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 September 30, 1999
------------------
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 (I.R.S. Employer
of Incorporation or Organization) Identification No.)
121 Main Street, Southington, Connecticut 06489
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (860) 628-0351
------------------------------
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 - 5,190,575 shares as of November 10, 1999
- --------------------------------------------------------------------------------
1
<PAGE>
BANCORP CONNECTICUT, INC.
FORM 10-Q
INDEX
PART I.
Page
Item 1. Financial Statements
Consolidated Condensed Statements of Condition as of
September 30, 1999 (unaudited) and December 31, 1998........... 3
Consolidated Condensed Statements of Income for the
Three Months Ended September 30, 1999 and 1998 (unaudited)..... 4
Consolidated Condensed Statements of Income for the
Nine Months Ended September 30, 1999 and 1998 (unaudited)...... 5
Consolidated Condensed Statements of Changes in Shareholders'
Equity for the Nine Months Ended
September 30, 1999 and 1998 (unaudited)........................ 6
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 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....... 24
PART II.
Item 1. Legal Proceedings................................................ 25
Item 2. Changes in Securities and Use of Proceeds........................ 25
Item 3. Defaults Upon Senior Securities.................................. 25
Item 4. Submission of Matters to a Vote of Security Holders.............. 25
Item 5. Other Information................................................ 25
Item 6. Exhibits and Reports on Form 8-K................................. 25
Signatures.................................................................. 27
2
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF CONDITION
BANCORP CONNECTICUT, INC.
<TABLE>
<CAPTION>
September 30, December 31,
(dollars in thousands, except per share data) 1999 1998
- ---------------------------------------------------------------------------------------------
(unaudited) (Note 1)
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,510 $ 11,163
Interest bearing deposits with banks 294 15
Federal funds sold 9,625 --
--------- ---------
Cash and cash equivalents 19,429 11,178
--------- ---------
Securities available-for-sale (at market value) 212,491 217,333
Trading account securities 218 172
Federal Home Loan Bank stock 3,642 2,832
Loans 315,551 284,839
Less:
Deferred loan fees (714) (850)
Allowance for loan losses (5,610) (5,549)
--------- ---------
Net loans 309,227 278,440
--------- ---------
Deferred income taxes 6,709 1,901
Premises and equipment, net 4,121 4,524
Accrued income receivable 3,294 3,077
Foreclosed real estate, net 316 334
Other assets 3,100 1,585
--------- ---------
Total assets $ 562,547 $ 521,376
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits $ 345,120 $ 345,563
Advances from Federal Home Loan Bank of Boston 72,830 40,630
Federal funds purchased and securities sold under
agreements to repurchase 94,645 80,516
Accrued taxes, expenses and other liabilities 5,743 4,751
--------- ---------
Total liabilities 518,338 471,460
--------- ---------
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 5,811,188 shares in 1999 and
5,653,406 shares in 1998 5,811 5,653
Additional paid-in capital 18,345 17,421
Retained earnings 35,244 31,761
Accumulated other comprehensive (loss) income (8,181) 825
Treasury stock at cost: 594,836 shares in 1999 and
519,498 shares in 1998 (7,010) (5,744)
--------- ---------
Total shareholders' equity 44,209 49,916
--------- ---------
Total liabilities and shareholders' equity $ 562,547 $ 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
September 30,
----------------------------
(dollars in thousands, except per share data) 1999 1998
- --------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INTEREST INCOME:
Interest on loans, including fees $ 6,229 $ 5,629
----------- -----------
Interest and dividends on investment securities:
Interest income 2,952 2,437
Dividend income 562 786
Interest on trading account 1 4
----------- -----------
3,515 3,227
----------- -----------
Interest on federal funds sold 99 63
Other interest and dividends 50 42
----------- -----------
Total interest income 9,893 8,961
----------- -----------
INTEREST EXPENSE:
Savings deposits 663 633
Time deposits 1,901 2,148
NOW accounts 342 246
----------- -----------
2,906 3,027
Interest on borrowed money 1,959 1,737
----------- -----------
Total interest expense 4,865 4,764
----------- -----------
Net interest income 5,028 4,197
Provision for loan losses 157 50
----------- -----------
Net interest income after provision for loan losses 4,871 4,147
----------- -----------
NONINTEREST INCOME:
Net securities (losses) gains (262) 354
Net trading account losses (26) (178)
Gain on sale of trust operations 356 --
Service charges on deposit accounts 210 178
Brokerage servicing fees 137 107
Option call premiums 132 65
Trust fees 130 160
Other 274 76
----------- -----------
Total noninterest income 951 762
----------- -----------
NONINTEREST EXPENSE:
Salaries and employee benefits 1,777 1,598
Furniture and equipment 257 261
Net occupancy 148 129
Data processing 140 166
Advertising 132 114
Other 697 587
----------- -----------
Total noninterest expense 3,151 2,855
----------- -----------
Income before income taxes 2,671 2,054
Provision for income taxes 700 525
----------- -----------
NET INCOME $ 1,971 $ 1,529
=========== ===========
AVERAGE COMMON SHARES OUTSTANDING:
Basic 5,196,752 5,115,183
Diluted 5,537,575 5,538,043
NET INCOME PER COMMON SHARE:
Basic $ 0.38 $ 0.30
Diluted $ 0.36 $ 0.28
CASH DIVIDEND PER SHARE $ 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>
Nine Months Ended
September 30,
----------------------------
(dollars in thousands, except per share data) 1999 1998
- --------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INTEREST INCOME:
Interest on loans, including fees $ 17,987 $ 16,857
----------- -----------
Interest and dividends on investment securities:
Interest income 8,416 6,547
Dividend income 1,632 2,442
Interest on trading account 3 7
----------- -----------
10,051 8,996
----------- -----------
Interest on federal funds sold 207 224
Other interest and dividends 142 114
----------- -----------
Total interest income 28,387 26,191
----------- -----------
INTEREST EXPENSE:
Savings deposits 1,958 1,995
Time deposits 5,769 6,567
NOW accounts 941 697
----------- -----------
8,668 9,259
Interest on borrowed money 5,439 4,467
----------- -----------
Total interest expense 14,107 13,726
----------- -----------
Net interest income 14,280 12,465
Provision for loan losses 222 218
----------- -----------
Net interest income after provision for loan losses 14,058 12,247
----------- -----------
NONINTEREST INCOME:
Net securities gains 492 1,166
Net trading account losses (35) (137)
Service charges on deposit accounts 565 504
Trust fees 431 440
Gain on sale of trust operations 356 --
Option call premiums 300 193
Brokerage servicing fees 256 330
Other 589 238
----------- -----------
Total noninterest income 2,954 2,734
----------- -----------
NONINTEREST EXPENSE:
Salaries and employee benefits 5,058 4,298
Furniture and equipment 740 504
Net occupancy 446 385
Data processing 425 536
Advertising 305 328
Other 2,008 1,587
----------- -----------
Total noninterest expense 8,982 7,638
----------- -----------
Income before income taxes 8,030 7,343
Provision for income taxes 2,267 2,318
----------- -----------
NET INCOME $ 5,763 $ 5,025
=========== ===========
AVERAGE COMMON SHARES OUTSTANDING:
Basic 5,188,442 5,106,080
Diluted 5,537,771 5,555,980
NET INCOME PER COMMON SHARE:
Basic $ 1.11 $ 0.98
Diluted $ 1.04 $ 0.90
CASH DIVIDEND PER SHARE $ 0.44 $ 0.40
</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 data) Stock Capital Earnings Gains(Losses) Stock Equity
- --------------------------------------------- ------ ---------- -------- -------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $ 5,612 $17,051 $ 28,149 $ 1,879 $(5,744) $ 46,947
--------
Net income -- -- 5,025 -- -- 5,025
Decrease in net unrealized gain on
securities available-for-sale -- -- -- (1,077) -- (1,077)
--------
Total comprehensive income 3,948
--------
Stock options exercised 24 184 -- -- -- 208
Cash dividends declared ($0.40 per share) -- -- (2,041) -- -- (2,041)
Tax benefits related to common stock
options exercised -- 82 -- -- -- 82
------- ------- -------- ------- ------- --------
BALANCE, SEPTEMBER 30, 1998 $ 5,636 $17,317 $ 31,133 $ 802 $(5,744) $ 49,144
======= ======= ======== ======= ======= ========
BALANCE, DECEMBER 31, 1998 $ 5,653 $17,421 $ 31,761 $ 825 $(5,744) $ 49,916
--------
Net income -- -- 5,763 -- -- 5,763
Decrease in unrealized gain on
securities available-for-sale -- -- -- (9,006) -- (9,006)
--------
Total comprehensive loss (3,243)
--------
Stock options exercised 158 809 -- -- -- 967
Cash dividends declared ($0.44 per share) -- -- (2,280) -- -- (2,280)
Treasury stock purchased -- -- -- -- (1,266) (1,266)
Tax benefits related to common stock
options exercised -- 115 -- -- -- 115
------- ------- -------- ------- ------- --------
BALANCE, SEPTEMBER 30, 1999 $ 5,811 $18,345 $ 35,244 $(8,181) $(7,010) $ 44,209
======= ======= ======== ======= ======= ========
</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.
Nine Months Ended
September 30,
-----------------------
(dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,763 $ 5,025
--------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of bond premiums (accretion of
discounts), net (1,750) (475)
Deferred income tax provision (benefit) (168) 325
Provision for loan losses 222 218
Provision for foreclosed real estate losses 43 53
Gain on sale of foreclosed real estate (11) (123)
Amortization of deferred loan points (185) (220)
Realized investment security gains (492) (1,166)
Gain on sale of trust operations (356) --
Depreciation and amortization 624 404
Net trading account losses 35 137
(Increase) decrease in trading account (81) 94
Increase in accrued income receivable (217) (426)
Increase in other assets (1,409) (1,041)
Increase (decrease) in accrued expenses
payable and other liabilities 1,107 (53)
--------- ---------
Total adjustments (2,638) (2,273)
--------- ---------
Net cash provided by operating activities 3,125 2,752
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available-for-sale (110,273) (147,584)
Proceeds from sales of securities available-for-sale 71,937 56,481
Proceeds from maturities of securities 19,024 13,088
Paydowns on mortgage-backed securities 12,749 18,623
Purchases of Federal Home Loan Bank (FHLB) stock (810) (737)
Net increase in loans (30,849) (8,758)
Purchases of premises and equipment, net (186) (1,831)
Proceeds from sale of trust operations 106 --
Proceeds from sales of foreclosed real estate, net 121 762
--------- ---------
Net cash used for investing activities (38,181) (69,956)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in time deposits (4,249) (5,290)
Net increase in other deposits 3,806 14,119
Proceeds from FHLB borrowings 53,000 148,668
Repayment of FHLB borrowings (20,800) (124,276)
Net increase in Federal funds purchased and
repurchase agreements 14,129 33,974
Proceeds from exercise of stock options 967 208
Repurchase common stock (1,266) --
Cash dividends paid (2,280) (2,042)
--------- ---------
Net cash provided by financing activities 43,307 65,361
--------- ---------
Net increase (decrease) in cash and
cash equivalents 8,251 (1,843)
Cash and cash equivalents at beginning of period 11,178 10,717
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,429 $ 8,874
========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES
Decrease in net unrealized gain on securities
available-for-sale $ (9,006) $ (1,077)
Transfer of loans to foreclosed real estate 137 131
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 September 30, 1999, the
consolidated condensed statements of income for the three and nine month periods
ended September 30, 1999 and 1998, and the consolidated condensed statements of
changes in shareholders' equity and consolidated condensed statements of cash
flows for the nine month periods ended September 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 September 30, 1999 and the results of
operations for the three and nine month periods ended September 30, 1999 and
1998, and the changes in shareholders' equity and cash flows for the nine month
periods ended September 30, 1999 and 1998. Results of operations for the three
and nine month periods ended September 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 September 30, 1999 and December
31, 1998 were as follows:
September 30, 1999
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
United States Government and
agency obligations $ 61,604 $ 28 $ (8,274) $ 53,358
Municipal bonds 5,477 48 (33) 5,492
Corporate bonds 941 -- (8) 933
Mortgage-backed securities 76,912 1 (2,372) 74,541
Capital trust preferreds 26,022 97 (1,379) 24,740
Marketable equity securities 53,329 1,075 (1,618) 52,786
Mutual funds 602 40 (1) 641
-------- -------- --------- --------
$224,887 $ 1,289 $ (13,685) $212,491
======== ======== ========= ========
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:
September 30, December 31,
1999 1998
------------- ------------
(in thousands)
Commercial $ 59,022 $ 42,857
Commercial real estate 45,014 42,408
Residential real estate 135,184 137,326
Real estate construction 3,115 3,688
Consumer 73,216 58,560
--------- ---------
315,551 284,839
Less:
Deferred loan fees (714) (850)
Allowance for loan losses (5,610) (5,549)
--------- ---------
Total loans $ 309,227 $ 278,440
========= =========
Note 4 - Allowance for Loan and Foreclosed Real Estate Losses
- --------------------------------------------------------------
Changes in the allowances were:
Nine Months Ended
September 30,
--------------------------
1999 1998
--------- ---------
(in thousands)
Allowance for loan losses:
Balance, beginning of year $ 5,549 $ 5,306
Provision charged to expense 222 218
Loan charge-offs (240) (85)
Recoveries 79 95
--------- ---------
Balance, end of period $ 5,610 $ 5,534
========= =========
Allowance for foreclosed real
estate losses:
Balance, beginning of year $ 50 $ 25
Provision charged to expense 43 53
Foreclosed real estate
write-downs, net (43) (38)
--------- ---------
Balance, end of period $ 50 $ 40
========= =========
10
<PAGE>
Note 5 - Nonperforming Assets
- -----------------------------
The balances of nonperforming assets were:
September 30, December 31,
1999 1998
------------- ------------
(dollars in thousands)
Nonaccrual loans:
Commercial $ 589 $ 60
Commercial real estate 24 402
Residential real estate 988 705
Consumer 84 98
------ ------
Total nonaccrual loans 1,685 1,265
Accruing loans past due 90 days or more -- --
------ ------
Total nonperforming loans 1,685 1,265
Other real estate owned 316 334
------ ------
Total nonperforming assets $2,001 $1,599
====== ======
Nonperforming loans as a percentage of total loans 0.53% 0.44%
====== ======
Nonperforming assets as a percentage of total assets 0.36% 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 nine month periods ended
September 30, 1999 and 1998 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
------ ------ ------ ------
(in thousands) (in thousands)
Basic 5,197 5,115 5,188 5,106
Effect of dilutive stock options 341 423 350 450
----- ----- ----- -----
Diluted 5,538 5,538 5,538 5,556
===== ===== ===== =====
11
<PAGE>
Note 7 - Shareholders' Equity
- -----------------------------
The following table presents the components and related tax effects allocated to
other comprehensive income for the nine month period ended September 30, 1999.
Before Tax Net
Tax (Benefit) of Tax
Amount Expense Amount
---------- ----------- ----------
(in thousands)
Net unrealized losses on securities
arising during the period $(13,155) $ (4,473) $ (8,682)
Less: reclassification adjustment for
gains realized in net income 492 168 324
-------- -------- --------
Net unrealized losses on securities $(13,647) $ (4,641) $ (9,006)
======== ======== ========
The following table presents the components and related tax effects allocated to
other comprehensive income for the nine month period ended September 30, 1998.
Before Tax Net
Tax (Benefit) of Tax
Amount Expense Amount
---------- ----------- ----------
(in thousands)
Net unrealized losses on securities
arising during the period $ (637) $ (256) $ (381)
Less: reclassification adjustment for
gains realized in net income 1,166 470 696
-------- -------- --------
Net unrealized losses on securities $ (1,803) $ (726) $ (1,077)
======== ======== ========
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 November 10, 1999, the
Corporation repurchased 106,338 shares at an average price of $16.40.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF THE THREE AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1999 AND 1998
----------------------------------------------
The following discussion and analysis presents a review of the financial
condition and results of operations 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 $4,842,000 or 2.2% to
$212,491,000 as of September 30, 1999 from $217,333,000 as of December 31, 1998.
A reduction in the market value of the portfolio in the amount of $13,647,000,
as the result of rising interest rates, was the primary cause of the decrease in
securities available-for-sale. Unrealized gains totaled $1,251,000 as of
December 31, 1998 compared to unrealized losses of $12,396,000 as of September
30, 1999. Purchases of securities net of proceeds from maturities and sales
(excluding realized gains) and paydowns on mortgage-backed securities amounting
to $6,563,000 partially offset the decrease in the securities portfolio.
Deferred income taxes increased $4,808,000 to $6,709,000 as of September 30,
1999 from $1,901,000 as of December 31, 1998 mainly as a result of the
$13,647,000 increase in unrealized losses in the security portfolio noted above.
LOANS - Loans increased $30,712,000 or 10.8% to $315,551,000 as of September 30,
1999 from $284,839,000 as of 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 $18,771,000 or 22.0% and represented
33.0% of the loan portfolio as of September 30, 1999. Consumer loans increased
$14,656,000 or 25.0% primarily due to loans closed by BCIF.
DEPOSITS - Total deposits as of September 30, 1999 in the amount of $345,120,000
remained relatively unchanged compared to the $345,563,000 as of December 31,
1998. Decreases in time and savings deposits of $4,249,000 and $3,052,000,
respectively, were partially offset by an increase in demand and NOW accounts
principally reflecting an increase in the Bank's money fund checking product.
BORROWINGS - Advances from the Federal Home Loan Bank of Boston (the "FHLB")
increased by $32,200,000 or 79.3% to $72,830,000 as of September 30, 1999
compared to $40,630,000 as of year end 1998. In addition, Federal funds
purchased and securities sold under agreements to repurchase increased
$14,129,000 or 17.5% to $94,645,000 from $80,516,000. These increases in
borrowings were primarily utilized to fund the Bank's loan growth and net
purchases of securities. As of September 30, 1999, broker/dealer repurchase
agreements and retail repurchase agreements totaled $70,680,000 and $22,015,000,
respectively.
CHANGES IN RESULTS OF OPERATIONS
EARNINGS - Net income for the quarter ended September 30, 1999 was $1,971,000
compared to $1,529,000 for the third quarter of 1998, an increase of 28.9%.
Increases in net interest income and noninterest income, partially offset by
increased noninterest expense and a higher provision for loan losses were
13
<PAGE>
principally responsible for the improved operating results. During the third
quarter of 1999, a gain in the amount of $356,000 was realized from the sale of
the Bank's trust operations. This gain was approximately offset by security
losses resulting from a restructuring of a segment of the investment portfolio.
The annualized return on average assets for the quarter ended September 30, 1999
was 1.44% compared to 1.21% for the same quarter last year while the return on
average equity rose to 17.49% from 12.49% the previous year.
Net income for the nine months ended September 30, 1999 was $5,763,000 compared
to $5,025,000 for the same period in 1998, an increase of 14.7%. An increase in
net interest income partially offset by increased noninterest expense, and the
$356,000 aforementioned gain on the sale of the Bank's trust operations were the
principal reasons for the increased earnings. The annualized return on average
assets was 1.43% for the nine months ended September 30, 1999 compared to 1.38%
for the same period in 1998 while the return on average equity rose to 15.90%
from 13.89% for the prior year period.
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 $48,899,000 or 10.0% to
$537,656,000 for the three months ended September 30, 1999 from $488,757,000 for
the same quarter in 1998.
For the three months ended September 30, 1999 net interest income, on a tax
equivalent basis, increased $723,000 or 16.0% compared to the same period in
1998 primarily as a result of a $44,592,000 increase in the average volume of
the loan portfolio. In addition, average noninterest bearing demand deposits
increased by $1,676,000 or 4.9% 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 on a tax equivalent basis was 3.31% for the three
months ended September 30, 1999 compared to 3.07% for the same period in 1998.
The ratio of net interest income to average interest earning assets on a tax
equivalent basis was 3.90% for the quarter ended September 30, 1999 compared to
3.70% for the same period in 1998. A proportionately greater decline in interest
rates on sources of funds compared with yields on earning assets concurrent with
an improvement in the mix of deposits helped to achieve the increase in the
interest rate spread in 1999 compared to 1998. 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. This factor lessens the
increase in the interest rate spread slightly in 1999.
Average interest earning assets increased by $52,982,000 or 11.3% to
$523,209,000 for the nine months ended September 30, 1999 from $470,227,000 for
the same period in 1998.
For the nine months ended September 30, 1999 net interest income, on a tax
equivalent basis, increased $1,432,000 or 10.6% compared to the same period in
1998 mainly due to increases in the average volume of the invested funds and
loan portfolios of $16,214,000 and $36,768,000, respectively. In addition,
average noninterest bearing demand deposits increased by $3,589,000 or 11.6%
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 remained relatively unchanged at 3.22% for the nine
months ended September 30, 1999 compared to 3.19% for the same period in 1998.
Similarly, the ratio of net interest income to average interest earning assets
on a tax equivalent basis was 3.80% for the nine months ended September 30, 1999
compared to 3.82% for the same period in 1998.
14
<PAGE>
PROVISION FOR LOAN LOSSES - For the three months ended September 30, 1999 and
1998, the provisions for loan losses were $157,000 and $50,000, respectively.
Net loan charge-offs totaled $131,000 for the third quarter of 1999 compared to
$1,000 for the same period in 1998.
For the nine months ended September 30, 1999 and 1998, the provisions for loan
losses were $222,000 and $218,000, respectively. Net loan charge-offs totaled
$161,000 for the nine months ended September 30, 1999 compared to net loan
recoveries of $10,000 during the same period in 1998. The allowance for loan
losses was $5,610,000 or 1.78% of outstanding loans as of September 30, 1999
compared to $5,534,000 or 2.05% of outstanding loans as of September 30, 1998.
Nonperforming loans were $1,685,000 as of September 30, 1999 and $2,104,000 as
of September 30, 1998, representing .53% and .78%, 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.
Management increased the provision for loan losses during the third quarter of
1999 compared to 1998 in light of the increased loan charge-offs during the
quarter.
NONINTEREST INCOME - Total noninterest income increased by $189,000 or 24.8% to
$951,000 in the third quarter of 1999 from $762,000 for the same period in 1998.
During the third quarter of 1999, the Corporation recognized total net
securities losses of $262,000 on the sale of securities available-for-sale
compared to net securities gains of $354,000 in 1998. Net trading account losses
totaled $26,000 for the third quarter compared $178,000 for the same period in
1998. Option call premiums increased $67,000 for the third quarter of 1999
compared to 1998. During the third quarter of 1999, a gain in the amount of
$356,000 was realized from the sale of the Bank's trust operations. This gain
was approximately offset by security losses resulting from a restructuring of a
segment of the investment portfolio. Brokerage servicing fees increased $30,000
for the third quarter of 1999 compared to 1998 due to higher sales volume. Other
income totaled $274,000 in 1999 compared to $76,000 in 1998, representing an
increase of $198,000 or 260.5%. This increase reflected increased fee income
from the sale and servicing of loans generated by BCIF as well as increased
insurance fees recorded by the Bank.
Total noninterest income increased by $220,000 or 8.0% to $2,954,000 for the
nine months ended September 30, 1999 from $2,734,000 for the same period in
1998. During the nine month period in 1999, the Corporation recognized total net
securities gains of $492,000 on the sale of securities available-for-sale
compared to $1,166,000 in 1998, a decrease of $674,000 or 57.8%. Net trading
account losses totaled $35,000 for the nine month period compared to $137,000
for the same period in 1998. Option call premiums increased $107,000 in 1999
compared to 1998. Brokerage servicing fees decreased $74,000 or 22.4% for the
nine months ended September 30, 1999 compared to 1998 due to lower sales volume.
Other income totaled $589,000 in 1999 compared to $238,000 in 1998, representing
an increase of $351,000 or 147.5%. This increase reflected increased fee income
from the sale and servicing of loans generated by BCIF as well as increased
insurance fees recorded by the Bank.
NONINTEREST EXPENSE - Operating expenses increased $296,000 or 10.4% to
$3,151,000 in the third quarter of 1999 from $2,855,000 in 1998.
Salaries and employee benefits were $179,000 or 11.2% higher in 1999 compared to
1998. This increase reflects higher staffing levels at BCIF, increased
commission salaries and scheduled employee annual salary increases. In addition,
higher 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.
15
<PAGE>
The expenses related to furniture and equipment totaled $257,000 for the third
quarter of 1999 compared to $261,000 for the same period in 1998. As the result
of a change to a new in-house core processing system from a service bureau
environment during the third quarter of 1998, the bank scrapped data processing
equipment with a remaining book value of $57,000. Offsetting this 1998 charge
was increased depreciation, amortization, and computer maintenance expenses
during 1999 related to the Bank's installation of the new in-house core
processing system.
The increase in other noninterest expenses of $110,000 or 18.7% reflected a net
increase in a number of miscellaneous expense categories. The most significant
increases in these categories were expenses incurred in 1999 for outside fund
management fees for the internal trust operations of the Bank, as a result of
higher volume, and foreclosed real estate activity.
Operating expenses increased $1,344,000 or 17.6% to $8,982,000 for the nine
months ended September 30, 1999 from $7,638,000 in 1998.
Salaries and employee benefits were $760,000 or 17.7% higher in 1999 compared to
1998. This increase reflects 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. In addition, higher 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 $740,000 for the nine
months ended September 30, 1999 compared to $504,000 for the same period in
1998, an increase of $236,000 or 46.8%. Higher depreciation, amortization, and
maintenance charges related to the Bank's installation of the new in-house core
processing system during the third quarter of 1998 were primarily responsible
for the increase.
Data processing expenses decreased by $111,000 or 20.7% to $425,000 for the nine
months ended September 30, 1999 compared to $536,000 for the same period in
1998. This decrease was primarily due to the change to a new in-house core
processing system from a service bureau environment.
The increase in other noninterest expenses of $421,000 or 26.5% reflected a net
increase in a number of miscellaneous expense categories. The most significant
increases in these categories were expenses incurred in 1999 for outside fund
management fees for the internal trust operations of the Bank as a result of
higher volume, the minority interest in the net income of BCIF, the outsourcing
of the internal audit function and net foreclosed real estate activity.
PROVISION FOR INCOME TAXES - The provision for income taxes for the three months
ended September 30, 1999 and 1998 was $700,000 and $525,000, respectively,
representing effective tax rates of 26.2% and 25.6%, respectively. During the
third quarter of 1998, the Corporation recorded a $242,000 income tax credit as
a result of the receipt of an income tax settlement from the state of
Connecticut for tax years 1992 through 1994. The effective tax rate for the
third quarter of 1998 without this credit was 37.3%. The effective income tax
rates are below statutory rates primarily as a result of the dividends received
deduction.
The provision for income taxes for the nine months ended September 30, 1999 and
1998 was $2,267,000 and $2,318,000, respectively, representing effective tax
rates of 28.2% and 31.6%, respectively. The effective tax rate for 1998 adjusted
for the income tax credit noted above was 34.9%.
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
16
<PAGE>
eliminated resulting in the lower effective tax rates mentioned above for the
quarter and nine month periods ended September 30, 1999 as compared to the same
periods in 1998 as adjusted.
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
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 September 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 September 30, 1999, qualified collateral totaled $116,175,000.
The Bank's actual borrowings on that date were $72,830,000.
The inflow and outflow of funds is detailed in the consolidated condensed
statements of cash flows for the nine months ended September 30, 1999 and 1998
and is summarized below.
During the current period, cash and cash equivalents increased by $8,251,000, as
net cash provided by operating activities and financing activities of
$46,432,000 exceeded the $38,181,000 of net cash used for investing activities.
Net cash used for investing activities, which primarily reflects the net
redeployment of funds into the loan and securities portfolios, was $38,181,000
for the nine months ended September 30, 1999. During this period, the
Corporation experienced net originations of loans totaling $30,849,000 and a net
increased investment in securities in the amount of $6,563,000, which were
funded primarily by increased borrowings.
The net cash provided by financing activities of $43,307,000 for the nine months
ended September 30, 1999 primarily reflected net increases in funds borrowed
from the FHLB of $32,200,000 and Federal funds purchased and repurchase
agreements of $14,129,000.
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
17
<PAGE>
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 September
30, 1999, that the Bank meets all capital adequacy requirements to which it is
subject.
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 September 30, 1999:
Total Capital (to Risk Weighted Assets) $ 51,546 14.60 % >/= $ 35,311 >/= 10.0 %
Tier I Capital (to Risk Weighted Assets) 47,117 13.34 >/= 21,186 >/= 6.0
Tier I Capital (to Average Assets) 47,117 8.48 >/= 27,781 >/= 5.0
</TABLE>
On July 21, 1999, the Board of Directors of the Corporation declared a cash
dividend of $.15 per common share which was paid on August 16, 1999 to
shareholders of record on August 2, 1999. Subsequent to September 30, 1999, the
Board of Directors of the Corporation declared a cash dividend of $.155 per
common share payable on November 16, 1999 to shareholders of record on November
1, 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 November 10, 1999, the
Corporation repurchased 106,338 shares at an average price of $16.40.
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.
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
18
<PAGE>
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
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 including the 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. This cost has been capitalized and is being amortized and
depreciated over the useful lives of the assets. Related amortization and
depreciation amounts to 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 in 1999 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 had 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. As a
result, management does not expect third-party vendor exposures to have a
material adverse effect on the Bank.
19
<PAGE>
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.
Based on the results of our mailings and questionnaires management believes that
no significant credit exposure exists related to Year 2000 regarding our
commercial borrowers.
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. The Bank has complied with all standards set forth by
the regulatory agencies.
20
<PAGE>
Average Balance Sheets, Net Interest Income and Interest Rates(a)
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended September 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) $308,434 $ 6,229 8.08% $263,842 $ 5,629 8.53%
Taxable investment securities(c) 214,438 3,663 6.83% 213,426 3,483 6.53%
Municipal bonds(c) 3,790 67 7.07% 3,514 62 7.06%
Federal funds sold 7,606 99 5.21% 4,706 63 5.35%
Other interest-earning assets 3,388 51 6.02% 3,269 48 5.87%
-------- -------- -------- --------
Total interest-earning assets 537,656 10,109 7.52% 488,757 9,285 7.60%
-------- -------- -------- --------
Noninterest-earning assets 10,778 17,107
-------- --------
TOTAL ASSETS $548,434 $505,864
======== ========
LIABILITIES AND EQUITY
Interest-bearing liabilities:
NOW and savings deposits $154,895 1,005 2.60% $132,281 879 2.66%
Time deposits 158,234 1,901 4.81% 160,911 2,148 5.34%
FHLB of Boston advances 52,776 688 5.21% 41,152 560 5.44%
Federal funds purchased and securities
sold under agreements to repurchase 96,557 1,271 5.27% 86,268 1,177 5.46%
-------- -------- -------- --------
Total interest-bearing liabilities 462,462 4,865 4.21% 420,612 4,764 4.53%
-------- -------- -------- --------
Noninterest-bearing liabilities:
Demand deposits 36,128 34,452
Other 4,761 1,819
Shareholders' equity 45,083 48,981
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $548,434 $505,864
======== ========
Net interest income on a tax
equivalent basis(c) 5,244 4,521
Tax equivalent adjustment (216) (324)
-------- --------
Net interest income $ 5,028 $ 4,197
======== ========
Net interest spread (tax equivalent basis) 3.31% 3.07%
==== ====
Net interest margin (tax equivalent basis) 3.90% 3.70%
==== ====
</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 0% and
9.5% in 1999 and 1998, respectively.
21
<PAGE>
Average Balance Sheets, Net Interest Income and Interest Rates(a)
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 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) $298,490 $ 17,987 8.03% $261,722 $ 16,857 8.59%
Taxable investment securities(c) 212,220 10,474 6.58% 196,631 9,799 6.64%
Municipal bonds(c) 3,610 188 6.94% 3,399 180 7.06%
Federal funds sold 5,650 207 4.88% 5,535 224 5.40%
Other interest-earning assets 3,239 145 5.97% 2,940 128 5.80%
-------- -------- -------- --------
Total interest-earning assets 523,209 29,001 7.39% 470,227 27,188 7.71%
-------- -------- -------- --------
Noninterest-earning assets 13,909 15,360
-------- --------
TOTAL ASSETS $537,118 $485,587
======== ========
LIABILITIES AND EQUITY
Interest-bearing liabilities:
NOW and savings deposits $152,293 2,899 2.54% $132,853 2,692 2.70%
Time deposits 158,404 5,769 4.86% 164,155 6,567 5.33%
FHLB of Boston advances 45,706 1,758 5.13% 29,449 1,253 5.67%
Federal funds purchased and securities
sold under agreements to repurchase 94,121 3,681 5.21% 78,532 3,214 5.46%
-------- -------- -------- --------
Total interest-bearing liabilities 450,524 14,107 4.17% 404,989 13,726 4.52%
-------- -------- -------- --------
Noninterest-bearing liabilities:
Demand deposits 34,516 30,927
Other 3,739 1,441
Shareholders' equity 48,339 48,230
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $537,118 $485,587
======== ========
Net interest income on a tax
equivalent basis(c) 14,894 13,462
Tax equivalent adjustment (614) (997)
-------- --------
Net interest income $ 14,280 $ 12,465
======== ========
Net interest spread (tax equivalent basis) 3.22% 3.19%
==== ====
Net interest margin (tax equivalent basis) 3.80% 3.82%
==== ====
</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 0% and
9.5% in 1999 and 1998, respectively.
22
<PAGE>
Rate/Volume Analysis
- --------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999 September 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 $ 913 $ (313) $ 600 $ 2,264 $(1,134) $ 1,130
Taxable investment securities 17 163 180 770 (95) 675
Municipal bonds 5 -- 5 11 (3) 8
Federal funds sold 38 (2) 36 5 (22) (17)
Other interest-earning assets 2 1 3 13 4 17
------- ------- ------- ------- ------- -------
975 (151) 824 3,063 (1,250) 1,813
------- ------- ------- ------- ------- -------
Interest paid on:
NOW and savings deposits 147 (21) 126 377 (170) 207
Time deposits (35) (212) (247) (224) (574) (798)
FHLB of Boston advances 152 (24) 128 635 (130) 505
Federal funds purchased and securities
sold under agreements to repurchase 137 (43) 94 615 (148) 467
------- ------- ------- ------- ------- -------
401 (300) 101 1,403 (1,022) 381
------- ------- ------- ------- ------- -------
Change in net interest income $ 574 $ 149 $ 723 $ 1,660 $ (228) $ 1,432
======= ======= ======= ======= ======= =======
</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.
23
<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 as of September 30, 1999 and December 31, 1998 utilizing a
simulation model to measure the estimated percentage change in net interest
income due to an increase or decrease in market interest rates of up to 200
basis points, spread evenly over the next twelve months, is within the Bank's
established 10% tolerance limit.
24
<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
Not applicable
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
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 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)
25
<PAGE>
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
(b) Reports on Form 8-K
The registrant did not file any Report on Form 8-K during the third 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: November 12,1999 /s/ Robert D. Morton
-------------------------- ---------------------------------
Robert D. Morton
President and Chief
Executive Officer
(Principal Executive Officer)
Date: November 12,1999 /s/ Phillip J. Mucha
-------------------------- ---------------------------------
Phillip J. Mucha
Chief Financial Officer
and Treasurer/Secretary
(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
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 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 September 30, 1999 (unaudited)
and the Consolidated Condensed Statements of Operations for the nine months
ended September 30, 1999 (unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,510
<INT-BEARING-DEPOSITS> 294
<FED-FUNDS-SOLD> 9,625
<TRADING-ASSETS> 218
<INVESTMENTS-HELD-FOR-SALE> 212,491
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 315,551
<ALLOWANCE> (5,610)
<TOTAL-ASSETS> 562,547
<DEPOSITS> 345,120
<SHORT-TERM> 29,645
<LIABILITIES-OTHER> 5,743
<LONG-TERM> 137,830
0
0
<COMMON> 5,811
<OTHER-SE> 38,398
<TOTAL-LIABILITIES-AND-EQUITY> 562,547
<INTEREST-LOAN> 17,987
<INTEREST-INVEST> 10,051
<INTEREST-OTHER> 349
<INTEREST-TOTAL> 28,387
<INTEREST-DEPOSIT> 8,668
<INTEREST-EXPENSE> 14,107
<INTEREST-INCOME-NET> 14,280
<LOAN-LOSSES> 222
<SECURITIES-GAINS> 492
<EXPENSE-OTHER> 8,982
<INCOME-PRETAX> 8,030
<INCOME-PRE-EXTRAORDINARY> 8,030
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,763
<EPS-BASIC> 1.11
<EPS-DILUTED> 1.04
<YIELD-ACTUAL> 3.64
<LOANS-NON> 1,685
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 4,834
<ALLOWANCE-OPEN> 5,549
<CHARGE-OFFS> 240
<RECOVERIES> 79
<ALLOWANCE-CLOSE> 5,610
<ALLOWANCE-DOMESTIC> 4,361
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,249
</TABLE>
