had 21 years of service.
<PAGE>
SUPPLEMENTAL PENSION PLAN
Effective January 1, 1996, the Bank adopted a supplemental executive
retirement plan ("SERP") for Mr. Morton. Under the terms of the SERP, Mr. Morton
will receive a supplemental pension benefit at retirement equal to the excess
benefit which would have accrued if the Bank's defined benefit pension plan
benefit were calculated without regard to the compensation and benefit limits of
Sections 401(a)(17) and 415 of the Code.
Retirement benefits payable under the SERP may be paid in any form
permitted under the Bank's defined benefit pension plan, a lump sum payout, or a
fixed number of equal annual installments commencing when Mr. Morton begins
receipt of his benefits under the defined benefit pension plan.
The Bank has funded its obligations under the SERP by purchasing a cash
surrender value life insurance policy on Mr. Morton.
Effective December 21, 1998, the Bank adopted another SERP for Mr. Morton,
which in combination with current and prior other employer provided retirement
benefits would provide upon Mr. Morton's retirement a benefit equal to 60% of
his final average compensation. The benefits under the Plan will not vest until
Mr. Morton's death, disability or completion of 10 years service with the Bank
(on June 30, 2000), except for a change of control, in which event his benefits
will immediately vest. The Bank's first funding obligation under this plan will
not occur until 1999. The Bank expects to fund its obligations with assets to be
purchased by the Bank and held in a grantor trust.
SAVINGS PLAN
In 1987, the Bank adopted a contributory defined contribution profit
sharing plan that is intended to be qualified under the Code and ERISA, and is
further intended to comply with the requirements of Section 401(k) of the Code.
The plan covers employees who have attained the age of 21 and have completed at
least one year of service with the Bank. Eligible employees may elect to defer
from 1% to 15% of their compensation (but, for 1998, not in excess of $10,000)
by means of payroll deduction. For employees earning over $80,000, the amount
which they may contribute may be further limited in any year to enable the
savings plan to meet certain tests imposed by the Code. Participants who work at
least 500 hours during a calendar year also receive a Bank matching contribution
equal to, in the Bank's discretion, no more than 6% of their compensation for
the calendar year. Such participants received Bank matching contributions of 3%
of their compensation for 1998. Such participants will receive matching
contributions of 3% of their compensation for 1999. Participants are always 100%
vested in their contributions and Bank matching contributions.
Contributed sums are held in trust and invested by the trustee.
Participants receive a proportionate share of plan earnings or losses based upon
their investment selection and their account balances. Participants may request
a loan from their accounts in the plan subject to certain restrictions.
Generally, the amount of the loan may not exceed one-half of their interest in
the plan. Participants may request a withdrawal of their contributions in
certain circumstances. Otherwise, upon a participant's retirement, death,
disability or termination of employment, the participant's accounts may be paid
out in a lump sum.
EMPLOYMENT AGREEMENT
The Bank and Robert D. Morton, President and Chief Executive Officer of the
Company and the Bank, are parties to a three-year employment agreement, which
expires January 1, 2000. The term of the employment agreement extends
automatically for one additional year on each January 1, so that there are
successive three-year terms of employment, unless either party gives 90-days
advance notice. The agreement provides, among other things, for an annual review
of Mr. Morton's salary, for merit increases at the discretion of the Bank Board,
and for participation in bonuses and employee benefit plans and fringe benefits
which are or may be adopted by the Bank for its executive employees.
<PAGE>
The Bank Board may terminate Mr. Morton's employment agreement at any time
with or without cause. If he were terminated without cause, Mr. Morton would be
entitled to receive either a monthly payment over the remaining term of the
agreement or a lump sum amount equal to Mr. Morton's then current salary for the
remaining term of the agreement, discounted by one-half of one percent for each
month of the remaining term of the agreement. Such amounts would not be reduced
by any compensation that Mr. Morton might receive from new employment. If Mr.
Morton's employment is terminated within one year of a change in control of the
Company, either involuntarily by action of the Bank or by Mr. Morton, the
agreement provides for a lump sum severance payment to Mr. Morton on or before
his last day of employment with the Bank equal to three times the highest
compensation paid or payable to Mr. Morton with respect to any twelve
consecutive month period during the three years ending with the date of Mr.
Morton's termination. Severance payments would be reduced by any liability of
the Bank for any payments made for termination without cause but not for
compensation received for any new employment. The employment agreement also
contains a two-year covenant not to compete if Mr. Morton terminates his
employment without the consent of the Bank Board or more than one year after a
change in control of the Company and/or the Bank.
TRANSACTIONS WITH MANAGEMENT
There has been no transaction or series of transactions since January 1,
1998, and no transactions are proposed, to which the Company or the Bank is a
party in which the amount involved exceeds $60,000 and in which any director,
nominee, executive officer or member of their immediate families has an
interest.
CERTAIN BUSINESS RELATIONSHIPS
Mr. Dennis J. Stanek, a member of the Board, is a Senior Vice President -
Investments of Tucker Anthony Incorporated ("Tucker Anthony"), which firm
provides securities brokerage services to the Bank. Mr. Stanek did not receive
any portion of the fees paid by the Bank to Tucker Anthony in connection with
these services during 1998. Tucker Anthony will continue to perform such
services in 1999.
For information concerning Mr. Kelley's relationship with the Bank, see
"Compensation Committee Interlocks and Insider Participation" below.
In the opinion of management, the services described in this section and
under "Transactions with Management" were provided on terms at least as
favorable as could be obtained from independent parties. The Company and the
Bank expect to continue to use the services of each of the above persons and
entities in the future.
INDEBTEDNESS OF MANAGEMENT AND OTHERS
The Bank has engaged and expects to engage in the future in banking
transactions in the ordinary course of business with directors and executive
officers of the Company and their associates and members of their respective
families. Such transactions are made on substantially the same terms, including
interest rates and collateral on loans, as those prevailing at the same time for
comparable transactions with others and do not involve more than the normal risk
of collectibility or present other unfavorable features.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company provides no cash compensation to its executive officers.
Instead, the Bank provides such compensation.
<PAGE>
The Compensation Committee of the Company is responsible for reviewing and
approving the Company's overall compensation philosophy and, together with the
Compensation Committee of the Bank, recommending the compensation of the Bank's
executive officers. The Compensation Committee's recommendations on executive
compensation are presented to the Bank Board and the Board for review and
approval.
The Bank's compensation program is comprised of a base salary, stock
options, an annual cash profit sharing program and customary retirement,
insurance and vacation benefits.
In establishing executive compensation, one of the Compensation Committee's
primary considerations is its review of industry data from peer group surveys of
salary ranges and incentive pay. The Bank's peer group is determined based on
company asset size, number of employees and geographical considerations. The
Compensation Committee exercises discretion and makes judgments after
considering all factors that are relevant to the success of the Bank, including
the achievement of objective targets relating to the Bank's management and
financial performance. The Compensation Committee considered the following
guidelines in establishing Mr. Morton's compensation: overall leadership of the
Bank and the Company; development of future strategies for the Bank and the
Company; implementation of strategic plans; achievement of performance targets
that reflect the continued financial success of the Bank and the Company and
overall shareholder value. Mr. Morton received an annual merit increase of
$19,449 for 1998 (or 11.7% of his 1997 salary).
Although, in previous years, the Compensation Committee has established a
profit sharing pool each year, the Compensation Committee decided for the year
ended 1998 to phase out the profit sharing pool by 1999, and to utilize some of
the accrued dollars in the pool to adjust base salaries and ranges to make them
more competitive.
Although certain employees were paid a percentage of last year's profit
sharing payout the Board of Directors voted not to pay Mr. Morton a profit
sharing pool payout in 1998, but, instead increased his base salary in 1999 to
make it more in line with that of his peer group.
The Board also voted effective December, 1998 to provide him with an
additional supplemental executive retirement plan, as described under
"Supplemental Pension Plan," to make his plan more in line with that of his peer
group.
Stock options are granted to employees at all levels of the organization.
In recommending option grants for 1998, the Compensation Committee reviewed all
ownership of options and distributed new options to certain officers, based on
total past options granted. In 1998, Mr. Morton received options to purchase
7,500 shares of the Company's common stock, representing 23% of the total
options distributed to those employees during 1998.
The Compensation Committee believes that executive compensation levels
during fiscal 1999 adequately reflect the Bank's compensation goals, policies
and philosophies. Effective for 1999, Mr. Morton's total compensation award
reflects the Compensation Committee's judgment based on its evaluation of Mr.
Morton's contribution to the Bank's 1998 operating results.
Walter J. Hushak David P. Kelley Frank R. Miller
Michael J. Karabin Joseph L. LaPorte Anthony S. Pizzitola
Andrew J. Meade
* * * *
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Hushak, Karabin, Kelley, LaPorte, Meade, Miller and Pizzitola
served as members of the Compensation Committee of the Company and the Bank
Board during the fiscal year ended December 31, 1998. As part of the Boards'
review of the Compensation Committee's recommendations, Mr. Morton participated
in the Boards' deliberations concerning executive officer compensation. Mr.
Morton did not participate in any such deliberations relating to his own
compensation.
Mr. Kelley is a partner of the law firm of Kelley, Crispino & Kania. He
received a retainer of $17,000 for acting as Bank Counsel in 1998. In 1998, the
Bank paid Kelley, Crispino & Kania fees for additional legal representation on
various matters. Mr. Kelley will receive a $20,000 retainer for acting as Bank
counsel in 1999. Kelley, Crispino & Kania continues to represent the Bank on
various legal matters.
Mr. Morton is the President of the Company and President and Chief
Executive Officer of the Bank.
COMPENSATION OF DIRECTORS
The directors of the Company are also directors of the Bank. In 1998, each
director of the Bank, other than the President, received a fee of $400 for
attendance at each regular meeting of the Bank Board, $500 for attendance at
each director/officer seminar, and $300 for attendance at each meeting of a
committee of the Bank Board. Company board and committee meetings normally
immediately follow Bank meetings, and directors receive no additional
compensation for their services at such meetings. When a Company meeting does
not occur on the same day as a Bank meeting, the Company pays non-officer
directors for each meeting based upon the same rate schedule in effect for the
Bank.
In addition to his fees for attendance at Bank Board and committee
meetings, the Bank in 1998 also paid Walter J. Hushak $17,000 for services
rendered as Bank Chairman. Mr. Hushak will receive $20,000 for services rendered
as Bank Chairman in 1999.
Directors who are not employees of the Company may participate in the 1997
Stock Option Plan (the "1997 Plan") and be awarded non-qualified stock options
("NQSO's"). Nonemployee directors were previously eligible to be awarded NQSO's
pursuant to the 1993 Stock Option Plan that terminated on May 14, 1997 upon the
approval of the 1997 Stock Option Plan. The exercise price of these NQSO's may
never be less than the fair market value of the underlying Common Stock on the
date the NQSO's are granted.
Pursuant to the 1997 Plan, on December 21, 1998, Messrs. Beauchemin,
Hushak, Karabin, Kelley, Kuhr, LaPorte, Mann, Meade, Miller, Pizzitola and
Stanek were each granted NQSO's to purchase 7,500 shares of Common Stock. These
options become exercisable on December 21, 1999 at an exercise price of $15.625
per share and expire on December 21, 2008.
SHAREHOLDER RETURN PRESENTATION
The following graph compares the change in the Company's cumulative total
return on its Common Stock to (a) the change in the cumulative total return on
the stocks included in the Standard and Poor's 500 Index and (b) the change in
the cumulative total return on the stocks included in the Keefe, Bruyette &
Woods, Inc. New England Bank Index assuming an investment of $100 made on
December 31, 1993, in the Bank, the Company's sole subsidiary, and comparing
relative values on December 31, 1998. All of these cumulative total returns are
computed assuming the reinvestment of dividends at the frequency with which
dividends were paid during the period. Note that the Common Stock price
performance shown below should not be viewed as being indicative of future
performance.
<PAGE>
Performance Graph
INDEX OF TOTAL RETURN (12/31/93 = 100)
- ------------- --------------- ------------------- --------------- --------------
Price Plus
S&P 500 KBW New England BKCT Cumulative
Date Index Bank Index Indexed Dividends
- ------------- --------------- ------------------- --------------- --------------
12/31/93 100.00 100.00 100.00 $5.625
3/31/94 96.24 105.19 115.68 $6.507
6/30/94 96.65 123.93 120.25 $6.764
9/30/94 101.38 118.33 113.75 $6.399
12/31/94 101.36 100.67 99.60 $5.602
- ------------- --------------- ------------------- --------------- --------------
3/31/95 111.19 113.03 100.83 $5.671
6/30/95 121.77 128.41 131.28 $7.385
9/30/95 131.42 146.93 147.39 $8.291
12/31/95 139.31 157.13 142.07 $7.991
- ------------- --------------- ------------------- --------------- --------------
3/31/96 146.78 157.45 165.61 $9.316
6/30/96 153.35 167.00 221.14 $12.439
9/30/96 158.05 187.66 221.78 $12.475
12/31/96 171.21 217.03 223.75 $12.586
- ------------- --------------- ------------------- --------------- --------------
3/31/97 175.83 225.37 233.24 $13.120
6/30/97 206.46 270.80 258.02 $14.514
9/30/97 221.91 319.57 361.74 $20.348
12/31/97 228.26 373.11 430.52 $24.217
- ------------- --------------- ------------------- --------------- --------------
3/31/98 260.03 395.82 420.37 $23.646
6/30/98 268.59 386.00 399.95 $22.497
9/30/98 241.92 302.58 345.62 $19.441
12/31/98 293.36 344.79 317.02 $17.833
- ------------- --------------- ------------------- --------------- --------------
Source: KEEFE, BRUYETTE & WOODS, INC.
<PAGE>
THE ELECTION OF EACH NOMINEE REQUIRES THE AFFIRMATIVE VOTE OF A PLURALITY
OF THE SHARES PRESENT OR REPRESENTED AT THE MEETING. THE BOARD OF DIRECTORS
RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE ELECTION OF ALL NOMINEES.
PROPOSAL NUMBER TWO
RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP
AS INDEPENDENT ACCOUNTANTS FOR THE
FISCAL YEAR ENDING DECEMBER 31, 1999
The Board has entered into an agreement with PricewaterhouseCoopers LLP,
independent certified public accountants, to be the Company's independent
accountants for the fiscal year ending December 31, 1999, subject to
ratification by the Company's shareholders. PricewaterhouseCoopers LLP has been
the Company's independent certified public accountants since the Company's
formation on March 31, 1994 and the Bank's independent certified public
accountants since August 1993. A representative of PricewaterhouseCoopers LLP is
expected to be present at the Meeting to respond to appropriate questions and
will have the opportunity to make a statement if he or she desires to do so.
Unless otherwise directed, proxies will be voted in favor of ratification of the
appointment of PricewaterhouseCoopers LLP.
THE APPOINTMENT OF THE COMPANY'S INDEPENDENT ACCOUNTANTS MUST BE RATIFIED
BY THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES OF COMMON STOCK PRESENT OR
REPRESENTED AT THE MEETING. THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
THE RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE
COMPANY'S INDEPENDENT ACCOUNTANTS.
SHAREHOLDER PROPOSALS
If a shareholder intends to present a proposal at the Company's 2000 annual
meeting of shareholders, and seeks to have the proposal included in the
Company's proxy statement and form of proxy relating to that annual meeting,
pursuant to Rule 14a-8 of the Securities Exchange Act of 1934, as amended, the
proposal must be received by the Company at its principal executive offices
located at 121 Main Street, Southington, Connecticut 06489 on or before the
close of business December 17, 1999. If a shareholder wishes to present a matter
at the 2000 annual meeting that is outside of the processes of Rule 14a-8, the
Company's bylaws state that notice to the Company must be given to the Company
by April 28, 2000. After that date, the proposal will be considered untimely and
the Company's proxies will have discretionary voting authority with respect to
such matter. Any proposals, as well as any related questions, should be directed
to the Secretary of the Company.
SOLICITATION
The Company will bear all costs and expenses associated with soliciting
management proxies. In addition to the use of the mails, proxies may be
solicited by the directors, officers and regular employees of the Company and/or
the Bank by personal interview, telephone or telegram. Such directors, officers
and employees will not be additionally compensated for such solicitation but may
be reimbursed for out-of-pocket expenses incurred in connection therewith.
Arrangements will also be made with custodians, nominees and fiduciaries for the
forwarding of solicitation material to the beneficial owners of Common Stock
held of record by such persons, and the Company will reimburse such custodians,
nominees and fiduciaries for their reasonable out-of-pocket expenses incurred in
connection therewith.
<PAGE>
OTHER MATTERS
As of the date of this Proxy Statement, the Board is not aware of any other
business or matters to be presented for consideration at the Meeting other than
as set forth in the Notice of Meeting attached to this Proxy Statement. However,
if any other business shall come before the Meeting or any adjournment or
postponement thereof and be voted upon, the enclosed proxy shall be deemed to
confer discretionary authority on the individuals named to vote the shares
represented by such proxy as to any such matters.
ANNUAL REPORT ON FORM 10-K
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH BENEFICIAL HOLDER OF ITS
COMMON STOCK ON THE RECORD DATE, UPON THE WRITTEN REQUEST OF ANY SUCH PERSON, A
COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998, AS FILED WITH THE COMMISSION. ANY SUCH REQUEST SHOULD BE MADE
IN WRITING TO LESLEY A. DEANGELO, BANCORP CONNECTICUT, INC., 121 MAIN STREET,
SOUTHINGTON, CONNECTICUT 06489.
Southington, Connecticut
April 16, 1999`
<PAGE>
BANCORP CONNECTICUT, INC.
121 Main Street
Southington, CT 06489
Proxy for the Annual Meeting of Shareholders
To be held at 2:00 p.m. on May 19, 1999
Aqua Turf Club, 556 Mulberry Street, Southington, Connecticut
The undersigned hereby appoints Wayne F. Patenaude, Secretary and Treasurer, and
Stephen M. Settino, or any of them, attorneys and proxies for the undersigned
with power of substitution, to act and to vote, with the same force and effect
as the undersigned, all shares the undersigned is entitled to vote at the Annual
Meeting of Shareholders of Bancorp Connecticut, Inc. to be held on May 19, 1999,
and any and all adjournments thereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Please mark, sign and date your proxy on the reverse side.
<PAGE>
Please Detach and Mail in the Envelope Provided
/X/ Please mark your
votes as in this
example.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ALL OF THE BELOW PROPOSALS.
Proposal 1.
Election of
Directors for a
three year term
expiring in 2002.
WITHHOLD AUTHORITY
FOR FOR ALL NOMINEES
/ / / /
Michael J. Karabin, David P. Kelley, Ralph G. Mann, Anthony S. Pizzitola
TO WITHHOLD AUTHORITY FOR INDIVIDUAL NOMINEE(S). Write individual
nominee(s) name(s) below.
- --------------------------------------------------------------------------------
Proposal 2. Ratification of the appointment of PricewaterhouseCoopers LLP as
independent accountants.
FOR AGAINST ABSTAIN
/ / / / / /
Such persons (or their substitutes) are directed to vote as indicated in this
proxy and are authorized to vote in their discretion upon any other business
which properly comes before the meeting or any adjournment thereof.
IF NO CHOICE IS SPECIFIED, SHARES REPRESENTED BY THIS PROXY WILL BE VOTED FOR
ALL NOMINEES AND PROPOSAL 2.
Please sign and date this proxy and promptly return it in the envelope provided.
I WILL ATTEND THE ANNUAL MEETING / /
Signature(s) Date
-------------------------- -----------------------------
NOTE: Please sign as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such.
