SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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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.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1394443
- ---------------------------------------- -------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
121 Main Street, Southington, Connecticut 06074
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (860) 628-0351
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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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, $1.00 par value - 5,184,914 shares as of August 5, 1999
- --------------------------------------------------------------------------------
1
<PAGE>
BANCORP CONNECTICUT, INC.
FORM 10-Q
INDEX
PART I.
Page
Item 1. Financial Statements
Consolidated Condensed Statements of Condition as of
June 30, 1999 (unaudited) and December 31, 1998................. 3
Consolidated Condensed Statements of Income for the
Three Months Ended June 30, 1999 and 1998 (unaudited)........... 4
Consolidated Condensed Statements of Income for the
Six Months Ended June 30, 1999 and 1998 (unaudited)............. 5
Consolidated Condensed Statements of Changes in Shareholders'
Equity for the Six Months Ended
June 30, 1999 and 1998 (unaudited).............................. 6
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998 (unaudited)............. 7
Notes to Consolidated Condensed Financial Statements (unaudited).. 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 23
PART II.
Item 1. Legal Proceedings................................................. 24
Item 2. Changes in Securities and Use of Proceeds......................... 24
Item 3. Defaults Upon Senior Securities................................... 24
Item 4. Submission of Matters to a Vote of Security Holders............... 24
Item 5. Other Information................................................. 25
Item 6. Exhibits and Reports on Form 8-K.................................. 25
Signatures.................................................................. 27
2
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF CONDITION
BANCORP CONNECTICUT, INC.
<TABLE>
<CAPTION>
June 30, December 31,
(dollars in thousands, except share data) 1999 1998
- -------------------------------------------------------------------------------------------
(unaudited) (Note 1)
<S> <C> <C>
ASSETS
Cash and due from banks $ 11,217 $ 11,178
Federal funds sold 3,000 --
--------- ---------
Cash and cash equivalents 14,217 11,178
--------- ---------
Securities available for sale (at market value) 204,130 217,333
Trading account securities 277 172
Federal Home Loan Bank stock 2,832 2,832
Loans 306,991 284,839
Less:
Deferred loan fees (750) (850)
Allowance for loan losses (5,584) (5,549)
--------- ---------
Net loans 300,657 278,440
--------- ---------
Premises and equipment 4,277 4,524
Accrued income receivable 3,249 3,077
Foreclosed real estate, net 320 334
Deferred taxes 4,730 1,901
Other assets 2,107 1,585
--------- ---------
Total assets $ 536,796 $ 521,376
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits $ 351,325 $ 345,563
Advances from Federal Home Loan Bank of Boston 41,630 40,630
Federal funds purchased and securities sold under
agreements to repurchase 93,060 80,516
Accrued taxes, expenses and other liabilities 4,002 4,751
--------- ---------
Total liabilities 490,017 471,460
--------- ---------
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 5,768,070 shares at June 30, 1999 and
5,653,406 shares at December 31, 1998 5,768 5,653
Additional paid-in capital 18,048 17,421
Retained earnings 34,053 31,761
Accumulated other comprehensive (loss) income (4,946) 825
Treasury stock at cost: 544,998 shares at June 30, 1999 and
519,498 shares at December 31, 1998 (6,144) (5,744)
--------- ---------
Total shareholders' equity 46,779 49,916
--------- ---------
Total liabilities and shareholders' equity $ 536,796 $ 521,376
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
BANCORP CONNECTICUT, INC.
<TABLE>
<CAPTION>
Three Months Ended
June 30,
----------------------
(dollars in thousands, except per share data) 1999 1998
- -----------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INTEREST INCOME
Interest on loans, including fees $ 5,970 $ 5,614
--------- ---------
Interest and dividends on investment securities
Interest income 2,819 2,133
Dividend income 487 819
Interest on trading account -- 3
--------- ---------
3,306 2,955
--------- ---------
Interest on federal funds sold 98 39
Other interest and dividends 47 38
--------- ---------
Total interest income 9,421 8,646
--------- ---------
INTEREST EXPENSE
Savings deposits 665 634
Time deposits 1,888 2,180
NOW accounts 311 239
--------- ---------
2,864 3,053
Interest on borrowed money 1,792 1,422
--------- ---------
Total interest expense 4,656 4,475
--------- ---------
Net interest income 4,765 4,171
Provision for loan losses 35 68
--------- ---------
Net interest income after provision for loan losses 4,730 4,103
--------- ---------
NONINTEREST INCOME
Net securities gains 352 338
Net trading account gains 18 15
Trust fees 149 139
Service charges on deposit accounts 173 166
Brokerage servicing fees 64 143
Other 270 169
--------- ---------
Total noninterest income 1,026 970
--------- ---------
NONINTEREST EXPENSE
Salaries and employee benefits 1,682 1,446
Furniture and equipment expense 243 119
Occupancy expense, net 142 129
Professional services 181 141
Data processing expense 162 180
Advertising expense 101 110
Foreclosed real estate provision (recoveries) and expense, net (1) (7)
FDIC assessments 10 10
Other 448 342
--------- ---------
Total noninterest expense 2,968 2,470
--------- ---------
Income before income taxes 2,788 2,603
Provision for income taxes 831 852
--------- ---------
Net income $ 1,957 $ 1,751
--------- ---------
AVERAGE COMMON SHARES OUTSTANDING:
Basic 5,211,496 5,107,334
Diluted 5,550,721 5,575,028
NET INCOME PER COMMON SHARE:
Basic $ 0.38 $ 0.34
Diluted $ 0.35 $ 0.31
DIVIDENDS DECLARED $ 0.150 $ 0.135
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
BANCORP CONNECTICUT, INC.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
(dollars in thousands, except per share data) 1999 1998
- -----------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INTEREST INCOME
Interest on loans, including fees $ 11,758 $ 11,228
--------- ---------
Interest and dividends on investment securities
Interest income 5,465 4,109
Dividend income 1,069 1,657
Interest on trading account 2 3
--------- ---------
6,536 5,769
--------- ---------
Interest on federal funds sold 108 160
Other interest and dividends 92 72
--------- ---------
Total interest income 18,494 17,229
--------- ---------
INTEREST EXPENSE
Savings deposits 1,295 1,362
Time deposits 3,868 4,419
NOW accounts 599 451
--------- ---------
5,762 6,232
Interest on borrowed money 3,480 2,730
--------- ---------
Total interest expense 9,242 8,962
--------- ---------
Net interest income 9,252 8,267
Provision for loan losses 65 168
--------- ---------
Net interest income after provision for loan losses 9,187 8,099
--------- ---------
NONINTEREST INCOME
Net securities gains 754 812
Net trading account (losses) gains (9) 41
Trust fees 302 280
Service charges on deposit accounts 355 326
Brokerage servicing fees 119 223
Other 482 288
--------- ---------
Total noninterest income 2,003 1,970
--------- ---------
NONINTEREST EXPENSE
Salaries and employee benefits 3,281 2,700
Furniture and equipment expense 483 242
Occupancy expense, net 298 256
Professional services 361 276
Data processing expense 285 370
Advertising expense 173 214
Foreclosed real estate provision (recoveries) and expense, net 21 (18)
FDIC assessments 20 19
Other 909 721
--------- ---------
Total noninterest expense 5,831 4,780
--------- ---------
Income before income taxes 5,359 5,289
Provision for income taxes 1,567 1,793
--------- ---------
Net income $ 3,792 $ 3,496
--------- ---------
AVERAGE COMMON SHARES OUTSTANDING:
Basic 5,184,218 5,101,494
Diluted 5,537,363 5,566,587
NET INCOME PER COMMON SHARE:
Basic $ 0.73 $ 0.69
Diluted $ 0.68 $ 0.63
DIVIDENDS DECLARED $ 0.290 $ 0.265
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
BANCORP CONNECTICUT, INC.
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Additional Income Total
Common Paid-In Retained Unrealized Treasury Shareholders'
(dollars in thousands, except per share amounts) Stock Capital Earnings Gains(Losses) Stock Equity
- ------------------------------------------------- ----------- ------------ ---------- ---------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1997 $ 5,612 $17,051 $ 28,149 $ 1,879 $(5,744) $ 46,947
--------
Net income -- -- 3,496 -- -- 3,496
Decrease in net unrealized gain on securities
available-for-sale -- -- -- (356) -- (356)
--------
Total comprehensive income 3,140
--------
Stock options exercised 21 161 -- -- -- 182
Cash dividends declared - $0.265 per share -- -- (1,350) -- -- (1,350)
Tax benefits related to common stock options
exercised -- 77 -- -- -- 77
------- ------- -------- ------- ------- --------
Balance as of June 30, 1998 $ 5,633 $17,289 $ 30,295 $ 1,523 $(5,744) $ 48,996
======= ======= ======== ======= ======= ========
Balance as of December 31, 1998 $ 5,653 $17,421 $ 31,761 $ 825 $(5,744) $ 49,916
--------
Net income -- -- 3,792 -- -- 3,792
Decrease in unrealized gain on securities
available-for-sale -- -- -- (5,771) -- (5,771)
--------
Total comprehensive loss (1,979)
--------
Stock options exercised 115 543 -- -- -- 658
Cash dividends declared - $0.290 per share -- -- (1,500) -- -- (1,500)
Treasury stock purchased -- -- -- -- (400) (400)
Tax benefits related to common stock options
exercised -- 84 -- -- -- 84
------- ------- -------- ------- ------- --------
Balance as of June 30, 1999 $ 5,768 $18,048 $ 34,053 $(4,946) $(6,144) $ 46,779
======= ======= ======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
6
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
BANCORP CONNECTICUT, INC.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
(dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,792 $ 3,496
--------- ---------
Adjustments to reconcile net income to net cash provided
by operating activities
Deferred income tax provision 144 44
Net accretion and amortization of bond premiums
and discounts (1,001) (257)
Provision for loan losses 65 168
Provision for foreclosed real estate losses 13 53
Gain on sale of foreclosed real estate (9) (123)
Amortization of deferred loan points (101) (144)
Realized investment security gains (754) (812)
Depreciation expense 390 230
(Increase) decrease in trading account (96) 77
Increase in accrued income receivable (172) (117)
Increase in other assets (545) (338)
(Decrease) increase in accrued expenses payable
and other liabilities (679) 214
--------- ---------
Total adjustments (2,745) (1,005)
--------- ---------
Net cash provided by operating activities 1,047 2,491
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available-for-sale (71,597) (109,695)
Proceeds from sales of securities available-for-sale 51,549 46,299
Proceeds from maturities of securities 15,774 12,623
Paydowns on mortgage-backed securities 10,488 9,275
Purchases of Federal Home Loan Bank stock -- (271)
Net increase in loans (22,209) (836)
Purchases of premises and equipment, net (143) (1,165)
Proceeds from sales of foreclosed real estate, net 66 669
--------- ---------
Net cash used in investing activities (16,072) (43,101)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in time deposits (646) (7,512)
Net increase in other deposits 6,408 16,017
Proceeds from FHLB borrowings 3,000 50,201
Repayment of FHLB borrowings (2,000) (39,201)
Net increase in Federal funds purchased and
repurchase agreements 12,544 30,646
Proceeds from exercise of stock options 658 182
Repurchase common stock (400) --
Cash dividends paid (1,500) (1,350)
--------- ---------
Net cash provided by financing activities 18,064 48,983
--------- ---------
Net increase in cash and cash equivalents 3,039 8,373
Cash and cash equivalents at beginning of period 11,178 10,717
--------- ---------
Cash and cash equivalents at end of period $ 14,217 $ 19,090
========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES
Change in net unrealized gain on securities
available-for-sale $ (6,969) $ (623)
Transfer of loans to foreclosed real estate 57 131
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
7
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
BANCORP CONNECTICUT, INC.
Note 1 - Basis of Presentation
- ------------------------------
The consolidated condensed 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. SSB Mortgage Corporation commenced
operations during the first quarter of 1999. 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.
The consolidated condensed statement of condition as of June 30, 1999, the
consolidated condensed statements of income for the three and six month periods
ended June 30, 1999 and 1998, and the consolidated condensed statements of
changes in shareholders' equity and consolidated condensed statements of cash
flows for the six month periods ended June 30, 1999 and 1998 have been prepared
by the Corporation without audit. Certain amounts for prior periods have been
reclassified to conform to the current period presentation.
In the opinion of management, the financial statements have been prepared in
conformity with generally accepted accounting principles for interim financial
statements and include all adjustments necessary to present fairly the financial
position of the Corporation as of June 30, 1999 and the results of operations
for the three and six month periods ended June 30, 1999 and 1998, and the
changes in shareholders' equity and cash flows for the six month periods ended
June 30, 1999 and 1998. Results of operations for the three and six month
periods ended June 30, 1999 are not necessarily indicative of results for any
other period.
The statement of condition as of December 31, 1998, which has been included for
comparative purposes, has been condensed from the audited statements for the
year then ended. Certain information and footnote disclosures normally included
in financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted. These consolidated
condensed financial statements should be read in conjunction with the financial
statements and notes thereto included in the Corporation's annual report on Form
10-K for the year ended December 31, 1998.
8
<PAGE>
Note 2 - Securities
- -------------------
The amortized cost, gross unrealized gains and losses and estimated market
values of securities available for sale as of June 30, 1999 and December 31,
1998 were as follows:
June 30, 1999
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
United States Government and
agency obligations $ 73,912 $ 29 $ (5,908) $ 68,033
Municipal bonds 3,328 80 -- 3,408
Mortgage-backed securities 71,659 8 (1,881) 69,786
Capital trust preferreds 17,529 110 (849) 16,790
Marketable equity securities 44,593 1,624 (755) 45,462
Mutual funds 602 49 -- 651
-------- ------- --------- --------
$211,623 $ 1,900 $ (9,393) $204,130
======== ======= ========= ========
December 31, 1998
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
United States Government and
agency obligations $ 47,547 $ 277 $ (69) $ 47,755
Municipal bonds 3,584 101 (2) 3,683
Mortgage-backed securities 93,034 168 (70) 93,132
Capital trust preferreds 13,174 130 (338) 12,966
Marketable equity securities 58,141 1,925 (863) 59,203
Mutual funds 602 15 (23) 594
-------- ------- --------- --------
$216,082 $ 2,616 $ (1,365) $217,333
======== ======= ========= ========
9
<PAGE>
Note 3 - Loans
- --------------
The composition of the loan portfolio was:
June 30, December 31,
1999 1998
------------ ------------
(in thousands)
Residential real estate $ 136,308 $ 137,326
Commercial real estate 44,943 42,408
Real estate construction 2,599 3,688
Commercial 53,903 42,857
Consumer 69,238 58,560
--------- ---------
306,991 284,839
Less: Deferred loan fees (750) (850)
Allowance for loan losses (5,584) (5,549)
--------- ---------
Total loans $ 300,657 $ 278,440
========= =========
Note 4 - Allowance for Loan and Other Real Estate Owned Losses
- --------------------------------------------------------------
Changes in the allowances were:
Six Months Ended
June 30,
------------------------------
1999 1998
------------ ------------
(in thousands)
Allowance for loan losses:
Balance at beginning of year $ 5,549 $ 5,306
Provision charged to expense 65 168
Loan charge-offs (91) (69)
Recoveries 61 80
--------- ---------
Balance, end of period $ 5,584 $ 5,485
========= =========
Allowance for foreclosed real estate losses:
Balance at beginning of year $ 50 $ 25
Provision charged to expense 13 53
Foreclosed real estate write-downs, net (13) (38)
--------- ---------
Balance, end of period $ 50 $ 40
========= =========
10
<PAGE>
Note 5 - Nonperforming Assets
- -----------------------------
June 30, December 31,
1999 1998
------------ ------------
(dollars in thousands)
Nonaccrual loans
Residential real estate $ 1,094 $ 705
Commercial real estate 25 402
Commercial 156 60
Consumer 76 98
--------- ---------
Total nonaccrual loans 1,351 1,265
Accruing loans past due 90 days or more -- --
--------- ---------
Total nonperforming loans 1,351 1,265
Other real estate owned 320 334
--------- ---------
Total nonperforming assets $ 1,671 $ 1,599
========= =========
Nonperforming loans as a percentage of
total loans 0.44% 0.44%
========= =========
Nonperforming assets as a percentage of
total assets 0.31% 0.31%
========= =========
Note 6 - Per Common Share Data
- ------------------------------
Basic earnings per share is computed using the weighted average common shares
outstanding during the periods presented. 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 and six month periods ended
June 30, 1999 and 1998 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
(in thousands) (in thousands)
Basic 5,211 5,107 5,184 5,101
Effect of dilutive stock options 340 468 353 466
----- ----- ----- -----
Diluted 5,551 5,575 5,537 5,567
===== ===== ===== =====
11
<PAGE>
Note 7 - Shareholders' Equity
- -----------------------------
The following table presents the components and related tax effects allocated to
other comprehensive income for the six month period ended June 30, 1999.
Before Tax Net
Tax (Benefit) of Tax
Amount Expense Amount
------- --------- -------
(in thousands)
Net unrealized losses on securities
arising during the period $(7,990) $(2,717) $(5,273)
Less: reclassification adjustment for
gains realized in net income 754 256 498
------- ------- -------
Net unrealized losses on securities $(8,744) $(2,973) $(5,771)
======= ======= =======
The following table presents the components and related tax effects allocated to
other comprehensive income for the six month period ended June 30, 1998.
Before Tax Net
Tax (Benefit) of Tax
Amount Expense Amount
------- --------- -------
(in thousands)
Net unrealized gains on securities
arising during the period $ 216 $ (87) $ 129
Less: reclassification adjustment for
gains realized in net income 812 (327) 485
------- ------- -------
Net unrealized losses on securities $ (596) $ 240 $ (356)
======= ======= =======
On April 21, 1999, the Corporation announced that it planned to repurchase up to
5% (260,000) of the Corporation's currently outstanding shares of common stock.
Purchases are made from time to time in the open market and through private
transactions and will continue over the next year. The timing and amount of
these transactions, funded through available corporate funds, will depend upon
market conditions and corporate requirements. Shares repurchased are held in
treasury for general corporate purposes including reissue to satisfy the
exercise of outstanding stock options. Through August 5, 1999, the Corporation
repurchased 70,338 shares at an average price of $16.78.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF THE THREE AND SIX MONTH PERIODS
---------------------------------------------
ENDED JUNE 30, 1999 AND 1998
----------------------------
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 condensed financial statements and other
financial data presented elsewhere herein.
CHANGES IN FINANCIAL CONDITION
INVESTMENTS - Securities available for sale decreased $13,203,000 or 6.1% to
$204,130,000 at June 30, 1999 from $217,333,000 at December 31, 1998. The shift
in the market value of the portfolio, as the result of rising interest rates,
from unrealized gains totaling $1,251,000 at December 31, 1998 to unrealized
losses totaling $7,493,000 at June 30, 1999 was the primary cause of the
decrease in securities available for sale. Also, proceeds from maturities and
sales (excluding realized gains) of securities and paydowns on mortgage-backed
securities exceeded purchases by $5,460,000.
LOANS - Loans increased $22,152,000 or 7.8% to $306,991,000 at June 30, 1999
from $284,839,000 at December 31, 1998 primarily due to a higher volume of
commercial loan originations and loans closed by BCI Financial Corporation
("BCIF"), the Bank's auto loan financing subsidiary. Commercial loans and
commercial real estate loans increased $13,581,000 or 15.9% and represented
32.2% of the loan portfolio at June 30, 1999. Consumer loans increased
$10,678,000 or 18.2% primarily due to loans closed by BCIF. At June 30, 1999,
the consumer portfolio of $69,238,000 consisted of 47.6% home equity loans and
lines of credit, 44.2% automobile loans and 8.2% other consumer loans.
At June 30, 1999, loans collateralized by residential real estate, including
home equity loans and lines of credit, represented 55.6% of the total loan
portfolio.
DEPOSITS - Total deposits increased $5,762,000 or 1.7% during the first six
months of 1999 from $345,563,000 at December 31, 1998 primarily due to a net
inflow of $3,967,000 which principally reflects increases in the Bank's money
fund checking product, as well as increases in regular savings accounts and
money market deposit products.
BORROWINGS - Advances from the Federal Home Loan Bank of Boston (the "FHLB")
increased by $1,000,000 or 2.5% during the first six months of 1999. Federal
funds purchased and securities sold under agreements to repurchase increased
$12,544,000 or 15.6% to $93,060,000 at June 30, 1999 as compared to December 31,
1998. This increase consisted primarily of broker/dealer repurchase agreements
which increased $9,320,000 and have been primarily utilized to fund the Bank's
loan growth. As of June 30, 1999, broker/dealer repurchase agreements and retail
repurchase agreements totaled $71,880,000 and $19,605,000, respectively.
CHANGES IN RESULTS OF OPERATIONS
EARNINGS - Net income for the quarter ended June 30, 1999 was $1,957,000
compared to $1,751,000 for the second quarter of 1998, an increase of 11.8%.
Increases in net interest income and noninterest income, partially offset by
increased noninterest expense, combined with a lower effective tax rate due to
13
<PAGE>
the formation of a passive investment company, were the primary reasons for the
higher earnings. The annualized return on average assets was 1.46% for the
quarters ended June 30, 1999 and 1998 while the return on average equity rose to
15.65% at June 30, 1999 from 14.55% the previous year.
Net income for the six months ended June 30, 1999 was $3,792,000 compared to
$3,496,000 for the same period in 1998, an increase of 8.5%. An increase in net
interest income and a lower provision for loan losses, partially offset by
increased noninterest expense, combined with a lower effective tax rate due to
the formation of a passive investment company, were the principal reasons for
the increased earnings. The annualized return on average assets was 1.43% for
the six months ended June 30, 1999 compared to 1.48% for the same period in 1998
while the return on average equity rose to 15.29% at June 30, 1999 from 14.64%
the previous year.
NET INTEREST INCOME - Net interest income, the difference between interest
earned on interest earning assets and interest expense incurred on interest
bearing liabilities, is a significant component of the Corporation's
consolidated condensed statements of income. Net interest income is affected by
changes in the volumes of and rates on interest earning assets and interest
bearing liabilities, the volume of interest earning assets funded with
noninterest bearing deposits and shareholders' equity, and the level of
nonperforming assets.
Average interest earning assets increased by $56,421,000 or 12.1% to
$522,623,000 for the three months ended June 30, 1999 from $466,202,000 from the
same period in 1998.
For the three months ended June 30, 1999 the increase in net interest income on
a fully tax equivalent basis of $449,000 or 10.0% from 1998 reflects increases
in the average volume of the invested funds and loan portfolios of $18,462,000
and $37,959,000, respectively. In addition, average noninterest bearing demand
deposits increased by $3,835,000 or 12.8% during 1999 compared to 1998 which
helped reduce the average cost of funds and thus had a positive effect on net
interest income.
The interest rate spread was 3.21% for the three months ended June 30, 1999
compared to 3.24% for the same period in 1998. The ratio of net interest income
to average interest earning assets on a fully tax equivalent basis was 3.79% for
the three months ended June 30, 1999 compared to 3.87% for the same period in
1998. The decrease in the interest rate spread in 1999 compared to 1998 is
primarily attributable to a four basis points greater decrease in the average
yield on earning assets compared with the average interest rate of funds. The
decrease in the average yield on earning assets, in turn, is attributable, in
part, to the Bank's increased investment in its loan portfolio at generally
lower yields than the average yield on the existing loan portfolio.
Additionally, average yields were computed on a tax equivalent basis using a
Federal income tax rate of 34% for 1999 and 1998 and a state income tax rate of
0.0% for 1999 and 9.5% for 1998, due to the formation of a passive investment
company in 1999.
Average interest earning assets increased by $55,331,000 or 12.0% to
$515,861,000 for the six months ended June 30, 1999 from $460,530,000 for the
same period in 1998.
For the six months ended June 30, 1999 the increase in net interest income on a
fully tax equivalent basis of $717,000 or 8.02% from 1998 reflected increases in
the average volume of the invested funds and loan portfolios of $22,262,000 and
$33,069,000, respectively. In addition, average noninterest bearing demand
deposits increased by $4,586,000 or 15.75% during 1999 compared to 1998 which
helped reduce the average cost of funds and thus had a positive effect on net
interest income.
The interest rate spread was 3.17% for the six months ended June 30, 1999
compared to 3.26% for the same period in 1998. The ratio of net interest income
to average interest earning assets on a fully tax equivalent basis was 3.74% for
the six months ended June 30, 1999 compared to 3.89% for the same period in
1998. The decrease in the interest rate spread in 1999 compared to 1998 is
primarily attributable to a greater decrease in the average yield on earning
assets compared with the average interest rate of funds. The decrease in the
average yield on earning assets, in turn, is attributable in part to the Bank's
increased investment in its securities and loan portfolios at generally lower
14
<PAGE>
yields than the average yield on the existing securities and loan portfolios.
Additionally, average yields were computed on a tax equivalent basis using a
Federal income tax rate of 34% for 1999 and 1998 and a state income tax rate of
0.0% for 1999 and 9.5% for 1998, due to the formation of a passive investment
company in 1999.
PROVISION FOR LOAN LOSSES - For the three months ended June 30, 1999 and 1998,
the provisions for loan losses were $35,000 and $68,000, respectively. Net loan
charge-offs totaled $31,000 for the second three months of 1999 compared to net
loan recoveries of $32,000 for the same period in 1998.
For the six months ended June 30, 1999 and 1998, the provisions for loan losses
were $65,000 and $168,000, respectively. Net loan charge-offs totaled $30,000
for the six months ended June 30, 1999 compared to net loan recoveries of
$11,000 during the same period in 1998. The allowance for loan losses was
$5,584,000 or 1.82% of outstanding loans as of June 30, 1999 compared to
$5,485,000 or 2.09% of outstanding loans as of June 30, 1998. Nonperforming
loans were $1,351,000 as of June 30, 1999 and $2,408,000 as of June 30, 1998,
representing .44% and .92%, respectively, of outstanding loans.
The allowance for loan losses is established by management. Its adequacy is
monitored based on internal credit review and analysis of the loan portfolio,
which considers current economic conditions and their probable effect on
borrowers, the amount of nonperforming loans and related collateral, the amount
of charge-offs during the period and other relevant factors. This evaluation is
inherently subjective as it requires material estimates including the amounts
and timing of future cash flows expected to be received on impaired loans that
may be susceptible to significant change.
Strong current economic conditions in the Bank's lending area combined with the
aforementioned decrease in nonperforming loans are the principal reasons for the
lower provisions for loan losses for the quarter and six month period ended June
30, 1999 as compared to the same periods in 1998.
NONINTEREST INCOME - Total noninterest income increased by $56,000 or 5.8% to
$1,026,000 in the second quarter of 1999 from $970,000 for the same period in
1998. During the second quarter of 1999, the Corporation recognized total net
securities gains of $352,000 on the sale of securities available for sale
compared to $338,000 in 1998. Net trading account gains totaled $18,000 for the
second quarter compared to net trading gains of $15,000 for the same period in
1998. Brokerage servicing fees decreased $79,000 for the second quarter of 1999
compared to 1998 due to lower sales volume. Other income totaled $270,000 in
1999 compared to $169,000 in 1998, representing an increase of $101,000 or
59.8%. This increase reflected increased fee income generated by BCIF as well as
increased insurance fees recorded by the Bank.
Total noninterest income increased by $33,000 or 1.7% to $2,003,000 for the six
months ended June 30, 1999 from $1,970,000 for the same period in 1998. During
1999, the Corporation recognized total net securities gains of $754,000 on the
sale of securities available for sale compared to $812,000 in 1998, a decrease
of $58,000 or 7.1%. Net trading account losses totaled $9,000 for the six month
period compared to net trading gains of $41,000 for the same period in 1998.
Brokerage servicing fees decreased $104,000 or 46.6% for the six months ended
June 30, 1999 compared to 1998 due to lower sales volume. Other income totaled
$482,000 in 1999 compared to $288,000 in 1998, representing an increase of
$194,000 or 67.4%. This increase reflected increased fee income generated by
BCIF as well as increased insurance fees and increased call option premiums
recorded by the Bank.
NONINTEREST EXPENSE - Operating expenses increased $498,000 or 20.2% to
$2,968,000 in the second quarter of 1999 from $2,470,000 in 1998.
Salaries and employee benefits were $236,000 or 16.3% higher in 1999 compared to
1998 reflecting increased staffing levels due to the start-up of BCIF and the
new Wallingford branch facility in the second and third quarters of 1998,
respectively, and, to a lesser extent, scheduled employee annual salary
15
<PAGE>
increases. Increased group medical and retirement benefit costs as well as an
increase in the utilization of temporary employees during 1999 contributed to
the higher level of employee expense.
The expenses related to furniture and equipment totaled $243,000 for the second
quarter of 1999 compared to $119,000 for the same period in 1998, an increase of
$124,000 or 104.2%. Higher depreciation and maintenance charges related to the
Bank's installation of the new in-house core processing system during the second
quarter of 1998 were primarily responsible for the increase.
The increase in other noninterest expenses of $106,000 or 31.0% reflected a net
increase in a number of miscellaneous expense categories. The most significant
increases in these categories were expenses incurred in 1999 for Year 2000
testing and increased expenditures for telephone service and computer supplies
related to the new in-house core processing system as well as the increase in
the minority interest in the net income of BCIF.
Operating expenses increased $1,051,000 or 22.0% to $5,831,000 for the six
months ended June 30, 1999 from $4,780,000 in 1998.
Salaries and employee benefits were $581,000 or 21.5% higher in 1999 compared to
1998 reflecting increased staffing levels due to the start-up of BCIF and the
new Wallingford branch facility in the second and third quarters of 1998,
respectively, and, to a lesser extent, scheduled employee annual salary
increases. Increased group medical and retirement benefit costs as well as an
increase in the utilization of temporary employees during 1999 contributed to
the higher level of employee expense.
The expenses related to furniture and equipment totaled $483,000 for the first
six months of 1999 compared to $242,000 for the same period in 1998, an increase
of $241,000 or 99.6%. Higher depreciation and maintenance charges related to the
Bank's installation of the new in-house core processing system during the second
quarter of 1998 were primarily responsible for the increase.
The increase in other noninterest expenses of $188,000 or 26.1% reflected a net
increase in a number of miscellaneous expense categories. The most significant
increases in these categories were expenses incurred in 1999 for Year 2000
testing and increased expenditures for telephone service and customer and
computer supplies related to the new in-house core processing system as well as
the increase in the minority interest in the net income of BCIF.
PROVISION FOR INCOME TAXES - The provision for income taxes for the three months
ended June 30, 1999 and 1998 was $831,000 and $852,000, respectively,
representing effective tax rates of 29.8% and 32.7%, respectively.
The provision for income taxes for the six months ended June 30, 1999 and 1998
was $1,567,000 and $1,793,000, respectively, representing effective tax rates of
29.2% and 33.9%, respectively.
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 (among other provisions), 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. Subsequently, for tax
years beginning January 1, 1999, the Corporation's state tax expense has been
eliminated resulting in the lower effective tax rates mentioned above for the
quarter and six month period ended June 30, 1999 as compared to the same periods
in 1998.
LIQUIDITY - The liquidity of a banking institution reflects its ability to
provide funds to meet loan requests, to accommodate possible outflows in
deposits and to take advantage of interest rate market opportunities. Funding of
loan requests, providing for liability outflows and management of interest rate
fluctuations require continuous analysis in order to match the maturities of
specific categories of short-term loans and investments with specific types of
16
<PAGE>
deposits and borrowings. Bank liquidity is thus normally considered in terms of
the nature and mix of a banking institution's sources and uses of funds. The
Bank's Asset Liability Committee is responsible for implementing the policies
and guidelines for the maintenance of prudent levels of liquidity. The Bank's
principal sources of funds for operations are cash flows generated from
earnings, deposits, loan repayments, borrowings from correspondent banks and
securities sold under repurchase agreements. Such sources are supplemented by
interest bearing deposits with banks, Federal funds sold and unencumbered
securities available for sale. Brokered deposits were not utilized as a source
of funds during 1999 or 1998, and none were outstanding as of June 30, 1999.
The Bank is a member of the Federal Home Loan Bank of Boston (the "FHLB"), which
makes substantial borrowings available to its members. The Bank is eligible to
borrow against its assets in an amount not to exceed collateral as defined by
the FHLB. As of June 30, 1999, qualified collateral totaled $135,194,000. The
Bank's actual borrowings on that date were $41,630,000.
The inflow and outflow of funds is detailed in the consolidated condensed
statements of cash flows for the six months ended June 30, 1999 and 1998 and is
summarized below.
During the current period, cash and cash equivalents increased by $3,039,000, as
net cash provided by operating activities and financing activities exceeded the
$16,072,000 of net cash used for investing activities.
Net cash used for investing activities, which primarily reflects the net
redeployment of funds into the loan portfolio, was $16,072,000 for the six
months ended June 30, 1999. During the first six months of 1999, the Corporation
experienced net originations of loans totaling $22,209,000 which were funded by
a net decreased investment in securities in the amount of $6,214,000 and
increased deposits and borrowings.
The net cash provided by financing activities of $18,064,000 for the first six
months of 1999 primarily reflected net increases in deposits of $5,762,000 and a
net increase in funds borrowed from the FHLB of $1,000,000. The net increase in
Federal funds purchased and repurchase agreements of $12,544,000 consisted
primarily of broker/dealer repurchase agreements which increased $9,320,000 and
have been primarily utilized to fund the Bank's loan growth.
Closely related to the concept of liquidity is the management of interest
earning assets and interest bearing liabilities, which focuses on maintaining
stability in the interest rate spread, an important factor in earnings growth
and stability. Emphasis is placed on maintaining a controlled rate sensitivity
position to avoid wide swings in interest rate spreads and to minimize risk due
to changes in interest rates. An asset or liability is considered rate sensitive
within a specified period when it matures or could be repriced within such
period in accordance with its contractual terms. Management establishes overall
policy and interest rate risk tolerance levels which are administered by the
Bank's Asset Liability Committee on a monthly basis.
CAPITAL RESOURCES - 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 1 capital (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of June 30,
1999, that the Bank meets all capital adequacy requirements to which it is
subject.
17
<PAGE>
To be categorized as well capitalized, the Bank must maintain the ratios set
forth in the table below. Management believes that there are no events or
conditions that have occurred that would change its category. The Bank's actual
capital amounts and ratios were (dollars in thousands):
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt Corrective
Actual Action Provisions
------------------ -----------------------
Amount Ratio Amount Ratio
--------- ------- --------- --------
<S> <C> <C> <C> <C>
As of June 30, 1999:
Total Capital (to Risk Weighted Assets) $ 52,400 15.91 % >/= $ 32,932 >/= 10.0 %
Tier I Capital (to Risk Weighted Assets) 48,281 14.66 >/= 19,759 >/= 6.0
Tier I Capital (to Average Assets) 48,281 8.99 >/= 26,844 >/= 5.0
</TABLE>
On April 21, 1999, the Board of Directors of the Corporation declared a cash
dividend of $.15 per common share which was paid on May 17, 1999 to shareholders
of record on May 3, 1999. Subsequent to June 30, 1999, the Board of Directors of
the Corporation declared a cash dividend of $.15 per common share payable on
August 16, 1999 to shareholders of record on August 2, 1999.
On April 21, 1999, the Corporation announced that it planned to repurchase up to
5% (260,000) of the Corporation's currently outstanding shares of common stock.
Purchases are made from time to time in the open market and through private
transactions and will continue over the next year. The timing and amount of
these transactions, funded through available corporate funds, will depend upon
market conditions and corporate requirements. Shares repurchased are held in
treasury for general corporate purposes including reissue to satisfy the
exercise of outstanding stock options. Through August 5, 1999, the Corporation
repurchased 70,338 shares at an average price of $16.78.
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 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 processing system. The risk
assessment phase was completed by December 31, 1998 and the contingency plan was
completed by June 30, 1999.
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
18
<PAGE>
system has been certified Year 2000 compliant by its manufacturer. However, the
Bank performed its own independent tests rather than utilize proxy testing
results from the vendor. In addition, the Bank retained the services of an
independent party to review overall plan effectiveness and the results of
testing. The validation phase on all critical systems was completed 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 include core processing system, teller equipment and local area network
have already been placed into service. Implementation of all critical systems
was completed 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 and does not expect to exceed this amount.
RISKS AND CONTINGENCIES
Based upon a self-assessment of its current Year 2000 readiness, management
believes 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 was completed, significant third-party vendor exposures were
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 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.
19
<PAGE>
Average Balance Sheets, Net Interest Income and Interest Rates(a)
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
(dollars in thousands) Balance Interest Rate(c) Balance Interest Rate(c)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans(b) $298,514 $ 5,970 8.00% $260,555 $ 5,614 8.62%
Taxable investment securities
(at cost)(c) 209,128 3,429 6.56% 196,387 3,221 6.56%
Municipal bonds(c) 3,495 60 6.87% 3,339 59 7.07%
Federal funds sold 8,433 98 4.65% 2,872 39 5.43%
Other interest-earning assets 3,053 47 6.16% 3,049 41 5.38%
-------- ------- -------- -------
Total interest-earning assets 522,623 9,604 7.35% 466,202 8,974 7.71%
-------- ------- -------- -------
Noninterest-earning assets 14,795 14,355
-------- --------
TOTAL ASSETS $537,418 $480,557
======== ========
LIABILITIES AND EQUITY
Interest-bearing liabilities:
NOW and savings deposits $154,070 $ 976 2.53% $134,348 $ 873 2.60%
Time deposits 157,416 1,888 4.80% 163,510 2,180 5.33%
FHLB of Boston advances 41,632 531 5.10% 23,929 338 5.65%
Federal funds purchased and securities
sold under agreements to repurchase 97,207 1,261 5.19% 79,267 1,084 5.47%
-------- ------- -------- -------
Total interest-bearing liabilities 450,325 4,656 4.14% 401,054 4,475 4.46%
-------- ------- -------- -------
Noninterest-bearing liabilities:
Demand deposits 33,682 29,847
Other 3,395 1,511
Shareholders' equity 50,016 48,145
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $537,418 $480,557
======== ========
Net interest income on a tax
equivalent basis(c) 4,948 4,499
Tax equivalent adjustment (183) (328)
------- -------
Net interest income $ 4,765 $ 4,171
======= =======
Net interest spread (tax equivalent basis) 3.21% 3.24%
==== ====
Net interest margin (tax equivalent basis) 3.79% 3.87%
==== ====
</TABLE>
(a) Computed on an annualized basis.
(b) Average balances for loans include nonaccrual and renegotiated balances.
(c) Yields/Rates are computed on a tax equivalent basis using a Federal income
tax rate of 34% for 1999 and 1998 and a state income tax rate of 9.5% in
1998.
20
<PAGE>
AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND INTEREST RATES(A)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
(dollars in thousands) Balance Interest Rate(c) Balance Interest Rate(c)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans(b) $293,435 $ 11,758 8.01% $260,366 $ 11,228 8.62%
Taxable investment securities
(at cost)(c) 211,087 6,813 6.46% 188,094 6,317 6.72%
Municipal bonds(c) 3,519 122 6.93% 3,340 118 7.07%
Federal funds sold 4,656 108 4.64% 5,957 160 5.37%
Other interest-earning assets 3,164 94 5.94% 2,773 75 5.41%
-------- -------- -------- --------
Total interest-earning assets 515,861 18,895 7.33% 460,530 17,898 7.78%
-------- -------- -------- --------
Noninterest-earning assets 15,544 14,394
-------- --------
TOTAL ASSETS $531,405 $474,924
======== ========
LIABILITIES AND EQUITY
Interest-bearing liabilities:
NOW and savings deposits $150,970 $ 1,894 2.51% $132,721 $ 1,813 2.73%
Time deposits 158,490 3,868 4.88% 165,803 4,419 5.33%
FHLB of Boston advances 42,113 1,071 5.09% 23,500 694 5.91%
Federal funds purchased and securities
sold under agreements to repurchase 92,882 2,409 5.19% 74,827 2,036 5.44%
-------- -------- -------- --------
Total interest-bearing liabilities 444,455 9,242 4.16% 396,851 8,962 4.52%
-------- -------- -------- --------
Noninterest-bearing liabilities:
Demand deposits 33,696 29,110
Other 3,261 1,214
Shareholders' equity 49,993 47,749
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $531,405 $474,924
======== ========
Net interest income on a tax
equivalent basis(c) 9,653 8,936
Tax equivalent adjustment (401) (669)
-------- --------
Net interest income $ 9,252 $ 8,267
======== ========
Net interest spread (tax equivalent basis) 3.17% 3.26%
==== ====
Net interest margin (tax equivalent basis) 3.74% 3.89%
==== ====
</TABLE>
(a) Computed on an annualized basis.
(b) Average balances for loans include nonaccrual and renegotiated balances.
(c) Yields/Rates are computed on a tax equivalent basis using a Federal income
tax rate of 34% for 1999 and 1998 and a state income tax rate of 9.5% in
1998.
21
<PAGE>
RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999 Six Months Ended June 30, 1999
Compared to 1998 Compared to 1998
----------------------------------- --------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------- ---------------------
(in thousands) Volume Rate Net(1) Volume Rate Net(1)
- -------------------------------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans $ 779 $(423) $ 356 $ 1,361 $ (831) $ 530
Taxable investment securities 209 (1) 208 749 (253) 496
Municipal bonds 3 (2) 1 6 (2) 4
Federal funds sold 65 (6) 59 (32) (20) (52)
Other interest-earning assets -- 6 6 11 8 19
------- ----- ------- ------- ------- -----
1,056 (426) 630 2,095 (1,098) 997
------- ----- ------- ------- ------- -----
Interest paid on:
NOW and savings deposits 125 (22) 103 237 (156) 81
Time deposits (79) (213) (292) (189) (362) (551)
FHLB of Boston advances 229 (36) 193 485 (108) 377
Federal funds purchased and securities
sold under agreements to repurchase 235 (58) 177 472 (99) 373
------- ----- ------- ------- ------- -----
510 (329) 181 1,005 (725) 280
------- ----- ------- ------- ------- -----
Change in net interest income $ 546 $ (97) $ 449 $ 1,090 $ (373) $ 717
======= ===== ======= ======= ======= =====
</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.
22
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank manages interest rate risk through an Asset Liability Committee
comprised of senior management. The committee monitors exposure to interest rate
risk on a quarterly basis using both a traditional gap analysis and simulation
analysis. Traditional gap analysis identifies short and long-term interest rate
positions or exposure. Simulation analysis measures the amount of short-term
earnings at risk under both rising and falling rate scenarios. The Bank's
interest rate risk has not significantly changed from the prior year.
23
<PAGE>
PART II.
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. Wednesday May 19, 1999
b. Directors elected at this meeting:
Michael J. Karabin
David P. Kelly
Ralph G. Mann
Anthony S. Pizzitola
c. Directors whose term of office as director continued after this
meeting:
Andrew J. Meade
Frank R. Miller
Robert D. Morton
Dennis J. Stanek
Norbert H. Beauchemin
Walter J. Hushak
Frederick E. Kuhr
Joseph J. Laporte
c.1. The election of four directors for a three year term who, with the
eight directors whose term of office do not expire at this
meeting, will constitute the full Board of Directors.
For Withheld
--------- --------
Michael J. Karabin 3,898,776 91,218
David P. Kelly 3,895,784 94,210
Ralph G. Mann 3,907,122 82,872
Anthony S. Pizzitola 3,904,530 85,464
24
<PAGE>
c.2. The ratification of the appointment of PricewaterhouseCoopers LLP
as independent accountants for the fiscal year ending December 31,
1999.
For Against Abstain
--------- ------- -------
Total votes 3,963,118 6,936 19,938
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation of Registrant
(Incorporated by reference to Exhibit 3.1 to the
Registrants 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 Quarterly
Report on Form 10-Q for the quarterly period
ended June 30, 1996)
4 Instruments defining the rights of security
holders (Included in Exhibits 3.1 and 3.2)
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)
25
<PAGE>
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)
(Incorporated by reference to Exhibit 10.7 to
the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998)
27 Financial Data Schedule
(b) Reports on Form 8-K
The registrant did not file any Report on Form 8-K during the second quarter of
1999.
26
<PAGE>
SIGNATURES
Pursuant to the requirements 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: August 13, 1999 /s/ Robert D. Morton
-------------------- -----------------------------------
Robert D. Morton
President and Chief
Executive Officer
(Principal Executive Officer)
(Principal Accounting Officer)
27
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation of Registrant
(Incorporated by reference to Exhibit 3.1 to the
Registrants 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 Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1996)
4 Instruments defining the rights of security holders
(Included in Exhibits 3.1 and 3.2)
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)
(Incorporated by reference to Exhibit 10.7 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998)
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Condensed Statements of Condition at June 30, 1999 (unaudited) and
the Consolidated Condensed Statements of Operations for the six months ended
June 30, 1999 (unaudited) and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 11,217
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,000
<TRADING-ASSETS> 277
<INVESTMENTS-HELD-FOR-SALE> 204,130
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 306,991
<ALLOWANCE> (5,584)
<TOTAL-ASSETS> 536,796
<DEPOSITS> 351,325
<SHORT-TERM> 93,060
<LIABILITIES-OTHER> 4,002
<LONG-TERM> 41,630
0
0
<COMMON> 5,768
<OTHER-SE> 41,011
<TOTAL-LIABILITIES-AND-EQUITY> 536,796
<INTEREST-LOAN> 11,758
<INTEREST-INVEST> 6,536
<INTEREST-OTHER> 200
<INTEREST-TOTAL> 18,494
<INTEREST-DEPOSIT> 5,762
<INTEREST-EXPENSE> 9,242
<INTEREST-INCOME-NET> 9,252
<LOAN-LOSSES> 65
<SECURITIES-GAINS> 754
<EXPENSE-OTHER> 5,831
<INCOME-PRETAX> 5,359
<INCOME-PRE-EXTRAORDINARY> 5,359
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,792
<EPS-BASIC> 0.73
<EPS-DILUTED> 0.68
<YIELD-ACTUAL> 3.59
<LOANS-NON> 1,351
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 6,790
<ALLOWANCE-OPEN> 5,549
<CHARGE-OFFS> 91
<RECOVERIES> 61
<ALLOWANCE-CLOSE> 5,584
<ALLOWANCE-DOMESTIC> 4,178
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,402
</TABLE>
