SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________
Commission File Number 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 Identification No.)
Incorporation or Organization)
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 - 5,180,456 shares as of November 9, 2000
--------------------------------------------------------------------------------
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, 2000 (unaudited) and December 31, 1999........... 3
Consolidated Condensed Statements of Income for the
Three Months Ended September 30, 2000 and 1999 (unaudited)..... 4
Consolidated Condensed Statements of Income for the
Nine Months Ended September 30, 2000 and 1999 (unaudited)...... 5
Consolidated Condensed Statements of Changes in
Shareholders' Equity for the Nine Months Ended
September 30, 2000 and 1999 (unaudited)........................ 6
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999 (unaudited)...... 7
Notes to Consolidated Condensed Financial Statements
(unaudited).................................................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 25
PART II.
Item 1. Legal Proceedings................................................ 26
Item 2. Changes in Securities and Use of Proceeds........................ 26
Item 3. Defaults Upon Senior Securities.................................. 26
Item 4. Submission of Matters to a Vote of Security Holders.............. 26
Item 5. Other Information................................................ 26
Item 6. Exhibits and Reports on Form 8-K................................. 26
Signatures.................................................................. 28
2
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF CONDITION
BANCORP CONNECTICUT, INC.
September 30, December 31,
(dollars in thousands, except per share data) 2000 1999
--------------------------------------------------------------------------------
(unaudited) (Note 1)
ASSETS
Cash and due from banks $ 11,688 $ 13,548
Interest bearing deposits with banks 21 346
Federal funds sold 4,440 6,725
--------- ---------
Cash and cash equivalents 16,149 20,619
--------- ---------
Securities available-for-sale (at market value) 236,344 214,595
Trading account securities -- 348
Federal Home Loan Bank stock 6,217 4,392
Loans 323,135 316,093
Less:
Deferred loan fees (691) (702)
Allowance for loan losses (6,056) (5,681)
--------- ---------
Net loans 316,388 309,710
--------- ---------
Deferred income taxes 8,076 8,535
Accrued income receivable 4,138 3,482
Premises and equipment, net 3,960 3,971
Foreclosed real estate, net 166 195
Other assets 2,409 2,951
--------- ---------
Total assets $ 593,847 $ 568,798
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits $ 374,240 $ 348,441
Funds borrowed 166,939 171,129
Other liabilities 6,846 7,696
--------- ---------
Total liabilities 548,025 527,266
--------- ---------
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 5,896,292 shares in 2000 and
5,830,811 shares in 1999 5,896 5,831
Additional paid-in capital 18,872 18,507
Retained earnings 40,290 36,293
Accumulated other comprehensive loss (10,429) (11,611)
Treasury stock, at cost: 715,836 shares
in 2000 and 625,836 shares in 1999 (8,807) (7,488)
--------- ---------
Total shareholders' equity 45,822 41,532
--------- ---------
Total liabilities and shareholders' equity $ 593,847 $ 568,798
========= =========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
BANCORP CONNECTICUT, INC.
Three Months Ended
September 30,
--------------------------
(dollars in thousands, except per share data) 2000 1999
--------------------------------------------------------------------------------
(unaudited)
INTEREST INCOME:
Interest on loans, including fees $ 6,778 $ 6,229
----------- -----------
Interest and dividends on investment securities:
Interest income 3,833 2,952
Dividend income 526 562
Interest on trading account -- 1
----------- -----------
4,359 3,515
----------- -----------
Interest on federal funds sold 182 99
Other interest and dividends 119 50
----------- -----------
Total interest income 11,438 9,893
----------- -----------
INTEREST EXPENSE:
Savings deposits 608 663
Time deposits 2,699 1,901
NOW accounts 373 342
----------- -----------
3,680 2,906
Interest on borrowed money 2,539 1,959
----------- -----------
Total interest expense 6,219 4,865
----------- -----------
Net interest income 5,219 5,028
Provision for loan losses 118 157
----------- -----------
Net interest income after provision
for loan losses 5,101 4,871
----------- -----------
NONINTEREST INCOME:
Net securities gains (losses) 324 (262)
Net trading account gains (losses) 42 (26)
Service charges on deposit accounts 212 199
Brokerage servicing fees 174 137
Call options premiums 116 132
Gains on sales of loans, originated for sale 107 151
Trust fees -- 130
Gain on sale of trust operations -- 356
Other 155 134
----------- -----------
Total noninterest income 1,130 951
----------- -----------
NONINTEREST EXPENSE:
Salaries and employee benefits 1,732 1,777
Furniture and equipment 276 257
Net occupancy 120 148
Data processing 146 140
Advertising 107 132
Other 503 697
----------- -----------
Total noninterest expense 2,884 3,151
----------- -----------
Income before income taxes 3,347 2,671
Provision for income taxes 998 700
----------- -----------
NET INCOME $ 2,349 $ 1,971
=========== ===========
AVERAGE COMMON SHARES OUTSTANDING:
Basic 5,179,493 5,196,752
Diluted 5,403,853 5,537,575
NET INCOME PER COMMON SHARE:
Basic $ 0.45 $ 0.38
Diluted $ 0.43 $ 0.36
CASH DIVIDEND PER SHARE $ 0.17 $ 0.15
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
BANCORP CONNECTICUT, INC.
Nine Months Ended
September 30,
--------------------------
(dollars in thousands, except per share data) 2000 1999
--------------------------------------------------------------------------------
(unaudited)
INTEREST INCOME:
Interest on loans, including fees $ 19,756 $ 17,987
----------- -----------
Interest and dividends on investment securities:
Interest income 10,942 8,416
Dividend income 1,503 1,632
Interest on trading account 6 3
----------- -----------
12,451 10,051
----------- -----------
Interest on federal funds sold 315 207
Other interest and dividends 319 142
----------- -----------
Total interest income 32,841 28,387
----------- -----------
INTEREST EXPENSE:
Savings deposits 1,791 1,958
Time deposits 6,797 5,769
NOW accounts 1,066 941
----------- -----------
9,654 8,668
Interest on borrowed money 7,618 5,439
----------- -----------
Total interest expense 17,272 14,107
----------- -----------
Net interest income 15,569 14,280
Provision for loan losses 354 222
----------- -----------
Net interest income after provision
for loan losses 15,215 14,058
----------- -----------
NONINTEREST INCOME:
Net securities gains 601 492
Net trading account losses (2) (35)
Service charges on deposit accounts 604 549
Call options premiums 438 300
Brokerage servicing fees 416 256
Gains on sales of loans, originated for sale 403 264
Trust fees -- 431
Gain on sale of trust operations -- 356
Other 428 341
----------- -----------
Total noninterest income 2,888 2,954
----------- -----------
NONINTEREST EXPENSE:
Salaries and employee benefits 5,074 5,058
Furniture and equipment 805 740
Net occupancy 423 446
Data processing 426 425
Advertising 337 305
Other 1,668 2,008
----------- -----------
Total noninterest expense 8,733 8,982
----------- -----------
Income before income taxes 9,370 8,030
Provision for income taxes 2,794 2,267
----------- -----------
NET INCOME $ 6,576 $ 5,763
=========== ===========
AVERAGE COMMON SHARES OUTSTANDING:
Basic 5,205,323 5,188,442
Diluted 5,440,529 5,537,771
NET INCOME PER COMMON SHARE:
Basic $ 1.26 $ 1.11
Diluted $ 1.21 $ 1.04
CASH DIVIDEND PER SHARE $ 0.495 $ 0.440
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, 1998 $ 5,653 $ 17,421 $ 31,761 $ 825 $ (5,744) $ 49,916
--------
Net income -- -- 5,763 -- -- 5,763
Decrease in net unrealized gain on securities
available-for-sale -- -- -- (9,006) -- (9,006)
--------
Total comprehensive loss (3,243)
--------
Stock options exercised (157,782 shares) 158 809 -- -- -- 967
Cash dividends declared ($0.44 per share) -- -- (2,280) -- -- (2,280)
Treasury stock purchased (75,338 shares) -- -- -- -- (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
======== ======== ======== ======== ======== ========
BALANCE, DECEMBER 31, 1999 $ 5,831 $ 18,507 $ 36,293 $(11,611) $ (7,488) $ 41,532
--------
Net income -- -- 6,576 -- -- 6,576
Decrease in net unrealized loss on securities
available-for-sale -- -- -- 1,182 -- 1,182
--------
Total comprehensive income 7,758
--------
Stock options exercised (65,481 shares) 65 269 -- -- -- 334
Cash dividends declared ($0.495 per share) -- -- (2,579) -- -- (2,579)
Treasury stock purchased (90,000 shares) -- -- -- -- (1,319) (1,319)
Tax benefits related to common stock options
exercised -- 96 -- -- -- 96
-------- -------- -------- -------- -------- --------
BALANCE, SEPTEMBER 30, 2000 $ 5,896 $ 18,872 $ 40,290 $(10,429) $ (8,807) $ 45,822
======== ======== ======== ======== ======== ========
</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>
Nine Months Ended
September 30,
-----------------------
(in thousands) 2000 1999
--------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,576 $ 5,763
--------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of bond premiums (accretion of discounts), net (2,601) (1,750)
Deferred income tax provision (benefit) (149) (168)
Provision for loan losses 354 222
Provision (credit) for foreclosed real estate losses (50) 43
Gain on sale of foreclosed real estate (90) (11)
Gains on sales of loans, originated for sale (403) (264)
Proceeds from sales of loans, originated for sale 21,462 16,489
Loans originated for sale (21,535) (16,995)
Amortization of deferred loan points (80) (185)
Net securities gains (601) (492)
Gain on sale of trust operations -- (356)
Net trading account losses 2 35
Depreciation and amortization 608 624
Decrease (increase) in trading account 346 (81)
Increase in accrued income receivable (656) (217)
Decrease (increase) in other assets 497 (1,409)
(Decrease) increase in other liabilities (754) 3,006
--------- ---------
Total adjustments (3,650) (1,509)
--------- ---------
Net cash provided by operating activities 2,926 4,254
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available-for-sale (76,118) (110,273)
Proceeds from sales of securities available-for-sale 52,090 71,937
Proceeds from maturities of securities 1,000 19,024
Paydowns on mortgage-backed securities 6,271 12,749
Purchases of Federal Home Loan Bank stock (1,825) (810)
Net increase in loans (6,837) (30,099)
Purchases of premises and equipment, net (592) (186)
Proceeds from sale of trust operations 106 106
Proceeds from sales of foreclosed real estate, net 464 121
--------- ---------
Net cash used for investing activities (25,441) (37,431)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in time deposits 30,033 (4,249)
Net (decrease) increase in other deposits (4,234) 1,927
Net (decrease) increase in Federal funds purchased and
repurchase agreements (44,190) 14,129
Proceeds from other borrowings 320,000 53,000
Repayment of other borrowings (280,000) (20,800)
Proceeds from exercise of stock options 334 967
Repurchase common stock (1,319) (1,266)
Cash dividends paid (2,579) (2,280)
--------- ---------
Net cash provided by financing activities 18,045 41,428
--------- ---------
Net (decrease) increase in cash and cash equivalents (4,470) 8,251
Cash and cash equivalents at beginning of period 20,619 11,178
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,149 $ 19,429
========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Decrease in net unrealized loss/gain on securities available-for-sale $ 1,182 $ (9,006)
Transfer of loans to foreclosed real estate 295 137
</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 and one branch in
Wallingford, Connecticut. It has three subsidiaries, BCI Financial Corporation
("BCIF"), SSB Mortgage Corporation ("SSBM") and SSB Insurance Services, Inc.
("SSBI"). BCIF is an indirect auto finance subsidiary located in Southington,
Connecticut. SSBM, which commenced operations during the first quarter of 1999,
is a passive investment company formed to take advantage of changes in
Connecticut state tax statutes. SSBI, which commenced operations during the
second quarter of 2000, is a subsidiary which earns commissions on consumer and
business insurance coverage referrals through a joint marketing agreement with a
local insurance agency. 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, 2000, the
consolidated condensed statements of income for the three and nine month periods
ended September 30, 2000 and 1999, 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, 2000 and 1999 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, 2000 and the results of
operations for the three and nine month periods ended September 30, 2000 and
1999, and the changes in shareholders' equity and cash flows for the nine month
periods ended September 30, 2000 and 1999. Results of operations for the three
and nine month periods ended September 30, 2000 are not necessarily indicative
of results for any other period.
The statement of condition as of December 31, 1999, 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, 1999.
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, 2000 and December
31, 1999 were as follows:
September 30, 2000
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
United States Government and
agency obligations $ 69,221 $ 29 $ (10,766) $ 58,484
Municipal bonds 5,707 29 (29) 5,707
Corporate bonds 992 -- (30) 962
Mortgage-backed securities 104,530 176 (2,292) 102,414
Capital trust preferreds 34,173 31 (3,973) 30,231
Money market preferreds 15,700 -- -- 15,700
Marketable equity securities 21,037 2,092 (1,348) 21,781
Mutual funds 785 280 -- 1,065
--------- --------- --------- ---------
$ 252,145 $ 2,637 $ (18,438) $ 236,344
========= ========= ========= =========
December 31, 1999
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
United States Government and
agency obligations $ 60,867 $ -- $ (10,939) $ 49,928
Municipal bonds 5,356 8 (132) 5,232
Corporate bonds 944 -- (21) 923
Mortgage-backed securities 87,378 1 (3,811) 83,568
Capital trust preferreds 29,131 50 (2,582) 26,599
Money market preferreds 27,500 -- -- 27,500
Marketable equity securities 20,170 1,461 (1,939) 19,692
Mutual funds 840 326 (13) 1,153
--------- --------- --------- ---------
$ 232,186 $ 1,846 $ (19,437) $ 214,595
========= ========= ========= =========
9
<PAGE>
Note 3 - Loans
--------------
The composition of the loan portfolio was:
September 30, December 31,
2000 1999
------------- ------------
(in thousands)
Commercial $ 65,578 $ 56,828
Commercial real estate 51,358 47,961
Residential real estate 123,561 131,942
Real estate construction 2,380 3,250
Consumer 80,258 76,112
--------- ---------
323,135 316,093
Less:
Deferred loan fees (691) (702)
Allowance for loan losses (6,056) (5,681)
--------- ---------
Total loans $ 316,388 $ 309,710
========= =========
Note 4 - Allowance for Loan and Foreclosed Real Estate Losses
-------------------------------------------------------------
Changes in the allowances were:
Nine Months Ended
September 30,
----------------------------
2000 1999
------------- ------------
(in thousands)
Allowance for loan losses:
Balance, beginning of year $ 5,681 $ 5,549
Provision for loan losses 354 222
Loans charged-off (240) (240)
Recoveries 261 79
--------- ---------
Balance, end of period $ 6,056 $ 5,610
========= =========
Allowance for foreclosed real estate losses:
Balance, beginning of year $ 50 $ 50
Provision (credit) for losses (50) 43
Write-downs, net -- (43)
--------- ---------
Balance, end of period $ -- $ 50
========= =========
10
<PAGE>
Note 5 - Nonperforming Assets
-----------------------------
The balances of nonperforming assets were:
September 30, December 31,
2000 1999
------------- -----------
(dollars in thousands)
Nonaccrual loans:
Commercial $ 283 $ 420
Commercial real estate 20 --
Residential real estate 411 857
Consumer 27 127
-------- --------
Total nonaccrual loans 741 1,404
Accruing loans past due 90 days or more -- --
-------- --------
Total nonperforming loans 741 1,404
Foreclosed real estate, net 166 195
Repossessed property 1 --
-------- --------
Total nonperforming assets $ 908 $ 1,599
======== ========
Nonperforming loans as a percentage of total loans 0.23% 0.44%
======== ========
Nonperforming assets as a percentage of total assets 0.15% 0.28%
======== ========
Note 6 - Deposits
-----------------
Deposits consisted of the following:
September 30, December 31,
2000 1999
------------- -----------
(in thousands)
Noninterest-bearing demand deposits $ 39,116 $ 40,905
NOW accounts 50,026 49,380
Regular savings 68,836 69,534
Money market savings 29,432 31,825
Certificates of deposit - under $100,000 137,969 135,535
Certificates of deposit - $100,000 and over 48,048 20,995
Club accounts 813 267
-------- --------
Total deposits $374,240 $348,441
======== ========
11
<PAGE>
Note 7 - Funds Borrowed
-----------------------
Funds borrowed consisted of the following:
September 30, December 31,
2000 1999
------------- ------------
(in thousands)
Federal funds purchased $ 2,500 $ 2,100
Securities sold under repurchase agreements 40,109 84,699
Federal Home Loan Bank advances 124,330 72,830
Federal Reserve Bank advances -- 11,500
-------- --------
Total funds borrowed $166,939 $171,129
======== ========
Note 8 - 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, 2000 and 1999 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Basic 5,179,493 5,196,752 5,205,323 5,188,442
Effect of dilutive stock options 224,360 340,823 235,206 349,329
--------- --------- --------- ---------
Diluted 5,403,853 5,537,575 5,440,529 5,537,771
========= ========= ========= =========
Note 9 - 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, 2000.
Before Tax Net
Tax (Benefit) of Tax
Amount Expense Amount
-------- -------- --------
(in thousands)
Net unrealized gains on securities
arising during the period $ 2,391 $ 812 $ 1,579
Less: reclassification adjustment for
gains realized in net income 601 204 397
-------- -------- --------
Net unrealized gains on securities $ 1,790 $ 608 $ 1,182
======== ======== ========
12
<PAGE>
Note 9 - Shareholders' Equity - continued
-----------------------------------------
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)
======== ======= =======
On April 21, 1999, the Corporation announced that it planned to repurchase up to
5% (260,000) of its outstanding common shares over the next twelve months. On
April 20, 2000, this share buyback program was terminated. Pursuant to that
program, the Corporation purchased 136,338 shares of its outstanding shares of
common stock, or 2.6% of its outstanding shares as of April 21, 1999 and April
20, 2000.
On April 19, 2000, the Corporation's Board of Director's voted to authorize a
new share buyback program of up to 5% (262,000) of its outstanding shares of
common stock over the next year. Purchases are made from time to time in the
open market and through private transactions. 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 9, 2000, the Corporation repurchased
60,000 shares at an average price of $14.63.
Note 10 - Recent Accounting Pronouncements
------------------------------------------
In September 2000, The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 140 ("SFAS 140"), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." This Statement replaces FASB Statement No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
It revises the standards for accounting for securitizations and other transfers
of financial assets and collateral and requires certain disclosures, but it
carries over most of Statement No. 125's provisions without reconsideration.
This Statement will be effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after March 31, 2001. Management
anticipates that SFAS 140 will not have a significant effect on the
Corporation's results of operations or its financial position based on its
current operations.
13
<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, 2000 AND 1999
---------------------------------
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 increased $21,749,000 or 10.1% to
$236,344,000 as of September 30, 2000 from $214,595,000 as of December 31, 1999.
Purchases of securities net of proceeds from maturities and sales (excluding
realized gains) and paydowns on mortgage-backed securities amounted to
$16,757,000 during the nine months of 2000. Accretion of bond discounts, net of
amortization of bond premiums, were $2,601,000 for the same period. Net
unrealized losses (excluding the effective income tax benefits) in the
securities portfolio totaled $15,801,000 as of September 30, 2000, a decrease of
$1,790,000, compared to unrealized losses of $17,591,000 as of December 31,
1999. The decrease in net unrealized losses of $1,790,000 was mainly due to the
improved performance of the Corporation's portfolio of marketable equity
securities.
As of September 30, 2000, $15,700,000 of the securities portfolio was comprised
of money market preferred stocks. These securities are highly liquid, reprice
every 49 days and are subject to the tax advantages of the Federal dividends
received deduction in 2000 and 1999.
Deferred income taxes decreased $459,000 to $8,076,000 as of September 30, 2000
from $8,535,000 as of December 31, 1999 mainly as a result of the $1,790,000
decrease in unrealized losses in the securities portfolio noted above.
LOANS - Loans increased $7,042,000 or 2.2% to $323,135,000 as of September 30,
2000 from $316,093,000 as of December 31, 1999 primarily due to increased
commercial loan volume. Commercial loans and commercial real estate loans
increased $12,147,000 or 11.6% and represented 36.2% of the loan portfolio as of
September 30, 2000. The guaranteed portion of Small Business Administration
loans purchased accounted for $4,975,000 of this commercial loan increase.
Residential real estate loans decreased by $8,381,000 or 6.4% as the Bank's
focus with respect to residential real estate loans shifted to loans originated
for sale, on a servicing released basis, or referral to third parties. Real
estate construction loans decreased by $870,000 or 26.8%. Consumer loans
increased $4,146,000 or 5.4% mainly due to loans closed by BCI Financial
Corporation ("BCIF"), the Bank's auto loan financing subsidiary.
DEPOSITS - Total deposits increased $25,799,000 or 7.4% to $374,240,000 as of
September 30, 2000 from $348,441,000 as of December 31, 1999 primarily due to a
net inflow of $27,053,000 in certificates of deposit of $100,000 and over with
maturities primarily under one year.
BORROWINGS - Funds borrowed decreased from $171,129,000 as of December 31, 1999
to $166,939,000 as of September 30, 2000 as a result of the following. Advances
from the Federal Home Loan Bank of Boston (the "FHLB") increased by $51,500,000
or 70.7% to $124,330,000 as of September 30, 2000 compared to $72,830,000 as of
year end 1999. Federal funds purchased increased $400,000 to $2,500,000 as of
September 30, 2000. Federal Reserve Bank advances decreased by $11,500,000
during the same period resulting in no outstanding advances as of September 30,
2000. Securities sold under agreements to repurchase decreased $44,590,000 or
52.6% to $40,109,000 as of September 30, 2000 from $84,699,000 as of December
31, 1999. The resultant net decrease in borrowings of $4,190,000 was primarily
14
<PAGE>
funded by the increase in certificates of deposit. As of September 30, 2000,
broker/dealer repurchase agreements and retail repurchase agreements totaled
$24,500,000 and $15,609,000, respectively.
CHANGES IN RESULTS OF OPERATIONS
EARNINGS - Net income for the quarter ended September 30, 2000 was $2,349,000
compared to $1,971,000 for the third quarter of 1999, an increase of $378,000 or
19.2%. On a diluted per common share basis, the Corporation earned $.43 per
share in 2000 compared to $.36 per share in 1999. An increase in net interest
income mainly due to an expansion in earning assets, strong growth in
noninterest income coupled with a decrease in noninterest expense and the
provision for loan losses were 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 in
the third quarter of 1999 was approximately offset by securities losses
resulting from a restructuring of a segment of the investment portfolio. The
annualized return on average assets for the quarter ended September 30, 2000 was
1.58% compared to 1.44% for the same quarter last year while the return on
average equity rose to 21.70% from 17.49% the previous year. The increase in the
return on average equity was due to the increase in net income compared to the
prior year quarter as well as the increase in net unrealized losses in the
securities portfolio and the common stock purchases under the Corporation's
share repurchase program which reduced average equity.
Net income for the nine months ended September 30, 2000 was $6,576,000 compared
to $5,763,000 for the same period in 1999, an increase of $813,000 or 14.1%. An
increase in net interest income and an actual year to year decline in
noninterest expense, partially offset by a higher provision for loan losses,
were the principal reasons for the increased earnings. The annualized return on
average assets was 1.51% for the nine months ended September 30, 2000 compared
to 1.43% for the same period in 1999 while the return on average equity rose to
20.62% from 15.90% 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 $51,502,000 or 9.6% to $589,158,000
for the three months ended September 30, 2000 from $537,656,000 for the same
quarter in 1999.
For the three months ended September 30, 2000 net interest income, on a tax
equivalent basis, increased $192,000 or 3.7% compared to the same period in 1999
primarily as a result of increases in the average volume of the loan and
invested funds portfolios of $13,344,000 and $38,158,000, respectively,
partially offset by a net unfavorable rate variance between earning assets and
interest bearing liabilities. In addition, average noninterest bearing demand
deposits increased by $5,174,000 or 14.3% during the third quarter of 2000
compared to the same period in 1999 which helped reduce the average cost of
funds and thus had a positive effect on net interest income.
The ratio of net interest income, on a tax equivalent basis, to average interest
earning assets was 3.69% for the quarter ended September 30, 2000 compared to
3.90% for the same period in 1999. The interest rate spread, on a tax equivalent
basis, was 2.97% in 2000 compared to 3.31% in 1999. A proportionately greater
rise in interest rates on sources of funds compared with yields on earning
assets caused the decrease in the interest rate spread and margin in 2000
compared to 1999. If short-term interest rates were to rise further, some
additional compression in the net interest spread and margin is expected to
occur. Average yields were computed on a tax equivalent basis using a Federal
income tax rate of 34% for 2000 and 1999 and a state income tax rate of 0.0% for
both periods, due to the formation of a passive investment company in 1999.
Average interest earning assets increased by $51,265,000 or 9.8% to $574,474,000
for the nine months ended September 30, 2000 from $523,209,000 for the same
period in 1999.
15
<PAGE>
For the nine months ended September 30, 2000 net interest income, on a tax
equivalent basis, increased $1,289,000 or 8.7% compared to the same period in
1999 mainly due to increases in the average volume of the loan and invested
funds portfolios of $20,821,000 and $30,444,000, respectively, and a net
favorable rate variance between earning assets and interest bearing liabilities.
In addition, average noninterest bearing demand deposits were $4,265,000 or
12.4% higher during the nine months ended September 30, 2000 compared to the
same period in 1999 which helped reduce the average cost of funds and thus had a
positive effect on net interest income.
The ratio of net interest income, on a tax equivalent basis, to average interest
earning assets was 3.76% for the nine months ended September 30, 2000 compared
to 3.80% for the same period in 1999. The interest rate spread, on a tax
equivalent basis, was 3.08% in 2000 compared to 3.22% in 1999. A proportionately
greater rise in interest rates on sources of funds compared with yields on
earning assets caused the decrease in the interest rate spread and margin in
2000 compared to 1999. The decrease in the net interest margin was impacted less
as a result of the increase in average noninterest bearing demand deposits
previously mentioned. As noted above, if short-term interest rates were to rise
further, some compression in the net interest spread and margin is expected to
occur.
PROVISION FOR LOAN LOSSES - For the three months ended September 30, 2000 and
1999, the provisions for loan losses were $118,000 and $157,000, respectively.
Net loan recoveries totaled $110,000 for the third quarter of 2000 compared to
net loan charge-offs of $131,000 for the same period in 1999.
For the nine months ended September 30, 2000 and 1999, the provisions for loan
losses were $354,000 and $222,000, respectively. Net loan recoveries totaled
$21,000 for the nine months ended September 30, 2000 compared to net loan
charge-offs of $161,000 during the same period in 1999. The allowance for loan
losses was $6,056,000 or 1.87% of outstanding loans as of September 30, 2000
compared to $5,610,000 or 1.78% of outstanding loans as of September 30, 1999.
Nonperforming loans were $741,000 as of the end of the current quarter and
$1,685,000 as of the end of the same quarter last year, representing .23% and
.53%, respectively, of outstanding loans. The increase in the allowance for loan
losses from year end 1999 was driven by the provision for loan losses which was
recorded primarily due to the change in the mix of the loan portfolio from
residential to commercial and consumer and, to a lesser extent, growth in the
loan portfolio. The residential real estate loan portfolio, which declined
during the period, requires a lower reserve allocation while the commercial and
consumer portfolios, which carry more risk, increased and required a higher
reserve allocation.
Management regularly monitors and has established a formal process for
determining the adequacy of the allowance for loan losses. This process results
in an allowance that consists of two components, allocated and unallocated. The
allocated component includes allowance estimates that result from analyzing
certain individual loans (including unused lines of credit and impaired loans),
and specific loan types. The policy of the Bank is to review all commercial
loans and delinquent consumer loans quarterly. Up to a total of nine risk rating
classifications are used to describe the credit risk associated with commercial
and consumer loans. Of these classifications, the problem loan categories are:
"substandard," "doubtful" and "loss." Loans designated loss are charged-off
quarterly. A risk factor is assigned by loan type to loans within each
classification in determining the respective allowance. For loans that are
analyzed individually, third-party information such as appraisals may be used to
supplement management's analysis. For loans that are analyzed on a pool basis,
such as residential mortgage loans (1-4 family), management's analysis consists
of reviewing delinquency trends, historical charge-off experience, prevailing
economic conditions, size and current composition of the loan portfolio,
collateral value trends and other relevant factors. The unallocated component of
the allowance for loan losses is intended to compensate for the subjective
nature of estimating an adequate allowance for loan losses, economic
uncertainties, and other factors. The unallocated portion of the allowance for
loan losses was $1,297,000 as of September 30, 2000 compared to $1,580,000 as of
December 31, 1999 and $1,260,000 as of September 30, 1999. The decrease in the
unallocated portion of the allowance for loan losses as of September 30, 2000
compared to December 31, 1999 primarily reflects a refinement in the
determination of the allocated component of the allowance for loan losses and,
to a lesser extent, a change in the mix of the loan portfolio from residential
to commercial. The reduction in the unallocated portion of the allowance for
loan losses is not a result of credit risk rating downgrades.
16
<PAGE>
NONINTEREST INCOME - Total noninterest income, excluding net securities gains
(losses), net trading account gains (losses), trust fees and the gain on the
sale of the Bank's trust operations, increased by $11,000 or 1.5% to $764,000 in
the third quarter of 2000 from $753,000 for the same period in 1999. The
following table presents a comparison of the components of noninterest income.
Three Months Ended Increase
September 30, (Decrease)
------------------ ------------------
2000 1999 Amount Percent
------- ------- ------- -------
(dollars in thousands)
Service charges on deposit accounts $ 212 $ 199 $ 13 6.5%
Brokerage servicing fees 174 137 37 27.0%
Call options premiums 116 132 (16) -12.1%
Gains on sales of loans, originated
for sale 107 151 (44) -29.1%
Other 155 134 21 15.7%
------ ----- -----
764 753 11 1.5%
Net securities gains (losses) 324 (262) 586 223.7%
Net trading account gains (losses) 42 (26) 68 261.5%
Trust fees -- 130 (130) -100.0%
Gain on sale of trust operations -- 356 (356) -100.0%
------ ----- -----
Total noninterest income $1,130 $ 951 $ 179 18.8%
====== ===== =====
Brokerage servicing fees increased $37,000 due to higher sales volume. The gains
on sales of loans, originated for sale, decreased $44,000 primarily as a result
of a decline in loans generated for sale into the secondary market by BCIF, the
Bank's indirect auto finance company, as a direct result of the current interest
rate environment. The increase in other income reflects higher customer
investment fees of $21,000. The trust operations of the Bank were sold during
the third quarter of 1999.
Total noninterest income, excluding net securities gains, net trading account
losses, trust fees and the gain on the sale of the Bank's trust operations,
increased by $579,000 or 33.9% to $2,289,000 for the nine months ended September
30, 2000 from $1,710,000 for the same period in 1999. The following table
presents a comparison of the components of noninterest income.
Nine Months Ended Increase
September 30, (Decrease)
------------------ ------------------
2000 1999 Amount Percent
------- ------- ------- -------
(dollars in thousands)
Service charges on deposit accounts $ 604 $ 549 $ 55 10.0%
Call options premiums 438 300 138 46.0%
Brokerage servicing fees 416 256 160 62.5%
Gains on sales of loans, originated
for sale 403 264 139 52.7%
Other 428 341 87 25.5%
------ ------ -----
2,289 1,710 579 33.9%
Net securities gains 601 492 109 22.2%
Net trading account losses (2) (35) 33 -94.3%
Trust fees -- 431 (431) -100.0%
Gain on sale of trust operations -- 356 (356) -100.0%
------ ------ -----
Total noninterest income $2,888 $2,954 $ (66) -2.2%
====== ====== =====
17
<PAGE>
The increase in service charges on deposit accounts is primarily the result of
$67,000 in fees generated from the Bank's new SSB ATM/Debit card product
introduced in late 1999 to its consumer customers. Brokerage servicing fees
increased $160,000 due to higher sales volume. The gains on sales of loans,
originated for sale, increased $139,000 primarily as a result of loans generated
for sale into the secondary market by BCIF, the Bank's indirect auto finance
company. The increase in other income reflects increased fee income of $21,000
from brokered commissions on residential mortgages, higher customer investment
fees of $21,000, increased BCIF servicing fees of $15,000 and $11,000 from
insurance fees recorded by the Bank.
Near the end of the second quarter of 2000, the Bank launched a separate
subsidiary, SSB Insurance Services, Inc. (SSBI), which was formed to distribute
a range of consumer and business insurance products to its customers. SSBI
entered into a joint marketing agreement with a local insurance agency and will
earn commissions on insurance coverage referrals. Since SSBI is in its early
stages of operations, it has not yet generated a significant amount of income
for the Corporation.
NONINTEREST EXPENSE - Operating expenses decreased $267,000 or 8.5% to
$2,884,000 in the third quarter of 2000 from $3,151,000 in 1999.
Salaries and employee benefits were $45,000 or 2.5% less in 2000 compared to
1999. This decrease reflects no trust operation salaries and benefits in 2000 as
compared to approximately $73,000 in 1999 and decreased utilization of temporary
employees during 2000 in the amount of $24,000 partially offset by scheduled
employee annual salary increases.
The expenses related to furniture and equipment increased $19,000 or 7.4% to
$276,000 for the third quarter of 2000 compared to $257,000 for the same period
in 1999. Higher computer maintenance expense of $13,000 was the primary reason
for the increase.
Net occupancy expense decreased $28,000 or 18.9% in 2000 compared to 1999.
During the second quarter of 2000 the Bank purchased its operations center
building which was previously leased. Reduced rent expense coupled with rental
income, partially offset by property taxes and other operating expenses related
to this building, were the principal reasons for this expense reduction.
Advertising expense decreased $25,000 or 18.9% to $107,000 for the third quarter
of 2000 compared to $132,000 for the same period in 1999 primarily as a result
of timing of advertising expenditures to promote the Bank and its products.
The decrease in other noninterest expenses of $194,000 or 27.8% reflected a net
decrease in a number of miscellaneous expense categories. The most significant
decreases in these categories were $94,000 of expenses incurred in 1999 for
outside fund management fees and other operating expenses for the internal trust
operations of the Bank, which was sold during the third quarter of 1999, and net
foreclosed real estate recoveries which amounted to $41,000 in the third quarter
of 2000 versus $45,000 of expenses for the same period in 1999.
Operating expenses decreased $249,000 or 2.8% to $8,733,000 for the nine months
ended September 30, 2000 from $8,982,000 in 1999.
Salaries and employee benefits were $16,000 or .3% higher in 2000 compared to
1999. This increase reflects higher commission salaries of $66,000 and scheduled
employee annual salary increases partially offset by no trust operation salaries
and benefits in 2000 as compared to approximately $212,000 in 1999. Higher group
medical and retirement benefit costs of $49,000 were more than offset by a
decreased utilization of temporary employees during 2000 in the amount of
$93,000.
The expenses related to furniture and equipment totaled $805,000 for the nine
months ended September 30, 2000 compared to $740,000 for the same period in
1999, an increase of $65,000 or 8.8%. Higher depreciation and amortization
18
<PAGE>
charges and computer maintenance expenses totaling $8,000 and $23,000,
respectively, as well as furniture and equipment write-offs totaling $13,000 in
2000 versus a $5,000 gain in 1999 were the primary reasons for the increase.
Net occupancy expense decreased $23,000 or 5.2% in 2000 compared to 1999.
Reduced rent expense coupled with rental income, partially offset by property
taxes and other operating expenses, related to the Bank's operations center
building, discussed above, were the principal reasons for this expense
reduction.
Advertising expense increased $32,000 or 10.5% to $337,000 for the nine months
of 2000 compared to $305,000 for the same period in 1999 primarily as a result
of increases in advertising expenditures to promote the Bank and its products
including Internet banking to its consumer customers.
The decrease in other noninterest expenses of $340,000 or 16.9% reflected a net
decrease in a number of miscellaneous expense categories. The most significant
decreases in these categories were $191,000 of expenses incurred in 1999 for
outside fund management fees and other operating expenses for the internal trust
operations of the Bank, which was sold during the third quarter of 1999, and net
foreclosed real estate recoveries of $93,000 versus $66,000 of expenses in 1999.
PROVISION FOR INCOME TAXES - The provision for income taxes for the three months
ended September 30, 2000 and 1999 was $998,000 and $700,000, respectively,
representing effective tax rates of 29.8% and 26.2%, respectively.
The provision for income taxes for the nine months ended September 30, 2000 and
1999 was $2,794,000 and $2,267,000, respectively, representing effective tax
rates of 29.8% and 28.2%, respectively.
The effective income tax rates noted above are below statutory rates primarily
as a result of the dividends received deduction and the establishment of the
passive investment company.
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.
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. Management
believes, as of September 30, 2000, that liquidity as measured by the
Corporation is well in excess of its minimum guidelines.
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 2000 or 1999, and none were outstanding as of September 30,
2000.
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
19
<PAGE>
the FHLB. As of September 30, 2000, qualified collateral totaled $185,289,000.
The Bank's actual borrowings on that date were $124,330,000.
The inflow and outflow of funds is detailed in the consolidated condensed
statements of cash flows for the nine months ended September 30, 2000 and 1999
and is summarized below.
During the current period, cash and cash equivalents decreased by $4,470,000, as
net cash used for investing activities of $25,441,000 exceeded net cash provided
by operating activities and financing activities of $20,971,000.
Net cash used for investing activities, which primarily reflects the net
redeployment of funds into the loan and securities portfolios, was $25,441,000
for the nine months ended September 30, 2000. During this period, the
Corporation experienced net originations of loans totaling $6,837,000 and a net
increased investment in securities in the amount of $16,757,000, which were
funded primarily by increased certificates of deposit.
The net cash provided by financing activities of $18,045,000 for the nine months
ended September 30, 2000 primarily reflected net increases in deposits of
$25,799,000 and funds borrowed from the FHLB of $51,500,000 partially offset by
decreases in funds borrowed from the Federal Reserve Bank of $11,500,000 and
Federal funds purchased and repurchase agreements of $44,190,000.
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
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, 2000, that the Bank meets all capital adequacy requirements to which it is
subject.
20
<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 September 30, 2000:
Total Capital (to Risk Weighted Assets) $ 56,802 15.52% >/= $ 36,591 >/= 10.0%
Tier I Capital (to Risk Weighted Assets) 52,210 14.27% >/= 21,955 >/= 6.0%
Tier I Capital (to Average Assets) 52,210 8.83% >/= 29,553 >/= 5.0%
</TABLE>
On July 19, 2000, the Board of Directors of the Corporation declared a cash
dividend of $.17 per common share which was paid on August 15, 2000 to
shareholders of record on August 1, 2000. Subsequent to September 30, 2000, the
Board of Directors of the Corporation declared a cash dividend of $.18 per
common share payable on November 15, 2000 to shareholders of record on November
1, 2000.
On April 21, 1999, the Corporation announced that it planned to repurchase up to
5% (260,000) of its outstanding common shares over the next twelve months. On
April 20, 2000, this share buyback program was terminated. Pursuant to that
program, the Corporation purchased 136,338 shares of its outstanding shares of
common stock, or 2.6% of its outstanding shares as of April 21, 1999 and April
20, 2000.
On April 19, 2000, the Corporation's Board of Director's voted to authorize a
new share buyback program of up to 5% (262,000) of its outstanding shares of
common stock over the next year. Purchases are made from time to time in the
open market and through private transactions. 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 9, 2000, the Corporation repurchased
60,000 shares at an average price of $14.63.
21
<PAGE>
AVERAGE STATEMENTS OF CONDITION, NET INTEREST INCOME AND INTEREST RATES(a)
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------------------------------------
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) $321,778 $ 6,778 8.43% $308,434 $ 6,229 8.08%
Taxable investment securities(c) 244,291 4,466 7.31% 214,438 3,663 6.83%
Municipal bonds - tax exempt(c) 5,607 110 7.85% 3,790 67 7.07%
Federal funds sold 11,401 182 6.39% 7,606 99 5.21%
Other interest-earning assets 6,081 119 7.83% 3,388 51 6.02%
-------- -------- -------- --------
Total interest-earning assets 589,158 11,655 7.91% 537,656 10,109 7.52%
-------- --------
Noninterest-earning assets 5,796 10,778
-------- --------
TOTAL ASSETS $594,954 $548,434
======== ========
LIABILITIES AND EQUITY
Interest-bearing liabilities:
NOW and savings deposits $150,591 981 2.61% $154,895 1,005 2.60%
Time deposits 189,496 2,699 5.70% 158,234 1,901 4.81%
Federal funds purchased and
repurchase agreements 55,767 830 5.95% 96,557 1,271 5.27%
Other borrowings 108,026 1,709 6.33% 52,776 688 5.21%
-------- -------- -------- --------
Total interest-bearing liabilities 503,880 6,219 4.94% 462,462 4,865 4.21%
-------- --------
Noninterest-bearing liabilities:
Demand deposits 41,281 36,107
Other 6,489 4,782
Shareholders' equity 43,304 45,083
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $594,954 $548,434
======== ========
Net interest income on a tax
equivalent basis(c) 5,436 5,244
Tax equivalent adjustment (217) (216)
-------- --------
Net interest income $ 5,219 $ 5,028
======== ========
Net interest spread (tax equivalent basis) 2.97% 3.31%
==== ====
Net interest margin (tax equivalent basis) 3.69% 3.90%
==== ====
</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 2000 and 1999 and a state income tax rate of 0% in 2000
and 1999, respectively.
22
<PAGE>
AVERAGE STATEMENTS OF CONDITION, NET INTEREST INCOME AND INTEREST RATES(a)
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------------------------------------
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) $319,311 $ 19,756 8.25% $298,490 $ 17,987 8.03%
Taxable investment securities(c) 236,979 12,729 7.16% 212,220 10,474 6.58%
Municipal bonds - tax exempt(c) 5,590 330 7.87% 3,610 188 6.94%
Federal funds sold 6,672 315 6.29% 5,650 207 4.88%
Other interest-earning assets 5,922 325 7.32% 3,239 145 5.97%
-------- -------- -------- --------
Total interest-earning assets 574,474 33,455 7.76% 523,209 29,001 7.39%
-------- --------
Noninterest-earning assets 5,582 13,909
-------- --------
TOTAL ASSETS $580,056 $537,118
======== ========
LIABILITIES AND EQUITY
Interest-bearing liabilities:
NOW and savings deposits $149,742 2,857 2.54% $152,293 2,899 2.54%
Time deposits 169,656 6,797 5.34% 158,404 5,769 4.86%
Federal funds purchased and
repurchase agreements 64,739 2,756 5.68% 94,121 3,681 5.21%
Other borrowings 108,325 4,862 5.98% 45,706 1,758 5.13%
-------- -------- -------- --------
Total interest-bearing liabilities 492,462 17,272 4.68% 450,524 14,107 4.17%
-------- --------
Noninterest-bearing liabilities:
Demand deposits 38,767 34,502
Other 6,314 3,753
Shareholders' equity 42,513 48,339
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $580,056 $537,118
======== ========
Net interest income on a tax
equivalent basis(c) 16,183 14,894
Tax equivalent adjustment (614) (614)
-------- --------
Net interest income $ 15,569 $ 14,280
======== ========
Net interest spread (tax equivalent basis) 3.08% 3.22%
==== ====
Net interest margin (tax equivalent basis) 3.76% 3.80%
==== ====
</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 2000 and 1999 and a state income tax rate of 0% in 2000
and 1999, respectively.
23
<PAGE>
RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 2000 September 30, 2000
Compared to 1999 Compared to 1999
----------------------------- ------------------------------
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 $ 275 $ 274 $ 549 $ 1,279 $ 490 $ 1,769
Taxable investment securities 534 269 803 1,283 972 2,255
Municipal bonds - tax exempt 35 8 43 114 28 142
Federal funds sold 57 26 83 42 66 108
Other interest-earning assets 49 19 68 141 39 180
----- ----- ------- ------- ------ -------
Total interest income 950 596 1,546 2,859 1,595 4,454
----- ----- ------- ------- ------ -------
Interest paid on:
NOW and savings deposits (28) 4 (24) (49) 7 (42)
Time deposits 412 386 798 427 601 1,028
Federal funds purchased and
repurchase agreements (591) 150 (441) (1,228) 303 (925)
Other borrowings 848 173 1,021 2,767 337 3,104
----- ----- ------- ------- ------ -------
Total interest expense 641 713 1,354 1,917 1,248 3,165
----- ----- ------- ------- ------ -------
Change in net interest income $ 309 $(117) $ 192 $ 942 $ 347 $ 1,289
===== ===== ======= ======= ====== =======
</TABLE>
(1) The change in interest due to both tax equivalent rate and volume has been
allocated to changes due to volume and changes due to tax equivalent rate in
proportion to the relationship of the absolute dollar amounts of the change in
each.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements, including statements
regarding the Corporation's future operations. All forward-looking statements
are subject to risks and uncertainties that could cause actual results to differ
materially from those projected. Factors that could cause such a difference
include, without limitation, general risks associated with the delivery of
financial products and services, fluctuating investment returns, rapid
technological change, and competition, as well as other risks set forth in the
Corporation's filings with the Securities and Exchange Commission. The
forward-looking statements contained herein speak only as of the date of this
Form 10-Q. The Corporation expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any such statement to reflect any
change in the Corporation's expectations or any change in events, conditions or
circumstances on which any such statement is based.
24
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates, commodity prices and equity prices. The primary
market risk to which the Bank is exposed is interest rate risk. The majority of
the Bank's interest rate risk arises from the instruments, positions and
transactions entered into for purposes other than trading. They include loans,
securities available-for-sale, deposit liabilities, short-term borrowings and
long-term debt. Interest rate risk occurs when assets and liabilities reprice at
different times as interest rates change.
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, 2000 and December 31, 1999 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% of net interest income tolerance limit.
25
<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)
4.1 Instruments defining the rights of security holders
(Included in Exhibits 3.1 and 3.2)
26
<PAGE>
4.2 Form of Stock Certificate (Incorporated by
reference to Exhibit 4.5 to the Registrant's
Registration Statement on Form S-8 (Registration
No. 33-333-2638))
10.1 Employment and Non-Competition Agreement dated as
of February 1, 2000, by and between the
Corporation, Bank and Robert D. Morton (Exhibit
10.1 - Annexed Hereto)
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 4.3 to the
Registrant's Registration Statement on Form S-8
(Registration No. 33-30146))
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)
10.8 Employment and Non-Competition Agreement dated as
of February 1, 2000, by and between the
Corporation, Bank and Phillip J. Mucha (Exhibit
10.8 - Annexed Hereto)
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
2000.
27
<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 9, 2000 /s/ Robert D. Morton
-------------------------- ------------------------------------------
Robert D. Morton
President and Chief
Executive Officer
(Principal Executive Officer)
Date: November 9, 2000 /s/ Phillip J. Mucha
-------------------------- ------------------------------------------
Phillip J. Mucha
Chief Financial Officer
and Treasurer/Secretary
(Principal Accounting Officer)
28
<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)
4.1 Instruments defining the rights of security holders (Included
in Exhibits 3.1 and 3.2)
4.2 Form of Stock Certificate (Incorporated by reference to
Exhibit 4.5 to the Registrant's Registration Statement on
Form S-8 (Registration No. 33-333-2638))
10.1 Employment and Non-Competition Agreement dated as of February
1, 2000, by and between the Corporation, Bank and Robert D.
Morton (Exhibit 10.1 - Annexed Hereto)
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 4.3 to the Registrant's
Registration Statement on Form S-8 (Registration No.
33-30146))
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)
10.8 Employment and Non-Competition Agreement dated as of February
1, 2000, by and between the Corporation, Bank and Phillip J.
Mucha (Exhibit 10.8 - Annexed Hereto)
27 Financial Data Schedule
