Pursuant to Rule 424b3
Registration No. 333-90865
INTERESTS IN
THE SAVINGS BANK OF MANCHESTER
SAVINGS PLAN
AND
OFFERING OF 972,033 SHARES OF
CONNECTICUT BANCSHARES, INC.
COMMON STOCK ($.01 PAR VALUE)
This prospectus supplement relates to the offer and sale to participants in
The Savings Bank of Manchester Savings Plan of participation interests and
shares of common stock of Connecticut Bancshares.
The Board of Directors of Savings Bank of Manchester has adopted a plan to
convert Connecticut Bankshares, M.H.C., the mutual holding company for Savings
Bank of Manchester, to a stock holding company. As part of the conversion,
Connecticut Bancshares has been established to acquire all of the stock of
Savings Bank of Manchester and simultaneously offer Connecticut Bancshares
common stock to the public under certain purchase priorities in the plan of
conversion. After the conversion, Connecticut Bankshares, M.H.C. will cease to
exist.
In connection with the offering of Connecticut Bancshares common stock,
savings plan participants are now permitted to direct the trustee of the savings
plan to use their current account balances to subscribe for and purchase shares
of Connecticut Bancshares common stock through the Connecticut Bancshares, Inc.
Stock Fund. Based upon the value of the savings plan assets at June 30, 1999,
the trustee of the savings plan could purchase up to 972,033 shares of
Connecticut Bancshares common stock assuming a purchase price of $10.00 per
share. This prospectus supplement relates to the election of savings plan
participants to direct the trustee of the savings plan to invest all or a
portion of their savings plan accounts in Connecticut Bancshares common stock.
The prospectus dated January 12, 2000, of Connecticut Bancshares, which we
have attached to this prospectus supplement, includes detailed information
regarding the conversion of Connecticut Bankshares, M.H.C., Connecticut
Bancshares common stock and the financial condition, results of operations and
business of Savings Bank of Manchester. This prospectus supplement provides
information regarding the savings plan. You should read this prospectus
supplement together with the prospectus and keep both for future reference.
Please refer to "Risk Factors" beginning on page 12 of the attached
prospectus.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, the Federal Deposit Insurance Corporation, nor any other state or
federal agency or any state securities commission, has approved or disapproved
these securities. Any representation to the contrary is a criminal offense.
These securities are not deposits or accounts and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
This prospectus supplement may be used only in connection with offers and
sales by Connecticut Bancshares of interests or shares of common stock under the
savings plan to participants of the savings plan. No one may use this
prospectus supplement to reoffer or resell interests or shares of common stock
acquired through the savings plan.
You should rely only on the information contained in this prospectus
supplement and the attached prospectus. Connecticut Bancshares, Savings Bank of
Manchester and the savings plan have not authorized anyone to provide you with
information that is different.
This prospectus supplement does not constitute an offer to sell or
solicitation of an offer to buy any securities in any jurisdiction to any person
to whom it is unlawful to make an offer or solicitation in that jurisdiction.
Neither the delivery of this prospectus supplement and the prospectus nor any
sale of common stock shall under any circumstances imply that there has been no
change in the affairs of Savings Bank of Manchester or the savings plan since
the date of this prospectus supplement, or that the information contained in
this prospectus supplement or incorporated by reference is correct as of any
time after the date of this prospectus supplement.
The date of this prospectus supplement is January 12, 2000.
TABLE OF CONTENTS
THE OFFERING...................................................................... 1
Securities Offered........................................................... 1
Election to Purchase Connecticut Bancshares Common Stock in the Conversion... 1
Value of Participation Interests............................................. 1
Method of Directing Transfer................................................. 1
Time for Directing Transfer.................................................. 2
Irrevocability of Transfer Direction in Connection with the Conversion....... 2
Purchase Price of Connecticut Bancshares Common Stock........................ 2
Nature of a Participant's Interest in Connecticut Bancshares Common Stock.... 2
Voting and Tender Rights of Connecticut Bancshares Common Stock.............. 2
DESCRIPTION OF THE SAVINGS PLAN................................................... 3
Introduction................................................................. 3
Eligibility and Participation................................................ 3
Contributions Under the Savings Plan......................................... 3
Limitations on Contributions................................................. 3
Investment of Contributions.................................................. 4
Benefits Under the Savings Plan.............................................. 5
Withdrawals and Distributions From the Savings Plan.......................... 5
Administration of the Savings Plan........................................... 6
Reports to Savings Plan Participants......................................... 6
Plan Administrator........................................................... 7
Amendment and Termination.................................................... 7
Merger, Consolidation or Transfer............................................ 7
Federal Income Tax Consequences.............................................. 7
Restrictions on Resale....................................................... 8
SEC Reporting and Short-Swing Profit Liability............................... 9
LEGAL OPINION..................................................................... 9
CHANGE OF INVESTMENT ALLOCATION FORM
THE OFFERING
Securities Offered
The securities offered in connection with this prospectus supplement are
participation interests in the savings plan. Assuming a purchase price of
$10.00 per share, the trustee may acquire up to 972,033 shares of Connecticut
Bancshares common stock for the Connecticut Bancshares, Inc. Stock Fund. The
interests offered under this prospectus supplement are conditioned on the
completion of the conversion. Your investment in the Connecticut Bancshares,
Inc. Stock Fund in connection with the conversion is also governed by the
purchase priorities contained in the plan of conversion of Connecticut
Bankshares, M.H.C.
This prospectus supplement contains information regarding the savings plan.
The attached prospectus contains information regarding the conversion of
Connecticut Bankshares, M.H.C. and the financial condition, results of
operations and business of Savings Bank of Manchester. The address of the
principal executive office of Savings Bank of Manchester is 923 Main Street,
Manchester, Connecticut 06040. The telephone number of Savings Bank of
Manchester is (860) 646-1700.
Election to Purchase Connecticut Bancshares Common Stock in the Conversion
In connection with the conversion of Connecticut Bankshares, M.H.C. to a
stock holding company, the savings plan will permit you to direct the trustee to
transfer all or part of the funds which represent your current beneficial
interest in the assets of the savings plan to the Connecticut Bancshares, Inc.
Stock Fund. The trustee of the savings plan will subscribe for Connecticut
Bancshares common stock offered for sale in connection with the conversion of
Connecticut Bankshares, M.H.C., in accordance with each participant's direction.
If there is not enough common stock in the conversion to fill all subscriptions,
the common stock will be apportioned according to the priority rules of the plan
of conversion as described in the attached prospectus under the heading "The
Conversion -- The Subscription, Direct Community and Syndicated Community
Offerings" and the trustee for the savings plan may not be able to purchase all
of the common stock you requested. In such case, the trustee will purchase
shares in the open market, on your behalf, after the conversion to fulfill your
initial request. Such purchases may be at prices higher than the initial public
offering price.
All plan participants are eligible to direct a transfer of funds to the
Connecticut Bancshares, Inc. Stock Fund. However, such directions are subject to
the purchase priorities in the plan of conversion of Connecticut Bankshares,
M.H.C. Participants who have a savings account of $50 or more on deposit at
Savings Bank of Manchester as of July 31, 1998 have first priority to purchase
Connecticut Bancshares common stock in the offering and can direct the trustee
to make the purchase. No savings plan participant may purchase in the offering
more than $250,000 of Connecticut Bancshares common stock.
Value of Participation Interests
As of June 30, 1999, the market value of the assets of the savings plan
equaled approximately $9,720,330. The plan administrator has informed each
participant of the value of his or her beneficial interest in the savings plan.
The value of savings plan assets represents past contributions to the savings
plan on your behalf, plus or minus earnings or losses on the contributions, less
previous withdrawals.
Method of Directing Transfer
The last three pages of this prospectus supplement is a change in
investment allocation form for you to direct a transfer of some portion of your
account under the savings plan to the Connecticut Bancshares, Inc. Stock Fund.
If you wish to transfer all, or part, in multiples of not less than 1%, of your
beneficial interest in the assets of the savings plan to the Connecticut
Bancshares Stock Fund, you should complete the change of investment allocation
form. If you do not wish to make such an election at this time, you do not need
to take any action. The minimum investment in the Connecticut Bancshares, Inc.
Stock Fund during the initial public offering is $250.
1
Time for Directing Transfer
The deadline for submitting a direction to transfer amounts to the
Connecticut Bancshares, Inc. Stock Fund in connection with the conversion of
Savings Bank of Manchester is February 3, 2000. You should return the change of
investment allocation form to Joyce Trainer in the Human Resources Department of
Savings Bank of Manchester by 4:00 p.m. on February 3, 2000.
Irrevocability of Transfer Direction in Connection with the Conversion
Your direction to transfer amounts credited to your account in the savings
plan to the Connecticut Bancshares, Inc. Stock Fund in connection with the
conversion cannot be changed.
Purchase Price of Connecticut Bancshares Common Stock
The trustee will use the funds transferred to the Connecticut Bancshares,
Inc. Stock Fund to purchase shares of Connecticut Bancshares common stock in the
conversion of Connecticut Bankshares, M.H.C. The trustee will pay the same
price for shares of Connecticut Bancshares common stock as all other persons who
purchase shares of Connecticut Bancshares common stock in the conversion. If
there is not enough common stock in the conversion to fill all subscriptions,
the common stock will be apportioned according to the priority rules of the plan
of conversion as described in the attached prospectus under the heading "The
Conversion -- The Subscription, Direct Community and Syndicated Community
Offerings" and the trustee for the savings plan may not be able to purchase all
of the common stock you requested. In such case, the trustee will purchase
shares in the open market, on your behalf, after the conversion to fulfill your
initial request. Such purchases may be at prices lower or higher than the
initial public offering price.
Nature of a Participant's Interest in Connecticut Bancshares Common Stock
The trustee will hold Connecticut Bancshares common stock in the name of
the savings plan. If you direct the trustee to invest in the Connecticut
Bancshares, Inc. Stock Fund you will have an allocable interest in the fund.
Your interest in the fund will be reported on your account statement in units
and valued daily. In addition, your account will also be credited with a
portion of any cash held in the Connecticut Bancshares, Inc. Stock Fund.
Earnings with respect to your account should not be affected by the investment
designations of other participants in the savings plan.
Voting and Tender Rights of Connecticut Bancshares Common Stock
The trustee generally will exercise voting and tender rights attributable
to all Connecticut Bancshares common stock held by the Connecticut Bancshares,
Inc. Stock Fund as directed by participants with interests in the Connecticut
Bancshares, Inc. Stock Fund. With respect to each matter as to which holders of
Connecticut Bancshares common stock have a right to vote, you will be given
voting instruction rights reflecting your proportionate interest in the
Connecticut Bancshares, Inc. Stock Fund. The number of shares of Connecticut
Bancshares common stock held in the Connecticut Bancshares, Inc. Stock Fund that
are voted for and against on each matter will be proportionate to the number of
voting instruction rights exercised in such manner. If there is a tender offer
for Connecticut Bancshares common stock, the savings plan provides that each
participant will be allotted a number of tender instruction rights reflecting
such participant's proportionate interest in the Connecticut Bancshares, Inc.
Stock Fund. The percentage of shares of Connecticut Bancshares common stock
held in the Connecticut Bancshares, Inc. Stock Fund that will be tendered will
be the same as the percentage of the total number of tender instruction rights
that are exercised in favor of tendering. The remaining shares of Connecticut
Bancshares common stock held in the Connecticut Bancshares, Inc. Stock Fund will
not be tendered. The savings plan makes provisions for participants to exercise
their voting instruction rights and tender instruction rights on a confidential
basis.
2
DESCRIPTION OF THE SAVINGS PLAN
I. Introduction
Effective January 1, 1985, Savings Bank of Manchester adopted The Savings
Bank of Manchester Savings Plan. Savings Bank of Manchester intends for the
savings plan to comply, in form and in operation, with all applicable provisions
of the Internal Revenue Code and the Employee Retirement Income Security Act of
1974. Savings Bank of Manchester may change the savings plan from time to time
in the future to ensure continued compliance with these laws. Savings Bank of
Manchester may also amend the savings plan from time to time in the future to
add, modify, or eliminate certain features of the plan, as it sees fit. As a
plan governed by the Employee Retirement Income Security Act of 1974, as
amended, federal law provides you with various rights and protections as a plan
participant. Although the savings plan is governed by many of the provisions of
the Employee Retirement Income Security Act of 1974, as amended, your benefits
under the plan are not guaranteed by the Pension Benefit Guaranty Corporation.
Reference to Full Text of Plan. The following portions of this prospectus
supplement provide an overview of the material provisions of the savings plan.
Savings Bank of Manchester qualifies this overview in its entirety by reference
to the full text of the savings plan. You may obtain copies of the full savings
plan document by sending a request to the Human Resources Department at Savings
Bank of Manchester. You should carefully read the full text of the savings plan
document to understand your rights and obligations under the plan.
II. Eligibility and Participation
Any employee of Savings Bank of Manchester may participate in the savings
plan as of the first January 1 following completion of six months of service
with Savings Bank of Manchester.
As of June 30, 1999, 291 of the 333 eligible employees of Savings Bank of
Manchester elected to make pre-tax salary deferrals to the savings plan.
III. Contributions Under the Savings Plan
Savings Plan Participant Contributions. The savings plan permits each
participant to make pre-tax salary deferrals to the savings plan in amounts
ranging from 1% to 15% of compensation. In addition, participants may also make
post-tax deferrals up to 10% of a participant's compensation. Participants may
modify the amount contributed to the plan on an annual basis and may cease
deferrals at anytime during the year.
Savings Bank of Manchester Contributions. Savings Bank of Manchester has
discretion under the savings plan to make matching and/or other employer-
provided contributions. Savings Bank of Manchester currently makes matching
contributions to the savings plan equal to 50% of a participant's elective
deferrals up to 6% of a participant's base compensation. Matching contributions
are allocated to a participant's account for a plan year only if (i) the
participant was employed for at least 1,000 hours by Savings Bank of Manchester
or a participating employer as of the last day of the plan year, (ii) the
participant died or became a retired or disabled participant during the plan
year, or (iii) the participant separated from service with Savings Bank of
Manchester after becoming eligible for early retirement.
IV. Limitations on Contributions
Limitation on Employee Salary Deferral. Although the savings plan permits
you to defer up to 15% of your compensation, by law your total pre-tax deferrals
under the savings plan, together with similar plans, may not exceed $10,500 for
2000. The Internal Revenue Service will periodically increase this annual
limitation. Contributions in excess of this limitation, or excess deferrals,
will be included in an affected participant's gross income for federal income
tax purposes in the year they are made. In addition, a participant will have to
pay federal income taxes on any excess deferrals when distributed by the savings
plan to the participant, unless the excess deferral and any related income
allocable is distributed to the participant not later than the first April 15th
following the close of the taxable year in which the excess deferral is made.
Any income on the excess deferral that is distributed not later than such date
shall be treated, for federal income tax purposes, as earned and received by the
participant in the taxable year in which the distribution is made.
3
Limitations on Annual Additions and Benefits. Under the requirements of
the Internal Revenue Code, the savings plan provides that the total amount of
contributions and forfeitures (annual additions) allocated to a participant
during any year may not exceed the lesser of 25% of the participant's
compensation for that year, or $30,000. The savings plan will also limit annual
additions to the extent necessary to prevent the limitations contained in the
Internal Revenue Code for all of the qualified defined contribution plans
maintained by Savings Bank of Manchester from being exceeded.
Limitation on Plan Contributions for Highly Compensated Employees. Special
provisions of the Internal Revenue Code limit the amount of salary deferrals and
matching contributions that may be made to the savings plan in any year on
behalf of highly compensated employees in relation to the amount of deferrals
and matching contributions made by or on behalf of all other employees eligible
to participate in the savings plan. If these limitations are exceeded, the
level of deferrals by highly compensated employees may have to be adjusted.
In general, a highly compensated employee includes any employee who, (1)
was a five percent owner of the sponsoring employer at any time during the year
or preceding year, or (2) had compensation for the preceding year in excess of
$80,000 and, if the sponsoring employer so elects, was in the top 20% of
employees by compensation for such year. The dollar amount in the foregoing
sentence are for 2000, but maybe adjusted annually to reflect increases in the
cost of living.
Top-Heavy Plan Requirements. If for any calendar year the savings plan is
a "Top-Heavy Plan," then Savings Bank of Manchester may be required to make
certain minimum contributions to the savings plan on behalf of non-key
employees. In addition, certain additional restrictions would apply with
respect to the combination of contributions to the savings plan and projected
annual benefits under any defined benefit plan maintained by Savings Bank of
Manchester.
In general, the savings plan will be treated as a "Top-Heavy Plan" for any
calendar year if, as of the last day of the preceding calendar year, the
aggregate balance of the accounts of participants who are "Key Employees"
exceeds 60% of the aggregate balance of the accounts of all participants. "Key
Employees" generally include any employee who, at any time during the calendar
year or any of the four preceding years, is:
(1) an officer of Savings Bank of Manchester having annual compensation in
excess of $67,500 who is in an administrative or policy-making capacity,
(2) one of the ten employees having annual compensation in excess of
$30,000 and owning, directly or indirectly, the largest interests in Savings
Bank of Manchester,
(3) a person who owns directly or indirectly more than 5% of the stock of
Connecticut Bancshares, or stock possessing more than 5% of the total combined
voting power of all stock of Connecticut Bancshares, or
(4) a person who owns directly or indirectly combined voting power of all
stock and more than 1% of the total stock of Connecticut Bancshares and has
annual compensation in excess of $150,000.
The foregoing dollar amounts are for 2000.
V. Investment of Contributions
All amounts credited to participants' accounts under the savings plan are
held in trust. A trustee appointed by the Board of Directors of Savings Bank of
Manchester administers the trust.
Before the Conversion, the savings plan offered the following investment
choices with an annual percentage return for the past three (3) years as noted
below. However, effective November 22, 1999, all Class B Fund shares were
converted to Class A Fund shares and the savings plan assets held in the Money
Market Fund were transferred to the Savings Bank of Manchester 401(k) Investment
Account.
4
1998 1997 1996
------ ------ ------
Savings Bank of Manchester 401(k) Investment 6.68% 6.67% 6.59%
Account
Money Market Fund
Class B 3.74% 3.65% 3.54%
Class A 4.79% 4.69% 4.75%
Capital Growth Fund
Class B 31.31% 23.71% 16.17%
Class A 32.34% 24.58% 17.16%
Intermediate Income Fund
Class B 4.63% 4.91% 3.81%
Class A 5.63% 5.95% 4.89%
Total Return Fund
Class B 11.19% 19.87% 13.78%
Class A 11.91% 20.67% 14.60%
Emerging Growth Fund
Class B 23.56% 19.73% 13.85%
Class A 24.49% 20.64% 14.78%
Global Asset Fund
Class B 5.63% 9.66% 14.48%
Class A 6.21% 10.24% 15.23%
The savings plan now provides the Connecticut Bancshares, Inc. Stock Fund
as an additional choice to these investment alternatives. The Connecticut
Bancshares, Inc. Stock Fund invests primarily in the common stock of Connecticut
Bancshares. Participants in the savings plan may direct the trustee to invest
all or a portion of their savings plan account balance in the Connecticut
Bancshares, Inc. Stock Fund.
The Connecticut Bancshares, Inc. Stock Fund consists primarily of
investments in the common stock of Connecticut Bancshares made on the effective
date of the conversion of Connecticut Bancshares, M.H.C. After the conversion,
the trustee of the savings plan will, to the extent practicable, use all amounts
held by it in the Connecticut Bancshares, Inc. Stock Fund, including cash
dividends paid on the common stock held in the fund, to purchase additional
shares of common stock of Connecticut Bancshares.
As of the date of this prospectus supplement, none of the shares of
Connecticut Bancshares common stock have been issued or are outstanding and
there is no established market for the Connecticut Bancshares common stock.
Accordingly, there is no record of the historical performance of the Connecticut
Bancshares, Inc. Stock Fund. Performance of the Connecticut Bancshares, Inc.
Stock Fund depends on a number of factors, including the financial condition and
profitability of Connecticut Bancshares and Savings Bank of Manchester and
market conditions for Connecticut Bancshares common stock generally.
Investments in the Connecticut Bancshares, Inc. Stock Fund involve special
risks in investments in the common stock of Connecticut Bancshares. For a
discussion of the material risk factors, see "Risk Factors" beginning on page 12
of the attached prospectus.
VI. Benefits Under the Savings Plan
Vesting. A participant is always 100% vested in his or her account under
the savings plan.
VII. Withdrawals and Distributions From the Savings Plan
Withdrawals Before Termination of Employment. You may receive in-service
distributions from the savings plan under limited circumstances in the form of
hardship distributions and withdrawal of rollover contributions. In order
5
to qualify for a hardship withdrawal, you must have an immediate and substantial
need to meet certain expenses and have no other reasonably available resources
to meet the financial need. If you qualify for a hardship distribution, the
trustee will make the distribution proportionately from the investment funds in
which you have invested your account balances. Restrictions are imposed upon
your participation in the savings plan if you take a hardship withdrawal.
Distribution Upon Retirement or Disability. Upon retirement or disability,
you may elect to receive your benefits in one of the following terms: (i) lump
sum payment; (ii) purchase from an insurer of a nontransferable annuity
contract; or (iii) installment payments over a fixed period of time or in fixed
amounts. Your distributable benefit will be equal to the value of your accounts
under the savings plan.
Distribution Upon Death. If you die before your benefits are paid from the
savings plan, your benefits will be paid to your surviving spouse, or if you are
single or your spouse consents, to your named beneficiary under one or more of
the forms available under the savings plan.
Distribution Upon Termination for Any Other Reason. If you terminate
employment for any reason other than retirement, disability or death and your
account balance exceeds $3,500, the trustee will make your distribution on your
normal retirement date, unless you request otherwise. If your account balances
does not exceed $3,500, the trustee will generally distribute your benefits to
you as soon as administratively practicable following termination of employment.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations
order, benefits payable under the savings plan shall not be subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to
benefits payable under the savings plan shall be void.
Applicable federal tax law requires the savings plan to impose substantial
restrictions on your right to withdraw amounts held under the plan before your
termination of employment with Savings Bank of Manchester. Federal law may also
impose an excise tax on withdrawals made from the savings plan before you attain
59 1/2 years of age regardless of whether the withdrawal occurs during your
employment with Savings Bank of Manchester or after termination of employment,
except that the excise tax will not apply to a post-termination of employment
withdrawal if you terminated employment after age 55.
Administration of the Savings Plan
The trustee with respect to the savings plan is the named fiduciary of the
savings plan for purposes of the Employee Retirement Income Security Act of
1974.
Trustees. The board of directors of Savings Bank of Manchester appoints a
trustee to serve at its pleasure. The board of directors has appointed Eastern
Bank & Trust Company as trustee of the savings plan.
The trustee receives, holds and invests the contributions to the savings
plan in trust and distributes them to participants and beneficiaries in
accordance with the terms of the savings plan and the directions of the plan
administrator. The trustee is responsible for investment of the assets of the
trust in accordance with the directions of individual participants.
Reports to Savings Plan Participants
The plan administrator will furnish you a statement at least quarterly
showing the balance in your account as of the end of that period, the amount of
contributions allocated to your account for that period, and any adjustments to
your account to reflect earnings or losses.
6
Plan Administrator
The current plan administrator of the savings plan is Savings Bank of
Manchester. The plan administrator is responsible for the administration of the
savings plan, interpretation of the provisions of the plan, prescribing
procedures for filing applications for benefits, preparation and distribution of
information explaining the plan, maintenance of plan records, books of account
and all other data necessary for the proper administration of the plan, and
preparation and filing of all returns and reports relating to the plan which are
required to be filed with the U.S. Department of Labor and the Internal Revenue
Service, and for all disclosures required to be made to participants,
beneficiaries and others under Employee Retirement Income Security Act of 1974,
as amended.
Amendment and Termination
Savings Bank of Manchester intends to continue the savings plan
indefinitely. Nevertheless, Savings Bank of Manchester may terminate the
savings plan at any time. Savings Bank of Manchester reserves the right to
make, from time to time, changes which do not cause any part of the trust to be
used for, or diverted to, any purpose other than the exclusive benefit of
participants or their beneficiaries; provided, however, that Savings Bank of
Manchester may amend the plan as it determines necessary or desirable, with or
without retroactive effect, to comply with the Employee Retirement Income
Security Act of 1974, as amended, or the Internal Revenue Code of 1986, as
amended.
Merger, Consolidation or Transfer
If the savings plan merges or consolidates with another plan or transfers
the trust assets to another plan, and if either the savings plan or the other
plan is then terminated, the savings plan requires that you would receive a
benefit immediately after the merger, consolidation or transfer which is equal
to or greater than the benefit you would have been entitled to receive
immediately before the merger, consolidation or transfer if the savings plan had
then terminated.
Federal Income Tax Consequences
The following is only a brief summary of the material federal income tax
aspects of the savings plan. You should not rely on this summary as a complete
or definitive description of the material federal income tax consequences
relating to the savings plan. Statutory provisions change, as do their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws. You are urged to consult
your tax advisor with respect to any distribution from the savings plan and
transactions involving the plan.
As a "qualified retirement plan," the Internal Revenue Code affords the
savings plan special tax treatment, including:
(1) the sponsoring employer is allowed an immediate tax deduction for the
amount contributed to the plan each year;
(2) participants pay no current income tax on amounts contributed by the
employer on their behalf; and
(3) earnings of the plan are tax-deferred thereby permitting the tax-free
accumulation of income and gains on investments.
Savings Bank of Manchester will administer the savings plan to comply in
operation with the requirements of the Internal Revenue Code as of the
applicable effective date of any change in the law. If Savings Bank of
Manchester receives an adverse determination letter regarding its tax-exempt
status from the Internal Revenue Service, all participants would generally
recognize income equal to their vested interest in the savings plan, the
participants would not be permitted to transfer amounts distributed from the
savings plan to an Individual Retirement Account or to another qualified
retirement plan, and Savings Bank of Manchester may be denied certain deductions
taken with respect to the savings plan.
7
Lump Sum Distribution. A distribution from the savings plan to a
participant or the beneficiary of a participant will qualify as a lump sum
distribution if it is made within one taxable year, on account of the
participant's death, disability or separation from service, or after the
participant attains age 59 1/2; and consists of the balance to the credit of the
participant under this plan and all other profit sharing plans, if any,
maintained by Savings Bank of Manchester. The portion of any lump sum
distribution required to be included in your taxable income for federal income
tax purposes consists of the entire amount of the lump sum distribution less the
amount of after-tax contributions, if any, you have made to this plan and any
other profit sharing plans maintained by Savings Bank of Manchester which is
included in the distribution.
Averaging Rules. The portion of any lump sum distribution, required to be
included in your federal taxable income for federal income tax purposes,
attributable to participation after 1973 in the savings plan or in any other
profit-sharing plan maintained by Savings Bank of Manchester, known as the
"ordinary income portion," will be taxable generally as ordinary income for
federal income tax purposes. However, if you have completed at least five (5)
years of participation in the savings plan before the taxable year in which the
distribution is made, or receive a lump sum distribution on account of your
death, regardless of the period of your participation in this plan or any other
profit-sharing plan maintained by Savings Bank of Manchester, you may elect to
have the ordinary income portion of such lump sum distribution taxed according
to a special five-year averaging rule. The election of the special five-year
averaging rules may apply only to one lump sum distribution you or your
beneficiary receive, provided such amount is received on or after the date you
turn 59-1/2 and the recipient elects to have any other lump sum distribution
from a qualified plan received in the same taxable year taxed under the special
five-year averaging rule. The special five-year averaging rule is not available
for distributions after December 31, 1999. Under a special grandfather rule,
individuals who turned 50 by 1986 may elect to have their lump sum distribution
taxed under the prior law ten-year averaging rule. These individuals also may
elect to have that portion of the lump sum distribution attributable to the
participant's pre-1974 participation in the plan taxed at a flat 20% rate as
gain from the sale of a capital asset.
Connecticut Bancshares Common Stock Included in Lump Sum Distribution. If
a lump sum distribution includes Connecticut Bancshares common stock, the
distribution generally will be taxed in the manner described above, except that
the total taxable amount may be reduced by the amount of any net unrealized
appreciation with respect to Connecticut Bancshares common stock that is the
excess of the value of Connecticut Bancshares common stock at the time of the
distribution over its cost or other basis of the securities to the trust. The
tax basis of Connecticut Bancshares common stock for purposes of computing gain
or loss on its subsequent sale equals the value of Connecticut Bancshares common
stock at the time of distribution less the amount of net unrealized
appreciation. Any gain on a subsequent sale or other taxable disposition of
Connecticut Bancshares common stock, to the extent of the amount of net
unrealized appreciation at the time of distribution, will constitute long-term
capital gain regardless of the holding period of Connecticut Bancshares common
stock. Any gain on a subsequent sale or other taxable disposition of
Connecticut Bancshares common stock in excess of the amount of net unrealized
appreciation at the time of distribution will be considered either short-term,
mid-term or long-term capital gain depending upon the length of the holding
period of Connecticut Bancshares common stock. The recipient of a distribution
may elect to include the amount of any net unrealized appreciation in the total
taxable amount of the distribution to the extent allowed by the regulations to
be issued by the Internal Revenue Service.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan or
to an IRA. You may roll over virtually all distributions from the savings plan
to another qualified plan or to an individual retirement account generally in
accordance with the terms of the other plan or account.
We have provided you with a brief description of the material federal
income tax aspects of the savings plan which are of general application under
the Code. It is not intended to be a complete or definitive description of the
federal income tax consequences of participating in or receiving distributions
from the savings plan. Accordingly, you are urged to consult a tax advisor
concerning the federal, state and local tax consequences of participating in and
receiving distributions from the savings plan.
Restrictions on Resale
Any person receiving a distribution of shares of common stock under the
savings plan who is an "affiliate" of Connecticut Bancshares under Rules 144 and
405 under the Securities Act of 1933, as amended, may reoffer or resell
8
such shares only under a registration statement filed under the Securities Act
of 1933, as amended, assuming the availability of a registration statement,
under Rule 144 or some other exemption of the registration requirements of the
Securities Act of 1933, as amended. Directors, officers and substantial
shareholders of Connecticut Bancshares are generally considered "affiliates."
Any person who may be an "affiliate" of Savings Bank of Manchester may wish to
consult with counsel before transferring any common stock they own. In addition,
participants are advised to consult with counsel as to the applicability of
Section 16 of the Securities Exchange Act of 1934, as amended, which may
restrict the sale of Connecticut Bancshares common stock acquired under the
savings plan, or other sales of Connecticut Bancshares common stock.
Persons who are not deemed to be "affiliates" of Savings Bank of Manchester
at the time of resale will be free to resell any shares of Connecticut
Bancshares common stock distributed to them under the savings plan, either
publicly or privately, without regard to the registration and prospectus
delivery requirements of the Securities Act or compliance with the restrictions
and conditions contained in the exemptive rules under federal law. An
"affiliate" of Savings Bank of Manchester is someone who directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control, with Savings Bank of Manchester. Normally, a director,
principal officer or major shareholder of a corporation may be deemed to be an
"affiliate" of that corporation. A person who may be deemed an "affiliate" of
Savings Bank of Manchester at the time of a proposed resale will be permitted to
make public resales of the common stock only under a "reoffer" prospectus or in
accordance with the restrictions and conditions contained in Rule 144 under the
Securities Act of 1933, as amended, or some other exemption from registration,
and will not be permitted to use this prospectus in connection with any such
resale. In general, the amount of the common stock which any such affiliate may
publicly resell under Rule 144 in any three-month period may not exceed the
greater of one percent of Connecticut Bancshares common stock then outstanding
or the average weekly trading volume reported on the National Association of
Securities Dealers Automated Quotation System during the four calendar weeks
before the sale. Such sales may be made only through brokers without
solicitation and only at a time when Connecticut Bancshares is current in filing
the reports required of it under the Securities Exchange Act of 1934, as
amended.
SEC Reporting and Short-Swing Profit Liability
Section 16 of the Securities Exchange Act of 1934, as amended, imposes
reporting and liability requirements on officers, directors and persons
beneficially owning more than ten percent of public companies such as
Connecticut Bancshares. Section 16(a) of the Securities Exchange Act of 1934,
as amended, requires the filing of reports of beneficial ownership. Within ten
days of becoming a person required to file reports under Section 16(a), a Form 3
reporting initial beneficial ownership must be filed with the Securities and
Exchange Commission. Certain changes in beneficial ownership must be reported
periodically, either on a Form 4 within ten days after the end of the month in
which a change occurs, or annually on a Form 5 within 45 days after the close of
Connecticut Bancshares' fiscal year.
In addition to the reporting requirements described above, Section 16(b) of
the Securities Exchange Act of 1934 provides for the recovery by Connecticut
Bancshares of profits realized by any officer, director or any person
beneficially owning more than ten percent of the common stock resulting from the
purchase and sale or sale and purchase of the common stock within any six-month
period.
The Securities and Exchange Commission has adopted rules that exempt many
transactions involving the savings plan from the Section 16(a) reporting
requirements and the "short-swing" profit recovery provisions of Section 16(b).
However, certain transactions may be subject to reporting and/or short-swing
profit recovery. Plan participants who are subject to the Section 16
requirements should consult with counsel regarding the applicability of Section
16 to specific transactions involving savings plan or otherwise.
LEGAL OPINION
The validity of the issuance of the common stock of Connecticut Bancshares
will be passed upon by Muldoon, Murphy & Faucette LLP, Washington, D.C. Muldoon,
Murphy & Faucette LLP acted as special counsel for Savings Bank of Manchester in
connection with the conversion of Savings Bank of Manchester.
9
THE SAVINGS BANK OF MANCHESTER SAVINGS PLAN
CHANGE OF INVESTMENT ALLOCATION
- -------------------------------
1. Participant Data
____________________________________________________________________________________________
Print your full name above (Last, first, middle initial) Social Security Number
____________________________________________________________________________________________
Street Address City State Zip
2. Instructions
The Savings Bank of Manchester Savings Plan is giving participants a special
opportunity to invest their savings plan account balances in a new investment
fund - the Connecticut Bancshares, Inc. Stock Fund - which is comprised
primarily of common stock issued by Connecticut Bancshares, Inc. in connection
with the conversion of Connecticut Bankshares, M.H.C. to a stock holding
company. The percentage of a participant's account transferred at the direction
of the participant into the Connecticut Bancshares, Inc. Stock Fund will be used
to purchase shares of common stock during the Subscription and Community
Offering. Please review the prospectus and the prospectus supplement before
making any decision.
If there is not enough common stock in the conversion to fill all subscriptions,
the common stock will be apportioned according to the priority rules of the plan
of conversion as described in the attached prospectus under the heading "The
Conversion--The Subscription, Direct Community and Syndicated Community
Offerings" and the trustee for the plan may not be able to purchase all of the
common stock you requested. In such case, the trustee will purchase shares in
the open market, on your behalf, after the conversion to fulfill your initial
request. Such purchases may be at prices higher than the initial public
offering price.
Investing in common stock entails some risks, and we encourage you to discuss
this investment decision with your spouse and investment advisor. The plan
trustee and the plan administrator are not authorized to make any
representations about this investment other than what appears in the prospectus
and prospectus supplement, and you should not rely on any information other than
what is contained in the prospectus and prospectus supplement. For a discussion
of the material risks that should be considered by each participant as to an
investment in the common stock, see "Risk Factors" beginning on page 12 of the
prospectus. Any shares purchased by the plan pursuant to your election will be
subject to the conditions or restrictions otherwise applicable to common stock,
as discussed in the prospectus and prospectus supplement.
3. Investment Directions (Applicable to Accumulated Balances Only)
To direct a transfer of all or part of the funds credited to your accounts to
the Connecticut Bancshares, Inc. Stock Fund, you should complete and file this
form with the Human Resources Department at Savings Bank of Manchester, no later
than February 3, 2000 at 4:00 p.m. If you need any assistance in completing
this form, please contact Joyce Trainer in the Human Resources Department. If
you do not complete and return this form to Human Resources by 4:00 p.m., the
funds credited to accounts under the plan will continue to be invested in
accordance with your prior investment direction, or in accordance with the terms
of the savings plan if no investment direction had been provided.
I hereby revoke any previous investment direction and now direct that the market
value of the units that I have invested in the following funds, to the extent
permissible, be transferred out of the specified fund and invested (in whole
percentages) in the Connecticut Bancshares, Inc. Stock Fund as follows:
Fund Percentage to be transferred
---- ----------------------------
Savings Bank of Manchester 401(k) Investment Account _____%
Capital Growth Fund _____%
Intermediate Income Fund _____%
Total Return Fund _____%
Emerging Growth Fund _____%
Global Asset Fund _____%
Note: The total amount transferred may not exceed the total value of your
accounts.
10
4. Investment Directions (Applicable to Future Contributions After April 1,
2000 Only)
I hereby revoke any previous investment instructions and now direct that any
future contributions and/or loan repayments, if any, made by me or on my behalf
by Savings Bank of Manchester, including those contributions and/or repayments
received by The Savings Bank of Manchester Savings Plan during the same
reporting period as this form, be invested in the following whole percentages.
Fund Percentage
---- ----------
Savings Bank of Manchester 401(k) Investment Account _____%
Capital Growth Fund _____%
Intermediate Income Fund _____%
Total Return Fund _____%
Emerging Growth Fund _____%
Global Asset Fund _____%
Connecticut Bancshares, Inc. Stock Fund _____%
100 %
======
5. Participant Signature and Acknowledgment - Required
By signing this change of investment allocation form, I authorize and direct the
Plan administrator and trustee to carry out my instructions. I acknowledge that
I have been provided with a copy of the prospectus and the prospectus supplement
relating to the issuance of common stock. I am aware of the risks involved in
the investment in common stock, and understand that the trustee and plan
administrator are not responsible for my choice of investment. By signing this
acknowledgment, I understand that I am not waiving any of my rights under the
Federal securities laws, including the Securities Act of 1933 and the Securities
Exchange Act of 1934.
PARTICIPANT'S SIGNATURE
_____________________________________________ _________________________
Signature of Participant Date
Joyce Trainer is hereby authorized to make the above listed change(s) to this
participant's record.
_____________________________________________ _________________________
Signature of The Savings Bank of Manchester Date
Authorized Representative
Minimum Stock Purchase is $250.
Maximum Stock Purchase is $250,000.
PLEASE COMPLETE AND RETURN TO HUMAN RESOURCES AT
THE SAVINGS BANK OF MANCHESTER BY 4:00 P.M. ON FEBRUARY 3, 2000.
11
PROSPECTUS
CONNECTICUT BANCSHARES, INC.
(Proposed Holding Company for The Savings Bank of Manchester)
13,225,000 Shares of Common Stock
Connecticut Bankshares, M.H.C., the mutual holding company for The Savings Bank
of Manchester, is converting to a stock holding company. After the conversion,
Connecticut Bancshares will own all of Savings Bank of Manchester's common
stock.
Price Per Share: $10.00
Minimum Subscription Requirement: 25 Shares or $250
Expected Trading Market and Symbol: Nasdaq National Market "SBMC"
Minimum Maximum
----------- ------------
Number of shares: 9,775,000 13,225,000
Gross offering proceeds: $97,750,000 $132,250,000
Estimated underwriting commissions
and other offering expenses: $ 3,979,000 $ 4,469,000
Estimated net proceeds: $93,771,000 $127,781,000
Estimated net proceeds per share: $ 9.59 $ 9.66
If the appraiser increases the estimated value, Connecticut Bancshares may
increase the maximum number of shares by up to 15%, to 15,208,750 shares.
Sandler O'Neill will use its best efforts to assist Connecticut Bancshares in
selling at least the minimum number of shares but does not guarantee that this
number will be sold. Sandler O'Neill is not obligated to purchase any shares of
common stock in the offering. Sandler O'Neill intends to make a market in the
common stock.
The offering to depositors, officers, directors and employees of Savings Bank of
Manchester will end at 4:00 p.m., Eastern Time, on February 15, 2000. An
offering to the general public may also be held and may end as early as 4:00
p.m., Eastern Time, on February 15, 2000. If the conversion is not completed by
March 31, 2000, and the Connecticut Department of Banking allows more time to
complete the conversion, all subscribers will be able to increase, decrease or
cancel their orders. All extensions may not go beyond November 22, 2001.
Connecticut Bancshares will hold all funds of subscribers in an interest-bearing
savings account until the conversion is completed or terminated. Funds will be
returned promptly with interest if the conversion is terminated.
________________________________________________________________________________
These securities are not deposits or accounts and are not insured or guaranteed
by Savings Bank of Manchester, Connecticut Bancshares, the Federal Deposit
Insurance Corporation or any other federal or state government agency. The
common stock is subject to investment risk, including the possible loss of money
invested.
For a discussion of the material risks that you should consider, see "Risk
Factors" beginning on page 12.
Neither the Securities and Exchange Commission, the Federal Deposit Insurance
Corporation, the Connecticut Department of Banking, nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
________________________________________________________________________________
For assistance, please contact the conversion center at (860) 645-5300.
SANDLER O'NEILL & PARTNERS, L.P.
The date of this prospectus is January 12, 2000.
SUMMARY
You should read the entire prospectus carefully before you decide to
invest. For assistance, please contact the conversion center at (860) 645-5300.
THE COMPANIES
Connecticut Bankshares, M.H.C. (page 57) Connecticut Bankshares, M.H.C. was formed in 1996 as the mutual holding company
923 Main Street for Savings Bank of Manchester. In the mutual holding company reorganization,
Manchester, Connecticut 06040 Savings Bank of Manchester converted from mutual to stock form and issued all of
(860) 646-1700 its outstanding stock to Connecticut Bankshares, M.H.C. Connecticut Bankshares,
M.H.C. is governed by a Board of Directors. All voting control of Connecticut
Bankshares, M.H.C. lies in its governing body of corporators. To date, Connecticut
Bankshares, M.H.C.'s business activities have been limited to directing, planning
and coordinating Savings Bank of Manchester's business activities. After the
conversion, Connecticut Bankshares, M.H.C. will no longer exist.
Connecticut Bancshares, Inc. (page 58) Savings Bank of Manchester recently formed Connecticut Bancshares to be its new
923 Main Street stock holding company. To date, Connecticut Bancshares has only conducted
Manchester, Connecticut 06040 organizational activities. After the conversion, it will own all of Savings Bank
(860) 646-1700 of Manchester's capital stock and will direct, plan and coordinate Savings Bank of
Manchester's business activities. After the conversion, Connecticut Bancshares
might become an operating company or acquire or organize other operating
subsidiaries, including other financial institutions or financial services
companies. Connecticut Bancshares intends to retain 50% of the net conversion
proceeds.
The Savings Bank of Manchester (page 58) Savings Bank of Manchester is a Connecticut-chartered stock savings bank that
923 Main Street operates as a community bank dedicated to serving the financial service needs of
Manchester, Connecticut 06040 consumers and small businesses within its primary market area. Currently,
(860) 646-1700 Savings Bank of Manchester operates out of its main office in Manchester,
Connecticut and its 22 other branch offices in Hartford, Tolland and Windham
Counties, Connecticut, which Savings Bank of Manchester considers its primary
market area for making loans and attracting deposits.
Historically, Savings Bank of Manchester's principal business has been attracting
deposits from the general public and using those funds to originate loans secured
by residential real estate, which accounted for 57.1% of Savings Bank of
Manchester's total loan portfolio at August 31, 1999. More recently, Savings Bank
of Manchester has increased its emphasis on commercial real estate and business
lending,
1
which accounted for 30.0% of its total loan portfolio at August 31, 1999. Savings
Bank of Manchester also invests in U.S. government and agency securities, U.S.
government insured or guaranteed mortgage-backed securities, corporate bonds and
marketable equity securities. At August 31, 1999, Savings Bank of Manchester had
total assets of $1.18 billion, deposits of $887.3 million and total capital of
$117.6 million.
Recently, Savings Bank of Manchester expanded the products and services that it
offers to include Internet banking, debit cards, a bank issued credit card, and
merchant credit card processing. In 1997, it added annuities to its existing sales
of mutual funds and other non-deposit investment products.
For a discussion of Savings Bank of Manchester's business strategy and recent
results of operations, see "Recent Developments" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." For a discussion of
Savings Bank of Manchester's business activities, see "Business of Savings Bank of
Manchester."
THE CONVERSION
What is the Conversion (page 116) The conversion is a change in Connecticut Bankshares, M.H.C.'s legal form of
organization. Currently, Connecticut Bankshares, M.H.C. owns all of the
outstanding capital stock of Savings Bank of Manchester. Connecticut Bankshares,
M.H.C. is a mutual holding company and has no stock or stockholders. Instead,
Connecticut Bankshares, M.H.C. operates for the mutual benefit of Savings Bank of
Manchester's depositors. Connecticut Bankshares, M.H.C.'s corporators elect
directors and vote on other important matters. After the conversion, Connecticut
Bankshares, M.H.C. and its governing body of corporators will cease to exist and
Savings Bank of Manchester will continue as a stock savings bank but will be owned
and controlled by the new holder of all its stock, Connecticut Bancshares. Voting
rights in Savings Bank of Manchester will belong to Connecticut Bancshares. Voting
rights in Connecticut Bancshares will belong to its stockholders.
Savings Bank of Manchester is conducting the conversion under the terms of its
plan of conversion. The corporators of Connecticut Bankshares, M.H.C. approved the
plan of conversion at a special meeting of corporators called for that purpose and
held on November 22, 1999. The Connecticut Department of Banking approved the plan
of conversion on January 11, 2000. In addition, the Federal Deposit Insurance
Corporation and the Federal Reserve Board have reviewed the application for
conversion. Connecticut Bancshares expects to receive approval from the Office of
Thrift Supervision to acquire all of the stock of Savings Bank of Manchester.
Before the offering may close and the conversion may be completed,
2
Savings Bank of Manchester and Connecticut Bancshares must obtain all required
regulatory approvals, including that of the Office of Thrift Supervision, and
satisfy all conditions of those approvals that must be completed before closing of
the offering and the completion of the conversion. See "The Conversion--General."
Reasons for the Conversion (page 121) By converting Connecticut Bankshares, M.H.C. to the stock form of organization,
Savings Bank of Manchester will be structured in the form used by commercial
banks, most business entities and a large number of savings institutions. The
conversion will be important to Savings Bank of Manchester's future growth and
performance because it will:
. enhance its ability to diversify into other financial services related
activities;
. enhance its ability to expand through the acquisition of other financial
institutions or their assets;
. enhance its ability to attract and retain qualified management through
stock-based compensation plans; and
. provide a larger capital base from which to operate and expand its ability
to serve the public.
Currently, neither Connecticut Bancshares nor Savings Bank of Manchester has any
specific contracts, understandings, or arrangements for the acquisition of other
financial service companies or their assets.
SBM Charitable Foundation, Inc. To continue its long-standing commitment to its local communities, Savings Bank of
(page 118) Manchester intends to establish a charitable foundation, SBM Charitable
Foundation, Inc., as part of the conversion. The foundation will be funded with
Connecticut Bancshares common stock equal to 8% of the shares sold in the
conversion. This would range from 782,000 shares, assuming 9,775,000 shares are
sold in the conversion, to 1,058,000 shares, assuming 13,225,000 shares are sold
in the conversion, or 1,216,700 shares, assuming the number of shares sold in the
conversion is increased to 15,208,750 shares. Based on the purchase price of
$10.00 per share, the foundation would be funded with between $7.8 million and
$10.6 million of common stock, or $12.2 million, if the number of shares sold in
the conversion is increased to 15,208,750 shares. SBM Foundation will make grants
and donations to non-profit and community groups within the communities in which
Savings Bank of Manchester operates. If SBM Foundation was not established as part
of the conversion, then the amount of common stock sold would be greater than if
the conversion was completed with the foundation. For a further discussion of the
financial impact of the foundation, including its dilutive effect
3
on those who purchase shares in the conversion, see "Risk Factors--The
contribution to SBM Foundation means that a stockholder's total ownership interest
will be 7.4% less after the contribution," "Pro Forma Data" and "Comparison of
Independent Valuation and Pro Forma Financial Information With and Without the
Foundation."
SBM Foundation will complement the activities of the Savings Bank of Manchester
Foundation, Inc., a private foundation established by Savings Bank of Manchester
in 1998. In 1998, Savings Bank of Manchester contributed marketable equity
securities with a fair market value of $3.0 million to initially fund the
foundation. Savings Bank of Manchester Foundation, Inc., which had assets of $2.9
million at August 31, 1999, provides grants to individuals and not-for-profit
organizations within the communities that Savings Bank of Manchester serves.
Savings Bank of Manchester does not expect to make any further contributions to
the Savings Bank of Manchester Foundation, Inc. after the conversion.
Benefits of the Conversion to Management Connecticut Bancshares and Savings Bank of Manchester intend to adopt certain
(page 97) benefit plans and employment and change in control agreements as discussed below.
The following table summarizes the total number and dollar value of the shares of
common stock which the employee stock ownership plan expects to acquire and the
total value of all stock awards that are expected to be available under the stock-
based incentive plan, assuming 14,283,000 shares are issued in the conversion. The
table assumes the value of the shares is $10.00 per share. The table does not
include a value for stock options because their grant value would be equal to the
fair market value of the common stock on the day that the options are granted. As
a result, financial gains can be realized on an option only if the market price of
common stock increases above the price at which the options are granted.
Percentage
of Shares
Number Estimated Issued
of Value in the
Shares of Shares Conversion
----------- -------------- ------------
Employee stock ownership plan 1,142,640 $11,426,400 8.0%
Stock awards 571,320 5,713,200 4.0
Stock options 1,428,300 -- 10.0
--------- ----------- ----
Total 3,142,260 $17,139,600 22.0%
========= =========== ====
The following table summarizes the estimated value of the benefits payable under
the employment agreements, change in control agreements, supplemental executive
retirement plan and the employee severance compensation plan assuming a change in
control of Connecticut Bancshares or Savings Bank of
4
Manchester had occurred as of December 31, 1999 based on 1999 compensation data.
The estimated value of the benefit payable under the employee severance
compensation plan assumes that all employees are terminated.
Estimated
Value
of Benefit
-----------
Employment agreements......................................... $ 2,700,000
Change in control agreements.................................. 2,200,000
Supplemental executive retirement plan........................ 500,000
Employee severance compensation plan.......................... 12,500,000
-----------
$17,900,000
===========
The following is a description of these benefit plans, employment agreements and
change in control agreements:
. Employee Stock Ownership Plan. This plan intends to acquire an amount of
shares equal to 8% of the shares issued in the conversion. This would range
from 844,560 shares, assuming 10,557,000 shares are issued in the conversion,
to 1,142,640 shares, assuming 14,283,000 shares are issued in the conversion,
or 1,314,036 shares if the number of shares issued in the conversion is
increased to 16,425,450 shares. This plan intends to acquire such shares by
subscribing for 5% of the shares sold in the conversion and by purchasing the
remaining amount of shares in the open market. Savings Bank of Manchester
will allocate these shares to employees over a period of years in proportion
to their compensation.
. Stock-Based Incentive Plan. Under this plan, which will be adopted after the
conversion and will be submitted to stockholders for their approval,
Connecticut Bancshares may award stock options to key employees and directors
of Connecticut Bancshares and its affiliates. No decisions have been made as
to who will be awarded options or the amounts that will be awarded. The
number of options available under this plan will equal 10% of the number of
shares issued in the conversion. This would range from 1,055,700 shares,
assuming 10,557,000 shares are issued in the conversion, to 1,428,300 shares,
assuming 14,283,000 shares are issued in the conversion, or 1,642,545 shares
if the number of shares issued in the conversion is increased to 16,425,450
shares.
In addition to awarding options, this plan may also award shares of stock to
key employees and directors at no cost to the recipient. No decisions have
been made as to who will be awarded shares of stock or the amounts that will
be awarded. The number of shares available for stock awards will equal an
additional 4% of the number of shares issued in the conversion. This would
range from 422,280 shares, assuming 10,557,000 shares are issued in the
conversion, to
5
571,320 shares, assuming 14,283,000 shares are issued in the conversion, or
657,018 shares assuming the number of shares issued in the conversion is
increased to 16,425,450 shares.
. Employment Agreements. Connecticut Bancshares and Savings Bank of Manchester
intend to enter into employment agreements with six officers of Savings Bank
of Manchester. These agreements will provide for severance benefits if the
executive is terminated following a change in control of Connecticut
Bancshares or Savings Bank of Manchester.
. Change in Control Agreements. Savings Bank of Manchester intends to enter
into change in control agreements with seven officers of Savings Bank of
Manchester who will not be covered by an employment agreement. These
agreements will provide for the payment of severance compensation in the
event of a change in control of Savings Bank of Manchester or Connecticut
Bancshares.
. Supplemental Executive Retirement Plan. This plan will provide benefits to
eligible employees if their retirement benefits under the employee stock
ownership plan are reduced because of federal tax law limitations. The plan
will also provide benefits to eligible employees if they retire or are
participants at the time of a change in control of Connecticut Bancshares or
Savings Bank of Manchester but before the complete allocation of shares under
the employee stock ownership plan.
. Employee Severance Compensation Plan. This plan will provide severance
benefits to eligible employees if there is a change in control of Connecticut
Bancshares or Savings Bank of Manchester.
For a discussion of risks associated with these plans and agreements, see "Risk
Factors--Implementation of additional benefit plans will increase future
compensation expense and lower Savings Bank of Manchester's profits," "Risk
Factors--Issuance of shares for benefit program may lower your ownership interest"
and "Risk Factors--Employment and change in control agreements, the employee stock
ownership plan, supplemental executive retirement plan and the severance plan
could make takeover attempts more difficult to achieve." For a further discussion
of these plans and agreements, see "Management of Savings Bank of Manchester--
Executive Compensation."
6
The Offering
Subscription Offering (page 125) Savings Bank of Manchester has granted subscription rights in the following
order of priority to:
Note: Subscription rights are not
transferable, and persons with subscription 1. Persons with $50 or more on deposit at Savings Bank of Manchester as of
rights may not subscribe for shares for the July 31, 1998.
benefit of any other person. If you violate
this prohibition, you may lose your rights to 2. The Savings Bank of Manchester employee stock ownership plan.
purchase shares and may face criminal
prosecution and/or other sanctions. 3. Savings Bank of Manchester's directors, officers and employees who do
not have a higher priority right.
To ensure that Savings Bank of Manchester properly identifies your subscription
rights, you must list all of your deposit accounts as of the eligibility date on
the stock order form. If you fail to do so, your subscription may be reduced or
rejected.
The subscription offering will end at 4:00 p.m., Eastern time, on February 15,
2000. If the offering is oversubscribed, shares will be allocated in order of the
priorities described above under a formula outlined in the plan of conversion.
Direct Community Offering (page 127) Connecticut Bancshares may offer shares not sold in the subscription offering to
the general public in a direct community offering. Residents of Hartford, Tolland
and Windham Counties, Connecticut, will have first preference to purchase shares
in a direct community offering. If shares are available, Connecticut Bancshares
expects to offer them to the general public immediately after the end of the
subscription offering, but may begin a direct community offering at any time
during the subscription offering.
Connecticut Bancshares and Savings Bank of Manchester may reject orders received
in the direct community offering either in whole or in part. If your order is
rejected in part, you cannot cancel the remainder of your order.
Time Period for Completing the Conversion If the conversion is not completed by March 31, 2000, and the Connecticut
Department of Banking allows more time to complete the conversion, everyone who
subscribed for shares will be contacted to see if they still want to purchase
stock. This is known as a "resolicitation offering." A material change in the
independent appraisal of Connecticut Bancshares and Savings Bank of Manchester
would be the most likely, but not necessarily the only, reason for a delay in
completing the conversion. The conversion must be completed by November 22, 2001,
unless the Connecticut Department of Banking allows more time to complete the
conversion.
7
In the resolicitation offering, if you previously subscribed for stock, you will
receive a supplement to this prospectus which will instruct you how to confirm,
modify or cancel your subscription. If you fail to respond to the resolicitation
offering, it would be as if you had canceled your order. If you paid for stock by
check or money order, your subscription funds would be returned to you, together
with accrued interest. If you authorized payment by withdrawal of funds on deposit
at Savings Bank of Manchester, that authorization would terminate.
If you affirmatively confirm your subscription order during the resolicitation
offering, your subscription funds will be held until the end of the resolicitation
offering. You would be unable to cancel your resolicitation order without the
approval of Connecticut Bancshares and Savings Bank of Manchester until the
conversion is completed or terminated.
Purchase Price The purchase price is $10.00 per share. The Boards of Directors of Connecticut
Bancshares and Savings Bank of Manchester consulted with Sandler O'Neill in
determining it. You will not pay a commission to buy any shares in the conversion.
Number of Shares to be Sold (page 132) Connecticut Bancshares will sell between 9,775,000 and 13,225,000 shares of its
common stock in this offering. With regulatory approval, Connecticut Bancshares
may increase the number of shares to be sold to 15,208,750 shares without giving
you further notice.
Independent Appraiser Values the Shares of The amount of common stock that Connecticut Bancshares will offer in the
Connecticut Bancshares to be Sold in conversion is based on an independent appraisal of the estimated market value of
this Offering at Approximately $98 Million the common stock of Connecticut Bancshares to be sold in this offering as if the
to $132 Million (page 132) conversion had occurred as of the date of the appraisal. RP Financial, LC., an
independent appraiser, has estimated that, in its opinion, as of October 22, 1999,
and updated as of December 31, 1999, the estimated market value ranged between
$97.8 million and $132.3 million, with a midpoint of $115.0 million. The appraisal
was based in part on Savings Bank of Manchester's financial condition and results
of operations and the effect on Savings Bank of Manchester of the additional
capital raised by the sale of common stock in this offering. The independent
appraisal will be updated before the conversion is completed.
Comparable Thrift Stock Pricing Ratios In preparing its independent appraisal, RP Financial focused primarily on the
price/book and price/earnings valuation methodologies, both of which are discussed
in the appraisal report. See "Where You Can Find More Information" for how you may
obtain a copy of the appraisal report. The following table, which is derived from
data contained in the independent appraisal report, compares Savings Bank of
Manchester's pro forma price/earnings and price/book ratios at the minimum and
maximum of the offering range to the medians for all publicly
8
traded thrift institutions, all publicly traded Connecticut thrift institutions
and a peer group of 10 publicly traded thrift institutions identified in the
appraisal report, based on the closing prices as of October 22, 1999 and updated
as of December 31, 1999. Thrift institutions in the mutual holding company
structure that have publicly issued stock are excluded from each comparison group.
The pro forma price/earnings ratios for Savings Bank of Manchester presented in
the following table are based on earnings for the trailing 12 months as required
by regulatory appraisal guidelines. Therefore, these ratios differ from the ratios
presented in the tables under "Pro Forma Data."
Price/ Price/
Earnings Book
Ratio Ratio
----------- ------------
Savings Bank of Manchester:
Minimum...................................... 10.85x 52.46%
Maximum...................................... 13.71x 61.65%
Median for all publicly traded thrifts.......... 12.72x 96.60%
Median for all publicly traded
Connecticut thrifts......................... 12.24x 149.18%
Median for the peer group....................... 14.33x 90.24%
The independent appraisal does not necessarily indicate market value. Do not
assume or expect that Savings Bank of Manchester's valuation as shown in the above
table means that the common stock will trade above the $10.00 purchase price after
the conversion. Connecticut Bancshares cannot guarantee that anyone who purchases
shares in the conversion will be able to sell their shares at or above the $10.00
purchase price.
Purchase Limitations (page 134) The minimum purchase is 25 shares.
The maximum purchase in the subscription offering by any person or group of
persons through a single deposit account or similarly titled deposit accounts is
$250,000 of common stock, which equals 25,000 shares.
The maximum purchase by any person, related persons or persons acting together in
the direct community offering is $250,000 of common stock, which equals 25,000
shares.
The maximum purchase in the subscription offering and direct community offering
combined by any person, related persons or persons acting together is 1% of the
common stock sold in the offering. This maximum purchase limit ranges from
$977,500, if 9,775,000 shares are sold in the offering, to $1,322,500, if
13,225,000 shares are sold in the offering, to $1,520,875, if 15,208,750 shares
are sold in the offering.
9
How to Purchase Common Stock (page 130) If you want to subscribe for shares in the subscription offering or place a
purchase order for shares in the direct community offering, you must complete an
Note: Once Savings Bank of Manchester receives original stock order form and send it together with full payment to Savings Bank
your order, you cannot cancel or change it of Manchester in the postage-paid envelope provided. You must sign the
without Savings Bank of Manchester's consent. certification that is part of the stock order form. Savings Bank of Manchester
If Connecticut Bancshares and Savings Bank of must receive your stock order form before the end of the subscription offering
Manchester intend to sell fewer than 9,775,000 or the end of the direct community offering, as appropriate.
shares or more than 15,208,750 shares, all
subscribers will be notified and given the You may pay for shares in the subscription offering or the direct community
opportunity to change or cancel their orders. offering in any of the following ways:
If you do not respond to this notice, Savings
Bank of Manchester will return your funds . By cash, if delivered in person to a full-service banking office of
promptly with interest. Savings Bank of Manchester.
. By check or money order made payable to Connecticut Bancshares, Inc.
. By withdrawal from an account at Savings Bank of Manchester. To use
funds in an Individual Retirement Account at Savings Bank of Manchester,
you must transfer your account to an unaffiliated institution or broker-
dealer. Please contact the conversion center as soon as possible for
assistance.
Savings Bank of Manchester will pay interest on your subscription funds at the
rate it pays on passbook accounts from the date it receives your funds until the
conversion is completed or terminated. All funds authorized for withdrawal from
deposit accounts with Savings Bank of Manchester will earn interest at the
applicable account rate until the conversion is completed. There will be no early
withdrawal penalty for withdrawals from certificates of deposit used to pay for
stock.
No prospectus will be mailed later than five days before the end of the offering
or hand-delivered less than 48 hours before the end of the offering.
Use of Proceeds (page 26) Connecticut Bancshares will use 50% of the net offering proceeds to buy all of the
common stock of Savings Bank of Manchester and will retain the remaining net
proceeds for general business purposes. These purposes may include investment in
securities, paying cash dividends or repurchasing shares of its common stock,
although Connecticut Bancshares has no specific plans to pay dividends or
repurchase its common stock at this time. Savings Bank of Manchester will use the
funds it receives for general business purposes, including originating loans and
purchasing securities.
Connecticut Bancshares will also lend an amount equal to 8% of the total dollar
value of the stock to be issued in the conversion to the employee stock ownership
plan to fund its purchase of
10
common stock both in the conversion and in the open market after the conversion.
Connecticut Bancshares and Savings Bank of Manchester may also use the proceeds of
the offering to expand and diversify their businesses, although they do not have
any specific contracts, understandings or arrangements to acquire other financial
service companies or their assets.
Purchases by Directors and Executive Officers Savings Bank of Manchester's directors and executive officers intend to subscribe
(page 115) for 292,500 shares, which equals 2.21% of the 13,225,000 shares that would be sold
at the maximum of the offering range. If fewer shares are sold in the conversion,
then directors and executive officers will own a greater percentage of Connecticut
Bancshares. Directors and executive officers will pay the $10.00 per share price
as will everyone else who purchases shares in the conversion. For a further
discussion of the impact of management's ownership interests in Connecticut
Bancshares, see "Risk Factors--Expected voting control by management and employees
may make takeover attempts more difficult to achieve" and "Restrictions on
Acquisition of Connecticut Bancshares and Savings Bank of Manchester."
Market for Common Stock (page 29) Connecticut Bancshares intends to have its common stock quoted on the Nasdaq
National Market under the trading symbol "SBMC." After shares of the common stock
begin trading, you may contact a stock broker to buy or sell shares. Connecticut
Bancshares cannot assure you that there will be an active trading market for the
common stock. See "Risk Factors--Connecticut Bancshares cannot assure or guarantee
an active trading market for the common stock."
Dividend Policy (page 28) Connecticut Bancshares intends to adopt a policy of paying regular cash dividends,
but has not yet decided on the exact amount or range of amounts, or the frequency
of payments. For a further discussion of Savings Bank of Manchester's and
Connecticut Bancshares' dividend policies, see "Dividend Policy."
11
RISK FACTORS
Before investing in Connecticut Bancshares common stock please carefully
consider the matters discussed below.
Savings Bank of Manchester's lower than average return on equity may decrease
the market price of the common stock
Return on average equity, which equals net income divided by average
equity, is a ratio used by many investors to compare the performance of a
particular company with other companies. For the eight months ended August 31,
1999, Savings Bank of Manchester's annualized return on average equity was
9.32%. As a result of the additional capital that will be raised in this
offering, Savings Bank of Manchester's return on average equity will decrease
substantially. Assuming the conversion was completed as of August 31, 1999,
Savings Bank of Manchester's return on average equity would have been 5.51% if
9,775,000 shares were sold in the conversion, 5.09% if 13,225,000 shares were
sold in the conversion, and 4.89% if 15,208,750 shares were sold in the
conversion. Savings Bank of Manchester will not be able to immediately deploy
the increased capital from the offering into higher-yielding loans. Savings Bank
of Manchester's ability to invest in loans will depend on market interest rates,
demand in its market area and its ability to compete successfully for loans.
Unless and until the capital can be invested in higher-yielding loans, Savings
Bank of Manchester expects that its return on average equity will continue to be
below average. In addition, compensation expense will increase as a result of
the new benefit plans. Over time, Connecticut Bancshares and Savings Bank of
Manchester intend to use the net proceeds from this offering to increase
earnings per share and book value per share, without assuming undue risk, with
the goal of achieving a return on average equity competitive with other publicly
traded financial institutions. This goal could take a number of years to
achieve, and Connecticut Bancshares and Savings Bank of Manchester cannot assure
you that they can reach this goal. Consequently, you should not expect a return
on equity that is average or better than average in the near future. See "Pro
Forma Data" for an illustration of the financial effects of this stock offering.
Competition has hurt Savings Bank of Manchester's net interest income
Savings Bank of Manchester faces intense competition both in making high
yield and quality loans and in attracting deposits. This competition has forced
Savings Bank of Manchester to offer higher deposit rates in its market area.
This competition from other providers of financial services for loans and
deposits has contributed to a recent narrowing of its interest rate spread, from
3.76% for the year ended December 31, 1994 to 3.42% for the eight months ended
August 31, 1999, which has hurt net interest income. Savings Bank of Manchester
expects that the competition for loans and deposits will continue to be intense
and is likely to increase in the future. For more information about Savings Bank
of Manchester's market area and the competition it faces, see "Business of
Savings Bank of Manchester--Market Area" and "Business of Savings Bank of
Manchester--Competition."
Savings Bank of Manchester's increased emphasis on commercial lending may hurt
both asset quality and profits
At August 31, 1999, commercial real estate and commercial business loans
aggregated 30.0% of Savings Bank of Manchester's total loan portfolio. Savings
Bank of Manchester intends to continue to increase its emphasis on commercial
real estate and commercial business lending. Commercial business lending
involves loans secured by business assets other than real estate, such as
equipment, inventory and accounts receivable. Commercial loans generally offer a
higher rate of return but also possess a greater risk of loss than loans secured
by residential real estate. Savings Bank of Manchester cannot assure you that
the level of nonperforming commercial real estate and business loans, as well as
other types of loans, will not be higher in future periods which would reduce
net interest income, or that it will not have to charge-off material amounts of
commercial loans or other types of loans in future periods, which could lead to
a material increase in the provision for loan losses in future periods which
would also reduce profits. In September 1999 Savings Bank of Manchester charged-
off $700,000 in connection with its largest lending relationship, a residential
development loan. See "Recent Developments" for further discussion. See also
12
"Business of Savings Bank of Manchester--Lending Activities--Nonperforming
Assets, Delinquencies and Impaired Loans" and "Business of Savings Bank of
Manchester--Lending Activities--Commercial Loans" for additional information.
Declining interest rates could hurt Savings Bank of Manchester's profits
Like most financial institutions, Savings Bank of Manchester's ability to
make a profit depends largely on its net interest income, which is the
difference between the interest income it receives from its loans and securities
and the interest it pays on deposits and borrowings. A large percentage of
Savings Bank of Manchester's interest-earning assets have shorter maturities.
Therefore, if interest rates decline, Savings Bank of Manchester anticipates
that its net interest income would decline because interest earned on its assets
would decrease more quickly than the interest paid on deposits. For further
discussion of how changes in interest rates could impact Savings Bank of
Manchester, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Management of Interest Rate Risk and Market Risk
Analysis."
A downturn in the local economy could hurt Savings Bank of Manchester's profits
The vast majority of Savings Bank of Manchester's loans are made to
borrowers who live and work in Central Connecticut. A prolonged economic
recession in Central Connecticut would likely cause significant increases in
nonperforming loans and assets, which would create operating losses for Savings
Bank of Manchester and would hurt its profits. For a further discussion of
Savings Bank of Manchester's market area and competition, see "Business of
Savings Bank of Manchester--Market Area" and "Business of Savings Bank of
Manchester--Competition."
Management will have substantial discretion over investment of the offering
proceeds and may make investments with which you may disagree
The net offering proceeds to Savings Bank of Manchester are estimated to
range from $46.9 million to $63.9 million. The net offering proceeds to
Connecticut Bancshares are estimated to range from $38.4 million to $52.5
million after it loans a portion of the proceeds to Savings Bank of Manchester's
employee stock ownership plan to purchase shares of common stock. Connecticut
Bancshares and Savings Bank of Manchester intend to use these funds for general
business purposes, giving management substantial discretion over their
investment. You may disagree with investments that management makes. See "Use of
Proceeds" for further discussion.
Year 2000 data processing problems could interrupt and hurt Savings Bank of
Manchester's operations
Computer programs that use only two digits to identify a year could fail or
create erroneous results at or after the year 2000. Although Savings Bank of
Manchester maintains an internal computer system for its operating functions,
its data processing is provided substantially by a core banking software system
that is supported by a third party vendor. If the vendor is unable to complete
its year 2000 adjustments in a timely fashion, or if it fails to successfully
make all the necessary year 2000 adjustments, resulting computer malfunctions
could interrupt the operations of Savings Bank of Manchester and have a
significant adverse impact on Savings Bank of Manchester's financial condition
and results of operations. For further discussion of Savings Bank of
Manchester's year 2000 compliance program, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000 Readiness."
Establishment of the SBM Foundation will hurt Connecticut Bancshares's profits
for the year 2000
Connecticut Bancshares intends to contribute to SBM Foundation shares of
its common stock equal to 8% of the shares sold in the conversion. This
contribution will hurt operating results during the fiscal year in which the
foundation is established, which is expected to be 2000, possibly resulting in
an operating loss for such year. For a further discussion regarding the effect
of the contribution to the foundation, see "The Conversion--Establishment of the
Charitable Foundation."
13
The contribution to SBM Foundation means that a stockholder's total ownership
interest will be 7.4% less after the contribution
Purchasers of shares will have their ownership and voting interests in
Connecticut Bancshares diluted by 7.4% at the close of the conversion when
Connecticut Bancshares issues an additional 8% of its shares and contributes
those shares to the foundation. For a further discussion regarding the effect
of the contribution to the foundation, see "Pro Forma Data" and "Comparison of
Independent Valuation and Pro Forma Financial Information With and Without the
Foundation."
Contribution to SBM Foundation may not be tax deductible which could hurt
Connecticut Bancshares' profits
Connecticut Bancshares believes that its contribution to the SBM Foundation
should be deductible for federal income tax purposes. However, Connecticut
Bancshares does not have any assurance that the Internal Revenue Service will
grant tax-exempt status to the foundation. If the contribution is not
deductible, Connecticut Bancshares would not receive any tax benefit from the
contribution. In addition, even if the contribution is tax deductible,
Connecticut Bancshares may not have sufficient profits to be able to fully use
the deduction. For a further discussion of the contribution to the charitable
foundation, see "The Conversion--Establishment of the Charitable Foundation--Tax
Considerations."
Implementation of additional benefit plans will increase future compensation
expense and lower Savings Bank of Manchester's profits
Savings Bank of Manchester will recognize additional material employee
compensation and benefit expenses stemming from the shares purchased or granted
to employees and executives under new benefit plans. Savings Bank of Manchester
cannot predict the actual amount of these new expenses because applicable
accounting practices require that they be based on the fair market value of the
shares of common stock at specific points in the future. Savings Bank of
Manchester would recognize expenses for its employee stock ownership plan when
shares are committed to be released to participants' accounts and would
recognize expenses for the stock-based incentive plan over the vesting period of
awards made to recipients. These expenses have been estimated in the pro forma
financial information under "Pro Forma Data" assuming the $10.00 per share
purchase price as fair market value. Actual expenses, however, may be higher or
lower. For further discussion of these plans, see "Management of Savings Bank
of Manchester--Benefits."
Expected voting control by management and employees may make takeover attempts
more difficult to achieve
The shares of common stock that Savings Bank of Manchester's directors and
executive officers intend to purchase in the conversion, when combined with the
shares that may be awarded to participants under Savings Bank of Manchester's
employee stock ownership plan and Connecticut Bancshares' stock-based incentive
plan, could result in management and employees controlling a significant
percentage of Connecticut Bancshares' common stock. If these individuals were
to act together, they could have significant influence over the outcome of any
stockholder vote. This voting power may discourage takeover attempts you might
like to see happen. In addition, the total voting power of management and
employees could exceed 20% of Connecticut Bancshares' outstanding stock, which
would enable management and employees as a group to defeat any stockholder
matter that requires an 80% vote. For information about management's intended
stock purchases and the number of shares that may be awarded under new benefit
plans, see "Management of Savings Bank of Manchester--Executive Compensation,"
"Shares to Be Purchased by Management with Subscription Rights" and
"Restrictions on Acquisition of Connecticut Bancshares and Savings Bank of
Manchester."
14
Issuance of shares for benefit program may lower your ownership interest
If stockholders approve the new stock-based incentive plan, Connecticut
Bancshares intends to issue shares to its officers and directors through this
plan. If the restricted stock awards under the stock-based incentive plan are
granted from authorized but unissued stock, your ownership interest could be
reduced by up to approximately 3.85%. If the options under the stock-based
incentive plan are granted from authorized but unissued stock, your ownership
interest could be further reduced by up to approximately 9.09%. See "Pro Forma
Data" and "Management of Savings Bank of Manchester--Benefits."
Anti-takeover provisions and statutory provisions could make takeover attempts
more difficult to achieve and may decrease the market price of the common stock
Provisions in Connecticut Bancshares' Certificate of Incorporation and
Bylaws, the corporate law of the State of Delaware, Connecticut banking law, and
federal banking regulations may make it difficult and expensive to pursue a
takeover attempt that management opposes. These provisions may discourage or
prevent takeover attempts you might like to see happen and may decrease the
market price of the common stock. These provisions will also make the removal of
the current board of directors or management of Connecticut Bancshares, or the
appointment of new directors, more difficult. These provisions include:
limitations on voting rights of beneficial owners of more than 5% or 10% of
Connecticut Bancshares' common stock; supermajority voting requirements for
certain business combinations; the election of directors to staggered terms of
three years; and the elimination of cumulative voting for directors. The
Certificate of Incorporation of Connecticut Bancshares also contains provisions
regarding the timing and content of stockholder proposals and nominations and
limiting the calling of special meetings. Similar provisions in the Amended and
Restated Articles of Incorporation and Bylaws of Savings Bank of Manchester
would also discourage takeover attempts and make takeovers less likely to
succeed without the support of management. For further information about these
provisions, see "Restrictions on Acquisition of Connecticut Bancshares and
Savings Bank of Manchester."
Employment and change in control agreements, the employee stock ownership plan,
supplemental executive retirement plan and the severance plan could make
takeover attempts more difficult to achieve
The employment and change in control agreements to be entered into with
officers of Connecticut Bancshares and Savings Bank of Manchester provide for
cash severance payments and/or the continuation of health, life and disability
benefits if the officers are terminated following a change in control of
Connecticut Bancshares or Savings Bank of Manchester. If a change in control
had occurred at December 31, 1999, the aggregate value of the severance benefits
available to these officers under the agreements would have been approximately
$4.9 million based on 1999 compensation data. In addition, if a change in
control had occurred at December 31, 1999 and all eligible employees had been
terminated, the aggregate payment due under the supplemental executive
retirement plan would have been approximately $500,000 and the aggregate payment
due under the severance plan would have been approximately $12.5 million. These
estimates do not take into account future salary adjustments or bonus payments
or the value of the continuation of other employee benefits. All of these
arrangements may have the effect of increasing the costs of acquiring
Connecticut Bancshares, thereby discouraging future attempts to take over
Connecticut Bancshares or Savings Bank of Manchester. For information about the
proposed employment, change in control and severance agreements and severance
plan, see "Management of Savings Bank of Manchester--Executive Compensation."
Connecticut Bancshares cannot assure or guarantee an active trading market for
the common stock
Because Connecticut Bancshares has never issued stock, there is no current
trading market for the common stock. Consequently, Connecticut Bancshares
cannot assure or guarantee that an active trading market for the common stock
will develop or that an active trading market, if developed, will continue. An
active and orderly trading market will depend on the existence and individual
decisions of willing buyers and sellers at any given time over which neither
Connecticut Bancshares nor any market maker will have any control. If an active
trading market does not develop or is sporadic, this may hurt the market value
of the common stock. Furthermore, Connecticut
15
Bancshares cannot assure or guarantee that purchasers of common stock in the
offering will be able to sell their shares after the conversion at or above the
$10.00 per share purchase price. For further information, see "Market for Common
Stock."
Banking reform legislation restricts the activities in which Connecticut
Bancshares may engage compared to existing unitary holding companies
The U.S. Congress has enacted and the President has recently signed the
Financial Services Modernization Act of 1999 which is intended to modernize the
financial services industry. The legislation provides for greater affiliations
by commercial bank holding companies with financial companies such as securities
and insurance companies. Under the legislation, newly formed unitary savings
and loan holding companies will not have the broad powers formerly available to
unitary savings and loan holding companies. Connecticut Bancshares will be a
unitary savings and loan holding company after the conversion. Certain unitary
savings and loan holding companies would be grandfathered under the proposed
legislation; however, Connecticut Bancshares will not qualify for the
grandfathering. Consequently, Connecticut Bancshares will be restricted in the
activities in which it may engage to a greater extent than previously existing
unitary savings and loan holding companies. For example, Connecticut Bancshares
would generally not be permitted to engage in commercial activities whereas a
grandfathered unitary holding company would have such authority.
16
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables contain certain information concerning the
consolidated financial position and results of operations of Connecticut
Bankshares, M.H.C. and Subsidiary at the dates and for the periods indicated.
The data as of December 31, 1998, 1997 and 1996 and for the years then ended are
derived from the audited consolidated financial statements of Connecticut
Bankshares, M.H.C. and Subsidiary. The data as of August 31, 1999 and 1998 and
for the eight month periods then ended are derived from unaudited consolidated
financial statements but, in the opinion of management, reflects all adjustments
necessary to present fairly the results for these interim periods. These
adjustments consist only of normal recurring adjustments. The results of
operations for the eight months ended August 31, 1999 are not necessarily
indicative of the results of operations that may be expected for the year ended
December 31, 1999. This information should be read in conjunction with the
Consolidated Financial Statements included in this prospectus.
At August 31, At December 31,
------------------------- ----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- -------- -------- --------
(In thousands)
Selected Consolidated Financial Data:
Total assets.......................... $1,181,669 $1,076,676 $1,108,287 $1,033,086 $968,252 $935,833 $848,628
Cash and cash equivalents............. 42,823 31,004 45,048 14,660 22,850 39,972 23,870
Loans, net............................ 899,692 789,853 806,787 798,292 732,448 695,797 682,944
Securities held to maturity:
Mortgage-backed securities......... 22,477 24,555 22,742 14,409 8,047 4,280 --
Other investment securities........ 22,388 34,763 29,855 35,874 39,518 47,123 38,761
---------- ---------- ---------- ---------- -------- -------- --------
Total securities held to
maturity...................... 44,865 59,318 52,597 50,283 47,565 51,403 38,761
---------- ---------- ---------- ---------- -------- -------- --------
Securities available for sale:
Mortgage-backed securities......... 12,143 14,567 12,859 17,985 24,570 26,818 18,194
U.S. Government and agency
obligations..................... 67,753 64,323 71,703 48,767 35,907 14,333 --
Marketable equity securities....... 42,968 30,173 42,773 40,635 37,797 29,038 25,894
Other securities................... 36,600 42,845 40,816 24,202 32,987 46,250 32,717
---------- ---------- ---------- ---------- -------- -------- --------
Total securities available
for sale...................... 159,464 151,908 168,151 131,589 131,261 116,439 76,805
---------- ---------- ---------- ---------- -------- -------- --------
Deposits.............................. 887,322 824,231 855,117 827,667 792,833 764,789 691,137
Short-term borrowed funds............. 97,847 85,050 79,545 71,179 58,747 64,262 46,571
Advances from Federal Home
Loan Bank.......................... 66,899 45,000 45,000 17,987 15,000 17,593 33,910
Capital............................... 117,634 105,505 112,807 101,191 88,535 77,143 65,484
Premises and equipment, net........... 14,735 16,223 15,621 15,709 11,369 9,849 7,705
Nonperforming assets (1).............. 6,863 4,596 3,283 7,543 12,760 13,198 13,715
For the Eight Months
Ended August 31, For the Year Ended December 31,
------------------------- -------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ------- ------- ------- ------- ------- -------
(In thousands)
Selected Operating Data:
Total interest and dividend income.... $51,437 $51,680 $76,858 $73,931 $69,973 $64,840 $55,944
Total interest and dividend expense... 23,976 24,786 37,200 35,856 34,714 32,728 26,388
------- ------- ------- ------- ------- ------- -------
Net interest income................ 27,461 26,894 39,658 38,075 35,259 32,112 29,556
Provision for loan losses............. 400 800 1,200 1,200 1,200 1,550 2,555
------- ------- ------- ------- ------- ------- -------
Net interest income after provision
for loan losses................. 27,061 26,094 38,458 36,875 34,059 30,562 27,001
------- ------- ------- ------- ------- ------- -------
Noninterest income:
Gains on sales of securities, net.. 246 3,035 2,621 4,007 842 2,522 317
Other.............................. 5,172 5,719 9,539 7,460 8,155 5,788 4,591
------- ------- ------- ------- ------- ------- -------
Total noninterest income........ 5,418 8,754 12,160 11,467 8,997 8,310 4,908
------- ------- ------- ------- ------- ------- -------
Noninterest expense................... 23,281 25,401 37,092 31,556 27,772 24,539 24,025
------- ------- ------- ------- ------- ------- -------
Income before provision
for income taxes................ 9,198 9,447 13,526 16,786 15,284 14,333 7,884
Provision for income taxes............ 2,943 2,929 4,208 6,584 5,853 5,927 3,274
------- ------- ------- ------- ------- ------- -------
Net income......................... $ 6,255 $ 6,518 $ 9,318 $10,202 $ 9,431 $ 8,406 $ 4,610
======= ======= ======= ======= ======= ======= =======
17
At or For the Eight
Months Ended
August 31, At or For the Year Ended December 31,
------------------ --------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------- ------ ------ ------ ------ ------ ------
Selected Operating Ratios and
Other Data (2):
Performance Ratios:
Average yield on interest-
earning assets.............................. 7.15% 7.65% 7.54% 7.75% 7.69% 7.85% 7.30%
Average rate paid on interest-bearing
liabilities................................. 3.73 4.06 4.02 4.11 4.15 4.04 3.54
Average interest rate spread (3)............... 3.42 3.59 3.52 3.64 3.54 3.81 3.76
Net interest margin (4)........................ 3.81 3.97 3.89 3.96 3.85 3.89 3.85
Interest-earning assets
to interest-bearing liabilities............. 111.92 110.71 110.29 109.47 108.62 106.58 106.74
Net interest income after provision for
loan losses to noninterest expense.......... 116.24 102.73 103.68 116.86 122.64 124.54 112.39
Noninterest expense as a percentage
of average assets........................... 2.04 2.38 3.46 3.15 2.92 2.75 2.83
Return on average assets....................... 0.82 0.91 0.87 1.02 0.99 0.94 0.57
Return on average capital...................... 8.15 9.32 8.71 10.75 11.38 11.78 7.49
Ratio of average capital to average assets..... 10.08 9.81 9.99 9.48 8.70 7.99 7.80
Regulatory Capital Ratios (2):
Leverage capital ratio......................... 9.34 9.27 9.33 8.98 8.41 7.60 7.80
Total risk-based capital ratio................. 14.37 14.41 13.89 13.67 13.09 12.68 12.33
Asset Quality Ratios (2):
Nonperforming loans and troubled
debt restructurings as a percentage
of total loans (5).......................... 0.65 0.32 0.19 0.35 0.98 1.20 1.15
Nonperforming assets and troubled debt
restructurings as a percentage of
total assets (1)............................ 0.58 0.43 0.29 0.73 1.32 1.41 1.62
Allowance for loan losses as a percentage
of total loans.............................. 1.19 1.33 1.30 1.23 1.23 1.20 1.11
Allowance for loan losses as a percentage
of nonperforming loans and troubled
debt restructurings......................... 181.00 416.86 694.55 350.79 125.46 100.41 96.50
Net loans charged-off to
average interest-earning loans.............. 0.04 0.05 0.13 0.12 0.25 0.21 0.48
Full service offices at end of period.......... 23 23 23 23 22 20 21
______________________
(1) Nonperforming assets consist of nonperforming loans, troubled debt
restructurings, and other real estate owned.
(2) Asset Quality and Regulatory Capital Ratios are end of period ratios.
Except for end of period ratios, all ratios are based on average monthly
balances during the indicated periods and are annualized for interim
periods.
(3) Average interest rate spread represents the difference between the average
yield on interest-earning assets and the average rate paid on interest-
bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(5) Nonperforming loans consist of nonperforming loans and loans 90 days or more
past due and accruing interest.
18
RECENT DEVELOPMENTS
The following tables contain certain information concerning the
consolidated financial position and the results of operations of Connecticut
Bankshares, M.H.C. and Subsidiary at the dates and for the periods indicated.
The data as of December 31, 1998 are derived from the audited consolidated
financial statements of Connecticut Bankshares, M.H.C. and Subsidiary. The data
as of September 30, 1999 and for the three and nine month periods then ended are
derived from unaudited consolidated financial statements but, in the opinion of
management, reflect all adjustments necessary to present fairly the results of
operations for these interim periods. These adjustments consist only of normal
recurring adjustments. The results of operations for the three and nine months
periods ended September 30, 1999 are not necessarily indicative of the results
of operations that may be expected for the year ended December 31, 1999. This
information should be read in conjunction with the Consolidated Financial
Statements included in this prospectus. To present ratios and other data for the
three and nine months periods ended September 30, 1999 and 1998, which can be
compared to the ratios and data for the annual periods, the ratios and other
data for the three and nine month periods ended September 30, 1999 and 1998 have
been presented as if they relate to an annual period.
At At
September 30, December 31,
1999 1998
------------- ------------
(In thousands)
Selected Consolidated Financial Data:
Total assets...................................................................... $1,188,504 $1,108,287
Cash and cash equivalents......................................................... 38,384 45,048
Loans, net........................................................................ 911,101 806,787
Securities held to maturity....................................................... 48,090 52,597
Securities available for sale..................................................... 155,413 168,151
Deposits.......................................................................... 882,644 855,117
Short-term borrowed funds......................................................... 94,777 79,545
Advances from Federal Home Loan Bank.............................................. 87,896 45,000
Capital........................................................................... 117,636 112,807
Premises and equipment, net....................................................... 14,714 15,621
Nonperforming assets (1).......................................................... 14,796 3,283
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
1999 1998 1999 1998
----------- --------- ---------- ----------
(In thousands)
Selected Operating Data:
Total interest and dividend income....................... $19,931 $18,699 $58,114 $57,718
Total interest and dividend expense...................... 9,465 9,379 27,158 27,827
------- ------- ------- -------
Net interest income................................... 10,466 9,320 30,956 29,891
Provision for loan losses................................ 650 300 950 900
------- ------- ------- -------
Net interest income after provision
for loan losses.................................... 9,816 9,020 30,006 28,991
------- ------- ------- -------
Noninterest income:
(Losses) gains on sales of securities, net............ (428) (134) 115 3,035
Other................................................. 1,778 3,106 5,755 7,373
------- ------- ------- -------
Total noninterest income........................... 1,350 2,972 5,870 10,408
------- ------- ------- -------
Noninterest expense...................................... 9,377 8,329 26,514 28,072
------- ------- ------- -------
Income before provision for income taxes.............. 1,789 3,663 9,362 11,327
Provision for income taxes............................... 573 1,135 2,996 3,511
------- ------- ------- -------
Net income............................................ $ 1,216 $ 2,528 $ 6,366 $ 7,816
======= ======= ======= =======
19
For the Nine Months
Ended
September 30,
------------------------
1999 1998
--------- ---------
(In thousands)
Condensed Cash Flow Data:
Cash flows provided by (used in) operating activities:
Net income................................................................... $ 6,366 $ 7,815
Net gains on sales of mortgage loans
and other real estate owned............................................... (440) (1,760)
Gains on sales of securities, net............................................ (115) (3,035)
Changes in operating assets and liabilities.................................. (2,878) 503
Other, net................................................................... 3,318 3,718
--------- ---------
Net cash provided by operating activities................................. $ 6,251 $ 7,241
========= =========
Cash flows provided by (used in) investing activities:
Loan originations and purchases, net of repayments........................... $(123,004) $ (63,851)
Proceeds from sales of loans................................................. 17,024 80,935
Proceeds from sales of investments and
principal payments of investments......................................... 39,552 27,750
Purchases of investments..................................................... (26,757) (61,367)
Other, net................................................................... 3,324 6,778
--------- ---------
Net cash used in investing activities........................................ $ (89,861) $ (9,755)
========= =========
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits and
mortgagors' escrow accounts............................................... $ 25,466 $ (12,471)
Net increase in short-term borrowed funds.................................... 15,232 8,226
Increase in advances from Federal Home Loan Bank............................. 42,896 35,000
--------- ---------
Net cash provided by financing activities................................. $ 83,594 $ 30,755
========= =========
20
At or For the Three Months At or For the Nine Months
Ended Ended
September 30, September 30,
------------------------------ -------------------------------
1999 1998 1999 1998
----------- ----------- ------------- ------------
Selected Operating Ratios and Other Data:
Performance Ratios:
Average yield on interest-earning assets............ 6.96% 7.29% 6.77% 7.50%
Average rate paid on interest-bearing
liabilities........................................ 3.69 4.11 3.53 4.06
Average interest rate spread........................ 3.27 3.18 3.24 3.44
Net interest margin................................. 3.66 3.63 3.60 3.88
Interest-earning assets to
interest-bearing liabilities..................... 111.53 112.35 111.53 112.35
Net interest income after provision for
loan losses to noninterest expense.............. 104.68 108.30 113.17 103.27
Noninterest expense as a percentage of
average assets................................... 3.17 3.07 3.08 3.50
Return on average assets............................ 0.41 0.93 0.74 0.97
Return on average capital........................... 4.44 10.05 7.92 10.65
Ratio of average capital to average assets.......... 9.23 9.27 9.34 9.15
Regulatory Capital Ratios:
Leverage capital ratio.............................. 9.25 9.26 9.25 9.26
Total risk-based capital ratio...................... 14.01 14.26 14.01 14.26
Asset Quality Ratios:
Nonperforming loans as a
percentage of total loans........................ 1.50 0.38 1.50 0.38
Nonperforming assets as a
percentage of total assets(1).................... 1.25 0.46 1.25 0.46
Allowance for loan losses as a
percentage of total loans........................ 1.15 1.37 1.15 1.37
Allowance for loan losses as a
percentage of nonperforming loans................ 76.74 363.08 76.74 363.08
Net loans charged-off to average
interest-earning loans........................... 0.09 -- 0.09 --
Full service offices at end of period.................. 23 23 23 23
___________________________________
(1) Nonperforming assets consist of nonperforming loans and other real estate
owned.
Comparison of Financial Condition at September 30, 1999 and December 31, 1998
Total assets increased $80.7 million, or 7.3%, to $1.19 billion at
September 30, 1999 from $1.11 billion at December 31, 1998. This increase was
primarily the result of a $104.3 million increase in net loans which was
primarily funded by increases in deposits of $27.5 million, short-term borrowed
funds of $15.2 million and advances from Federal Home Loan Bank of $42.9
million.
Deposits totalled $882.6 million at September 30, 1999, representing an
increase of $27.5 million, or 3.2%, compared to $855.1 million at December 31,
1998. The deposit growth reflects a $22.8 million, or 59.5%, increase in money
market accounts, a $3.0 million, or 1.4%, increase in savings accounts, a $6.0
million, or 15.4%, increase in demand accounts, and a $1.8 million, or 0.4%,
increase in certificates of deposit partially offset by a $6.2 million, or 5.6%
decrease in NOW accounts. The overall increase in deposits and the change in the
composition of the
21
deposit base were due primarily to the effects of broadening Savings Bank of
Manchester's deposit products offered to customers and the more aggressive
marketing and pricing of deposit products. Advances from the Federal Home Loan
Bank increased $42.9 million, or 95.3%, to $87.9 million at September 30, 1999
from $45.0 million at December 31, 1998. The Federal Home Loan Bank advances
were used primarily for the origination of residential mortgage loans.
Savings Bank of Manchester's commercial transactional repurchase accounts,
which are included in short-term borrowed funds, totalled $93.8 million, or
7.9%, of liabilities as of September 30, 1999. This was an increase of $15.1
million, or 19.2%, from the balance of $78.7 million as of December 31, 1998.
Nonperforming assets totalled $14.8 million at September 30, 1999 compared
to $3.3 million at December 31, 1998. The increase was primarily due to the
addition of a $4.3 million commercial real estate loan, which is in the process
of foreclosure, to nonaccrual status in April 1999 and the addition of four
commercial real estate loans to one borrower aggregating $6.0 million to
nonaccrual status in September 1999. Other real estate owned decreased to $1.0
million at September 30, 1999 from $1.8 million at December 31, 1998 due to
sales of properties during the 1999 period.
With respect to the four commercial real estate loans to one borrower
placed on nonaccrual status, Savings Bank of Manchester charged-off $700,000 in
September 1999 to reduce their aggregate book amount to $6.0 million as of
September 30, 1999. The charge-off was determined by management based on its
analysis of certain estimated cash flow information provided by the borrower
with respect to the collateral property. Savings Bank of Manchester has obtained
an appraisal of the property as of December 1, 1999 which indicates that the
aggregate book amount of the loans as of September 30, 1999 is realizable. Based
on the appraisal, management does not believe that any additional charge-offs
are necessary at this time. Savings Bank of Manchester is in workout
negotiations with the borrower. Should these negotiations fail, Savings Bank of
Manchester's remaining course of action would be to institute foreclosure
proceedings, which could result in additional material expense and loss to
Savings Bank of Manchester. See "Business of Savings Bank of Manchester--Lending
Activities--Construction Loans" for further information regarding this lending
relationship.
Total capital increased $4.8 million to $117.6 million at September 30,
1999 as compared to $112.8 million at December 31, 1998. This increase was due
to net income of $6.4 million for the nine months ended September 30, 1999
partially offset by a $1.6 million decrease in accumulated other comprehensive
income to $7.7 million at September 30, 1999 from $9.3 million at December 31,
1998 as a result of a decrease in the after-tax net unrealized gain on available
for sale securities.
Comparison of Operating Results for the Three Months Ended September 30, 1999
and 1998
Net Income. Net income decreased $1.3 million, or 51.9%, to $1.2 million
for the three months ended September 30, 1999 from $2.5 million for the three
months ended September 30, 1998. The decrease was primarily attributable to a
$1.2 million reduction in gains on mortgage loan sales and a $1.0 million
increase in noninterest expense partially offset by an increase in interest and
dividend income of $1.2 million. Gains on mortgage loan sales decreased for the
three months ended September 30, 1998 compared to the 1999 period because
Savings Bank of Manchester limited the sales of fixed-rate mortgages in early
1999. Savings Bank of Manchester anticipates that it will continue its strategy
of limiting the sales of fixed-rate mortgage loans.
Noninterest expense increased primarily due to increases in salaries and
benefits expense of $500,000, or 11.8%, fees and services paid of $300,000, or
34.6%, and marketing costs of $130,000, or 39.1% for the three months ended
September 30, 1999 as compared to the same period in 1998. Differences in the
timing of these payments, rather than increased costs, account primarily for the
changes between the 1998 and 1999 amounts.
22
Interest and dividend income increased for the three months ended September
30, 1999 compared to the 1998 period as a result of an increase in interest
income on loans of $1.6 million, offset by a decrease in interest and dividend
income on investments of $321,000.
Net Interest Income. Net interest income for the three months ended
September 30, 1999 increased by $1.1 million, or 12.3%, to $10.5 million for the
three months ended September 30, 1999 from $9.3 million for the three months
ended September 30, 1998. This increase was primarily due to reduced interest
expense on deposit accounts due to a lower interest rate environment which was
partially offset by higher interest expense on borrowings due to an increase in
the average balance of Federal Home Loan Bank advances. Interest and dividend
income for the three months ended September 30, 1999 and 1998 was $19.9 million
and $18.7 million, respectively. The yield on interest-earning assets was 6.96%
and 7.29% for the three months ended September 30, 1999 and 1998, respectively,
due to a lower interest rate environment in the 1999 period. Interest income on
loans increased by $1.6 million, or 10.1%, to $16.9 million for the three months
ended September 30, 1999 from $15.3 million for the same period in 1998. The
increase was attributable to an increase of $101.3 million in the average
balance of loans for the 1999 period compared to the 1998 period partially
offset by a decrease in the average yield on loans from 7.69% during the three
months ended September 30, 1998 to 7.51% during the same period in 1999 due to a
lower interest rate environment. Interest and dividend income on investment
securities decreased $321,000, or 9.5%, to $3.0 million for the three months
ended September 30, 1999 from $3.4 million for the three months ended September
30, 1998. This decrease was attributable to a $11.1 million decrease in the
average balance of investment securities to $215.0 million for the three months
ended September 30, 1999 and a 29 basis point decrease in the average yield
earned on such investments due to a lower interest rate environment.
Interest and dividend expense increased $86,000, or 0.9%, from $9.4 million
for the three-month period ended September 30, 1998 to $9.5 million for the
three-month period ended September 30, 1999. The cost of interest-bearing
liabilities decreased by 42 basis points from 4.11% for the three months ended
September 30, 1998 to 3.69% for the same period in 1999 primarily due to a lower
interest rate environment. Interest on deposits decreased $135,000, or 1.6%,
despite a $64.6 million, or 7.9%, increase in deposits from September 30, 1998
to September 30, 1999, primarily due to a 28 basis point decrease in the average
rate paid on deposits resulting from a lower interest rate environment. The
decrease in interest expense on deposits was offset by an increase of $221,000
in interest on Federal Home Loan Bank advances for the three months ended
September 30, 1999 compared to the same period in the prior year due to an
increase in the average balance of Federal Home Loan Bank advances which were
used primarily for the origination of residential mortgage loans.
Provision for Loan Losses. The provision for loan losses increased by
$350,000, or 117%, to $650,000 for the three months ended September 30, 1999
from $300,000 for the three months ended September 30, 1998. The increase in
the provision for loan losses is primarily due to an additional provision of
$500,000 taken to partially offset the $700,000 charge-off taken in connection
with the previously discussed group of loans to one borrower secured by the
retirement facility under construction in Central New England. This lending
relationship was placed on nonaccrual status in September 1999. Additionally,
in April 1999, Savings Bank of Manchester added to its nonperforming loans a
$4.3 million commercial real estate loan. Nonperforming loans totalled $13.8
million and $3.0 million at September 30, 1999 and 1998, respectively, and
represented 1.50% and 0.38% of total loans at September 30, 1999 and 1998,
respectively. At September 30, 1999 and 1998, the allowance for loan losses was
$10.6 million and $10.8 million, respectively, which represented 76.74% of
nonperforming loans and 1.15% of total loans at September 30, 1999, compared to
363.08% of nonperforming loans and 1.37% of total loans at September 30, 1998.
Savings Bank of Manchester's management assesses the adequacy of the
allowance for loan losses based on known and inherent risks in the loan
portfolio and upon management's continuing analysis of the quality of the loan
portfolio. While management believes that, based on information currently
available, Savings Bank of Manchester's allowance for loan losses is sufficient
to cover probable losses inherent in its loan portfolio at this time, no
assurances can be given that Savings Bank of Manchester's level of allowance for
loan losses will be sufficient to cover loan losses incurred by Savings Bank of
Manchester or that future adjustments to the allowance
23
for loan losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for loan losses. Management may
increase its level of allowance for loan losses as a percentage of total loans
and nonperforming loans if the level of commercial, multi-family, construction
or consumer lending as a percentage of total loan portfolio increases. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review Savings Bank of Manchester's allowance for loan
losses. These agencies may require Savings Bank of Manchester to provide
additions to the allowance based on judgments different from those of
management.
Noninterest Income. Noninterest income decreased $1.6 million, or 54.6%, to
$1.4 million for the three months ended September 30, 1999 from $3.0 million in
the same period in the prior year primarily due to a $1.2 million, or 91.3%,
reduction in gains on mortgage loan sales to $111,000 for the three months ended
September 30, 1999 from $1.3 million for the three months ended September 30,
1998 since Savings Bank of Manchester limited sales of fixed-rate mortgages in
early 1999.
Noninterest Expense. Noninterest expense for the three months ended
September 30, 1999 was $9.4 million, an increase of $1.0 million, or 12.6%,
compared to $8.3 million for the three months ended September 30, 1998. The
increase is primarily attributable to increases in salaries and benefits expense
of $500,000, or 11.8%, fees and services paid of $300,000, or 34.6%, and
marketing costs of $130,000, or 39.1% in the 1999 period. Differences in the
timing of these payments, rather than increased costs, account primarily for the
changes between the 1998 and 1999 amounts.
Provision for Income Taxes. The provision for income taxes was $573,000 and
$1.1 million for the three months ended September 30, 1999 and 1998,
respectively. The effective tax rate was 32% and 31% for the three months ended
September 30, 1999 and 1998, respectively. The 1999 effective tax rate reflects
the benefit associated with the establishment of a passive investment company
which is expected to eliminate state income taxes effective January 1, 1999. The
1998 effective tax rate reflects the effect of the gain related to the
appreciated securities contributed to the Savings Bank of Manchester Foundation,
Inc. not being subject to income taxes.
Comparison of Operating Results for the Nine Months Ended September 30, 1999 and
1998
Net Income. Net income decreased $1.4 million, or 18.6%, to $6.4 million
for the nine months ended September 30, 1999 from $7.8 million for the nine
months ended September 30, 1998. The decrease was primarily attributable to a
$2.9 million reduction in gains on sales of securities and a $1.6 million
reduction in gains on mortgage loan sales partially offset by a $1.6 million net
reduction in noninterest expense primarily related to securities contributed to
the Savings Bank of Manchester Foundation, Inc. and a $1.1 million increase in
net interest income. The reduction in the gains on sales of securities was
primarily due to a $2.3 million gain recognized in the nine months ended
September 30, 1998, resulting from funding the 1998 contribution to the Savings
Bank of Manchester Foundation, Inc. with the transfer of investment securities
owned by Savings Bank of Manchester. The gain represents the excess of the fair
value of the transferred securities over the cost basis at the date of the
transfer. Savings Bank of Manchester recognized an expense for the contribution
in an amount equal to the fair value of the securities transferred of $3.0
million in the 1998 period. There was no similar contribution made in the nine
months ended September 30, 1999. Gains on mortgage loan sales decreased for the
nine months ended September 30, 1999 compared to the 1998 period because Savings
Bank of Manchester limited the sales of fixed-rate mortgages in early 1999.
Savings Bank of Manchester anticipates that it will continue its strategy of
limiting the sales of fixed-rate mortgage loans.
Net Interest Income. Net interest income for the nine months ended
September 30, 1999 increased by $1.1 million, or 3.6%, to $31.0 million for the
nine months ended September 30, 1999 from $29.9 million for the nine months
ended September 30, 1998. This increase was primarily due to reduced interest
expense on deposit accounts due to a lower interest rate environment which was
partially offset by higher interest expense on borrowings due to an increase in
the average balance of Federal Home Loan Bank advances. Interest and dividend
income for the nine months ended September 30, 1999 and 1998 was $58.1 million
and $57.7 million, respectively. The yield on
24
interest-earning assets was 6.77% and 7.50% for the nine months ended September
30, 1999 and 1998, respectively. The reduction in the yield for the 1999 period
was due to a lower market interest rate environment. Interest income on loans
increased by $352,000, or 7.2%, to $49.0 million for the nine months ended
September 30, 1999 from $48.6 million for the same period in 1998. The increase
was attributable to an increase of $59.0 million in the average balance of loans
for the 1999 period compared to the 1998 period partially offset by a decrease
in the average yield on loans from 8.08% during the first nine months of 1998 to
7.58% during the same period in 1999 due to a lower interest rate environment.
Interest and dividend income on investment securities increased $44,000, or
0.5%, to $9.2 million for the nine months ended September 30, 1999 from $9.1
million for the nine months ended September 30, 1998. This increase was
primarily attributable to an $11.3 million increase in the average balance of
investment securities to $214.5 million for the nine months ended September 30,
1999, which was partially offset by a 29 basis point decrease in the average
yield earned on such investments due to a lower interest rate environment.
Interest expense decreased $669,000, or 2.4%, from $27.8 million for the
nine-month period ended September 30, 1998 to $27.2 million for the nine-month
period ended September 30, 1999. The cost of interest-bearing liabilities
decreased by 53 basis points from 4.06% for the nine months ended September 30,
1998 to 3.53% for the same period in 1999 primarily due to a lower interest rate
environment. Interest on deposits decreased $1.4 million, or 5.3%, despite a
$64.6 million, or 7.9%, increase in deposits from September 30, 1998 to
September 30, 1999, primarily due to a 34 basis point decrease in the average
rate paid on deposits resulting from a lower interest rate environment. The
decrease in interest expense on deposits was offset by an increase of $731,000
in interest on Federal Home Loan Bank advances for the nine months ended
September 30, 1999 compared to the same period in the prior year due to an
increase in the average balance of Federal Home Loan Bank advances which were
used primarily for the origination of residential mortgage loans.
Provision for Loan Losses. The provision for loan losses increased by
$50,000, or 5.6%, to $950,000 for the nine months ended September 30, 1999 from
$900,000 for the nine months ended September 30, 1998. The increase in the
provision for loan losses is primarily due to an additional provision of
$500,000 taken to partially offset the $700,000 charge-off against the
previously discussed group of loans to one borrower secured by the retirement
facility under construction in Central New England. This lending relationship
was placed on nonaccrual status in September 1999. Additionally, in April 1999,
Savings Bank of Manchester added to its nonperforming loans a $4.3 million
commercial real estate loan. Nonperforming loans totalled $13.8 million and
$3.0 million at September 30, 1999 and 1998, respectively, and represented 1.50%
and 0.38% of total loans at September 30, 1999 and 1998, respectively. At
September 30, 1999 and 1998, the allowance for loan losses was $10.6 million and
$10.8 million, respectively, which represented 76.74% of nonperforming loans and
1.15% of total loans at September 30, 1999 as compared to 363.08% of
nonperforming loans and 1.37% of total loans at September 30, 1998.
Noninterest Income. Noninterest income decreased $4.5 million, or 43.6%, to
$5.9 million for the nine months ended September 30, 1999 from $10.4 million in
the same period in the prior year primarily due to a decrease in gains on sales
of securities of $2.9 million, or 96.2%, from $3.0 million for the nine months
ended September 30, 1998 to $115,000 for the nine months ended September 30,
1999. The decrease was due to the 1998 contribution of appreciated securities to
the Savings Bank of Manchester Foundation, Inc. whereby Savings Bank of
Manchester recognized a $2.3 million gain which was not subject to income taxes.
However, due to the planned establishment of SBM Foundation as part of the
conversion, Savings Bank of Manchester does not intend to make further
contributions of securities to Savings Bank of Manchester Foundation, Inc. and,
therefore, it is not expected that future gains on the contribution of
appreciated securities will be recognized. There was no similar contribution of
securities during the nine months ended September 30, 1999. Gains on mortgage
loan sales decreased $1.6 million, or 76.4%, to $481,000 for the nine months
ended September 30, 1999 from $2.0 million for the nine months ended September
30, 1998 since Savings Bank of Manchester limited sales of fixed-rate mortgages
in early 1999.
25
Noninterest Expense. Noninterest expense for the nine months ended
September 30, 1999 was $26.5 million, a decrease of $1.6 million, or 6.0%,
compared to $28.1 million for the nine months ended September 30, 1998. The
decrease is primarily attributable to the $3.0 million expense associated with
the contribution of securities to the Savings Bank of Manchester Foundation,
Inc. during the nine months ended September 30, 1998 and no similar contribution
during the nine months ended September 30, 1999. This decrease was offset in
part by increased salaries of $669,000, or 6.7%, to $10.7 million for the nine
months ended September 30, 1999 from $10.0 million for the same period in 1998.
Provision for Income Taxes. The provision for income taxes was $3.0 million
and $3.5 million for the nine months ended September 30, 1999 and 1998,
respectively. The effective tax rate was 32% and 31% for the nine months ended
September 30, 1999 and 1998, respectively. The 1999 effective tax rate reflects
the benefit associated with the establishment of a passive investment company
which is expected to eliminate state income taxes effective January 1, 1999. The
1998 effective tax rate reflects the effect of the gain related to the
appreciated securities contributed to the Savings Bank of Manchester Foundation,
Inc. not being subject to income taxes.
USE OF PROCEEDS
The following table presents the estimated net proceeds of the offering,
the amount to be retained by Connecticut Bancshares, the amount to be
contributed to Savings Bank of Manchester, and the amount of Connecticut
Bancshares' loan to the employee stock ownership plan. See "Pro Forma Data" for
the assumptions used to arrive at these amounts.
9,775,000 13,225,000 15,208,750
Shares at Shares at Shares at
$10.00 $10.00 $10.00
Per Share Per Share Per Share
---------- ----------- -----------
(In thousands)
Gross proceeds.......................................................... $ 97,750 $ 132,250 $ 152,088
Less: estimated underwriting commissions and
other offering expenses.......................................... 3,979 4,469 4,750
---------- ----------- -----------
Net proceeds............................................................ $ 93,771 $ 127,781 $ 147,338
========== =========== ===========
Net proceeds to be retained by Connecticut Bancshares................... $ 46,885 $ 63,890 $ 73,669
Net proceeds to be contributed to Savings Bank of Manchester............ $ 46,886 $ 63,891 $ 73,669
Amount of loan by Connecticut Bancshares to employee
stock ownership plan................................................. $ 8,446 $ 11,426 $ 13,140
Connecticut Bancshares will purchase all of the capital stock of Savings
Bank of Manchester to be issued in the conversion in exchange for 50% of the net
proceeds of the stock offering. Receipt of the 50% of the net proceeds of the
sale of the common stock will increase Savings Bank of Manchester's capital and
will support the expansion of Savings Bank of Manchester's existing business
activities. Savings Bank of Manchester will use the funds contributed to it for
general business purposes, including, loan originations and investment in short-
to intermediate-term investment grade securities as well as government issued
mortgage-backed securities.
Connecticut Bancshares intends to loan to the employee stock ownership plan
the amount necessary for the plan to acquire an amount of shares equal to 8% of
the shares issued in the conversion, including shares issued to SBM Foundation.
Accordingly, acquisitions by the employee stock ownership plan would range
between 844,560 shares at the minimum of the offering range and 1,142,640 shares
at the maximum of the offering range. At the midpoint of the offering range,
the employee stock ownership plan would acquire 993,600, shares. If 16,425,450
shares are issued in the conversion, the employee stock ownership plan would
acquire 1,314,036 shares. The
26
employee stock ownership plan plans to acquire such amount of stock by
subscribing for 5% of the shares sold in the conversion in the stock offering
and acquiring the remaining balance of shares through open market purchases
after the completion of the conversion. For purposes of the above table, it is
assumed that any shares of common stock to be purchased by the employee stock
ownership plan in the open market will be purchased at $10.00 per share. If
there are not enough shares to satisfy the employee stock ownership plan's
subscription for shares sold in the conversion, the plan may purchase such
shares in the open market after conversion. It is anticipated that the employee
stock ownership plan loan will have a 15-year term with a fixed rate of interest
equal to the prime rate published in The Wall Street Journal on the closing date
of the conversion. The loan will be repaid primarily from Savings Bank of
Manchester's contributions to the employee stock ownership plan and from any
dividends paid on shares of common stock held by the employee stock ownership
plan.
The remaining net proceeds retained by Connecticut Bancshares will
initially be invested primarily in short- to intermediate-term investment grade
securities. Connecticut Bancshares may also use the funds it retains to support
future expansion of operations or diversification into other banking or
financial services related businesses and for other business or investment
purposes. However, there are no specific plans, arrangements, agreements or
understandings, written or oral, regarding any expansion activities.
Connecticut Bancshares may also use available funds to repurchase shares of
common stock and for the payment of dividends, subject to any limitations set
forth in applicable laws and regulations. Following the conversion, the Board of
Directors will have the authority to adopt plans that meet statutory and
regulatory requirements for repurchases of common stock. Since Connecticut
Bancshares has not yet issued stock, there currently is insufficient information
upon which an intention to repurchase stock could be based and consequently, no
such intention currently exists. The Board of Directors will consider many facts
and circumstances in determining whether to repurchase stock in the future.
These factors include market and economic factors such as the price at which the
stock is trading in the market, the volume of trading, the attractiveness of
other investment alternatives in terms of the rate of return and risk involved
in the investment, the ability to increase the book value and/or earnings per
share of the remaining outstanding shares, and the ability to improve
Connecticut Bancshares' return on equity. The avoidance of dilution to
stockholders by not having to issue additional shares to cover the exercise of
stock options or to fund employee stock benefit plans is another factor that
will be considered. The Board of Directors will also consider any other
circumstances in which repurchases would be in the best interests of Connecticut
Bancshares and its stockholders.
Before undertaking any stock repurchases, the Board of Directors must
determine that both Connecticut Bancshares and Savings Bank of Manchester will
be capitalized in excess of all applicable regulatory requirements after any
repurchases and that capital will be adequate, taking into account, among other
things, Savings Bank of Manchester's level of nonperforming and classified
assets, Connecticut Bancshares' and Savings Bank of Manchester's current and
projected results of operations and asset/liability structure, the economic
environment and tax and other regulatory considerations. For a discussion of
the regulatory limitations applicable to stock repurchases, see "The Conversion-
- -Restrictions on Repurchase of Stock."
Except as described above, neither Connecticut Bancshares nor Savings Bank
of Manchester has specific plans for the investment of the proceeds of this
offering. For a discussion of management's business reasons for undertaking the
conversion, see "The Conversion--Reasons for the Conversion."
27
DIVIDEND POLICY
General
Connecticut Bancshares' Board of Directors intends to adopt a policy of
paying regular cash dividends after the conversion, but has not decided the
exact amount or range of amounts that may be paid, when the payments may begin
or the frequency of any payments. In addition, the Board of Directors may
declare and pay periodic special cash dividends in addition to, or in lieu of,
regular cash dividends. When deciding whether to declare or pay any dividends,
whether regular or special, the Board of Directors will take into account the
amount of the net proceeds retained by Connecticut Bancshares, Connecticut
Bancshares' financial condition, results of operations, tax considerations,
capital requirements, industry standards, and economic conditions. The Board of
Directors will also consider the regulatory restrictions discussed below that
affect the payment of dividends by Savings Bank of Manchester to Connecticut
Bancshares. Connecticut Bancshares is also subject to Delaware law, which
generally limits dividends to an amount equal to the excess of the net assets of
a company (the amount by which total assets exceed total liabilities) over
statutory capital, or if there is no excess, to the company's net profits for
the current and/or immediately preceding fiscal year. In order to pay cash
dividends, however, Connecticut Bancshares must have available cash either from
the net proceeds raised in the conversion and retained by Connecticut
Bancshares, borrowings by Connecticut Bancshares, dividends received from
Savings Bank of Manchester or earnings on Connecticut Bancshares' assets. No
assurances can be given that any dividends, either regular or special, will be
declared or paid, or if declared and paid, what the amount of dividends will be
or whether they will continue uninterrupted.
Regulatory Restrictions
Dividends from Connecticut Bancshares may partially depend upon receipt of
dividends from Savings Bank of Manchester because Connecticut Bancshares will
initially have no source of income other than dividends from Savings Bank of
Manchester and earnings from the investment of the net proceeds from the
offering retained by Connecticut Bancshares. Savings Bank of Manchester, as a
Connecticut-chartered savings bank, must also comply with Connecticut law when
considering paying a dividend. Unless specifically approved by the Connecticut
Banking Commissioner, Connecticut law limits all cash dividends declared by a
bank in any calendar year to the total of net profits for that year and retained
net profits for the preceding two years. Net profits are defined as the
remainder of all earnings from current operations. Subject to the approval of
the Connecticut Banking Commissioner, stock dividends may be declared and paid
up to the amount of the bank's surplus earnings. In addition, Savings Bank of
Manchester may not declare or pay a cash dividend on its capital stock if the
effect would be to reduce its regulatory capital below the amount required for
the liquidation account to be established under the plan of conversion and below
amounts required to be maintained by the Federal Deposit Insurance Corporation.
See "The Conversion--Effects of Conversion to Stock Form--Liquidation Account."
Tax Considerations
In addition to the foregoing, retained earnings of Savings Bank of
Manchester appropriated to bad debt reserves and previously deducted for federal
income tax purposes cannot be used to pay cash dividends to Connecticut
Bancshares without the payment of federal income taxes by Savings Bank of
Manchester at the then current income tax rate on the amount deemed distributed,
which would include the amounts of any federal income taxes relating to the
distribution. See "Federal and State Taxation of Income--Federal Income
Taxation." Connecticut Bancshares does not contemplate any distribution by
Savings Bank of Manchester that would result in a recapture of its bad debt
reserve or create the above-mentioned federal tax liabilities.
28
MARKET FOR COMMON STOCK
Because Connecticut Bancshares and Savings Bank of Manchester have not
issued capital stock to the public, no established market for the common stock
exists. Connecticut Bancshares expects to receive approval to have its common
stock quoted on the Nasdaq National Market under the trading symbol "SBMC" upon
completion of the conversion. To receive that approval, Connecticut Bancshares
must satisfy various conditions, including selling the stock and meeting certain
listing criteria. There can be no assurance that the common stock will be able
to meet the applicable listing criteria to maintain its quotation on the Nasdaq
National Market or that an active and liquid trading market will develop or, if
developed, will be maintained. No assurance can be given that an investor will
be able to resell the common stock at or above the purchase price of the common
stock after the conversion. See "Risk Factors--Connecticut Bancshares cannot
assure or guarantee an active trading market for the common stock."
29
CAPITALIZATION
The following table presents the historical capitalization of Connecticut
Bankshares, M.H.C. at August 31, 1999, and the pro forma capitalization of
Connecticut Bancshares after giving effect to the assumptions listed under "Pro
Forma Data," based on the sale of the number of shares of common stock indicated
in the table. Pro forma capitalization does not reflect the issuance of
additional shares under the proposed stock-based incentive plan. A change in
the number of shares to be issued in the conversion may materially affect pro
forma capitalization.
Connecticut Bancshares Pro Forma
Capitalization Based Upon the Sale of
-----------------------------------------------------
15% Above
Minimum of Maximum of Minimum of
Estimated Estimated Estimated
Valuation Valuation Valuation
Range Range Range
------------------ ---------------- -----------
Connecticut
Bankshares, M.H.C. 9,775,000 13,225,000 15,208,750
Capitalization Shares at Shares at Shares at
as of $10.00 $10.00 $10.00
August 31, 1999 Per Share Per Share Per Share
------------------- ------------------ ---------------- -----------
(In thousands)
Deposits (1).......................................... $ 887,322 $ 887,322 $ 887,322 $ 887,322
Short-term borrowed funds............................. 97,847 97,847 97,847 97,847
Advances from Federal Home Loan Bank.................. 66,899 66,899 66,899 66,899
---------- ---------- ----------- -----------
Total deposits and borrowed funds..................... $1,052,068 $1,052,068 $ 1,052,068 $ 1,052,068
========== ========== =========== ===========
Stockholders' equity:
Preferred stock:
1,000,000 shares, $.01 par value per share,
authorized; none issued or outstanding....... $ -- $ -- $ -- $ --
Common stock:
45,000,000 shares, $.01 par value per share,
authorized; specified number of shares
assumed to be issued and outstanding (2)..... -- 106 143 164
Additional paid-in capital............................ -- 93,665 127,638 147,173
Surplus............................................... 14,957 14,957 14,957 14,957
Undivided profits (3)................................. 94,852 94,852 94,852 94,852
Net unrealized gain on available for sale securities.. 7,825 7,825 7,825 7,825
Plus:
Contribution to foundation......................... -- 7,820 10,580 12,167
Less:
Expense of contribution to foundation (4).......... -- (7,820) (10,580) (12,167)
Plus:
Tax benefit of contribution to foundation (4)...... -- 2,502 3,386 3,893
Less:
Common stock acquired by employee
stock ownership plan (5)........................ -- (8,446) (11,426) (13,140)
Common stock to be acquired by stock-based
incentive plan (6).............................. -- (4,223) (5,713) (6,570)
---------- ---------- ----------- -----------
Total stockholders' equity............................ $ 117,634 $ 201,238 $ 231,662 $ 249,154
========== ========== =========== ===========
_______________________
(1) Withdrawals from deposit accounts for the purchase of common stock are not
reflected. Withdrawals to purchase common stock will reduce pro forma
deposits by the amounts of the withdrawals.
(2) After conversion, Savings Bank of Manchester's authorized capital will
consist solely of 10,000 shares of common stock, without par value, 1,000
shares of which will be issued to Connecticut Bancshares, and 1,000 shares
of preferred stock, without par value, none of which will be issued in
connection with the conversion.
(3) Undivided profits are restricted by applicable regulatory capital
requirements. Additionally, Savings Bank of Manchester will be prohibited
from paying any dividend that would reduce its regulatory capital below the
amount in the liquidation account, which will be established for the
benefit of its eligible depositors as of July 31, 1998 at the time of the
conversion and decreased subsequently as these account holders reduce their
balances or cease to be depositors. See "The Conversion--Effects of
Conversion to Stock Form--Liquidation Account."
(4) Represents the expense and tax benefit, net of tax, of the contribution of
common stock to SBM Foundation based on an estimated tax rate of 32%. The
realization of the tax benefit is limited annually to 10% of Connecticut
Bancshares' annual taxable income. However, for federal tax and state
purposes, Connecticut Bancshares can carry forward any unused portion of
the deduction for five years following the year in which the contribution
is made.
(5) Assumes that 8% of the common stock issued in the conversion will be
acquired by the employee stock ownership plan in the conversion and in the
open market after the conversion at $10.00 per share with funds borrowed
from Connecticut Bancshares. The employee stock ownership plan intends to
purchase 5% of the shares sold in the conversion in the stock offering and
will acquire the remaining percentage through open market purchases after
the completion of the conversion. Under generally accepted accounting
principles, the amount of common stock to be purchased by the employee
stock ownership plan represents unearned compensation and is, accordingly,
reflected as a reduction of capital. As shares are released to employee
stock ownership plan participants' accounts, a corresponding reduction in
the charge against capital will occur. See "Management of Savings Bank of
Manchester--Benefits--Employee Stock Ownership Plan."
(6) Assumes the purchase in the open market at $10.00 per share, under the
proposed stock-based incentive plan, of a number of shares equal to 4% of
the shares of common stock issued in the conversion. The shares are
reflected as a reduction of stockholders' equity. See "Risk Factors--
Issuance of shares for benefit program may lower your ownership interest,"
"Pro Forma Data" and "Management of Savings Bank of Manchester--Benefits--
Stock-Based Incentive Plan." The stock-based incentive plan will be
submitted to stockholders for approval at a meeting following the
conversion.
30
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
The following table presents Savings Bank of Manchester's historical and
pro forma capital position relative to its regulatory capital requirements at
August 31, 1999. The amount of capital infused into Savings Bank of Manchester
for purposes of the following table is 50% of the net proceeds of the offering.
For purposes of the table, the amount expected to be borrowed by the employee
stock ownership plan and the cost of the shares expected to be awarded under the
stock-based incentive plan as restricted stock are deducted from pro forma
regulatory capital. For a discussion of the assumptions underlying the pro forma
capital calculations presented below, see "Use of Proceeds," "Capitalization"
and "Pro Forma Data." The definitions of the terms used in the table are those
provided in the capital regulations issued by the Federal Deposit Insurance
Corporation. For a discussion of the capital standards applicable to Savings
Bank of Manchester, see "Regulation and Supervision--Federal Regulations--
Capital Requirements."
Savings Bank of Manchester Pro Forma Regulatory Capital
Compliance at August 31, 1999 Based Upon the Sale of
-------------------------------------------------------------------
15% Above
Minimum of Maximum of Maximum of
Savings Bank Estimated Estimated Estimated
of Manchester Valuation Range Valuation Range Valuation Range
-------------------- --------------------- --------------------
Historical at 9,775,000 Shares 13,225,000 Shares 15,208,750 Shares
August 31, 1999(1) at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share
-------------------- -------------------- --------------------- --------------------
Percent of Percent of Percent of Percent of
Adjusted Adjusted Adjusted Adjusted
Total Total Total Total
Amount Assets (2) Amount Assets Amount Assets Amount Assets
-------- ----------- -------- ---------- -------- ---------- -------- ----------
(Dollars in thousands)
Generally accepted accounting
principles capital ........... $117,634 9.95% $151,851 12.40% $164,385 13.26% $172,592 13.74%
======== ===== ======== ===== ======== ===== ======== =====
Leverage Capital:
Capital level (3) ............ $106,665 9.34% $140,882 11.89% $153,416 12.78% $160,623 13.29%
Requirement .................. 45,672 4.00 47,378 4.00 47,999 4.00 48,356 4.00
-------- ----- -------- ----- -------- ----- -------- -----
Excess ....................... $ 60,993 5.34% $ 93,504 7.89% $105,417 8.78% $112,267 9.29%
======== ===== ======== ===== ======== ===== ======== =====
Total Risk-Based Capital:
Total risk-based capital (4) . $116,835 14.37% $151,052 18.10% $163,586 19.47% $171,793 20.18%
Requirement .................. 65,040 8.00 66,746 8.00 67,367 8.00 67,723 8.00
-------- ----- -------- ----- -------- ----- -------- -----
Excess ....................... $ 51,795 6.37% $ 84,306 10.10% $ 96,219 11.43% $103,070 12.18%
======== ===== ======== ===== ======== ===== ======== =====
____________________
(1) Includes $50,000 in cash held by Connecticut Bankshares, M.H.C. that will
be added to Savings Bank of Manchester's capital upon conversion.
(2) Leverage capital levels are shown as a percentage of adjusted total assets
of $1.2 billion. Risk-based capital levels are shown as a percentage of
risk-weighted assets of $813.0 million.
(3) A portion of the net unrealized gains on available-for-sale investment
securities accounts for the difference between generally accepted
accounting principles capital and leverage capital.
(4) Percentage represents total core and supplementary capital divided by total
risk-weighted assets. Assumes net proceeds are invested in assets that
carry a 50% risk-weighting.
31
PRO FORMA DATA
The plan of conversion requires that the common stock must be sold at a
price equal to the estimated market value of Connecticut Bancshares and Savings
Bank of Manchester, as converted, based upon an independent appraisal by RP
Financial, LC. The estimated valuation range as of October 22, 1999, and updated
as of December 31, 1999, is from a minimum of $97.8 million to a maximum of
$132.3 million with a midpoint of $115.0 million. At a price per share of
$10.00, this results in a minimum number of shares of 9,775,000, a maximum
number of shares of 13,225,000 and a midpoint number of shares of 11,500,000.
The actual net proceeds from the sale of the common stock cannot be
determined until the conversion is completed. However, net proceeds indicated in
the following tables are based upon the following assumptions:
(1) All shares of common stock will be sold in the subscription and direct
community offerings;
(2) Sandler O'Neill will receive a fee equal to 1.50% of the aggregate
purchase price of the shares sold in the subscription and direct
community offerings, except that no fee will be paid with respect to
shares purchased by the employee benefit plans, and any officers,
employees or directors of Savings Bank of Manchester or Connecticut
Bancshares or members of their immediate families. See "The
Conversion--Plan of Distribution for the Subscription, Direct
Community and Syndicated Community Offerings"; and
(3) Conversion expenses, excluding the 1.50% fee paid to Sandler O'Neill,
will total approximately $2.6 million regardless of the number of
shares sold in the conversion.
Actual expenses may vary from this estimate, and the fees paid will depend
upon whether a syndicate of broker-dealers or other means is necessary to sell
the shares, and other factors.
Connecticut Bancshares and Savings Bank of Manchester prepared the
following pro forma data with the assistance of RP Financial. The following
tables summarize the historical net income and capital of Connecticut
Bankshares, M.H.C. and the pro forma net income and stockholders' equity of
Connecticut Bancshares at and for the eight months ended August 31, 1999 and at
and for the year ended December 31, 1998. Pro forma net income for the eight
months ended August 31, 1999 has been calculated as if the conversion was
completed on January 1, 1999 and the estimated net proceeds had been invested at
5.11% beginning on that date, which represents the one-year U.S. Treasury Bill
yield as of August 31, 1999. Pro forma net income for the year ended December
31, 1998 has been calculated as if the conversion was completed on January 1,
1998 and the estimated net proceeds had been invested at 4.52% beginning on that
date, which represents the one-year U.S. Treasury Bill yield as of December 31,
1998.
A pro forma after-tax return of 3.47% and 3.07% is used for both
Connecticut Bancshares and Savings Bank of Manchester for the eight months ended
August 31, 1999 and the year ended December 31, 1998, respectively, after giving
effect to a combined federal and state income tax rate of 32%. Historical and
pro forma per share amounts have been calculated by dividing historical and pro
forma amounts by the number of shares of common stock indicated in the table.
When reviewing the following tables you should consider the following:
. The final column gives effect to the sale of an additional 1,983,750
shares in the conversion, which may be issued without any further
notice if RP Financial increases its appraisal to reflect the results
of this offering, changes in the financial condition or results of
operations of Savings Bank of Manchester or changes in market
conditions after the date of the appraisal. See "The Conversion--
Stock Pricing and Number of Shares to be Issued."
32
. Since funds on deposit at Savings Bank of Manchester may be withdrawn
to purchase shares of common stock, the amount of funds available for
investment will be reduced by the amount of withdrawals for stock
purchases. The pro forma tables do not reflect withdrawals from
deposit accounts.
. Historical per share amounts have been computed as if the shares of
common stock expected to be issued in the conversion had been
outstanding at January 1, 1998 or January 1, 1999, as applicable.
However, neither historical nor pro forma stockholders' equity has
been adjusted to reflect the investment of the estimated net proceeds
from the sale of the shares in the conversion, the additional employee
stock ownership plan expense or the proposed stock-based incentive
plan.
. Pro forma stockholders' equity ("book value") represents the
difference between the stated amounts of Savings Bank of Manchester's
assets and liabilities. The amounts shown do not reflect the
liquidation account, which will be established for the benefit of
eligible depositors as of July 31, 1998, or the federal income tax
consequences of the restoration to income of Savings Bank of
Manchester's special bad debt reserves for income tax purposes, which
would be required in the unlikely event of liquidation. See "Federal
and State Taxation of Income" and "The Conversion--Effects of
Conversion to Stock Form." The amounts shown for book value do not
represent fair market values or amounts available for distribution to
stockholders in the unlikely event of liquidation.
. The amounts shown as pro forma stockholders' equity per share do not
represent possible future price appreciation or depreciation of
Connecticut Bancshares' common stock.
. The amounts shown do not account for the shares to be reserved for
issuance upon the exercise of stock options that may be granted under
the proposed stock-based incentive plan, which requires stockholder
approval at a meeting following the conversion.
The following pro forma data, which are based on Connecticut Bankshares,
M.H.C.'s capital at August 31, 1999, and net income for the year ended December
31, 1998 and for the eight months ended August 31, 1999, may not represent the
actual financial effects of the conversion or the operating results of
Connecticut Bancshares after the conversion. The pro forma data rely
exclusively on the assumptions outlined above. The pro forma data do not
represent the fair market value of Connecticut Bancshares' common stock, the
current fair market value of Savings Bank of Manchester's or Connecticut
Bancshares' assets or liabilities, or the amount of money that would be
available for distribution to stockholders if Connecticut Bancshares is
liquidated after the conversion.
The following tables assume that SBM Foundation is funded as part of the
conversion and therefore gives effect to the issuance of authorized but unissued
shares of Connecticut Bancshares common stock to the SBM Foundation. The
valuation range accounts for the dilutive impact of the issuance of shares to
the SBM Foundation.
33
At or For the Eight Months Ended
August 31, 1999
---------------------------------------------
15% Above
Minimum of Maximum of Maximum of
Estimated Estimated Estimated
Valuation Valuation Valuation
Range Range Range
---------------------------------------------
9,775,000 13,225,000 15,208,750
Shares Shares Shares
at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share
---------------------------------------------
(Dollars in thousands, except per share
amounts)
Gross proceeds...................................................................... $ 97,750 $ 132,250 $ 152,088
Plus: shares issued to the foundation (equal to 8% of the shares
issued in the conversion)........................................................ 7,820 10,580 12,167
----------- ----------- -----------
Pro forma market capitalization..................................................... $ 105,570 $ 142,830 $ 164,255
=========== =========== ===========
Gross proceeds...................................................................... $ 97,750 $ 132,250 $ 152,088
Less: estimated expenses........................................................... (3,979) (4,469) (4,750)
----------- ----------- -----------
Estimated net proceeds.............................................................. 93,771 127,781 147,338
Less: common stock acquired by employee stock ownership plan....................... (8,446) (11,426) (13,140)
Less: common stock to be acquired by stock-based incentive plan.................... (4,223) (5,713) (6,570)
----------- ----------- -----------
Net investable proceeds.......................................................... $ 81,102 $ 110,642 $ 127,628
=========== =========== ===========
Pro Forma Net Income:
Number of shares used to calculate pro forma net income per share................... 9,749,976 13,191,144 15,169,816
Pro forma net income (1):
Historical....................................................................... $ 6,255 $ 6,255 $ 6,255
Pro forma income on net investable proceeds...................................... 1,879 2,563 2,957
Less: pro forma employee stock ownership plan adjustments (2)................... (255) (345) (397)
Less: pro forma stock-based incentive plan adjustments (3)...................... (383) (518) (596)
----------- ----------- -----------
Pro forma net income.......................................................... $ 7,496 $ 7,955 $ 8,219
=========== =========== ===========
Pro forma net income per share (1):
Historical....................................................................... $ 0.64 $ 0.47 $ 0.41
Pro forma income on net investable proceeds...................................... 0.19 0.19 0.19
Less: pro forma employee stock ownership plan adjustments (2)................... (0.03) (0.03) (0.03)
Less: pro forma stock-based incentive plan adjustments (3)...................... (0.04) (0.04) (0.04)
----------- ----------- -----------
Pro forma net income per share (4)............................................ $ 0.76 $ 0.59 $ 0.53
=========== =========== ===========
Pro Forma Stockholders' Equity:
Number of shares used to calculate pro forma stockholders' equity
per share........................................................................ 10,557,000 14,283,000 16,425,450
Pro forma stockholders' equity (book value) (1):
Historical....................................................................... $ 117,634 $ 117,634 $ 117,634
Estimated net proceeds........................................................... 93,771 127,781 147,338
Plus: stock issued to the foundation............................................. 7,820 10,580 12,167
Less: stock contribution to the foundation....................................... (7,820) (10,580) (12,167)
Plus: tax benefit of the contribution to the foundation.......................... 2,502 3,386 3,893
Less: common stock acquired by the employee stock ownership plan................. (8,446) (11,426) (13,140)
Less: common stock acquired by stock-based incentive plan (3).................... (4,223) (5,713) (6,570)
----------- ----------- -----------
Pro forma stockholders' equity (4)............................................ $ 201,238 $ 231,662 $ 249,155
=========== =========== ===========
Pro forma stockholders' equity per share (1):
Historical....................................................................... $ 11.14 $ 8.24 $ 7.16
Estimated net proceeds........................................................... 8.88 8.95 8.97
Plus: tax benefit to the foundation............................................. 0.74 0.74 0.74
Less: stock contribution to foundation.......................................... (0.74) (0.74) (0.74)
Plus: tax benefit of the contribution to the foundation.......................... 0.24 0.24 0.24
Less: common stock acquired by the employee stock ownership plan................. (0.80) (0.80) (0.80)
Less: common stock acquired by stock-based incentive plan (3).................... (0.40) (0.40) (0.40)
----------- ----------- -----------
Pro forma stockholders' equity per share...................................... $ 19.06 $ 16.23 $ 15.17
=========== =========== ===========
Offering price as a percentage of pro forma stockholders' equity per share......... 52.47% 61.61% 65.92%
Offering price as a multiple of pro forma net income per share (annualized)........ 8.77x 11.30x 12.58x
34
At or For the Year Ended December 31, 1998
--------------------------------------------
15% Above
Minimum of Maximum of Maximum of
Estimated Estimated Estimated
Valuation Valuation Valuation
Range Range Range
--------------------------------------------
9,775,000 13,225,000 15,208,750
Shares Shares Shares
at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share
--------------------------------------------
(Dollars in thousands, except per share
amounts)
Gross proceeds....................................................................... $ 97,750 $ 132,250 $ 152,088
Plus: shares issued to the foundation (equal to 8% of the shares
issued in the conversion)......................................................... 7,820 10,580 12,167
----------- ----------- -----------
Pro forma market capitalization...................................................... $ 105,570 $ 142,830 $ 164,255
=========== =========== ===========
Gross proceeds....................................................................... $ 97,750 $ 132,250 $ 152,088
Less: estimated expenses............................................................ (3,979) (4,469) (4,750)
----------- ----------- -----------
Estimated net proceeds............................................................... 93,771 127,781 147,338
Less: common stock acquired by employee stock ownership plan........................ (8,446) (11,426) (13,140)
Less: common stock to be acquired by stock-based incentive plan..................... (4,223) (5,713) (6,570)
----------- ----------- -----------
Net investable proceeds........................................................... $ 81,102 $ 110,642 $ 127,628
=========== =========== ===========
Pro Forma Net Income:
Number of shares used to calculate pro forma net income per share.................... 9,768,744 13,216,536 15,199,016
Pro forma net income (1):
Historical........................................................................ $ 9,318 $ 9,318 $ 9,318
Pro forma income on net investable proceeds....................................... 2,493 3,401 3,923
Less: pro forma employee stock ownership plan adjustments (2).................... (383) (518) (596)
Less: pro forma stock-based incentive plan adjustments (3)....................... (574) (777) (894)
----------- ----------- -----------
Pro forma net income........................................................... $ 10,854 $ 11,424 $ 11,751
=========== =========== ===========
Pro forma net income per share (1):
Historical........................................................................ $ 0.95 $ 0.71 $ 0.61
Pro forma income on net investable proceeds....................................... 0.26 0.26 0.26
Less: pro forma employee stock ownership plan adjustments (2).................... (0.04) (0.04) (0.04)
Less: pro forma stock-based incentive plan adjustments (3)....................... (0.06) (0.06) (0.06)
----------- ----------- -----------
Pro forma net income per share (4)............................................. $ 1.11 $ 0.87 $ 0.77
=========== =========== ===========
Pro Forma Stockholders' Equity:
Number of shares used to calculate pro forma stockholders' equity
per share........................................................................ 10,557,000 14,283,000 16,425,450
Pro forma stockholders' equity (book value) (1):
Historical........................................................................ $ 112,807 $ 112,807 $ 112,807
Estimated net proceeds............................................................ 93,771 127,781 147,338
Plus: stock issued to the foundation.............................................. 7,820 10,580 12,167
Less: stock contribution to the foundation........................................ (7,820) (10,580) (12,167)
Plus: tax benefit of the contribution to the foundation........................... 2,502 3,386 3,893
Less: common stock acquired by the employee stock ownership plan.................. (8,446) (11,426) (13,140)
Less: common stock acquired by stock-based incentive plan (3)..................... (4,223) (5,713) (6,570)
----------- ----------- -----------
Pro forma stockholders' equity (4)............................................. $ 196,411 $ 226,835 $ 244,328
=========== =========== ===========
Pro forma stockholders' equity per share (1):
Historical........................................................................ $ 10.69 $ 7.90 $ 6.87
Estimated net proceeds............................................................ 8.88 8.95 8.97
Plus: stock issued to the foundation............................................. 0.74 0.74 0.74
Less: stock contribution to the foundation....................................... (0.74) (0.74) (0.74)
Plus: tax benefit of the contribution to the foundation........................... 0.24 0.24 0.24
Less: common stock acquired by the employee stock ownership plan.................. (0.80) (0.80) (0.80)
Less: common stock acquired by stock-based incentive plan (3)..................... (0.40) (0.40) (0.40)
----------- ----------- -----------
Pro forma stockholders' equity per share....................................... $ 18.61 $ 15.89 $ 14.88
=========== =========== ===========
Offering price as a percentage of pro forma stockholders' equity
per share......................................................................... 53.73% 62.93% 67.20%
Offering price as a multiple of pro forma net income per share....................... 9.01x 11.49x 2.99x
35
_____________________________
(1) Does not give effect to the non-recurring expense that will be recognized in
2000 as a result of the contribution of common stock to the SBM Foundation.
The following table shows the estimated after-tax expense associated with
the contribution to the foundation, as well as pro forma net income and pro
forma net income per share assuming the contribution to the foundation was
expensed during the periods presented. The pro forma data assumes that
Connecticut Bancshares will realize 100% of the income tax benefit as a
result of the contribution to the foundation based on a 32% tax rate. The
realization of the tax benefit is limited annually to 10% of Connecticut
Bancshares' annual taxable income. However, for federal and state tax
purposes, Connecticut Bancshares can carry forward any unused portion of the
deduction for five years following the year in which the contribution is
made.
15% Above
Minimum Maximum Maximum
of Estimated of Estimated of Estimated
Valuation Valuation Valuation
Range Range Range
-------------- --------------- -------------
9,775,000 13,225,000 15,208,750
Shares Shares Shares
at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share
------------- --------------- -------------
(Dollars in thousands, except per share data)
After-tax expense of contribution to foundation:
Eight months ended August 31, 1999...................... $ 5,318 $ 7,194 $ 8,274
Year ended December 31, 1998............................ 5,318 7,194 8,274
Pro forma net income (loss):
Eight months ended August 31, 1999...................... 2,178 761 (55)
Year ended December 31, 1998............................ 5,536 4,230 3,477
Pro forma net income per share:
Eight months ended August 31, 1999...................... 0.22 0.06 -
Year ended December 31, 1998............................ 0.57 0.32 0.23
(2) Assumes that the employee stock ownership plan will acquire an amount of
stock equal to 8% of the shares of common stock issued in the conversion.
The employee stock ownership plan intends to purchase 5% of the shares sold
in the conversion in the stock offering and acquire the remaining percentage
through open market purchases after the completion of the conversion.
Shares purchased in the open market are assumed to be purchased at $10.00
per share. The employee stock ownership plan will borrow the funds used to
acquire these shares from the net proceeds from the conversion retained by
Connecticut Bancshares. The amount of this borrowing, which will have an
interest rate equal to the prime rate as published in The Wall Street
Journal, which was 8.00% at August 31, 1999, has been reflected as a
reduction from gross proceeds to determine estimated net investable
proceeds. Savings Bank of Manchester intends to make contributions to the
employee stock ownership plan in amounts at least equal to the principal and
interest requirement of the debt. As the debt is paid down, stockholders'
equity will be increased. Savings Bank of Manchester's payment of the
employee stock ownership plan debt is based upon equal installments of
principal over a 15-year period, assuming a combined federal and state
income tax rate of 32%. Interest income earned by Connecticut Bancshares on
the loan to the employee stock ownership plan offsets the interest paid on
the loan by Savings Bank of Manchester. No reinvestment is assumed on
proceeds contributed to fund the employee stock ownership plan. Applicable
accounting principles require that compensation expense for the employee
stock ownership plan be based upon shares committed to be released and that
unallocated shares be excluded from earnings per share computations. The
valuation of shares committed to be released would be based upon the average
market value of the shares during the year, which, for purposes of this
calculation, was assumed to be equal to the $10.00 per share purchase price.
See "Management of Savings Bank of Manchester--Benefits--Employee Stock
Ownership Plan."
(3) Assumes that the stock-based incentive plan will acquire an amount of stock
equal to 4% the common stock issued in the conversion for award to key
employees and directors. In calculating the pro forma effect of the stock-
based incentive plan, it is assumed that the required stockholder approval
has been received, that the shares were acquired by the stock-based
incentive plan at the beginning of the respective period in open market
purchases at the $10.00 per share purchase price, that 20% of the amount
contributed was an amortized expense during the period, that the combined
federal and state income tax rate is 32%, and that stock options which may
be issued under the stock-based incentive plan are not granted or exercised.
The issuance of authorized but
36
unissued shares of the common stock instead of open market purchases would
dilute the voting interests of existing stockholders by approximately 3.85%.
For purposes of this table, shares issued under the stock-based incentive
plan vest 20% per year and compensation expense is recognized on a straight-
line basis over each vesting period. If the fair market value per share is
greater than $10.00 per share on the date shares are awarded under the
stock-based incentive plan, total stock-based incentive plan expense would
be greater. The total estimated stock-based incentive plan expense was
multiplied by 20%, which is the total percent of shares for which expense is
recognized in the first year.
The following table shows the estimated pro forma net income and
stockholders' equity per share if shares for the stock-based incentive plan
were authorized but unissued shares instead of repurchased shares. The table
also shows the estimated pre-tax stock-based incentive plan expense.
15% Above
Minimum Maximum Maximum
of Estimated of Estimated of Estimated
Valuation Valuation Valuation
Range Range Range
--------------- --------------- ---------------
9,775,000 13,225,000 15,208,750
Shares Shares Shares
at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share
--------------- --------------- ---------------
(Dollars in thousands, except per share data)
Pro forma net income per share:
Eight months ended August 31, 1999........... $ 0.73 $ 0.58 $ 0.53
Year ended December 31, 1998................. 1.07 0.84 0.75
Pro forma stockholders' equity per share:
At August 31, 1999........................... 18.72 15.99 14.98
At December 31, 1998......................... 18.28 15.66 14.69
Pre-tax stock-based incentive plan expense:
Eight months ended August 31, 1999........... 563 762 876
Year ended December 31, 1998................. 845 1,143 1,314
(4) In calculating the pro forma effect of the stock-based incentive plan, no
effect has been given for any shares that may be reserved for issuance upon
the exercise of stock options that may be granted under the stock-based
incentive plan. The number of options available under the stock-based
incentive plan will be equal to 10% of the number of shares issued in the
conversion. The issuance of authorized but unissued shares of common stock
instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 9.09%.
The following table shows the estimated pro forma net income and
stockholders' equity per share if shares for stock issued as a result of the
exercise of stock options were authorized but unissued shares instead of
repurchased shares.
15% Above
Minimum Maximum Maximum
of Estimated of Estimated of Estimated
Valuation Valuation Valuation
Range Range Range
---------------- ------------- -------------
9,775,000 13,225,000 15,208,750
Shares Shares Shares
at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share
---------------- ------------- -------------
Pro forma net income per share:
Eight months ended August 31, 1999............ $ 0.72 $ 0.57 $ 0.51
Year ended December 31, 1998.................. 1.03 0.81 0.72
Pro forma stockholders' equity per share:
At August 31, 1999........................... 18.24 15.66 14.70
At December 31, 1998......................... 17.82 15.35 14.43
37
COMPARISON OF INDEPENDENT VALUATION AND
PRO FORMA FINANCIAL INFORMATION WITH AND WITHOUT THE FOUNDATION
As set forth in the following table, if the SBM Foundation is not established
and funded as part of the conversion, RP Financial estimates that the pro forma
valuation of Connecticut Bancshares and Savings Bank of Manchester would be
greater than if the foundation is included, and would result in an increase in
the amount of common stock offered for sale in the conversion. If the foundation
is not established, there is no assurance that the appraisal prepared at that
time of conversion would conclude that the pro forma market value of Connecticut
Bancshares and Savings Bank of Manchester would be the same as the estimate set
forth in the table below. Any appraisal prepared at the time of conversion would
be based on the facts and circumstances existing at that time, including, among
other things, market and economic conditions.
The information presented in the following table is for comparative purposes
only. It assumes that the conversion was completed at August 31, 1999, based on
the assumptions set forth under "Pro Forma Data."
At the Maximim
At the Minimum of At the Maximum of as Adjusted, of
Estimated Valuation Estimated Valuation Estimated Valuation
Range Range Range
------------------------ ---------------------- -------------------------
With No With No With No
Foundation Foundation Foundation Foundation Foundation Foundation
---------- ----------- ---------- ---------- ------------- ----------
(Dollars in thousands, except per share amounts)
Estimated pro forma valuation (1)................ $ 97,750 $ 110,500 $ 132,250 $ 149,500 $ 152,088 $ 171,925
Pro forma market capitalization.................. 105,570 110,500 142,830 149,500 164,255 171,925
Total assets..................................... 1,280,485 1,291,625 1,295,696 1,308,507 1,313,189 1,327,921
Total liabilities................................ 1,064,035 1,064,035 1,064,035 1,064,035 1,064,035 1,064,035
Pro forma stockholders' equity................... 201,239 210,707 231,661 244,472 249,154 263,886
Pro forma net income (2)......................... 7,496 7,743 7,955 8,290 8,218 8,604
Pro forma stockholders' equity per share......... 19.06 19.07 16.23 16.35 15.17 15.35
Pro forma net income per share (2)............... 0.76 0.75 0.59 0.59 0.53 0.53
Pro Forma Pricing Ratios:
Offering price as a percentage of pro forma
stockholders' equity....................... 52.47% 52.44% 61.61% 61.16% 65.92% 65.15%
Offering price as a multiple of pro forma net
income per share (2)....................... 8.77x 8.89x 11.30x 11.30x 12.58x 12.58x
Offering price to assets....................... 8.24% 8.56% 11.02% 11.43% 12.51% 12.95%
Pro Forma Financial Ratios:
Return on assets (annualized).................. 0.88% 0.90% 0.92% 0.95% 0.94% 0.97%
Return on stockholders' equity (annualized).... 5.59% 5.51% 5.15% 5.09% 4.95% 4.89%
Stockholders' equity to total assets........... 15.72% 16.31% 17.88% 18.68% 18.97% 19.87%
______________________
(1) Based on independent valuation prepared by RP Financial as of October 22,
1999, and updated as of December 31, 1999.
(2) Net income and net income per share data are annualized based on the eight
month period ended August 31, 1999.
38
CONNECTICUT BANKSHARES, M.H.C. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
The following Consolidated Statements of Operations for each of the years in
the three year period ended December 31, 1998 have been audited by Arthur
Andersen LLP, independent public accountants. The report of Arthur Andersen LLP
on these Consolidated Statements of Operations appears on page F-2 of this
prospectus. Information for the eight months ended August 31, 1999 and 1998,
which is unaudited, includes all adjustments which, in the opinion of
management, are of a normal recurring nature and are necessary for a fair
presentation of these interim periods. Results for the eight months ended August
31, 1999 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1999. These statements should be read in conjunction
with the Consolidated Financial Statements and Notes and with the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus.
Eight Months Ended
August 31, Year Ended Decemebr 31,
---------------------------- ------------------------------------------
1999 1998 1998 1997 1996
------------ ----------- ----------- ----------- -----------
(Unaudited)
(In thousands)
Interest income on loans................................. $43,299 $43,736 $64,511 $63,314 $59,480
Interest and dividends on investment securities.......... 8,138 7,944 12,347 10,617 10,493
------- ------- ------- ------- -------
Total interest and dividend income................... 51,437 51,680 76,858 73,931 69,973
------- ------- ------- ------- -------
Interest and dividend expense:
Dividends on deposits................................... 22,012 23,414 34,893 34,880 33,492
Interest on borrowings.................................. 1,964 1,372 2,307 976 1,222
------- ------- ------- ------- -------
Total interest and dividend expense.................. 23,976 24,786 37,200 35,856 34,714
------- ------- ------- ------- -------
Net interest income...................................... 27,461 26,894 39,658 38,075 35,259
Provision for loan losses................................ 400 800 1,200 1,200 1,200
------- ------- ------- ------- -------
Net interest income after provision for loan losses...... 27,061 26,094 38,458 36,875 34,059
------- ------- ------- ------- -------
Noninterest income:
Service charges and fees................................ 3,632 3,537 5,448 5,120 5,104
Gains on sales of securities, net....................... 246 3,035 2,621 4,007 842
Gains on mortgage loan sales............................ 438 1,079 2,415 410 924
Gain on sale of merchant credit card operations......... -- -- -- -- 1,500
Other................................................... 1,102 1,103 1,676 1,930 627
------- ------- ------- ------- -------
Total noninterest income............................. 5,418 8,754 12,160 11,467 8,997
------- ------- ------- ------- -------
Noninterest expense:
Salaries................................................ 9,382 8,893 14,091 12,582 10,910
Pension and other employee benefits..................... 2,681 2,594 3,959 3,293 3,065
Occupancy, net.......................................... 2,180 2,083 3,162 2,929 2,480
Fees and services....................................... 2,482 2,080 3,215 2,922 2,766
Furniture and equipment................................. 2,037 1,987 2,852 2,271 1,908
Marketing............................................... 1,104 983 1,664 1,400 1,231
Foreclosed real estate expense.......................... 209 391 385 903 1,129
Net losses (gains) on sales of other real estate owned.. 41 319 (324) 404 135
Securities contributed to Savings Bank of
Manchester Foundation, Inc........................... -- 3,000 3,000 -- --
Other operating expenses................................ 3,165 3,071 5,088 4,852 4,148
------- ------- ------- ------- -------
Total noninterest expense............................ 23,281 25,401 37,092 31,556 27,772
------- ------- ------- ------- -------
Income before provision for income taxes................. 9,198 9,447 13,526 16,786 15,284
Provision for income taxes............................... 2,943 2,929 4,208 6,584 5,853
------- ------- ------- ------- -------
Net income............................................... $ 6,255 $ 6,518 $ 9,318 $10,202 $ 9,431
======= ======= ======= ======= =======
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Consolidated Financial Information" and the Consolidated Financial Statements
and related Notes appearing elsewhere in the prospectus. In addition to
historical information, the following discussion contains forward looking
statements as a result of certain factors, including those discussed in "Risk
Factors," contained elsewhere in this prospectus.
General
Savings Bank of Manchester's results of operations depend primarily on net
interest income, which is the difference between the interest income earned on
its interest-earning assets, such as loans and securities, and the interest
expense on its interest-bearing liabilities, such as deposits and borrowings.
Savings Bank of Manchester also generates non-interest income primarily from
fees charged on customers' accounts and fees earned on activities such as
investment services provided through a third party registered broker-dealer.
Gains on the sales of securities is another source of non-interest income.
Savings Bank of Manchester's non-interest expenses primarily consist of employee
compensation and benefits, occupancy expense, advertising and other operating
expenses. Savings Bank of Manchester's results of operations are also affected
by general economic and competitive conditions, notably changes in market
interest rates, government policies and regulations. Savings Bank of Manchester
exceeded all of its regulatory capital requirements at August 31, 1999.
Forward Looking Statements
This prospectus contains forward looking statements that are based on
assumptions and describe future plans, strategies, and expectations of Savings
Bank of Manchester and Connecticut Bancshares. These forward looking statements
are generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. Savings Bank of
Manchester's and Connecticut Bancshares' ability to predict results or the
actual effect of future plans or strategies is inherently uncertain. Factors
which could have a material adverse effect on the operations of Savings Bank of
Manchester and Connecticut Bancshares and their subsidiaries include, but are
not limited to, changes in interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality and composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
Savings Bank of Manchester's and Connecticut Bancshares' market area,
unanticipated delays or failures in achieving Year 2000 compliance, and changes
in relevant accounting principles. These risks and uncertainties should be
considered in evaluating forward looking statements and undue reliance should
not be placed on such statements. Savings Bank of Manchester and Connecticut
Bancshares do not undertake--and specifically disclaim any obligation--to
publicly release the result of any revisions which may be made to any forward
looking statements to reflect events or circumstances after the date of the
statements or to reflect the occurrence of anticipated or unanticipated events.
Operating Strategy
Savings Bank of Manchester is an independent, community-oriented savings
bank, delivering quality customer service and offering a wide range of deposit,
loan and investment products to its customers. In recent years, Savings Bank of
Manchester's strategy has been to enhance profitability by emphasizing the
origination of commercial real estate and business loans, increasing sources of
noninterest income and by improving operating efficiencies while managing its
capital position and limiting its credit and interest rate risk exposure. To
accomplish these objectives, Savings Bank of Manchester has sought to:
. Operate as a full service community bank.
40
. Provide superior customer service and innovative products by expanding
delivery systems through the opening of new branch offices, offering a
bank-issued credit card and debit card services, establishing Internet
banking and a call center that provides interest rate information for
deposit and loan products and other customer services.
. Increase fee income by broadening non-depository product offerings and
services, including the establishment of a relationship with a third
party registered broker-dealer to provide a wide array of investment
offerings through financial service specialists and representatives.
. Increase fee income by providing merchant credit card processing
services.
. Originate high quality commercial real estate and commercial business
loans which increase the yields earned on its overall loan portfolio,
without incurring unacceptable credit risk.
. Control credit risk by focusing on the origination of single-family,
owner-occupied residential mortgage loans and consumer loans,
consisting primarily of home equity loans and lines of credit.
. Monitor and control interest rate risk primarily by selling longer-
term fixed-rate loans as market interest rate conditions dictate, by
investing in shorter-term mortgage-backed securities and by
selectively using off-balance sheet hedging transactions.
. Invest funds in excess of loan demand primarily in mortgage-backed
securities, investment grade debt and equity mutual funds.
. Invest in technological enhancements to increase productivity and
efficiency.
Comparison of Financial Condition at August 31, 1999 and December 31, 1998
Total assets increased $73.4 million, or 6.6%, to $1.18 billion at August
31, 1999 from $1.11 billion at December 31, 1998. This increase was primarily
the result of a $92.9 million increase in net loans primarily funded by
increases in deposits of $32.2 million, short-term borrowed funds of $18.3
million and Federal Home Loan Bank borrowings of $21.9 million.
Deposits totalled $887.3 million at August 31, 1999, representing an
increase of $32.2 million, or 3.7%, compared to $855.1 million at December 31,
1998. The deposit growth primarily reflects a $20.1 million, or 52.3%, increase
in money market accounts, a $6.3 million, or 2.8%, increase in savings accounts,
a $4.4 million, or 3.9%, increase in NOW accounts, and a $3.4 million, or 0.8%,
increase in certificates of deposit. The overall increase in deposits and the
slight change in the composition of the deposit base were due primarily to the
effects of broadening Savings Bank of Manchester's deposit products offered to
customers and the more aggressive marketing and pricing of deposit products.
Advances from the Federal Home Loan Bank increased $21.9 million, or 48.7%, to
$66.9 million at August 31, 1999 from $45.0 million at December 31, 1998. The
Federal Home Loan Bank advances were used primarily for the origination of
residential mortgage loans.
Savings Bank of Manchester's commercial transactional repurchase accounts,
which are included in short-term borrowed funds, totalled $96.6 million, or
9.1%, of liabilities as of August 31, 1999. This was an increase of $17.9
million, or 22.7%, from the balance of $78.7 million as of December 31, 1998.
Nonperforming assets totalled $6.9 million at August 31, 1999 compared to
$3.3 million at December 31, 1998, representing an increase of $3.6 million, or
109%. The increase was primarily due to the addition of a $4.3 million
commercial real estate loan which is in the process of foreclosure. Although no
assurances can be given, management believes this loan is fully secured.
Excluding the effect of this loan, nonperforming assets decreased 27.4% to $2.6
million. The amount of properties held as Other Real Estate Owned decreased
from $1.8 million at
41
December 31, 1998 to $901,000 at August 31, 1999 due to sales of properties
during the 1999 period. See "Recent Developments" for a discussion of an
increase in nonperforming assets at September 30, 1999.
Total capital increased $4.8 million to $117.6 million at August 31, 1999
as compared to $112.8 million at December 31, 1998. This increase was due to
net income of $6.3 million for the eight months ended August 31, 1999 partially
offset by a $1.4 million decrease in accumulated other comprehensive income to
$7.8 million at August 31, 1999 from $9.3 million at December 31, 1998 as a
result of a decrease in the after-tax net unrealized gain on available for sale
securities.
Comparison of Financial Condition at December 31, 1998 and 1997
Total assets increased $75.2 million, or 7.3%, to $1.11 billion at December
31, 1998 as compared to $1.03 billion at December 31, 1997. This increase was a
result of increases of $36.6 million in securities available for sale due to
reinvestment of the proceeds from mortgage loan sales, $30.4 million in cash and
cash equivalents and $8.5 million in net loans. The growth in assets was funded
by growth in deposits and Federal Home Loan Bank advances. Loans increased
primarily due to an improving state and local economy, expansion of loan
products offered by Savings Bank of Manchester, increased marketing efforts and
expansion of its market area in 1998 and lower market interest rates in 1998,
which resulted in an increase in loan refinancing. The effect of loan
originations was offset by the sale of approximately $94.3 million of fixed-rate
loans in 1998.
Deposits totalled $855.1 million at December 31, 1998, representing an
increase of $27.4 million, or 3.3%, compared to $827.7 million at December 31,
1997. The deposit growth reflects an increase of $14.1 million, or 6.8%, in
savings accounts, an increase of $24.6 million, or 28.6%, in NOW accounts, and
an increase of $6.2 million, or 19.1%, in money market accounts. These
increases were partially offset by a decrease of $29.6 million, or 6.2%, in
certificates of deposit. The increase in deposits was primarily attributable to
the more aggressive marketing and pricing of deposit products. In addition,
borrowings from the Federal Home Loan Bank increased $27.0 million, or 150%, to
$45.0 million at December 31, 1998 from $18.0 million at December 31, 1997, and
were used primarily to fund the origination of loans and the purchase of U.S.
Government and agency obligation securities.
Savings Bank of Manchester's commercial transactional repurchase accounts,
which are included in short-term borrowed funds, totalled $78.7 million, or
7.9%, of liabilities as of December 31, 1998. This was an increase of $8.4
million, or 11.9%, from the balance of $70.3 million as of December 31, 1997.
Nonperforming assets totalled $3.3 million at December 31, 1998 compared to
$7.5 million at December 31, 1997, representing a decrease of $4.2 million, or
56.5%. The decrease was primarily due to a $2.9 million, or 62.6%, decrease in
the amount of other real estate owned from $4.7 million as of December 31, 1997
to $1.8 million as of December 31, 1998 and a decrease of $1.3 million, or
46.2%, in the amount of nonperforming loans from $2.8 million as of December 31,
1997 to $1.5 million as of December 31, 1998. The decrease in other real estate
owned and nonperforming loans during this period was primarily due to an
improving state and local economy and, to a lesser extent, sales of properties
during 1998 and the implementation of more focused loan collection efforts.
Total capital increased $11.6 million, or 11.5%, to $112.8 million at
December 31, 1998 compared to $101.2 million at December 31, 1997. This
increase was due to net income of $9.3 million and an increase of $2.3 million
in accumulated other comprehensive income related to unrealized gains on
available for sale securities for the year ended December 31, 1998.
42
Comparison of Operating Results for the Eight Months Ended August 31, 1999 and
1998
Net Income. Net income decreased $263,000, or 4.0%, to $6.3 million for
the eight months ended August 31, 1999 from $6.5 million for the eight months
ended August 31, 1998. The decrease was primarily attributable to a $2.8
million reduction in gains on sales of securities and a $641,000 reduction in
gains on mortgage loan sales partially offset by a $3.0 million reduction in
noninterest expense related to securities contributed to the Savings Bank of
Manchester Foundation, Inc. The reduction in the gains on sales of securities
was primarily due to a $2.3 million gain recognized in the eight months ended
August 31, 1998, resulting from funding the 1998 contribution to the foundation
with the transfer of investment securities owned by Savings Bank of Manchester.
The gain represents the excess of the fair value of the transferred securities
over the cost basis at the date of the transfer. Savings Bank of Manchester
recognized an expense for the contribution in an amount equal to the fair value
of the securities transferred of $3.0 million in the 1998 period. There was no
similar contribution made in the eight months ended August 31, 1999. Gains on
mortgage loan sales decreased for the eight months ended August 31, 1998
compared to the 1999 period because Savings Bank of Manchester limited the sales
of fixed-rate mortgages in early 1999. Savings Bank of Manchester anticipates
that it will continue its strategy of limiting the sales of fixed-rate mortgage
loans.
Net Interest Income. Net interest income for the eight months ended August
31, 1999 increased by $567,000, or 2.1%, to $27.5 million for the eight months
ended August 31, 1999 from $26.9 million for the eight months ended August 31,
1998. This increase was primarily due to reduced interest expense on deposit
accounts due to a lower interest rate environment which was offset, in part, by
higher interest expense on borrowings due to an increase in the average balance
of Federal Home Loan Bank advances. Interest and dividend income for the eight
months ended August 31, 1999 and 1998 was $51.4 million and $51.7 million,
respectively. The yield on interest-earning assets was 7.13% and 7.63% for the
eight months ended August 31, 1999 and 1998, respectively, due to a lower market
interest rate environment. Interest income on loans decreased by $437,000, or
1.0%, to $43.3 million for the eight months ended August 31, 1999 from $43.8
million for the same period in 1998. The decrease was attributable to a
decrease in the average yield on loans from 8.17% during the first eight months
of 1998 to 7.56% during the same period in 1999 due to a lower interest rate
environment. The effect of the rate decrease was partially offset by an
increase of $54.9 million in the average balance of loans for the 1999 period
compared to the 1998 period. Interest and dividend income on investment
securities increased $194,000, or 2.4%, to $8.1 million for the eight months
ended August 31, 1999 from $7.9 million for the eight months ended August 31,
1998. This increase was primarily attributable to a $9.0 million increase in
the average balance of investment securities to $207.1 million for the eight
months ended August 31, 1999, which was partially offset by a 31 basis point
decrease in the average yield earned on such investments due to a lower interest
rate environment.
Interest expense decreased $810,000, or 3.3%, from $24.8 million for the
eight-month period ended August 31, 1998 to $24.0 million for the eight-month
period ended August 31, 1999. The cost of interest-bearing liabilities
decreased by 33 basis points from 4.06% for the eight months ended August 31,
1998 to 3.73% for the same period in 1999 primarily due to a lower interest rate
environment. Interest on deposits decreased $1.4 million, or 6.0%, despite a
$63.1 million, or 7.7%, increase in deposits, primarily due to a 46 basis point
decrease in the average rate paid on deposits resulting from a lower interest
rate environment. The decrease in interest expense on deposits was offset by an
increase of $592,000 in interest on Federal Home Loan Bank advances for the
eight months ended August 31, 1999 compared to the same period in the prior year
due to an increase in the average balance of Federal Home Loan Bank advances
which were used primarily for the origination of residential mortgage loans.
Provision for Loan Losses. The provision for loan losses decreased by
$400,000, or 50%, to $400,000 for the eight months ended August 31, 1999 from
$800,000 for the eight months ended August 31, 1998. The decrease in the
provision for loan losses reflects management's assessment of the losses
inherent in the loan portfolio. During the 1999 period, Savings Bank of
Manchester added to its nonperforming loans a $4.3 million commercial real
estate loan which is in the process of foreclosure. Although no assurances can
be given, management believes this loan is fully secured. Excluding this
nonperforming loan, there was a 2% decrease in the remaining nonperforming
43
loans for the eight months ended August 31, 1999. Nonperforming loans totalled
$6.0 million and $2.6 million at August 31, 1999 and 1998, respectively, and
represented 0.65% and 0.32% of total loans at August 31, 1999 and 1998,
respectively. At August 31, 1999 and 1998, the allowance for loan losses was
$10.8 million and $10.7 million, respectively, which represented 181.00% of
nonperforming loans and 1.19% of total loans at August 31, 1999 as compared to
416.86% of nonperforming loans and 1.33% of total loans at August 31, 1998.
Savings Bank of Manchester's management assesses the adequacy of the
allowance for loan losses based on known and inherent risks in the loan
portfolio and upon management's continuing analysis of the quality of the loan
portfolio. While management believes that, based on information currently
available, Savings Bank of Manchester's allowance for loan losses is sufficient
to cover probable losses inherent in its loan portfolio at this time, no
assurances can be given that Savings Bank of Manchester's level of allowance for
loan losses will be sufficient to cover loan losses incurred by Savings Bank of
Manchester or that future adjustments to the allowance for loan losses will not
be necessary if economic and other conditions differ substantially from the
economic and other conditions used by management to determine the current level
of the allowance for loan losses. Management may increase its level of
allowance for loan losses as a percentage of total loans and nonperforming loans
if the level of commercial, multi-family, construction or consumer lending as a
percentage of total loan portfolio increases. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
Savings Bank of Manchester's allowance for loan losses. Such agencies may
require Savings Bank of Manchester to provide additions to the allowance based
on judgments different from those of management.
Noninterest Income. Noninterest income decreased $3.3 million, or 38.1%,
to $5.4 million for the eight months ended August 31, 1999 from $8.8 million in
the same period in the prior year primarily due to a decrease in gains on sales
of securities of $2.8 million, or 91.9%, from $3.0 million for the eight months
ended August 31, 1998 to $246,000 for the eight months ended August 31, 1999.
The decrease was due to the 1998 contribution of appreciated securities to the
Savings Bank of Manchester Foundation, Inc. whereby Savings Bank of Manchester
recognized a $2.3 million gain which was not subject to income taxes. However,
due to the planned establishment of SBM Foundation as part of the conversion,
Savings Bank of Manchester does not intend to make further contributions of
securities to Savings Bank of Manchester Foundation, Inc. and, therefore, it is
not expected that future gains on the contribution of appreciated securities
will be recognized. There was no similar contribution of securities during the
eight months ended August 31, 1999. Gains on mortgage loan sales decreased
$641,000, or 59.4%, to $438,000 for the eight months ended August 31, 1999 from
$1.1 million for the eight months ended August 31, 1998 since Savings Bank of
Manchester limited sales of fixed-rate mortgages in early 1999.
Noninterest Expense. Noninterest expense for the eight months ended August
31, 1999 was $23.3 million, a decrease of $2.1 million, or 8.3%, compared to
$25.4 million for the eight months ended August 31, 1998. The decrease is
primarily attributable to the $3.0 million expense associated with the
contribution of securities to the Savings Bank of Manchester Foundation, Inc.
during the eight months ended August 31, 1998 and no similar contribution during
the eight months ended August 31, 1999. This decrease was offset in part by
increased salaries of $489,000, or 5.5%, to $9.4 million for the eight months
ended August 31, 1999 from $8.9 million for the same period in 1998.
Provision for Income Taxes. The provision for income taxes was $2.9
million for each of the eight months ended August 31, 1999 and 1998. The
effective tax rate was 32% and 31% for eight months ended August 31, 1999 and
1998, respectively. The 1999 effective tax rate reflects the benefit associated
with the establishment of a passive investment company which is expected to
eliminate state income taxes effective January 1, 1999. The 1998 effective tax
rate reflects the effect of the gain related to the appreciated securities
contributed to the Savings Bank of Manchester Foundation, Inc. not being subject
to income taxes.
44
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997
Net Income. Net income decreased by $884,000, or 8.7%, to $9.3 million for
1998 from $10.2 million for 1997. The decrease was primarily attributable to a
$5.5 million increase in noninterest expense and a $1.4 million decrease in
gains on sale of securities partially offset by a $1.6 million increase in net
interest income, a $693,000 increase in noninterest income and $2.4 million
decrease in the provision for income taxes.
Net Interest Income. Net interest income increased by $1.6 million, or
4.2%, to $39.7 million for 1998 from $38.1 million for 1997. This increase was
primarily a result of higher interest income from an increase in the level of
average interest-earning assets and a decrease in the average rate paid on
interest-bearing liabilities due to a lower interest rate environment. Interest
and dividend income increased $2.9 million, or 4.0%, to $76.9 million for 1998
from $73.9 million for 1997. The average yield on interest-earning assets
declined 15 basis points to 7.54% in 1998 from 7.69% in 1997 primarily due to a
decline in market interest rates. Interest income on loans increased $1.2
million, or 1.9%, to $64.5 million for 1998, compared to $63.3 million for the
prior year. This increase was due to a $42.5 million increase in the average
balance of loans outstanding, offset by a 28 basis point decrease in the average
yield on such loans primarily due to a decline in market interest rates.
Interest and dividend income from investment securities increased $1.7 million,
or 16.3%, from $10.6 million for 1997 to $12.3 million for 1998. The increase
in interest and dividend income from investment securities was due to an
increase in the average balance of investment securities of $32.1 million, or
18.6%, to $204.1 million for the year ended December 31, 1998, and a 23 basis
point increase in the average yield.
Interest expense increased $1.3 million, or 3.7%, to $37.2 million for 1998
from $35.9 million for 1997 primarily due to an increase in interest expense on
Federal Home Loan Bank advances. The average balance of such advances was $14.1
million for 1997 and $36.5 million for 1998, an increase of $22.4 million, or
158.87%. These advances were used primarily to fund loan originations. The
average rate paid on Federal Home Loan Bank advances decreased 59 basis points
to 6.31% in 1998 from 6.90% in 1997 due to a lower market interest rate
environment. Interest on deposits remained fairly constant at approximately
$34.9 million for 1998 and 1997 due to a decrease in the average rate paid on
deposits of 16 basis points during 1998 offset by an increase in the average
balance of $31.2 million.
Provision for Loan Losses. The provision for loan losses remained constant
at $1.2 million for 1998 and 1997. The allowance for loan losses was 1.30% of
total loans and 694.55% of nonperforming loans at December 31, 1998 compared to
1.23% and 350.79%, respectively, at December 31, 1997 due to the overall
improvement of the loan portfolio.
Noninterest Income. Noninterest income totalled $12.2 million and $11.5
million for 1998 and 1997, respectively. The $693,000 increase in noninterest
income was attributable to an increase in gains on mortgage sales of $2.0
million, or 489%, to $2.4 million for 1998 from $410,000 for 1997. This
increase was attributable primarily to sales of fixed-rate residential mortgages
to manage interest rate risk in 1998. This increase was partially offset by a
decrease in gains on sale of securities of $1.4 million, or 34.6%, to $2.6
million for the year ended December 31, 1998 from $4.0 million for the year
ended December 31, 1997. The $1.4 million decrease in gains on sales of
securities was primarily due to management's decision to defer the realization
of additional gains for tax purposes.
Noninterest Expense. Noninterest expense increased by $5.5 million, or
17.5%, to $37.1 million for 1998 from $31.6 million for 1997. The increase in
noninterest expense was primarily attributable to an increase in salaries and
employee benefits of $1.5 million, or 12.0%, to $14.1 million for 1998, from
$12.6 million for 1997 resulting from a combination of additional commercial
lending staff, the development of the Merchant Services Center program,
conversion to a new computer system in late 1997, and the Year 2000 project. In
addition, 1998 noninterest expense includes a $3.0 million expense associated
with the contribution of appreciated securities to Savings Bank of Manchester
Foundation, Inc. There was no such contribution in 1997. These increases were
45
partially offset by a $518,000 decrease in foreclosed real estate expense in
1998 due primarily to reduced holding periods for foreclosed properties in 1998
compared to 1997.
Provision for Income Taxes. The provision for income taxes decreased $2.4
million to $4.2 million for 1998, compared to $6.6 million for 1997. The
effective tax rates were 31.1% and 39.2% for 1998 and 1997, respectively. The
lower effective tax rate for 1998 was primarily the result of the gain on the
securities contributed to the Savings Bank of Manchester Foundation, Inc. not
being subject to income taxes.
Comparison of Operating Results for the Years Ended December 31, 1997 and 1996
Net Income. Net income increased $771,000, or 8.2%, to $10.2 million for
1997 from $9.4 million for 1996. The increase was primarily attributable to a
$2.8 million increase in net interest income and a $2.5 million increase in
noninterest income, partially offset by a $3.8 million increase in noninterest
expense. Net income for 1996 includes a one-time gain of $1.5 million from the
assignment of an agreement related to Savings Bank of Manchester's merchant
credit card operations. Excluding this one-time gain, net income for 1996 would
have been $8.6 million, on an after-tax basis. For further information
concerning this one-time gain, see Note 10 of the Notes to Consolidated
Financial Statements included in this prospectus.
Net Interest Income. Net interest income increased by $2.8 million, or
8.0%, from $35.3 million for 1996 to $38.1 million for 1997. The increase was
primarily due to increased interest income from an increase in the average
balance of interest-earning assets combined with a decrease in interest expense
on Federal Home Loan Bank advances. Interest and dividend income increased $3.9
million, or 5.7%, to $73.9 million for 1997 from $70.0 million for 1996. The
increase in interest and dividend income was primarily attributable to a $3.8
million, or 6.4%, increase in interest income on loans to $63.3 million for the
year ended December 31, 1997 from $59.5 million in the prior year. The average
balance of loans increased $51.9 million, or 7.2%, from $723.0 million during
1996 to $774.9 million during 1997 due to the improving economy and growth in
all segments of Savings Bank of Manchester's loan portfolio. The increase in
interest income due to the increase in loan volume was augmented slightly by a
three basis point increase in the average yield earned on loans while the
average cost of funds declined slightly due to a lower interest rate
environment. Interest and dividends on investment securities increased
$124,000, or 1.2%, to $10.6 million in 1997 from $10.5 million in 1996 due to an
increase in the average balance of investment securities of $5.3 million, or
3.2%, from $166.8 million for 1996 to $172.1 million for 1997 and offset by a 18
basis point increase in the average yield earned on investment securities.
These increases were offset in part by a decrease in interest income on federal
funds sold of $210,000 from $620,000 for 1996 to $410,000 for 1997 primarily due
to a decrease in the average balance of federal funds sold.
Interest and dividend expense increased $1.2 million, or 3.3%, to $35.9
million for 1997 from $34.7 million for 1996. The increase in interest expense
was primarily attributable to a $1.4 million, or 4.1%, increase in interest
expense on deposits due to an increase in the average balance of interest-
earning deposits. Interest expense on borrowings decreased $246,000 from $1.2
million in 1996 to $976,000 in 1997. The average balance of Federal Home Loan
Bank advances decreased from $15.2 million for 1996 to $12.5 million for 1997
and the average rate paid on such advances increased 21 basis points from 7.05%
in 1996 to 7.26% in 1997. The additional Federal Home Loan Bank advances were
used primarily to fund loan growth.
Provision for Loan Losses. The provision for loan losses remained constant
at $1.2 million for 1996 and 1997. Nonperforming loans decreased as a
percentage of total loans to 0.35% at December 31, 1997 from 0.98% at December
31, 1996, because total loans increased to $808.2 million at December 31, 1997
from $741.6 million at December 31, 1996. As a result, the allowance for loan
losses represented 1.23% of total loans at December 31, 1997 and 1996, and
represented 350.79% and 125.46% of nonperforming loans at December 31, 1997 and
1996, respectively.
46
Noninterest Income. Noninterest income totalled $11.5 million and $9.0
million for 1997 and 1996, respectively. The $2.5 million increase in
noninterest income was attributable to a $3.2 million increase in gains on sales
of securities. Additionally, Savings Bank of Manchester realized a one-time
gain of $1.5 million from the assignment of an agreement related to its merchant
credit card operations. The increase in gains on sales of securities was
primarily due to management decisions to realize gains in the common stock
portfolio during 1997.
Noninterest Expense. Noninterest expense increased $3.8 million, or 13.6%,
to $31.6 million for the year ended December 31, 1997 from $27.8 million for the
year ended December 31, 1996. The increase in noninterest expense was primarily
attributable to an increase of $1.7 million in salaries and employee benefits, a
$449,000 increase in occupancy costs, and a $704,000 increase in other operating
expenses. The increase in expenses during 1997 is attributable to payroll and
other costs associated with the conversion to a new computer system in December
1997 and to branch premium amortization in 1997 related to branch acquisitions
during the latter part of 1996 which had their full expense impact in 1997.
Provision for Income Taxes. The provision for income taxes was $6.6
million for 1997 compared to $5.9 million for 1996. The effective tax rate
increased to 39.2% in 1997 from 38.3% in 1996 primarily as a result of the
benefit for tax credits from the settlement of a class action suit with the
State of Connecticut concerning investment income on federal securities which
was recorded in 1996.
47
Average Balances, Interest and Average Yields/Cost
The following table presents certain information for the periods indicated
regarding average balances of assets and liabilities, as well as the total
dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and the resulting
average yields and costs. The yields and costs for the periods indicated are
derived by dividing income or expense by the average balances of assets or
liabilities, respectively, for the periods presented. Average balances were
derived from average monthly balances. The yields and rates include fees which
are considered adjustments to yields.
For the Eight Months Ended August 31,
---------------------------------------------------------
At August 31, 1999 1999 1998
------------------------------------------------------------------------------------
Average Average
Yield/ Average Yield/ Average
Balance Rate Balance Interest Rate Balance
--------- ----- -------- --------- ------ --------
(Dollars in thousands)
Interest-earning assets:
Loans (1):
Real estate........................ $ 706,067 7.42% $ 662,459 $32,754 7.42% $ 622,961
Consumer........................... 73,054 7.87 71,163 3,641 7.67 71,109
Commercial......................... 131,362 8.31 121,004 6,904 8.56 109,886
---------- ---- ---------- ------- ------ ----------
Total loans..................... 910,483 7.36 854,626 43,299 7.60 803,956
---------- ---- ---------- ------- ------ ----------
Mortgage-backed securities (2)........ 34,620 6.97 34,846 1,531 6.59 35,213
Investment securities (3):
U.S. Government and agency
obligations..................... 67,753 5.97 67,176 2,585 5.78 61,363
Corporate securities............... 39,298 5.92 40,540 1,713 6.35 32,677
Marketable equity securities....... 42,968 2.45 42,864 688 2.41 42,724
Other equity securities............ 432 -- 412 -- -- 260
Asset-backed securities............ 19,258 5.92 21,194 883 6.26 25,881
Other interest-bearing assets:
Federal Home Loan Bank stock....... 5,909 -- 5,909 285 7.23 5,796
Federal funds sold................. 16,000 5.13 11,666 453 4.54 5,000
---------- ---- ---------- ------- ------ ----------
Total interest-earning assets... 1,136,721 6.83% 1,079,233 $51,437 7.13% 1,012,870
=======
Noninterest-earning assets............ 44,948 62,562 56,607
---------- ---------- ----------
Total assets.................... $1,181,669 $1,141,795 $1,069,477
========== ========== ==========
Interest-bearing liabilities:
Deposits:
NOW accounts....................... $ 106,482 1.38% $ 109,116 $ 1,000 1.37% $ 91,867
Savings and money market
accounts........................ 285,389 2.43 272,215 4,394 2.42 242,648
Certificates of deposits........... 449,557 5.04 443,274 14,852 5.03 469,347
Escrow deposits.................... 3,159 2.50 5,084 100 2.95 4,828
---------- ---- ---------- ------- ------ ----------
Total interest-bearing deposits. 844,587 3.69 829,689 20,346 3.68 808,690
Short-term borrowed funds............. 97,847 2.91 86,161 1,666 2.90 73,443
Advances from Federal Home
Loan Bank.......................... 66,899 6.23 48,422 1,964 6.08 32,772
---------- ---- ---------- ------- ------ ----------
Total interest-bearing
liabilities.................... 1,009,333 3.78% 964,272 $23,976 3.73% 914,905
=======
Noninterest-bearing liabilities....... 54,702 62,390 49,638
---------- ---------- ----------
Total liabilities............... 1,064,035 1,026,662 964,543
Capital............................... 117,634 115,133 104,934
---------- ---------- ----------
Total liabilities and capital... $1,181,669 $1,141,795 $1,069,477
========== ========== ==========
Net interest-earning assets........... $ 127,388 $ 120,204 $ 101,745
========== ========== ==========
Net interest income................... $27,461
=======
Interest rate spread (4).............. 3.40%
Net interest margin (5)............... 3.81%
Ratio of interest-earning assets to
interest-bearing liabilities....... 112.46%
1998
----------------------------
Average
Yield/
Interest Rate
------------- -------------
Interest-earning assets:
Loans (1):
Real estate........................... $33,078 7.96%
Consumer.............................. 3,873 8.17
Commercial............................ 6,785 9.26
------- ------
Total loans........................ 43,736 8.16
------- ------
Mortgage-backed securities (2)........... 1,616 6.88
Investment securities (3):
U.S. Government and agency
obligations........................ 2,353 5.76
Corporate securities.................. 1,451 6.67
Marketable equity securities.......... 876 3.08
Other equity securities............... -- --
Asset-backed securities............... 1,128 6.54
Other interest-bearing assets:
Federal Home Loan Bank stock.......... 275 7.12
Federal funds sold.................... 245 5.19
------- ------
Total interest-earning assets...... $51,680 7.63%
=======
Noninterest-earning assets
Total assets........................
Interest-bearing liabilities:
Deposits:
NOW accounts.......................... $ 844 1.38%
Savings and money market
accounts........................... 3,876 2.40
Certificates of deposits.............. 17,134 5.48
Escrow deposits....................... 118 3.67
------- ------
Total interest-bearing deposits.... 21,972 4.08
Short-term borrowed funds................ 1,442 2.95
Advances from Federal Home
Loan Bank............................. 1,372 6.28
------- ------
Total interest-bearing
liabilities....................... $24,786 4.06%
=======
Noninterest-bearing liabilities..........
Total liabilities..................
Capital..................................
Total liabilities and capital......
Net interest-earning assets..............
Net interest income...................... $26,894
=======
Interest rate spread (4)................. 3.57%
Net interest margin (5).................. 3.97%
Ratio of interest-earning assets to
interest-bearing liabilities.......... 111.12%
_____________________________________________
(1) Balances are net of undisbursed proceeds of construction loans and include
none performing loans.
(2) Includes mortgage-backed securities available for sale and held to maturity
(3) Includes investment securities available for sale at market value and held
to maturity at amortized cost.
(4) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
48
For the Year Ended December 31,
--------------------------------------------------------------------------------
1998 1997
------------------------------------- -----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
--------- -------- ------- ------- -------- ----
(Dollars In thousands)
Interest-earning assets:
Loans (1):
Real estate.......................... $ 621,751 $48,338 7.77% $ 597,902 $47,713 7.98%
Consumer............................. 71,132 5,780 8.13 68,768 5,842 8.50
Commercial........................... 110,158 10,393 9.43 104,705 9,759 9.32
---------- ------- ------ ---------- ------- ------
Total loans....................... 803,041 64,511 8.03 771,375 63,314 8.21
---------- ------- ------ ---------- ------- ------
Mortgage-backed securities (2).......... 35,762 2,392 6.69 31,087 2,186 7.03
Investment securities (3):
U.S. Government and agency
obligations....................... 65,637 3,813 5.81 50,149 2,892 5.77
Corporate securities................. 34,960 2,266 6.48 27,557 1,721 6.25
Marketable equity securities......... 42,066 1,373 3.26 37,265 1,375 3.69
Other equity securities.............. 302 -- -- 192 -- --
Asset-backed securities.............. 25,419 1,650 6.49 25,824 1,683 6.52
Other interest-bearing assets:
Federal Home Loan Bank stock......... 5,831 369 6.33 5,512 350 6.35
Federal funds sold................... 6,846 484 5.03 5,115 410 5.13
---------- ------- ------ ---------- ------- ------
Total interest-earning assets..... 1,019,864 $76,858 7.54% 954,076 $73,931 7.75%
======= =======
Noninterest-earning assets.............. 59,199 50,195
---------- ----------
Total assets...................... $1,079,063 $1,004,271
========== ==========
Interest-bearing liabilities:
Deposits:
NOW accounts......................... $ 94,394 $ 1,299 1.38% $ 80,445 $ 1,101 1.37%
Savings and money market
accounts.......................... 248,915 5,982 2.40 238,132 5,644 2.37
Certificates of deposit.............. 463,226 25,138 5.43 471,865 26,219 5.56
Escrow deposits...................... 5,092 176 3.46 5,290 171 3.23
---------- ------- ------ ---------- ------- ------
Total interest-bearing
deposits......................... 811,627 32,595 4.02 795,732 33,135 4.16
Short-term borrowed funds............... 76,523 2,298 3.00 61,677 1,745 2.83
Advances from Federal Home
Loan Bank............................ 36,534 2,307 6.31 14,144 976 6.90
---------- ------- ------ ---------- ------- ------
Total interest-bearing
liabilities...................... 924,684 $37,200 4.02% 871,553 $35,856 4.11%
======= =======
Noninterest-bearing liabilities......... 47,865 37,398
---------- ----------
Total liabilities................. 972,549 908,951
Capital................................. 106,514 95,320
---------- ----------
Total liabilities and capital..... $1,079,063 $1,004,271
========== ==========
Net interest-earning assets............. $ 94,018 $ 89,310
========== ==========
Net interest income..................... $39,658 $38,075
======= =======
Interest rate spread (4)................ 3.52% 3.58%
Net interest margin (5)................. 3.89% 3.96%
Ratio of interest-earning assets
to interest-bearing liabilities...... 110.17% 110.25%
For the Year Ended December 31,
--------------------------------------
1996
--------------------------------------
Average
Average Yield/
Balance Interest Rate
-------------- -------- -------
Interest-earning assets:
Loans (1):
Real estate......................... $ 569,230 $45,317 7.96%
Consumer............................ 65,257 5,431 8.32
Commercial.......................... 92,889 8,732 9.40
--------- ------- ------
Total loans...................... 727,376 59,480 8.18
--------- ------- ------
Mortgage-backed securities (2)......... 32,496 2,338 7.19
Investment securities (3):
U.S. Government and agency
obligations...................... 42,280 2,285 5.40
Corporate securities................ 38,379 2,384 6.21
Marketable equity securities........ 32,798 1,117 3.41
Other equity securities............. 194 -- --
Asset-backed securities............. 20,668 1,407 6.81
Other interest-bearing assets:
Federal Home Loan Bank stock........ 5,290 340 6.43
Federal funds sold.................. 9,985 622 4.94
--------- ------- ------
Total interest-earning assets.... 909,466 $69,973 7.69%
=======
Noninterest-earning assets............. 35,965
---------
Total assets..................... $945,431
=========
Interest-bearing liabilities:
Deposits:
NOW accounts........................ $ 71,657 $ 1,030 1.44%
Savings and money market
accounts......................... 236,433 5,495 2.32
Certificates of deposit............. 448,918 25,071 5.58
Escrow deposits..................... 5,101 173 3.39
--------- ------- ------
Total interest-bearing
deposits........................ 762,109 31,769 4.17
Short-term borrowed funds.............. 59,833 1,723 2.88
Advances from Federal Home
Loan Bank........................... 15,319 1,222 7.98
--------- ------- ------
Total interest-bearing
liabilities..................... 837,261 $34,714 4.15%
=======
Noninterest-bearing liabilities........ 26,001
---------
Total liabilities................ 863,262
Capital................................ 82,169
---------
Total liabilities and capital.... $ 945,431
=========
Net interest-earning assets............ $ 79,334
=========
Net interest income.................... $35,259
=======
Interest rate spread (4)............... 3.48%
Net interest margin (5)................ 3.85%
Ratio of interest-earning assets
to interest-bearing liabilities....... 109.48%
______________________________
(1) Balances are net of undisbursed proceeds of construction loans in process
and include nonperforming loans.
(2) Includes mortgage-backed securities available for sale at market value and
held to maturity at amortized cost.
(3) Includes investment securities available for sale and held to maturity.
(4) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of interest-
bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
49
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on
the interest income and interest expense of Savings Bank of Manchester. The rate
column shows the effects attributable to changes in rate (changes in rate
multiplied by prior volume). The volume column shows the effects attributable to
changes in volume (changes in volume multiplied by prior rate). The net column
represents the sum of the prior columns. For purposes of this table, changes
attributable to changes in both rate and volume, which cannot be segregated,
have been allocated proportionately based on the absolute value of the change
due to rate and the change due to volume.
Eight Months Ended Year Ended Year Ended
August 31, 1999 December 31, 1998 December 31, 1997
Compared to Compared to Compared to
Eight Months Ended Year Ended Year Ended
August 31, 1998 December 31, 1997 December 31, 1996
-------------------------------- ------------------------------ -----------------------------
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
--------------------- --------------------- -------------------
Rate Volume Net Rate Volume Net Rate Volume Net
---------- --------- --------- --------- ---------- ------- ------- ---------- --------
(In thousands)
Interest-earning assets:
Loans:
Real estate................ $(3,448) $3,124 $ (324) $(1,254) $1,879 $ 625 $ 111 $2,285 $2,396
Consumer................... (295) 63 (232) (258) 196 (62) 116 295 411
Commercial................. (843) 962 119 123 511 634 (79) 1,106 1,027
------- ------ ------- ------- ------ ------- ----- ------ ------
Total loans............. (4,586) 4,149 (437) (1,389) 2,586 1,197 148 3,686 3,834
Mortgage-backed
securities................. (82) (3) (85) (115) 322 207 (53) (100) (153)
Investment securities......... (406) 685 279 (143) 1,666 1,523 (97) 374 277
------- ------ ------- ------- ------ ------- ----- ------ ------
Total interest-earning
assets.................. (5,074) 4,831 (243) (1,647) 4,574 2,927 (2) 3,960 3,958
------- ------ ------- ------- ------ ------- ----- ------ ------
Interest-bearing liabilities:
Deposits:
Demand accounts............ (43) 199 156 7 191 198 (52) 123 71
Savings accounts........... (46) 546 500 219 124 343 99 48 147
Certificates of deposit.... (1,484) (798) (2,282) (607) (474) (1,081) (130) 1,278 1,148
Other...................... (92) 316 224 120 433 553 (31) 53 22
------- ------ ------- ------- ------ ------- ----- ------ ------
Total deposits......... (1,665) 263 (1,402) (261) 274 13 (114) 1,502 1,388
Advances from Federal Home
Loan Bank.................. (228) 820 592 (148) 1,479 1,331 (159) (87) (246)
------- ------ ------- ------- ------ ------- ----- ------ ------
Total interest-bearing
liabilities.......... (1,893) 1,083 (810) (409) 1,753 1,344 (273) 1,415 1,142
------- ------ ------- ------- ------ ------- ----- ------ ------
Increase (decrease) in net
interest income...... $(3,181) $3,748 $ 567 $(1,238) $2,821 $ 1,583 $ 271 $2,545 $2,816
======= ====== ======= ======= ====== ======= ===== ====== ======
Management of Interest Rate Risk and Market Risk Analysis
Qualitative Aspects of Market Risk. Savings Bank of Manchester's most
significant form of market risk is interest rate risk. The principal objectives
of Savings Bank of Manchester's interest rate risk management are to evaluate
the interest rate risk inherent in certain balance sheet accounts, determine the
level of risk appropriate given its business strategy, operating environment,
capital and liquidity requirements and performance objectives, and manage the
risk consistent with its established policies. Savings Bank of Manchester has
an Asset/Liability Committee, responsible for reviewing its asset/liability
policies and interest rate risk position, which meets quarterly and reports
trends and interest rate risk position to the Executive Committee of the Board
of Directors and the Board of Directors on a quarterly basis. The extent of the
movement of interest rates is an uncertainty that could have a negative impact
on the earnings of Savings Bank of Manchester.
50
In recent years, Savings Bank of Manchester has managed interest rate risk
by:
(1) emphasizing the origination of adjustable-rate loans and generally
selling longer term fixed-rate loans as market interest rate
conditions dictate;
(2) originating variable rate commercial real estate loans and prime rate
commercial business loans;
(3) emphasizing shorter-term consumer loans including home equity lines of
credit indexed to the prime rate, as reported in The Wall Street
Journal;
(4) maintaining a high quality securities portfolio that provides adequate
liquidity and flexibility to take advantage of opportunities that may
arise from fluctuations in market interest rates, the overall maturity
and duration of which is monitored in relation to the repricing of its
loan portfolio;
(5) promoting lower cost liability accounts such as demand deposits and
business repurchase accounts;
(6) using Federal Home Loan Bank advances to better structure maturities
of its interest rate sensitive liabilities; and
(7) selectively utilizing off-balance sheet hedging transactions, such as
interest rate swaps and caps.
Savings Bank of Manchester's market risk also includes equity price risk.
Savings Bank of Manchester's marketable equity securities portfolio had gross
unrealized gains of $14.2 million and gross unrealized losses of $1.5 million at
August 31, 1999 which are included, net of taxes, in accumulated other
comprehensive income, a separate component of Savings Bank of Manchester's
capital. If equity security prices decline due to unfavorable market conditions
or other factors, Savings Bank of Manchester's capital would decrease.
Savings Bank of Manchester's investment policy authorizes it to be a party
to financial instruments with off-balance sheet risk in the normal course of
business to reduce its exposure to fluctuations in interest rates. These
financial instruments include interest rate cap agreements. Interest rate cap
agreements generally involve the payment of a premium in return for cash
receipts if interest rates rise above or fall below a specified interest rate
level. Payments are based on a notional principal amount. Caps generally are
not readily available for time periods longer than five years. Savings Bank of
Manchester's objective in using interest rate caps is to reduce risk associated
with adverse rate volatility while enabling Savings Bank of Manchester to
benefit from favorable interest rate movements. All counter-parties to cap
arrangements must be pre-approved by Savings Bank of Manchester's Executive
Committee and reported to its Investment Committee. At August 31, 1999, the
notional principal amount of Savings Bank of Manchester's outstanding interest
rate cap agreement was $25 million. Under the terms of the cap agreement,
Savings Bank of Manchester paid a premium totalling $123,000 which is included
in other assets and being amortized over three years which is the term of the
agreement. Amortization for the eight months ended August 31, 1999 totalled
$24,000 and is recorded as an interest expense on advances. The agreement
provides that, if the London Interbank Offered Rate exceeds 7%, Savings Bank of
Manchester receives cash payments on a quarterly basis. There were no cash
payments due at August 31, 1999. Savings Bank of Manchester was not a party to
any interest rate cap arrangements during the years ended December 31, 1998,
1997 and 1996.
Quantitative Aspects of Market Risk. The matching of assets and
liabilities may be analyzed by examining the extent to which such assets and
liabilities are "interest rate sensitive" and by monitoring a bank's interest
rate sensitivity "gap." An asset or liability is said to be interest rate
sensitive within a specific time period if it will mature or reprice within that
time period. The interest rate sensitivity gap is defined as the difference
between the amount of interest-earning assets maturing or repricing within a
specific time period and the amount of interest-bearing liabilities maturing or
repricing within that same time period. At August 31, 1999, Savings Bank of
51
Manchester's one-year gap position, the difference between the amount of
interest-earning assets maturing or repricing within one year and interest-
bearing liabilities maturing or repricing within one year, was 0.89%. A gap is
considered positive when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. Accordingly, during a
period of rising interest rates, Savings Bank of Manchester, having a positive
gap position, would be in a better position to invest in higher yielding assets
which, consequently, may result in the yield on its assets increasing at a pace
that more closely matches the increase in the cost of interest-bearing
liabilities than if it had a negative gap. During a period of falling interest
rates, an institution with a positive gap would tend to have its assets
repricing at a faster rate than one with a negative gap, which consequently, may
tend to restrain the growth of its net income or result in a decrease in
interest income.
The following table sets forth the amount of interest-earning assets and
interest-bearing liabilities outstanding at August 31, 1999, which are
anticipated by Savings Bank of Manchester, based upon certain assumptions, to
reprice or mature in each of the future time periods shown. Except as stated
below, the amount of assets and liabilities shown which reprice or mature during
a particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The table sets
forth an approximation of the projected repricing of assets and liabilities at
August 31, 1999, on the basis of contractual maturities, anticipated
prepayments, and scheduled rate adjustments within a series of time intervals.
For loans on residential mortgages, adjustable-rate loans, and fixed-rate loans,
prepayment rates were assumed to range from 1% to 50% annually. Mortgage-
related securities were assumed to prepay at rates between 4% and 14% annually.
Investment securities, which include callable federal agency obligations, are
presented based on stated maturities. NOW accounts were assumed to decay at
15%, 15%, 15%, 15%, 15% and 25%, respectively, for each of the following
periods: one year, one to two years, two to three years, three to four years,
four to five years and over five years. Noninterest-bearing demand deposit
accounts and savings accounts were assumed to decay at 10%, 10%, 10%, 10%, 10%
and 50%, respectively, for each of the following periods: one year, one to two
years, two to three years, three to four years, four to five years, and over
five years. Money market accounts were assumed to decay at 40%, 30%, 20%, 10%,
0% and 0%, respectively, for each of the following periods: one year, one to
two years, two to three years, three to four years, four to five years, and over
five years. Prepayment of deposit rates can have a significant impact on
Savings Bank of Manchester's estimated gap. While Savings Bank of Manchester
believes such assumptions to be reasonable, there can be no assurance that
assumed prepayment rates and decay rates will approximate actual future loan
repayment and deposit withdrawal activity. See "Business of Savings Bank of
Manchester--Lending Activities," "--Investment Activities" and "--Deposit
Activities and Other Sources of Funds."
52
At August 31, 1999
---------------------------------------------------------------------------------------------
More than More than More than More than
One Year Two Years Three Years Four Years
One Year to to to to Total More Than Fair
or Less Two Years Three Years Four Years Five Years Amount Five Years Value
--------- --------- ----------- ----------- ---------- ------ ---------- ----------
(Dollars in thousands)
Interest-earning assets:
Securities (1):
Investment securities (2)..... $ 52,439 $ 40,585 $ 17,223 $ 12,996 $ 9,579 $ 9,487 $ 142,309 $ 142,297
Mortgage-related securities... 7,954 4,869 3,621 3,091 2,643 12,442 34,620 33,887
Equity securities (3)......... 1,264 1,944 1,831 1,400 421 42,449 49,309 49,309
-------- -------- -------- -------- -------- ---------- ---------- ----------
Total securities........... 61,657 47,398 22,675 17,487 12,643 64,378 226,238 225,493
-------- -------- -------- -------- -------- ---------- ---------- ----------
Loans............................ 435,672 97,782 78,107 67,359 69,951 161,612 910,483 912,103
-------- -------- -------- -------- -------- ---------- ---------- ----------
Total interest-earning assets. $497,329 $145,180 $100,782 $ 84,846 $ 82,594 $ 225,990 $1,136,721 $1,137,596
======== ======== ======== ======== ======== ========== ========== ==========
Interest-bearing liabilities:
Money market accounts............ $ 23,382 $ 17,537 $ 11,690 $ 5,846 $ -- $ -- $ 58,455 $ 58,455
Savings accounts................. 22,693 22,693 22,693 22,693 22,693 113,469 226,934 226,934
Escrow accounts.................. 3,159 -- -- -- -- -- 3,159 3,153
NOW accounts..................... 15,972 15,972 15,973 15,972 15,972 26,621 106,482 106,482
Certificates of deposit.......... 345,528 39,926 21,850 23,050 19,203 -- 449,557 449,375
Advances from Federal
Home Loan Bank................ 36,899 -- -- -- -- 30,000 66,899 65,786
Short-term borrowed funds........ 39,140 29,354 19,569 9,784 -- -- 97,847 97,847
-------- -------- -------- -------- -------- ---------- ---------- ----------
Total interest-bearing
liabilities................ $486,773 $125,482 $ 91,775 $ 77,345 $ 57,868 $ 170,090 $1,009,333 $1,008,032
======== ======== ======== ======== ======== ========== ========== ==========
Interest-earning assets less
interest-bearing liabilities.. $ 10,556 $ 19,698 $ 9,007 $ 7,501 $ 24,726 $ 55,900 $ 127,388
Cumulative interest-rate
sensitivity gap............... $ 10,556 $ 30,254 $ 39,261 $ 46,762 $ 71,488 $ 127,388
Cumulative interest-rate gap as
a percentage of total assets.. 0.89% 2.56% 3.32% 3.96% 6.05% 10.78%
Cummulative interest-rate gap
as a percentage of total
interest-earning assets....... 0.89% 2.66% 3.45% 4.11% 6.29% 11.21%
Cumulative interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities................... 102.17% 104.94% 105.58% 105.98% 108.52% 112.62%
Cumulative interest-earning
assets........................ $497,329 $642,509 $743,291 $827,137 $910,731 $1,136,721
Cumulative interest-bearing
liabilities................... $486,773 $612,255 $704,030 $781,375 $839,243 $1,009,333
_______________________
(1) Includes available for sale at market value and held to maturity at
amortized cost.
(2) Includes Federal funds sold.
(3) Includes Federal Home Loan Bank stock.
53
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations
of a short-term nature. Savings Bank of Manchester further defines liquidity as
the ability to respond to the needs of depositors and borrowers as well as
maintaining the flexibility to take advantage of investment opportunities.
Primary sources of funds consist of deposit inflows, loan repayments,
maturities, paydowns, and sales of investment and mortgage-backed securities and
borrowings from the Federal Home Loan Bank of Boston. While maturities and
scheduled amortization of loans and securities are predictable sources of funds,
deposit outflows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition.
Savings Bank of Manchester's primary investing activities are (1)
originating residential one-to four-family mortgage loans and, to a lesser
extent, commercial business and real estate loans, multi-family loans, single-
family construction loans, home equity loans and lines of credit and consumer
loans and (2) investing in mortgage-backed securities, U.S. Government and
agency obligations and corporate equity securities and debt obligations. These
activities are funded primarily by principal and interest payments on loans,
maturities of securities, deposit growth and Federal Home Loan Bank of Boston
advances. During the eight months ended August 31, 1999 and the years ended
December 31, 1998 and 1997, Savings Bank of Manchester's loan originations
totalled $268.6 million, $377.6 million, and $291.9 million, respectively. At
August 31, 1999 and December 31, 1998 and 1997, Savings Bank of Manchester's
investments in mortgage-backed securities, U.S. Government and agency
obligations and corporate equity securities and debt obligations totalled $138.5
million, $151.2 million and $112.2 million, respectively. Savings Bank of
Manchester experienced a net increase in total deposits of $32.2 million, $27.4
million and $34.9 million for the eight months ended August 31, 1999 and the
years ended December 31, 1998 and 1997, respectively, primarily as a result of
retail and commercial programs designed to attract deposits. Deposit flows are
affected by the overall level of interest rates, the interest rates and products
offered by Savings Bank of Manchester and its local competitors and other
factors. Savings Bank of Manchester closely monitors its liquidity position on a
daily basis. If Savings Bank of Manchester should require funds beyond its
ability to generate them internally, additional sources of funds are available
through Federal Home Loan Bank advances and through repurchase agreement
borrowing facilities.
Outstanding commitments for all loans and unadvanced construction loans and
lines of credit totalled $184.8 million at August 31, 1999. Management of
Savings Bank of Manchester anticipates that it will have sufficient funds
available to meet its current loan commitments. Certificates of deposit that
are scheduled to mature in one year or less from August 31, 1999 totalled $343.7
million. Savings Bank of Manchester relies primarily on competitive rates,
customer service, and long-standing relationships with customers to retain
deposits. Occasionally, Savings Bank of Manchester will also offer special
competitive promotions to its customers to increase retention and promote
deposit growth. Based upon Savings Bank of Manchester's historical experience
with deposit retention, management believes that, although it is not possible to
predict future terms and conditions upon renewal, a significant portion of such
deposits will remain with Savings Bank of Manchester.
Savings Bank of Manchester must satisfy to various regulatory capital
requirements administered by the federal banking agencies including a risk-based
capital measure. The risk-based capital guidelines include both a definition of
capital and a framework for calculating risk-weighted assets by assigning
balance sheet assets and off-balance sheet items to broad risk categories. At
August 31, 1999, Savings Bank of Manchester exceeded all of its regulatory
capital requirements with a leverage capital level of $106.7 million, or 9.34%
of average assets, which is above the required level of $45.7 million, or 4%,
and risk-based capital of $116.8 million, or 14.37% of risk weighted assets,
which is above the required level of $65.0 million, or 8%. Savings Bank of
Manchester is considered "well capitalized" under regulatory guidelines.
The capital from the conversion will significantly increase liquidity and
capital resources. Over time, the initial level of liquidity will be reduced as
net proceeds are used for general corporate purposes, including the funding of
lending activities. Savings Bank of Manchester's financial condition and
results of operations will be enhanced by the capital from the conversion,
resulting in increased net interest-earning assets and net income. However, due
to the large increase in equity resulting from the capital injection, return on
equity will be adversely
54
impacted following the conversion. See "Risk Factors--Savings Bank of
Manchester's lower than average return on equity may decrease the market price
of the common stock."
Year 2000 Readiness
The Year 2000 issue refers to the potential failure of computer systems and
applications as a result of programs using only two digits to identify a year in
the date field. If not corrected, many computer systems and applications could
fail or create erroneous results by, at or after the Year 2000. Savings Bank of
Manchester established a Year 2000 team to evaluate and assess Savings Bank of
Manchester's exposure to Year 2000 issues and developed a plan consisting of
five phases. These phases include awareness, risk assessment, renovation,
validation or testing, and implementation.
The awareness phase consisted of defining the Year 2000 problem, developing
the necessary resources to perform compliance testing, establishing a Year 2000
program team, and developing an overall strategy that encompasses in-house
systems, service bureaus, vendors, customers and suppliers. Savings Bank of
Manchester substantially completed the awareness phase of the Year 2000 project
in March 1998.
The assessment phase required Savings Bank of Manchester to evaluate the
size and complexity of the problem and detail the magnitude of the effort
necessary to address Year 2000 issues. The objective of this phase was to
identify all hardware, software, networks, automated teller machines, other
various processing platforms and customer and vendor dependencies affected by
the Year 2000 date change. The assessment phase went beyond information systems
and included environmental systems that are dependent on embedded microchips,
such as security systems, elevators, sprinkler systems, alarms and vaults. The
assessment phase was substantially completed in September 1998, but is
continually monitored by Savings Bank of Manchester.
Savings Bank of Manchester maintains an internal computer system for its
operating functions and a substantial majority of Savings Bank of Manchester's
data processing is provided by a core banking software system that is supported
by a third party vendor. Savings Bank of Manchester recognizes that its ability
to be Year 2000 compliant is dependent upon the cooperation of its vendors and
other third parties. Savings Bank of Manchester is requiring its computer
systems and software vendors to represent that the products provided are or will
be Year 2000 compliant and have planned a program for testing for compliance.
Savings Bank of Manchester utilizes these representations from its computer
system and software vendors for the purpose of determining the vendors' Year
2000 readiness. Upon receiving such representations, Savings Bank of Manchester
then determines the need for replacement of or remediations to each particular
vendor's system. Rather than solely relying on representations from its
vendors, Savings Bank of Manchester independently tests both critical and non-
critical vendor applications. Savings Bank of Manchester has received
representations from its primary third party data processing vendor confirming
the Year 2000 compliance of that vendor's internally developed programs.
Remaining internal and external programs have been converted to Year 2000
compliant versions. Savings Bank of Manchester began testing the core banking
system renovated programs in November 1998. Savings Bank of Manchester has
completed testing of its critical vendors' computer applications and believes
that all identified Year 2000 issues have been addressed. Management believes
that all remaining Year 2000 testing, including testing of non-critical systems,
has been completed and any problems identified have been addressed.
The renovation phase includes the remediation of any systems identified in
the awareness phase as not Year 2000 compliant. For institutions relying on
outside servicers or third-party software providers, ongoing discussions and
monitoring of vendor progress is necessary. Savings Bank of Manchester completed
activities related to the renovation phase in July 1999. Most of Savings Bank of
Manchester's systems are vendor supplied or supported and are being remediated
by the vendors. Savings Bank of Manchester's primary software vendor has
provided Savings Bank of Manchester with a Year 2000 ready release that has been
installed. This release has been tested and validated by Savings Bank of
Manchester.
55
Savings Bank of Manchester has substantially completed its validation or
testing phase with the primary focus being on the core software that runs basic
banking applications. Testing of mission critical systems was substantially
completed as of January 1999. Further testing with mission critical vendors and
other significant third party vendors was completed by July 1999. To date,
Savings Bank of Manchester has not identified any Year 2000 problems with any of
its systems that would have a material adverse impact upon its operations.
Testing will continue as needed on newly acquired applications and vendor
upgrades. In addition, Savings Bank of Manchester has designated an internal
independent group to validate the test plan and test results. The validation was
completed by July 1999 without any material exceptions.
The implementation phase is the final Year 2000 activity. Only after
passing the validation phase where the hardware and software have been tested
and where the tests have been validated will the hardware and software be
certified as implemented and placed in service for the year 2000. If any system
fails the certification test, Savings Bank of Manchester will assess the impact
and implement the contingency plan developed for that application. Savings Bank
of Manchester's primary internal technological systems, including the core
processing system, teller equipment, and local area network have already been
placed in service. All critical systems have been implemented.
Savings Bank of Manchester has also identified and contacted commercial
borrowers that may be vulnerable to the Year 2000 date change and has also
provided brochures to its customers to make them aware of the Year 2000 issue.
Savings Bank of Manchester has determined that Year 2000 readiness issues have
little or no impact on Savings Bank of Manchester's one- to four-family lending
relationships. However, Savings Bank of Manchester views Year 2000 compliance
as an integral part of the commercial loan credit analysis and underwriting
process. Therefore, and as warranted by the type and nature of a particular
loan request, Savings Bank of Manchester reviews and assesses the impact of Year
2000 on an applicant's business and any factors that may limit the applicant's
ability to repay the debt. Additionally, an assessment is made on the potential
effect that vendors, suppliers and customers, who fail to remediate Year 2000
risks, might have on the applicant's business. Based upon the results of the
review and analysis, a determination is then made as to whether or not it is
necessary to require the applicant to develop a formal program to address Year
2000 issues and to report the progress of such a program to Savings Bank of
Manchester. In situations that warrant formal programs and monitoring, this
requirement becomes a condition of the terms for granting the loan.
Additionally, Savings Bank of Manchester has completed its efforts to contact
and survey all of its existing commercial borrowers with lending relationships
having aggregate exposure exceeding $250,000. The majority of credits
represented by these relationships are comprised of multi-family and commercial
real estate loans. All borrowers in this category responded to a comprehensive
questionnaire either in writing or by telephone. Based upon the responses and
analysis of the type of business operations that each borrower conducts, Savings
Bank of Manchester concluded that the effect of Year 2000 issues on these
credits do not pose a material risk to Savings Bank of Manchester.
Savings Bank of Manchester has budgeted approximately $3.8 million in
connection with the costs associated with achieving Year 2000 compliance. As of
August 31, 1999, Savings Bank of Manchester had expended approximately $3.7
million on Year 2000 issues.
The impact of Year 2000 on Savings Bank of Manchester will depend not only
on corrective actions taken by Savings Bank of Manchester, but also on the way
in which Year 2000 issues are addressed by parties that provide services or data
to, or receive services or data from, Savings Bank of Manchester, or whose
financial condition or operational capability is important to Savings Bank of
Manchester. To reduce this exposure, Savings Bank of Manchester has an ongoing
process of identifying and contacting mission critical third-party vendors and
other significant third-party vendors to determine their Year 2000 plans and
target dates. Notwithstanding Savings Bank of Manchester's efforts, there can be
no assurance that mission critical third-party vendors or other significant
third-party vendors will adequately address their Year 2000 issues.
56
Savings Bank of Manchester has developed contingency plans for
implementation in the event that mission critical third party vendors fail to
adequately address Year 2000 issues. The contingency plans involve identifying
alternate vendors or internal remediation. There can be no assurance that these
plans will eliminate any failures or problems. Furthermore, there may be certain
mission critical third parties, such as utilities and telecommunications
companies, where alternate arrangements or sources are limited or unavailable.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented in this
prospectus have been prepared in conformity with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation. Unlike many
industrial companies, substantially all of the assets and liabilities of Savings
Bank of Manchester are monetary in nature. As a result, interest rates have a
more significant impact on Savings Bank of Manchester's performance than the
general level of inflation. Over short periods of time, interest rates may not
necessarily move in the same direction or in the same magnitude as inflation.
Impact of New Accounting Standards
Accounting for Derivative Instruments and Hedging Activities. Effective
January 1, 1999, Connecticut Bankshares, M.H.C. adopted Statement of Financial
Accounting Standards ("SFAS") No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise, an amendment of SFAS No. 65." This statement
requires that after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities shall classify the resulting
mortgage-backed securities or other retained interests based on its ability and
intent to sell or hold those investments. The adoption had no effect on
Connecticut Bankshares, M.H.C.'s financial condition or results of operations.
In June 1998, the Financial Accounting Standards Board ("FASB")issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the statement of operations and requires that an entity formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. This statement was amended by SFAS No. 137, "Accounting for
Derivatives and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133." As a result, SFAS No. 133 will be effective in 2001 for
Connecticut Bancshares. Management does not expect that the adoption of this
statement will have a material impact on Connecticut Bancshares' financial
position or results of operations.
BUSINESS OF CONNECTICUT BANKSHARES, M.H.C.
Connecticut Bankshares, M.H.C. is a mutual holding company that was created
when Savings Bank of Manchester reorganized into the mutual holding company form
of organization in 1996. Connecticut Bankshares, M.H.C. is registered with the
Federal Reserve Board as a bank holding company under the Bank Holding Company
Act of 1956, as amended. Since the formation of Connecticut Bankshares, M.H.C.,
it has owned 100% of Savings Bank of Manchester's outstanding capital stock.
After consummation of the conversion, Connecticut Bankshares, M.H.C. will cease
to exist.
In addition to the capital stock of Savings Bank of Manchester, Connecticut
Bankshares, M.H.C.'s assets consist of $50,000 in cash as of August 31, 1999.
Connecticut Bankshares, M.H.C. is subject to regulation and supervision by the
Federal Reserve Bank and the Connecticut Department of Banking. At the present
time, Connecticut Bankshares, M.H.C. does not employ any persons other than
certain officers who are also officers of Savings Bank of Manchester but uses
the support staff of Savings Bank of Manchester from time to time.
57
BUSINESS OF CONNECTICUT BANCSHARES
General
Connecticut Bancshares was organized as a Delaware business corporation at
the direction of Savings Bank of Manchester in October 1999 to become the
holding company for Savings Bank of Manchester upon completion of the
conversion. As a result of the conversion, Savings Bank of Manchester will be a
wholly owned subsidiary of Connecticut Bancshares, which will own all of the
issued and outstanding capital stock of Savings Bank of Manchester.
Business
Before the completion of the conversion, Connecticut Bancshares will not
engage in any significant activities other than of an organizational nature.
Upon completion of the conversion, Connecticut Bancshares' business activity
will be the ownership of the outstanding capital stock of Savings Bank of
Manchester and management of the investment of offering proceeds retained from
the conversion. In the future, Connecticut Bancshares may acquire or organize
other operating subsidiaries; however, there are no current plans, arrangements,
agreements or understandings, written or oral, to do so.
Initially, Connecticut Bancshares will neither own nor lease any property
but will instead use the premises, equipment and other property of Savings Bank
of Manchester with the payment of appropriate rental fees, as required by
applicable law and regulations.
Since Connecticut Bancshares will hold the outstanding capital stock of
Savings Bank of Manchester after the conversion, the competitive conditions
applicable to Connecticut Bancshares will be the same as those confronting
Savings Bank of Manchester. See "Business of Savings Bank of Manchester--
Competition."
BUSINESS OF SAVINGS BANK OF MANCHESTER
General
Savings Bank of Manchester was founded in 1905 as a Connecticut-chartered
mutual savings bank. In 1996, Savings Bank of Manchester converted to stock
form as part of the Connecticut Bankshares, M.H.C. mutual holding company
formation. Savings Bank of Manchester is regulated by the Connecticut
Department of Banking and the Federal Deposit Insurance Corporation. Savings
Bank of Manchester's deposits are insured to the maximum allowable amount by the
Bank Insurance Fund of the Federal Deposit Insurance Corporation. Savings Bank
of Manchester has been a member of the Federal Home Loan Bank System since 1977.
Savings Bank of Manchester is a traditional savings association that
accepts retail deposits from the general public in the areas surrounding its 23
full-service banking offices and uses those funds, together with funds generated
from operations and borrowings, to originate residential mortgage loans,
commercial loans and consumer loans, primarily home equity loans and lines of
credit. Savings Bank of Manchester primarily holds the loans that it originates
for investment. However, Savings Bank of Manchester also sells loans, primarily
fixed-rate mortgage loans, in the secondary market, while generally retaining
the servicing rights. See "--Lending Activities." Savings Bank of Manchester
also invests in mortgage-backed securities, debt and equity securities and other
permissible investments. Savings Bank of Manchester's revenues are derived
principally from the generation of interest and fees on loans originated and, to
a lesser extent, interest and dividends on investment and mortgage-backed
securities. Savings Bank of Manchester's primary sources of funds are deposits,
principal and interest payments on loans and investments and mortgage-backed
securities and advances from the Federal Home Loan Bank of Boston.
58
Market Area
Savings Bank of Manchester is headquartered in Manchester, Connecticut in
Hartford County. Savings Bank of Manchester's primary deposit gathering and
lending areas are concentrated in the communities surrounding its 23 banking
offices located in Hartford, Tolland and Windham counties.
Hartford County is located in central Connecticut approximately two hours
from both Boston and New York City and contains the City of Hartford. The region
serves as the governmental and as a financial center of Connecticut. Hartford
County has a diversified mix of industry groups, including insurance and
financial services, manufacturing, service, government and retail. The major
employers in the area include several prominent international and national
insurance and manufacturing companies, such as Aetna, Inc., The Hartford
Financial Services Group, Inc., Travelers Property Casualty Corp., United
Technologies Corp., Stanley Works, as well as many regional banks and the
Connecticut State Government. According to published statistics, Hartford
County's 1998 population was approximately 825,000 and consisted of
approximately 315,000 households. The population decreased approximately 3.1%
from 1990. Per capita income in 1998 for Hartford County was approximately
$24,000, which was less than the Connecticut average of approximately $27,000
but significantly higher than the national average of $18,000. Likewise, 1998
median household income for Hartford County was $48,000 compared to
approximately $52,400 for Connecticut and $38,100 for the U.S.
Connecticut is in the midst of a broad-based recovery from the severe
recession experienced in the New England region in the late 1980s and early
1990s. This is evidenced by the state's 3.4% unemployment rate and personal
income growth of 3.90%. Connecticut, and Hartford County in particular,
continues to reflect personal wealth characteristics above national averages.
Furthermore, the gross domestic product growth figures for the state compare
favorably with the national statistics and single-family home sales increased
14.2% from 1997 to 1998. However, Connecticut has a high number of finance,
insurance, real estate and export related manufacturing jobs. As a result, the
state's employment may be more affected by the national financial market and, to
a lesser extent, international economies.
Competition
Savings Bank of Manchester faces intense competition for the attraction of
deposits and origination of loans in its primary market area. Savings Bank of
Manchester's most direct competition for deposits has historically come from the
several commercial and savings banks operating in its primary market area and,
to a lesser extent, from other financial institutions, such as brokerage firms,
credit unions and insurance companies. While these entities continue to provide
a source of competition for deposits, Savings Bank of Manchester increasingly
faces significant competition for deposits from the mutual fund industry as
customers seek alternative sources of investment for their funds. Savings Bank
of Manchester also faces significant competition for investors' funds from their
direct purchase of short-term money market securities and other corporate and
government securities. While Savings Bank of Manchester faces competition for
loans from the significant number of traditional financial institutions,
primarily savings banks and commercial banks in its market area, its most
significant competition comes from other financial service providers, such as
the mortgage companies and mortgage brokers operating in its primary market
area. Additionally, competition is likely to increase as a result of recent
regulatory actions and legislative changes, most notably the recent enactment of
the Financial Services Modernization Act of 1999. These changes have eased and
likely will continue to ease restrictions on interstate banking and the entrance
into the financial services market by non-depository and non-traditional
financial services providers, including insurance companies, securities
brokerage and underwriting firms, and specialty financial services companies
such as internet-based providers. Competition for deposits, for the origination
of loans and the provision of other financial services may limit Savings Bank of
Manchester's growth in the future. See "Risk Factors--Competition has hurt
Savings Bank of Manchester's net interest income."
59
Lending Activities
General. The types of loans that Savings Bank of Manchester may originate
are limited by federal and state laws and regulations. Interest rates charged by
Savings Bank of Manchester on loans are affected principally by Savings Bank of
Manchester's current asset/liability strategy, the demand for such loans, the
supply of money available for lending purposes and the rates offered by
competitors. These factors, in turn, are affected by general and economic
conditions, monetary policies of the federal government, including the Federal
Reserve Board, legislative tax policies and governmental budgetary matters.
60
Loan Portfolio Analysis. The following table sets forth the composition of
Savings Bank of Manchester's loan portfolio in dollar amounts and as a
percentage of the portfolio at the dates indicated.
At August 31,
------------------------------------------------------------
1999 1998 1997
--------------------- ------------------------ -----------------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
Real estate loans:
One- to four-family................. $519,960 57.11% $464,623 56.85% $489,105 60.53%
Construction (1).................... 43,989 4.83 35,860 4.39 23,524 2.90
Commercial and multi-family......... 142,118 15.60 131,717 16.11 117,622 14.55
-------- ------ -------- ------ -------- ------
Total real estate loans.......... 706,067 77.54 632,200 77.35 630,251 77.98
-------- ------ -------- ------ -------- ------
Commercial loans....................... 131,362 14.43 114,650 14.03 106,874 13.22
-------- ------ -------- ------ -------- ------
Consumer loans:
Home equity loans and lines
of credit........................ 22,144 2.43 21,605 2.64 20,559 2.54
Other............................... 50,910 5.60 48,917 5.98 50,553 6.26
-------- ------ -------- ------ -------- ------
Total consumer loans............. 73,054 8.03 70,522 8.62 71,112 8.80
-------- ------ -------- ------ -------- ------
Total loans...................... 910,483 100.00% 817,372 100.00% 808,237 100.00%
====== ====== ======
Allowance for loan losses........... (10,791) (10,585) (9,945)
-------- -------- --------
Total loans, net................. $899,692 $806,787 $798,292
======== ======== ========
At December 31,
---------------------------------------------------------------------------------
1996 1995 1994
------------------------ ----------------------- ----------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
------ ---------- ------ ---------- ------ ----------
Real estate loans:
One- to four-family................. $457,168 61.66% $431,208 61.23% $408,124 59.11%
Construction (1).................... 16,900 2.27 15,804 2.25 15,184 2.20
Commercial and multi-family......... 104,364 14.07 105,050 14.92 121,374 17.57
-------- ------ -------- ------ -------- ------
Total real estate loans.......... 578,432 78.00 552,062 78.39 544,682 78.87
-------- ------ -------- ------ -------- ------
Commercial loans....................... 97,117 13.10 86,975 12.35 76,809 11.12
-------- ------ -------- ------ -------- ------
Consumer loans:
Home equity loans and lines
of credit....................... 18,959 2.56 16,796 2.38 16,755 2.43
Other............................... 47,071 6.34 48,448 6.88 52,389 7.58
-------- ------ -------- ------ -------- ------
Total consumer loans............. 66,030 8.90 65,244 9.26 69,144 10.01
-------- ------ -------- ------ -------- ------
Total loans...................... 741,579 100.00% 704,281 100.00% 690,635 100.00%
====== ====== ======
Allowance for loan losses........... (9,131) (8,484) (7,691)
-------- -------- --------
Total loans, net................. $732,448 $695,797 $682,944
======== ======== ========
_________________
(1) Includes residential and commercial real estate loans.
61
One- to Four-Family Real Estate Loans. Savings Bank of Manchester's primary
lending activity is to originate loans secured by one- to four-family residences
located in its primary market area. At August 31, 1999, $520.0 million, or
57.1%, of Savings Bank of Manchester's total loans consisted of one- to four-
family mortgage loans. Of the one- to four-family loans outstanding at that
date, 53.0% were fixed-rate mortgage loans and 47.0% were adjustable-rate loans.
Savings Bank of Manchester originates fixed-rate fully amortizing loans
with maturities ranging between ten and 30 years. Management establishes the
loan interest rates based on market conditions. Savings Bank of Manchester
offers mortgage loans that conform to Fannie Mae and Freddie Mac guidelines, as
well as jumbo loans, which presently are loans in amounts over $240,000. Fixed-
rate conforming loans are generally originated for portfolio. However, such
loans may be sold by Savings Bank of Manchester from time to time. The
determination of whether to sell loans is determined periodically by management
in response to changes in prevailing market interest rates. Loans that are sold
are generally sold to Freddie Mac, with the servicing rights retained.
Savings Bank of Manchester also currently offers adjustable-rate mortgage
loans, with an interest rate based on the one year Constant Maturity Treasury
Bill index, which adjust annually from the outset of the loan or which adjust
annually after a three or five year initial fixed period and with terms of up to
30 years. Interest rate adjustments on such loans are limited to no more than
2% during any adjustment period and 6% over the life of the loan. Adjustable-
rate loans may possess a conversion option, whereby the borrower, at his or her
option, can convert the loan to a fixed interest rate after a predetermined
period of time, generally within the first 60 months of the loan term. Included
in Savings Bank of Manchester's adjustable-rate mortgage loan portfolio are
adjustable-rate loans which are originated at an interest rate below the fully
indexed rate. During 1998, Savings Bank of Manchester originated $21.5 million
of these discounted adjustable-rate mortgage loans, or 2.4% of the total loan
portfolio, with an average yield of 5.44%. The time period in which such loans
will reprice to their fully indexed rate may be longer than Savings Bank of
Manchester's other fully indexed adjustable-rate loans. However, Savings Bank
of Manchester's experience, which cannot be guaranteed in future periods, is
that these discounted adjustable-rate loans tend to be more stable and less
susceptible to prepayment activity in a falling interest rate environment and
less subject to default in a rising interest environment.
Adjustable-rate mortgage loans help reduce Savings Bank of Manchester's
exposure to changes in interest rates. There are, however, unquantifiable credit
risks resulting from the potential of increased costs due to changed rates to be
paid by borrowers. It is possible that during periods of rising interest rates
the risk of default on adjustable-rate mortgage loans may increase as a result
of repricing and the increased payments required to be paid by borrowers. In
addition, although adjustable-rate mortgage loans allow Savings Bank of
Manchester to increase the sensitivity of its asset base to changes in interest
rates, the extent of this interest sensitivity is limited by the annual and
lifetime interest rate adjustment limits. Because of these considerations
Savings Bank of Manchester has no assurance that yields on adjustable-rate
mortgage loans will be sufficient to offset increases in Savings Bank of
Manchester's cost of funds during periods of rising interest rates. Savings Bank
of Manchester believes these risks, which have not had a material adverse effect
on Savings Bank of Manchester to date, generally are less than the risks
associated with holding fixed-rate loans in its portfolio in a rising interest
rate environment.
Savings Bank of Manchester underwrites fixed- and variable-rate one- to
four-family residential mortgage loans with loan-to-value ratios of up to 97%
and 95%, respectively, provided that a borrower obtains private mortgage
insurance on loans that exceed 80% of the appraised value or sales price,
whichever is less, of the secured property. Savings Bank of Manchester also
requires fire, casualty, title, hazard insurance and, if appropriate, flood
insurance be maintained on all properties securing real estate loans made by
Savings Bank of Manchester. An independent licensed appraiser generally
appraises all properties.
In an effort to provide financing for moderate income and first-time home
buyers, Savings Bank of Manchester offers FHA and CHFA (Connecticut Housing
Finance Authority) loans and has its own First-Time Home Buyer loan program.
These programs offer residential mortgage loans to qualified individuals. These
loans are offered with adjustable- and fixed-rates of interest and terms of up
to 30 years. Such loans may be secured by
62
one- to four-family residential property, in the case of FHA and CHFA loans, and
must be secured by a single family owner-occupied unit in the case of First-Time
Home Buyer loans. All of these loans are originated using modified underwriting
guidelines. FHA loans are closed in the name of Savings Bank of Manchester and
immediately sold on the secondary market to Countrywide Mortgage Company with
the loan servicing released. CHFA loans are immediately assigned after closing
to the Connecticut Housing Finance Authority with servicing rights retained by
Savings Bank of Manchester. Countrywide Mortgage and CHFA establish their
respective rates and terms upon which such loans are offered. First-Time Home
Buyer loans are offered with a discounted interest rate (approximately 50 basis
points) and usually with no application or loan origination fees. All such loans
are originated in amounts of up to 97% of the lower of the property's appraised
value or the sale price. Private mortgage insurance is required on all such
loans.
Savings Bank of Manchester also offers its full-time employees who satisfy
certain criteria and the general underwriting standards of Savings Bank of
Manchester fixed and adjustable-rate mortgage loans with reduced interest rates
which are currently 100 basis points below the rates offered to Savings Bank of
Manchester's other customers. The Employee Mortgage Rate is limited to the
purchase, construction or refinancing of an employee's owner-occupied primary
residence. The Employee Mortgage Rate normally ceases upon termination of
employment or if the property no longer is the employee's primary residence.
Upon termination of the Employee Mortgage Rate, the interest rate reverts to the
contract rate in effect at the time that the loan was extended. All other terms
and conditions contained in the original mortgage and note continue to remain in
effect. As of August 31, 1999, Savings Bank of Manchester had $8.3 million of
Employee Mortgage Rate loans, or 0.9% of total loans.
Construction Loans. Savings Bank of Manchester originates construction
loans to individuals for the construction and acquisition of personal
residences. At August 31, 1999, residential construction loans amounted to $11.4
million, or 1.3% of Savings Bank of Manchester's total loans. At August 31,
1999, the unadvanced portion of construction loans totalled $6.4 million.
Savings Bank of Manchester's residential construction loans generally
provide for the payment of interest only during the construction phase, which is
usually twelve months. At the end of the construction phase, the loan converts
to a permanent mortgage loan. Loans can be made with a maximum loan to value
ratio of 90%, provided that the borrower obtains private mortgage insurance on
the loan if the loan balance exceeds 80% of the appraised value or sales price,
whichever is less, of the secured property. At August 31, 1999, the largest
outstanding residential construction loan commitment was for $408,000, $366,000
of which was outstanding. This loan was performing according to its terms at
August 31, 1999. Construction loans to individuals are generally made on the
same terms as Savings Bank of Manchester's one- to four-family mortgage loans.
Before making a commitment to fund a residential construction loan, Savings
Bank of Manchester requires an appraisal of the property by an independent
licensed appraiser. Savings Bank of Manchester also reviews and inspects each
property before disbursement of funds during the term of the construction loan.
Loan proceeds are disbursed after inspection based on the percentage of
completion method.
Savings Bank of Manchester also originates residential development loans
primarily to finance the construction of single-family homes and subdivisions.
At August 31, 1999, residential development loans totalled $24.8 million, or
2.7% of Savings Bank of Manchester's total loans. These loans are generally
offered to experienced builders with whom Savings Bank of Manchester has an
established relationship. Residential development loans are typically offered
with terms of up to 24 months. The maximum loan-to-value limit applicable to
these loans is 80% for contract sales and 70% for speculative properties.
Construction loan proceeds are disbursed periodically in increments as
construction progresses and as inspection by Savings Bank of Manchester's
approved appraisers warrants. At August 31, 1999, Savings Bank of Manchester's
largest residential development loan was a performing loan for $4.1 million
secured by a retirement facility located in Central New England. That facility
is part of a larger development, which also has a loan in the amount of $563,000
secured by eight residential units which matured on June 30, 1999. Interest
payments have been kept current on the latter loan,
63
and such loan will be repaid from either the sale or refinancing of those units.
This lending relationship was placed on nonaccrual status in September 1999. See
"Recent Developments" for further discussion.
Savings Bank of Manchester also makes construction loans for commercial
development projects. The projects include multi-family, apartment, industrial,
retail and office buildings. These loans generally have an interest-only phase
during construction then convert to permanent financing. Disbursement of funds
are at the sole discretion of Savings Bank of Manchester and are based on the
progress of construction. The maximum loan-to-value limit applicable to these
loans is 75%. At August 31, 1999, commercial construction loans totalled $7.8
million, or 0.9%, of total loans.
Savings Bank of Manchester also originates land loans to local contractors
and developers for the purpose of improving the property, or for the purpose of
holding or developing the land for sale. Such loans are secured by a lien on the
property, are limited to 70% of the lower of the acquisition price or the
appraised value of the land and have a term of up to two years with a floating
interest rate based on Savings Bank of Manchester's internal base rate. Savings
Bank of Manchester's land loans are generally secured by property in its primary
market area. Savings Bank of Manchester requires title insurance and, if
applicable, a hazardous waste survey reporting that the land is free of
hazardous or toxic waste.
Construction and development financing is generally considered to involve a
higher degree of credit risk than long-term financing on improved, owner-
occupied real estate. Risk of loss on a construction loan depends largely upon
the accuracy of the initial estimate of the property's value at completion of
construction compared to the estimated cost (including interest) of construction
and other assumptions. If the estimate of construction cost proves to be
inaccurate, Savings Bank of Manchester may be required to advance funds beyond
the amount originally committed in order to protect the value of the property.
Additionally, if the estimate of value proves to be inaccurate, Savings Bank of
Manchester may be confronted with a project, when completed, having a value
which is insufficient to assure full repayment.
Commercial and Multi-Family Real Estate Loans. Savings Bank of Manchester
originates multi-family and commercial real estate loans that are generally
secured by five or more unit apartment buildings and properties used for
business purposes such as small office buildings, industrial facilities or
retail facilities primarily located in Savings Bank of Manchester's primary
market area. At August 31, 1999, Savings Bank of Manchester had $142.1 million
in commercial and multi-family real estate loans which amounted to 15.6% of
total loans. Savings Bank of Manchester's multi-family and commercial real
estate underwriting policies provide that such real estate loans may be made in
amounts of up to 75% of the appraised value of the property provided such loan
complies with Savings Bank of Manchester's current loans-to-one-borrower limit,
which at August 31, 1999 was $19.3 million. Savings Bank of Manchester's multi-
family and commercial real estate loans may be made with terms of up to 25 years
and are offered with interest rates that adjust periodically and are generally
indexed to the one year Constant Maturity Treasury Bill index. In reaching its
decision on whether to make a multi-family or commercial real estate loan,
Savings Bank of Manchester considers the net operating income of the property,
the borrower's expertise, credit history and profitability and the value of the
underlying property. In addition, with respect to commercial real estate rental
properties, Savings Bank of Manchester will also consider the term of the lease
and the quality of the tenants. Savings Bank of Manchester has generally
required that the properties securing these real estate loans have debt service
coverage ratios (the ratio of earnings before debt service to debt service) of
at least 1.20x. Environmental surveys are generally required for commercial
real estate loans. Generally, multi-family and commercial real estate loans
made to corporations, partnerships and other business entities require personal
guarantees by the principals. The largest multi-family or commercial real
estate loan in Savings Bank of Manchester's portfolio at August 31, 1999 was a
performing $4.6 million real estate loan secured by two separate multi-tenant
retail buildings located in Middletown and Newington, Connecticut.
Loans secured by multi-family and commercial real estate properties
generally involve larger principal amounts and a greater degree of risk than
one-to four-family residential mortgage loans. Because payments on loans
secured by multi-family and commercial real estate properties are often
dependent on successful operation or
64
management of the properties, repayment of such loans may be affected by adverse
conditions in the real estate market or the economy. Savings Bank of Manchester
seeks to minimize these risks through its underwriting standards. See "Risk
Factors--Savings Bank of Manchester's increased emphasis on commercial lending
may hurt both asset quality and profits."
Commercial Loans. At August 31, 1999, Savings Bank of Manchester had $131.4
million in commercial loans which amounted to 14.4% of total loans. In addition,
at such date, Savings Bank of Manchester had $53.4 million of unadvanced
commercial lines of credit. Savings Bank of Manchester makes commercial business
loans primarily in its market area to a variety of professionals, sole
proprietorships and small businesses. Savings Bank of Manchester offers a
variety of commercial lending products, including term loans for fixed assets
and working capital, revolving lines of credit, letters of credit, and Small
Business Administration guaranteed loans. The maximum amount of a commercial
business loan is limited by Savings Bank of Manchester's loans-to-one-borrower
limit which at August 31, 1999, was $19.3 million. Term loans are generally
offered with initial fixed rates of interest for the first five years and with
terms of up to ten years. Business lines of credit have adjustable rates of
interest and are payable on demand, subject to annual review and renewal.
Business loans with variable rates of interest adjust on a daily basis and are
indexed to Savings Bank of Manchester's internal base rate.
When making commercial business loans, Savings Bank of Manchester considers
the financial statements of the borrower, Savings Bank of Manchester's lending
history with the borrower, the debt service capabilities of the borrower, the
projected cash flows of the business and the value of the collateral.
Commercial business loans are generally secured by a variety of collateral,
primarily accounts receivable, inventory and equipment, and are supported by
personal guarantees. Depending on the collateral used to secure the loans,
commercial loans are made in amounts of up to 90% of the value of the collateral
securing the loan. Savings Bank of Manchester generally does not make unsecured
commercial loans.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment or other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial loans are of higher risk and typically are made
on the basis of the borrower's ability to make repayment from the cash flow of
the borrower's business. As a result, the availability of funds for the
repayment of commercial loans may depend substantially on the success of the
business itself. Further, any collateral securing such loans may depreciate
over time, may be difficult to appraise and may fluctuate in value. See "Risk
Factors--Savings Bank of Manchester's increased emphasis on commercial lending
may hurt both asset quality and profits." At August 31, 1999, Savings Bank of
Manchester's largest commercial loan was a $3.3 million loan secured by
commercial real estate located in Windham, Connecticut and operating as a mobile
home park. This loan was performing according to its original terms at August
31, 1999.
Consumer Loans. Savings Bank of Manchester offers a variety of consumer
loans, including second mortgage loans and home equity lines of credit, both of
which are secured by owner-occupied one- to four-family residences. At August
31, 1999, second mortgage loans and equity lines of credit totalled $22.1
million, or 2.4% of Savings Bank of Manchester's total loans and 30.3% of
consumer loans. Additionally, at August 31, 1999, the unadvanced amounts of home
equity lines of credit totalled $23.3 million. The underwriting standards
employed by Savings Bank of Manchester for second mortgage loans and equity
lines of credit include a determination of the applicant's credit history, an
assessment of the applicant's ability to meet existing obligations and payments
on the proposed loan and the value of the collateral securing the loan. Home
equity lines of credit have adjustable rates of interest which are indexed to
the prime rate as reported in The Wall Street Journal. Interest rate adjustments
on home equity lines of credit are limited to no more than a maximum of 18%.
Generally, the maximum loan-to-value ratio on home equity lines of credit is
90%. A home equity line of credit may be drawn down by the borrower for a period
of 10 years from the date of the loan agreement. During this period, the
borrower has the option of paying, on a monthly basis, either principal and
interest or only the interest. The borrower has to pay back the amount
outstanding under the line of credit at the end of a 20 year period. Savings
Bank of Manchester offers fixed- and adjustable-rate second mortgage loans with
terms up to 20 years. The loan-to-value ratios of both fixed-rate and
adjustable-rate home equity loans are generally limited to 90%.
65
Savings Bank of Manchester offers fixed-rate automobile loans for new or
used vehicles with terms of up to 72 months and loan-to-value ratios of the
lesser of the purchase price or the retail value shown in the NADA Used Car
Guide. At August 31, 1999, automobile loans totalled $10.6 million, or 1.2% of
Savings Bank of Manchester's total loans and 14.5% of consumer loans. For the
eight months ended August 31, 1999 and for fiscal 1998, Savings Bank of
Manchester originated $4.0 million and $5.2 million of automobile loans,
respectively.
Other consumer loans at August 31, 1999 amounted to $40.3 million, or 4.4%
of Savings Bank of Manchester's total loans and 55.2% of consumer loans. These
loans include unsecured personal loans, collateral loans, credit card loans and
education loans. Unsecured personal loans generally have a fixed-rate, a maximum
borrowing limitation of $25,000 and a maximum term of five years. Collateral
loans are generally secured by a passbook account, a certificate of deposit or
marketable securities.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of loans that are unsecured or secured by rapidly
depreciating assets such as automobiles. In these cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections depend on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Loans to One Borrower. The maximum amount that Savings Bank of Manchester
may lend to one borrower is limited by statute. At August 31, 1999, Savings Bank
of Manchester's statutory limit on loans to one borrower was $19.3 million. At
that date, Savings Bank of Manchester's largest amount of loans to one borrower,
including the borrower's related interests, was approximately $7.7 million and
consisted of ten loans secured by various residential and commercial properties.
These loans were performing according to their original terms at August 31,
1999.
Maturity of Loan Portfolio. The following table shows the remaining
contractual maturity of Savings Bank of Manchester's total loans at August 31,
1999, excluding the effect of future principal prepayments.
At August 31, 1999
-----------------------------------------------------
Commercial
and Multi-
One- to Family
four-family (1) Construction (2) Real Estate
--------------- ---------------- --------------
(In thousands)
Amounts due in:
One year or less............................. $ 1,334 $18,419 $ 8,050
After one year:
More than one year to three years......... 2,996 7,472 3,304
More than three years to five years....... 14,193 -- 6,639
More than five years to 10 years.......... 36,716 425 23,309
More than 10 year to 15 years............. 83,792 1,650 40,434
More than 15 years........................ 430,357 16,023 60,382
-------- ------- --------
Total amount due....................... $569,388 $43,989 $142,118
======== ======= ========
-------------------------------------
Commercial Consumer Total
----------- ----------- --------
Amounts due in:
One year or less.......................... $ 47,588 $ 3,980 $ 79,371
After one year:
More than one year to three years...... 16,403 6,013 36,188
More than three years to five years.... 21,616 7,234 49,682
More than five years to 10 years....... 21,693 6,322 88,465
More than 10 year to 15 years.......... 8,459 42 134,377
More than 15 years..................... 15,603 35 522,400
-------- ------- --------
Total amount due.................... $131,362 $23,626 $910,483
======== ======= ========
______________________________________
(1) Includes home equity loans and lines of credit and second mortgages on
one- to four-family residences.
(2) Includes residential and commercial real estate loans.
66
The following table sets forth, at August 31, 1999, the dollar amount of
loans contractually due after August 31, 2000, and whether such loans have fixed
interest rates or adjustable interest rates.
Due After August 31, 2000
----------------------------------
Fixed Adjustable Total
---------- ---------- ---------
(In thousands)
Real estate loans:
One- to four-family (1).............. $345,295 $222,759 $568,054
Construction (2)..................... 10,870 14,700 25,570
Commercial and multi-family.......... 12,643 121,425 134,068
-------- -------- --------
Total real estate loans........... 368,808 358,884 727,692
Commercial loans........................ 31,040 52,734 83,774
Consumer loans.......................... 17,936 1,710 19,646
-------- -------- --------
Total loans..................... $417,784 $413,328 $831,112
======== ======== ========
_____________________________________
(1) Includes home equity loans and lines of credit and second mortgages on
one- to four-family residences.
(2) Includes residential and commercial real estate loans.
Scheduled contractual principal repayments of loans do not reflect the
actual life of the loans. The average life of a loan is substantially less than
its contractual term because of prepayments. In addition, due-on-sale clauses on
loans generally give Savings Bank of Manchester the right to declare loans
immediately due and payable if, among other things, the borrower sells the real
property with the mortgage and the loan is not repaid. The average life of a
mortgage loan tends to increase, however, when current mortgage loan market
rates are substantially higher than rates on existing mortgage loans and,
conversely, tends to decrease when rates on existing mortgage loans are
substantially higher than current mortgage loan market rates.
Loan Approval Procedures and Authority. Savings Bank of Manchester's
lending activities follow written, non-discriminatory, underwriting standards
and loan origination procedures established by Savings Bank of Manchester's
Board of Directors and management. Savings Bank of Manchester's policies and
loan approval limits are established by management and are approved by the Board
of Directors. The Board of Directors has designated certain individuals of
Savings Bank of Manchester and certain branch managers to consider and approve
loans within their designated authority.
All one- to four-family mortgage loans secured by the borrower's primary
residence in amounts of up to $400,000 and all residential construction and
second mortgage loans and home equity lines of credit in amounts of up to
$250,000 may be approved by any two designated individuals. All residential
construction and second mortgage loans and home equity lines of credit in excess
of $250,000 and up to $400,000 require the approval of Savings Bank of
Manchester's loan committee. All residential loans in excess of $400,000 and up
to $1.0 million require the approval of Savings Bank of Manchester's loan
committee. All residential loans in excess of $1.0 million require the approval
of the Executive Committee of the Board of Directors.
All commercial loans, including commercial real estate loans, multifamily
loans, commercial construction and development loans and commercial business
loans in amounts of up to $350,000 may be approved by any two of the designated
individuals. All commercial loans in excess of $350,000 and up to $1.0 million
require the approval of Savings Bank of Manchester's loan committee; and all
commercial loans in excess of $1.0 million require the approval of the Executive
Committee of the Board of Directors.
With regard to consumer loans, automobile loans in amounts of up to $50,000
and unsecured personal loans in amounts of up to $25,000 may be approved by
either one or two of the designated individuals depending on the credit score;
automobile loans in excess of $50,000 and unsecured personal loans in excess of
$25,000 must be
67
approved by Savings Bank of Manchester's loan committee. Collateral loans of up
to $25,000 may be approved by any branch manager.
Loan Originations, Purchases and Sales. Savings Bank of Manchester lending
activities are conducted by its salaried and commissioned loan personnel and
through non-bank third-party correspondents. Currently, Savings Bank of
Manchester uses 16 loan originators who solicit and originate mortgage loans on
behalf of Savings Bank of Manchester. These loan originators accounted for
approximately three-quarters of the adjustable-rate and fixed-rate mortgage
loans originated by Savings Bank of Manchester in the first eight months of
1999. Loan originators are compensated by a commission that is based upon the
origination fee charged to the borrower less payment of a portion of such
origination fee to Savings Bank of Manchester, which currently is 60 basis
points of the loan amount. All loans originated by the loan originators are
underwritten in conformity with Savings Bank of Manchester's loan underwriting
policies and procedures. At August 31, 1999, Savings Bank of Manchester
serviced $213.2 million of loans for others.
From time to time, Savings Bank of Manchester will purchase loans or
participation interests in loans, primarily secured by one- to four-family
residential properties located outside of Savings Bank of Manchester's primary
market area, usually in Fairfield County, Connecticut or in Massachusetts.
Purchased loans are underwritten according to Savings Bank of Manchester's own
underwriting criteria and procedures and are generally purchased without the
accompanying servicing rights. Amounts outstanding related to loan purchases
and participation interests totalled $56.9 million and $51.0 million at August
31, 1999 and December 31, 1998, respectively.
Substantially all of Savings Bank of Manchester's adjustable-rate mortgage
loans are originated for investment. Historically, Savings Bank of Manchester
originated fixed-rate mortgage loans for sale in the secondary market. However,
since 1998 and due to the low demand for adjustable-rate mortgage loans, Savings
Bank of Manchester has begun to retain for its portfolio a significant portion
of fixed-rate mortgage loans in order to maintain its targeted loan to asset
ratio of 80%. Sales are generally to Freddie Mac, with servicing rights
retained. Loan sale decisions are made by Savings Bank of Manchester's
management and are generally based on prevailing market interest rates and
Savings Bank of Manchester's loan to asset ratio.
68
The following table presents total loans originated, sold, purchased and
repaid during the periods indicated.
For the Eight
Months Ended For the Year Ended
August 31, December 31,
--------------------------- ---------------------------------------
1999 1998 1998 1997 1996
----------- ------------ ----------- ----------- -----------
(In thousands)
Loans at beginning of period.............................. $817,372 $808,237 $808,237 $741,579 $704,281
-------- -------- -------- -------- --------
Originations:
Real estate:
One-to four-family............................... 97,017 99,896 160,974 97,764 97,810
Construction (1)................................. 38,820 34,925 55,492 45,768 35,292
Commercial and multi-family...................... 26,531 10,188 24,948 23,921 9,478
-------- -------- -------- -------- --------
Total real estate loans.................... 162,368 145,009 241,414 167,453 142,580
Commercial.......................................... 66,286 59,006 88,170 85,483 90,553
Consumer............................................ 22,964 23,231 30,684 30,634 22,796
-------- -------- -------- -------- --------
Total loans originated........................... 251,618 227,246 360,268 283,570 225,929
Loans purchased........................................ 16,942 8,834 17,281 8,284 8,983
-------- -------- -------- -------- --------
Total loans originated and purchased............. 268,560 236,080 377,549 291,854 264,912
-------- -------- -------- -------- --------
Deduct:
Principal loan repayments and prepayments........... 159,892 177,521 274,246 208,643 197,060
Loan sales.......................................... 15,012 65,007 91,917 11,729 26,962
Charge-offs......................................... 332 411 1,087 946 1,762
Transfers to other real estate owned................ 213 841 1,164 3,878 1,830
-------- -------- -------- -------- --------
Total deductions.............................. 175,449 243,780 368,414 225,196 227,614
-------- -------- -------- -------- --------
Net increase (decrease) in loans.......................... 93,111 (7,700) 9,135 66,658 37,298
-------- -------- -------- -------- --------
Loans at end of period.................................... $910,483 $800,537 $817,372 $808,237 $741,579
======== ======== ======== ======== ========
___________________________________________
(1) Includes residential and commercial real estate loans.
Loan Commitments. Savings Bank of Manchester issues loan commitments to
prospective borrowers conditioned on the occurrence of certain events.
Commitments are made in writing on specified terms and conditions and are
generally honored for up to 60 days from approval. At August 31, 1999, Savings
Bank of Manchester had loan commitments and unadvanced loans and lines of credit
totaling $179.9 million. See Note 11 of the Notes to Consolidated Financial
Statements included in this prospectus.
Loan Fees. In addition to interest earned on loans, Savings Bank of
Manchester receives income from fees derived from loan originations, loan
modifications, late payments and for miscellaneous services related to its
loans. Income from these activities varies from period to period depending upon
the volume and type of loans made and competitive conditions. On loans
originated by third-party originators, Savings Bank of Manchester may pay a
premium to compensate an originator for loans where the borrower is paying a
higher rate on the loan.
Savings Bank of Manchester charges loan origination fees which are
calculated as a percentage of the amount borrowed. As required by applicable
accounting principles, loan origination fees, discount points and certain loan
origination costs are deferred and recognized over the contractual remaining
lives of the related loans on a level yield basis. At August 31, 1999, Savings
Bank of Manchester had approximately $1.5 million of net deferred loan fees.
Savings Bank of Manchester amortized $251,000 and $1.1 million of net deferred
loan fees during the eight months ended August 31, 1999 and the year ended
December 31, 1998, respectively.
69
Nonperforming Assets, Delinquencies and Impaired Loans. All loan payments
are due on the first day of each month. When a borrower fails to make a required
loan payment, Savings Bank of Manchester attempts to cure the deficiency by
contacting the borrower and seeking the payment. A late notice is mailed on the
16/th/ day of the month. In most cases, deficiencies are cured promptly. If a
delinquency continues beyond the 30/th/ day of the month, the account is
referred to an in-house collector. While Savings Bank of Manchester generally
prefers to work with borrowers to resolve problems, Savings Bank of Manchester
will institute foreclosure or other proceedings after the 90/th/ day of a
delinquency, as necessary, to minimize any potential loss.
Management informs the Board of Directors monthly of the amount of loans
delinquent more than 30 days, all loans in foreclosure, and all foreclosed and
repossessed property that Savings Bank of Manchester owns. Savings Bank of
Manchester ceases accruing interest on mortgage loans when principal or interest
payments are delinquent 90 days or more unless management determines the loan
principal and interest to be fully secured and in the process of collection.
Once the accrual of interest on a loan is discontinued, all interest previously
accrued is reversed against current period interest income once management
determines that interest is uncollectible.
On January 1, 1995, Savings Bank of Manchester adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118
"Accounting by Creditors for Impairment of a Loan--an amendment to SFAS No.
114." At August 31, 1999 and December 31, 1998 and 1997, Savings Bank of
Manchester had a $6.0 million, $1.5 million and $2.8 million, respectively,
recorded investment in impaired loans all of which had no specific allowances.
At August 31, 1999, the second largest loan in Savings Bank of Manchester's
loan portfolio was nonperforming. In 1988, Savings Bank of Manchester made a
$4.8 million first mortgage for the construction of a 45,000 square foot office
building in Savings Bank of Manchester's primary market area. In 1993, the $4.7
million balance of the loan was converted to an amortizing loan with a balloon
payment maturing in November 1998. The loan is additionally secured by a first
mortgage on another commercial property and a second mortgage on a multi-family
property. The loan matured in November 1998. At that time, the loan was
current as to principal and interest payments. However, the borrower requested
a discounted payoff which Savings Bank of Manchester refused. Savings Bank of
Manchester has since instituted foreclosure proceedings. In April 1999, the
loan was placed on nonaccrual status. At August 31, 1999, the loan had an
outstanding carrying balance of $4.3 million. Based on a February 1993
appraisal, the properties securing the loan had an appraised value of $4.9
million. Based on the value of the collateral, Savings Bank of Manchester does
not expect to incur any material losses on this loan.
In September 1999, the largest lending relationship in Savings Bank of
Manchester's loan portfolio was placed on nonaccrual status. See "Recent
Developments" for a further discussion of this lending relationship.
70
The following table sets forth information regarding nonperforming loans,
troubled debt restructurings and other real estate owned at the dates indicated.
At August 31, At December 31,
---------------- ------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------ ----- ------ ------ ------ ------ --------
(Dollars in thousands)
Nonperforming loans:
One- to four-family real estate.................. $ 478 $ 893 $ 456 $1,732 $ 5,181 $ 5,478 $ 3,362
Commercial and multi-family real estate.......... 4,563 372 388 408 1,076 1,093 1,642
Commercial....................................... 919 1,278 665 680 992 605 1,499
Consumer......................................... 2 20 15 15 29 81 14
------ ------ ------ ------ ------- ------- -------
Total nonperforming loans........................... 5,962 2,563 1,524 2,835 7,278 7,257 6,517
Other real estate owned............................. 901 2,033 1,759 4,708 5,482 4,749 5,745
------ ------ ------ ------ ------- ------- -------
Total nonperforming assets.................... 6,863 4,596 3,283 7,543 12,760 12,006 12,262
Troubled debt restructurings........................ -- -- -- -- -- 1,192 1,453
------ ------ ------ ------ ------- ------- -------
Total nonperforming assets and troubled
debt restructurings.............................. $6,863 $4,596 $3,283 $7,543 $12,760 $13,198 $13,715
====== ====== ====== ====== ======= ======= =======
Total nonperforming loans and troubled
debt restructurings as a percentage
of total loans................................... 0.65% 0.32% 0.19% 0.35% 0.98% 1.20% 1.15%
Total nonperforming assets and troubled
debt restructurings as a percentage
of total assets.................................. 0.58% 0.43% 0.30% 0.73% 1.32% 1.41% 1.62%
Interest income that would have been recorded for the eight months ended
August 31, 1999 and the year ended December 31, 1998 had nonaccruing loans been
current according to their original terms amounted to approximately $181,000 and
$136,000, respectively. No interest was included in interest income in either
period related to these loans.
71
The following tables set forth the delinquencies in Savings Bank of
Manchester's loan portfolio as of the dates indicated.
At August 31, 1999 At December 31, 1998
--------------------------------------------- ---------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
--------------------------------------------- ---------------------------------------------
Number Principal Number Principal Number Principal Number Principal
of Balance of of Balance of of Balance of of Balance of
Loans Loans Loans Loans Loans Loans Loans Loans
-------- ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
Real estate loans:
One- to four-family............ 3 $ 706 2 $ 96 1 $ 1 4 $ 151
Commercial and multi-
family...................... 1 2,458 1 277 -- -- 1 279
- ------ -- ----- -- ----- -- -----
Total real estate loans..... 4 3,164 3 373 1 1 5 430
- ------ -- ----- -- ----- -- -----
Commercial loans.................. 8 236 10 537 7 137 6 294
- ------ -- ----- -- ----- -- -----
Consumer loans:
Home equity loans and
lines of credit............. - -- -- -- 1 15 -- --
Other.......................... 9 41 2 2 5 7 3 16
- ------ -- ----- -- ----- -- -----
Total consumer loans........ 9 41 2 2 6 22 3 16
- ------ -- ----- -- ----- -- -----
Total....................... 21 $3,441 15 $ 912 14 $ 160 14 $ 740
== ====== == ===== == ===== == =====
Delinquent loans to total loans... 0.38% 0.10% 0.02% 0.09%
====== ===== ===== =====
At December 31, 1997 At December 31, 1996
---------------------------------------------- ----------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
------------------------ -------------------- --------------------- ----------------------
Principal Principal Principal Number Principal
Number Balance of Number Balance of Number Balance of of Loans Balance of
of Loans Loans of Loans Loans of Loans Loans Loans
---------- ---------- -------- ---------- -------- ---------- -------- ----------
(Dollars in thousands)
Real estate loans:
One- to four-family............ 1 $ 87 6 $ 473 3 $ 337 17 $1,832
Commercial and multi-
family...................... -- -- -- -- -- -- 2 262
-- ----- -- ----- -- ------ -- ------
Total real estate loans..... 1 87 6 473 3 337 19 2,094
-- ----- -- ----- -- ------ -- ------
Commercial loans.................. 3 116 2 140 8 1,437 4 365
-- ----- -- ----- -- ------ -- ------
Consumer loans:
Home equity loans and
lines of credit............. 3 95 3 130 -- -- 2 51
Other.......................... 5 29 4 15 11 42 7 29
-- ----- -- ----- -- ------ -- ------
Total consumer loans........ 8 124 7 145 11 42 9 80
-- ----- -- ----- -- ------ -- ------
Total....................... 12 $ 327 15 $ 758 22 $1,816 32 $2,539
== ===== == ===== == ====== == ======
Delinquent loans to
total loans.................... 0.04% 0.09% 0.24% 0.34%
===== ===== ====== ======
Real Estate Owned. Real estate acquired by Savings Bank of Manchester as a
result of foreclosure or by deed in lieu of foreclosure is classified as real
estate owned until sold. When property is acquired it is recorded at fair market
value at the date of foreclosure, establishing a new cost basis. Holding costs
and declines in fair value result in changes to expense after acquisition are
expensed. At August 31, 1999, Savings Bank of Manchester had $901,000 of real
estate owned, net, consisting primarily of two one- to four-family residences
and one commercial property.
Asset Classification. Banking regulators have adopted various regulations
and practices regarding problem assets of savings institutions. Under such
regulations, federal and state examiners have authority to identify problem
assets during examinations and, if appropriate, require their classification.
72
There are three classifications for problem assets: substandard, doubtful
and loss. Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified as loss. All or a portion of general loan
loss allowances established to cover probable losses related to assets
classified substandard or doubtful can be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital. Assets that do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are designated "special mention." Savings Bank of Manchester performs an
internal analysis of its loan portfolio and assets to classify such loans and
assets similar to the manner in which such loans and assets are classified by
the federal banking regulators. In addition, Savings Bank of Manchester
regularly analyzes the losses inherent in its loan portfolio and its
nonperforming loans in determining the appropriate level of the allowance for
loan losses.
Allowance for Loan Losses. In originating loans, Savings Bank of
Manchester recognizes that losses will be experienced on loans and that the risk
of loss will vary with, among other things, the type of loan being made, the
creditworthiness of the borrower over the term of the loan, general economic
conditions and, in the case of a secured loan, the quality of the security for
the loan. Savings Bank of Manchester maintains an allowance for loan losses to
absorb losses inherent in the loan portfolio. The allowance for loan losses
represents management's estimate of probable losses based on information
available as of the date of the financial statements. The allowance for loan
losses is based on management's evaluation of the collectibility of the loan
portfolio, including past loan loss experience, known and inherent risks in the
nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, and economic conditions.
The loan portfolio and other credit exposures are regularly reviewed by
management to evaluate the adequacy of the allowance for loan losses. The
methodology for assessing the appropriateness of the allowance includes
comparison to actual losses, peer group comparisons, industry data and economic
conditions. In addition, the regulatory agencies, as an integral part of their
examination process, periodically review Savings Bank of Manchester's allowance
for loan losses and may require Savings Bank of Manchester to make additional
provisions for estimated losses based upon judgments different from those of
management.
In assessing the allowance for loan losses, loss factors are applied to
various pools of outstanding loans and certain unused commitments. Savings Bank
of Manchester segregates the loan portfolio according to risk characteristics
(i.e., mortgage loans, home equity, consumer). Loss factors are derived using
Savings Bank of Manchester's historical loss experience and may be adjusted for
significant factors that, in management's judgment, affect the collectibility of
the portfolio as of the evaluation date.
In addition, management assesses the allowance using factors that cannot be
associated with specific credit or loan categories. These factors include
management's subjective evaluation of local and national economic and business
conditions, portfolio concentration and changes in the character and size of the
loan portfolio. The allowance methodology reflects management's objective that
the overall allowance appropriately reflects a margin for the imprecision
necessarily inherent in estimates of expected credit losses.
At August 31, 1999, Savings Bank of Manchester had an allowance for loan
losses of $10.8 million which represented 1.19% of total loans and 181.00% of
nonperforming loans at that date. Although management believes that it uses the
best information available to establish the allowance for loan losses, future
adjustments to the allowance for loan losses may be necessary and results of
operations could be adversely affected if circumstances differ substantially
from the assumptions used in making the determinations. Furthermore, while
Savings Bank of Manchester believes it has established its existing allowance
for loan losses in conformity with generally accepted accounting principles,
there can be no assurance that regulators, in reviewing Savings Bank of
Manchester's loan
73
portfolio, will not request Savings Bank of Manchester to increase its allowance
for loan losses. In addition, because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
the existing allowance for loan losses is adequate or that increases will not be
necessary should the quality of any loans deteriorate as a result of the factors
discussed above. Any material increase in the allowance for loan losses may
adversely affect Savings Bank of Manchester's financial condition and results of
operations.
The following table presents an analysis of Savings Bank of Manchester's
allowance for loan losses at and for the periods indicated.
At or For the Eight
Months Ended
August 31, At or For the Year Ended December 31,
----------------------------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------- ------- ------- ------- ------- ------- ------
(Dollars in thousands)
Allowance for loan losses,
beginning of period.................. $10,585 $ 9,945 $ 9,945 $ 9,131 $ 8,484 $ 7,691 $7,336
------- ------- ------- ------- ------- ------- ------
Charged-off loans:
One- to four-family real estate...... 75 245 340 299 695 474 177
Commercial and multi-family
real estate....................... 90 -- 112 133 326 395 1,983
Commercial........................... 102 83 483 311 366 287 625
Consumer............................. 65 83 152 203 375 325 324
------- ------- ------- ------- ------- ------- ------
Total charged-offs loans.......... 332 411 1,087 946 1,762 1,481 3,109
------- ------- ------- ------- ------- ------- ------
Recoveries on loans previously
charged off:
One- to four-family real estate...... 41 86 146 215 38 3 --
Commercial and multi-family
real estate....................... 4 8 12 10 18 -- --
Commercial........................... 60 210 283 229 939 533 600
Consumer............................. 33 46 86 106 214 188 309
------- ------- ------- ------- ------- ------- ------
Total recoveries.................. 138 350 527 560 1,209 724 909
------- ------- ------- ------- ------- ------- ------
Net loans charged-off................... 194 61 560 386 553 757 2,200
------- ------- ------- ------- ------- ------- ------
Provision for loan losses............... 400 800 1,200 1,200 1,200 1,550 2,555
------- ------- ------- ------- ------- ------- ------
Allowance for loan losses, end
of period............................ $10,791 $10,684 $10,585 $ 9,945 $ 9,131 $ 8,484 $7,691
======= ======= ======= ======= ======= ======= ======
Net loans charged-off to average
interest-earning loans............... 0.02% 0.05% 0.07% 0.05% 0.08% 0.11% 0.34%
Allowance for loan losses
to total loans....................... 1.19 1.33 1.30 1.23 1.23 1.20 1.11
Allowance for loan losses to
nonperforming loans and
troubled debt restructurings......... 181.00 416.86 694.55 350.79 125.46 100.41 96.50
Net loans charged-off to allowance
for loan losses...................... 2.70 0.86 5.29 3.88 6.06 8.92 28.60
Recoveries to charge-offs............... 41.57 85.16 48.48 59.20 68.62 48.89 29.24
For additional discussion regarding the provision for loan losses in recent
periods, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Comparison of Operating Results for the Eight Months
Ended August 31, 1999 and 1998--Provision for Loan Losses."
74
The following table presents the approximate allocation of the allowance
for loan losses by loan categories at the dates indicated and the percentage of
such amounts to the total allowance and to total loans. Management believes that
the allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not indicative of future losses
and does not restrict the use of any of the allowance to absorb losses in any
category.
At August 31, 1999
----------------------------------------------
Percent of
Allowance Percent
in Each of Loans
Category in Each
to Total Category to
Amount Allowance Total Loans
------------ ------------ --------------
(Dollars in thousands)
Real estate................. $ 5,166 48% 78%
Commercial.................. 4,671 43 14
Consumer.................... 954 9 8
------- --- ---
Total allowance for
loan losses........ $10,791 100% 100%
======= === ===
At December 31,
-------------------------------------------------------------------------------------------------
1998 1997
----------------------------------------- -----------------------------------------------------
Percent of Percent of
Allowance Percent Allowance Percent
in Each of Loans in Each of Loans
Category in Each Category in Each
to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans Amount
---------- ----------- ------------ -------- ----------- -------------- ----------
(Dollars in thousands)
Real estate............ $ 4,995 47% 77% $4,310 43% 78% $3,531
Commercial............. 4,714 45 14 4,913 50 13 4,958
Consumer............... 876 8 9 722 7 9 642
------- ------- ------- ------- ------- ------- -------
Total allowance
for loan losses.. $10,585 100% 100% $9,945 100% 100% $9,131
======= ======= ======= ======= ======= ======= =======
At December 31,
---------------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------------ -------------------------- ------------------------------------
Percent Percent Percent Percent
of of of Loans of
Allowance Percent Allowance in Each Allowance Percent
in Each of Loans in Each Category in Each of Loans
Category in Each Category to Category in Each
to Total Category to to Total Total to Total Category to
Allowance Total Loans Amount Allowance Loans Amount Allowance Total Loans
----------- ------------- ------- ----------- ----------- -------- ----------- ------------
Real estate............ 39% 78% $3,485 41% 79% $3,157 41% 79%
Commercial............. 54 13 4,349 51 12 3,868 50 11
Consumer............... 7 9 650 8 9 666 9 10
------- ------ ------- ------ ----- ------ ----- ------
Total allowance
for loan losses.. 100% 100% $8,484 100% 100% $7,691 100% 100%
======= ====== ======= ====== ===== ====== ===== ======
75
Investment Activities
General. Under Connecticut law, Savings Bank of Manchester has authority to
purchase a wide range of investment securities. As a result of recent changes
in federal banking laws, however, financial institutions such as Savings Bank of
Manchester may not engage as principals in any activities that are not
permissible for a national bank, unless the Federal Deposit Insurance
Corporation has determined that the investments would pose no significant risk
to the Bank Insurance Fund and that Savings Bank of Manchester is in compliance
with applicable capital standards. In 1993, the Regional Director of the
Federal Deposit Insurance Corporation approved a request by Savings Bank of
Manchester to invest in certain listed stocks and/or registered stocks subject
to certain conditions. See "Regulation and Supervision."
Savings Bank of Manchester's Board of Directors has the overall responsibility
for Savings Bank of Manchester's investment portfolio, including approval of
Savings Bank of Manchester's investment policy, appointment of Savings Bank of
Manchester's investment adviser and approval of Savings Bank of Manchester's
investment transactions. All investment transactions are reviewed by the Board
on a monthly basis. Savings Bank of Manchester's President and/or Chief
Financial Officer, or their designees, are authorized to make investment
decisions consistent with Savings Bank of Manchester's investment policy and the
recommendations of Savings Bank of Manchester's investment adviser and the
Board's Investment Committee. The Investment Committee meets quarterly with the
President and Chief Financial Officer in order to review and determine
investment strategies.
Savings Bank of Manchester's investment policy is designed to complement
Savings Bank of Manchester's lending activities, provide an alternative source
of income through interest, dividends and capital gains, diversify Savings Bank
of Manchester's assets and improve liquidity while minimizing Savings Bank of
Manchester's tax liability. Investment decisions are made in accordance with
Savings Bank of Manchester's investment policy and are based upon the quality of
a particular investment, its inherent risks, the composition of the balance
sheet, market expectations, Savings Bank of Manchester's liquidity, income and
collateral needs and how the investment fits within Savings Bank of Manchester's
interest rate risk strategy. Although Savings Bank of Manchester utilizes the
investment advisory services of a Boston-based investment firm, management is
ultimately and completely responsible for all investment decisions.
Savings Bank of Manchester's investment policy divides investments into two
categories, fixed income and equity portfolios. The primary objective of the
fixed income portfolio is to maintain an adequate source of liquidity sufficient
to meet regulatory and operating requirements, and to safeguard against deposit
outflows, reduced loan amortization and increased loan demand. The fixed income
portfolio primarily includes debt issues, including mortgage-backed and asset-
backed securities. Substantially all of Savings Bank of Manchester's mortgage-
backed securities are issued or guaranteed by agencies of the U.S. Government.
Accordingly, they carry lower credit risk than mortgage-backed securities of a
private issuer. Asset-backed securities are typically collateralized by the cash
flow from a pool of auto loans, credit card receivables, consumer loans and
other similar obligations.
Savings Bank of Manchester's investment policy permits Savings Bank of
Manchester to be a party to financial instruments with off-balance sheet risk in
the normal course of business in order to manage interest rate risk. Savings
Bank of Manchester's derivative position is reviewed by the Investment Committee
on a quarterly basis. The investment policy authorizes Savings Bank of
Manchester to be involved in and purchase various types of derivative
transactions and products including interest rate swap, cap and floor agreements
investment conduits. At August 31, 1999, Savings Bank of Manchester was a party
to one interest rate cap agreement with a notional principal amount of $25
million. Under the terms of the cap agreement, Savings Bank of Manchester paid
a premium totalling $123,000 which is included in other assets and being
amortized over three years which is the term of the agreement. Amortization for
the eight months ended August 31, 1999 totalled $24,000 and is recorded as an
interest expense on advances. The agreement provides that, if the London
Interbank Offered Rate exceeds 7%, Savings Bank of Manchester receives cash
payments on a quarterly basis. There were no cash payments due at August 31,
1999. Savings Bank of Manchester was not a party to any interest rate swap, cap
or floor arrangements during the years ended December 31, 1998, 1997 and 1996.
76
The marketable equity securities portfolio has the objective of producing
capital appreciation through long-term investment. Safety of principal and
prudent risk taking are of paramount importance. The total market value of the
marketable equity securities portfolio, excluding Federal Home Loan Bank stock,
is limited by the investment policy to 50% of Savings Bank of Manchester's Tier
1 capital. At August 31, 1999, the marketable equity securities portfolio
totalled $43.0 million or 36.4% of its authorized limit. At August 31, 1999,
the net unrealized gains associated with the marketable equity securities
portfolio were $12.7 million. In future periods and subject to market
conditions and other factors, Savings Bank of Manchester intends to increase its
marketable equity securities portfolio through periodic purchases of high
quality equity investments. Emphasis will be placed on companies with
established records of growth and financial strength.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that investments be categorized as "held to maturity,"
"trading securities" or "available for sale," based on management's intent as to
the ultimate disposition of each security. SFAS No. 115 allows debt securities
to be classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity." Debt and equity securities held for current resale are classified
as "trading securities." These securities are reported at fair value, and
unrealized gains and losses on the securities would be included in earnings.
Savings Bank of Manchester does not currently use or maintain a trading account.
Debt and equity securities not classified as either "held to maturity" or
"trading securities" are classified as "available for sale." These securities
are reported at fair value, and unrealized gains and losses on the securities
are excluded from earnings and reported, net of deferred taxes, as a separate
component of capital.
All of Savings Bank of Manchester's debt securities and mortgage-backed and
asset-backed securities carry market risk insofar as increases in market rates
of interest may cause a decrease in their market value. They also carry
prepayment risk insofar as they may be called or repaid before maturity in times
of low market interest rates, so that Savings Bank of Manchester may have to
invest the funds at a lower interest rate. The marketable equity securities
portfolio also carries equity price risk in that, if equity prices decline due
to unfavorable market conditions or other factors, Savings Bank of Manchester's
capital would decrease.
77
The following table presents the amortized cost and fair value of Savings Bank
of Manchester's securities, by type of security, at the dates indicated.
At August 31, At December 31,
-----------------------------------------------
1999 1998 1997
---------------------- ---------------------- ---------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- -------- --------- -------- --------- --------
(In thousands)
Debt securities held to maturity:
Asset-backed securities................... $ 19,258 $ 19,239 $ 23,204 $ 23,386 $ 25,674 $ 25,752
U.S. Government and agency obligations.... -- -- 3,506 3,524 7,055 7,071
Other debt securities..................... 3,130 3,137 3,145 3,246 3,145 3,224
-------- -------- -------- -------- -------- --------
Total............................... 22,388 22,376 29,855 30,156 35,874 36,047
-------- -------- -------- -------- -------- --------
Debt securities available for sale:
U.S. Government and agency
obligations............................ 68,201 67,753 70,563 71,703 48,534 48,767
Corporate securities...................... 36,574 36,168 40,128 40,420 23,771 24,010
-------- -------- -------- -------- -------- --------
Total............................... 104,775 103,921 110,691 112,123 72,305 72,777
-------- -------- -------- -------- -------- --------
Equity securities available for sale:
Marketable equity securities.............. 30,258 42,968 29,427 42,773 29,389 40,635
Other equity securities................... 432 432 396 396 192 192
-------- -------- -------- -------- -------- --------
Total............................... 30,690 43,400 29,823 43,169 29,581 40,827
-------- -------- -------- -------- -------- --------
Total debt and equity securities.... 157,853 169,697 170,369 185,448 137,760 149,651
-------- -------- -------- -------- -------- --------
Mortgage-backed securities:
Mortgage-backed securities held to
maturity:
FHLMC.................................. 7,567 7,357 8,615 8,719 10,238 10,259
FNMA................................... 6,293 6,036 7,376 7,464 1,508 1,548
GNMA................................... 8,617 8,351 6,751 6,715 2,663 2,682
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities
held to maturity................. 22,477 21,744 22,742 22,898 14,409 14,489
-------- -------- -------- -------- -------- --------
Mortgage-backed securities available
for sale:
FHLMC.................................. 2,310 2,296 3,086 3,130 4,595 4,649
FNMA................................... 6,204 6,044 4,782 4,878 5,847 5,929
GNMA................................... 3,977 3,803 4,964 4,851 7,434 7,407
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities
available for sale............... 12,491 12,143 12,832 12,859 17,876 17,985
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities.... 34,968 33,887 35,574 35,757 32,285 32,474
-------- -------- -------- -------- -------- --------
Total investment securities......... $192,821 $203,584 $205,943 $221,205 $170,045 $182,125
======== ======== ======== ======== ======== ========
At December 31,
-------------------------
1996
-------------------------
Amortized Fair
Cost Value
--------- --------
Debt securities held to maturity:
Asset-backed securities................... $ 24,860 $ 24,689
U.S. Government and agency
obligations............................ 14,502 14,489
Other debt securities..................... 155 154
-------- --------
Total............................... 39,517 39,332
-------- --------
Debt securities available for sale:
U.S. Government and agency
obligations............................ 36,232 35,907
Corporate securities...................... 32,745 32,795
-------- --------
Total............................... 68,977 68,702
-------- --------
Equity securities available for sale:
Marketable equity securities.............. 29,737 37,797
Other equity securities................... 192 192
-------- --------
Total............................... 29,929 37,989
-------- --------
Total debt and equity securities.... 138,423 146,023
-------- --------
Mortgage-backed securities:
Mortgage-backed securities held to
maturity:
FHLMC.................................. 4,132 4,106
FNMA................................... 1,948 1,986
GNMA................................... 1,968 1,960
-------- --------
Total mortgage-backed securities
held to maturity................. 8,048 8,052
-------- --------
Mortgage-backed securities available
for sale:
FHLMC.................................. 6,639 6,625
FNMA................................... 7,527 7,546
GNMA................................... 10,456 10,400
-------- --------
Total mortgage-backed securities
available for sale............... 24,622 24,571
-------- --------
Total mortgage-backed securities.... 32,670 32,623
-------- --------
Total investment securities......... $171,093 $178,646
======== ========
78
At August 31, 1999, Savings Bank of Manchester did not own any investment or
mortgage-backed securities of a single issuer, other than U.S. Government and
agency securities, which had an aggregate book value in excess of 10% of Savings
Bank of Manchester's capital at that date.
The following presents the activity in the investment securities and mortgage-
backed securities portfolios for the periods indicated.
Eight Months Ended
August 31, Year Ended December 31,
--------------------- ----------------------------------
1999 1998 1998 1997 1996
-------- -------- -------- --------- --------
(In thousands)
Mortgage-backed and asset-backed securities (1):
Mortgage-backed and asset-backed securities, beginning of period. $ 58,805 $ 58,068 $ 58,068 $ 57,477 $ 42,405
Purchases:
Asset-backed securities - held to maturity.................... -- 5,069 5,069 6,336 --
Mortgage-backed securities - held to maturity................. 2,971 12,235 12,235 4,929 17,181
Mortgage-backed securities - available for sale............... 2,206 -- -- 2,990 7,340
Sales:
Mortgage-backed securities - available for sale............... -- -- -- (1,297) --
Repayments and prepayments.................................... (9,678) (9,664) (16,510) (12,643) (9,210)
(Decrease) increase in net premium............................... (51) 88 25 114 62
Change in unrealized net gain on securities
available for sale............................................ (375) (81) (82) 162 (301)
-------- -------- -------- -------- --------
Net (decrease) increase in mortgage-backed and
asset-backed securities................................. (4,927) 7,647 737 591 15,072
-------- -------- -------- -------- --------
Mortgage-backed and asset-backed securities, end of period....... 53,878 65,715 58,805 58,068 57,477
-------- -------- -------- -------- --------
Investment securities (1):
Investment securities, beginning of period....................... 161,943 123,804 123,804 121,350 125,438
Purchases:
Investment securities - held to maturity...................... -- -- -- 775 --
Investment securities - available for sale.................... 17,196 38,669 61,694 86,593 34,740
Sales:
Investment securities - available for sale.................... (5,223) (6,472) (18,132) (60,815) (8,509)
Maturities:
Investment securities - held to maturity...................... (3,500) (2,000) (3,500) (9,375) (12,925)
Investment securities - available for sale.................... (17,000) (5,000) (5,000) (18,815) (21,106)
(Decrease) increase in net premium............................... (43) 55 17 159 77
Change in unrealized net gain on securities available for sale... (2,922) 395 3,060 3,932 3,635
-------- -------- -------- -------- --------
Net (decrease) increase in investment securities.............. (11,492) 25,647 38,139 2,454 (4,088)
-------- -------- -------- -------- --------
Investment securities, end of period............................. 150,451 149,451 161,943 123,804 121,350
-------- -------- -------- -------- --------
Total mortgage-backed, asset-backed and investment securities,
end of period.................................................... $204,329 $215,166 $220,748 $181,872 $178,827
======== ======== ======== ======== ========
_____________________
(1) Available for sale securities are presented at market value and held to
maturity securities are presented at amortized cost.
79
The following table presents certain information regarding the carrying
value, weighted average yields and maturities or periods to repricing of Savings
Bank of Manchester's debt securities at August 31, 1999.
At August 31, 1999
-------------------------------------------------------------------------------
More than One Year More than Five Years
One Year or Less to Five Years to Ten Years
---------------------------- ---------------------- ------------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------------- ------------ ---------- ---------- ----------- -----------
(Dollars in thousands)
Held to maturity securities:
Mortgage-backed securities................. $ 328 7.50% $ 96 7.50% $1,068 7.00%
Asset-backed securities.................... -- -- 4,851 2.43 3,754 6.39
Other securities........................... 10 5.50 135 7.75 -- --
------- ---- ------- ---- ------ ----
Total debt securities at
amortized cost...................... $ 338 7.44% $ 5,082 2.67% $4,822 6.53%
======= ======= ======
Available for sale securities:
U.S. Government and agency obligations..... $20,451 7.13% $41,988 6.21% $5,314 6.54%
Corporate securities....................... 10,695 6.86 25,473 6.87 -- --
Mortgage-backed securities................. 57 7.71 745 6.55 2,370 6.83
------- ---- ------- ---- ------ ----
Total debt securities at fair value.. $31,203 7.04% $68,206 6.46% $7,684 6.64%
======= ======= ======
--------------------- ------------------
More than Ten Years Total
--------------------- ------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
-------- ---------- -------- --------
Held to maturity securities:
Mortgage-backed securities................. $20,985 6.93% $ 22,477 6.94%
Asset-backed securities.................... 10,653 7.14 19,258 5.81
Other securities........................... 2,985 8.60 3,130 8.55
------- ---- -------- ----
Total debt securities at
amortized cost...................... $34,623 7.14% $ 44,865 6.57%
======= ========
Available for sale securities:
U.S. Government and agency obligations..... $ -- --% $ 67,753 6.51%
Corporate securities....................... -- -- 36,168 6.88
Mortgage-backed securities................. 8,971 7.39 12,143 7.57
------- ---- -------- ----
Total debt securities at fair value.. $ 8,971 7.39% $116,064 6.73%
======= ========
80
Deposit Activities and Other Sources of Funds
General. Deposits are the major external source of funds for Savings Bank
of Manchester's lending and other investment activities. In addition, Savings
Bank of Manchester also generates funds internally from loan principal
repayments and prepayments and maturing investment securities. Scheduled loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and money market conditions. Savings Bank of Manchester may use borrowings
from the Federal Home Loan Bank of Boston to compensate for reductions in the
availability of funds from other sources.
Deposit Accounts. Substantially all of Savings Bank of Manchester's
depositors reside in Connecticut. Savings Bank of Manchester offers a wide
variety of deposit accounts with a range of interest rates and terms. Savings
Bank of Manchester's deposit accounts consist of interest-bearing checking,
noninterest-bearing checking, regular savings, money market savings and
certificates of deposit. The maturities of Savings Bank of Manchester's
certificate of deposit accounts range from seven days to five years. In
addition, Savings Bank of Manchester offers retirement accounts, including IRAs
and Keogh accounts and simplified employee pension plan accounts. Savings Bank
of Manchester also offers commercial business products to small businesses
operating within its primary market area. Deposit account terms vary with the
principal differences being the minimum balance deposit, early withdrawal
penalties, limits on the number of transactions and the interest rate. Savings
Bank of Manchester reviews its deposit mix and pricing on a weekly basis.
Savings Bank of Manchester believes it offers competitive interest rates on
its deposit products. Savings Bank of Manchester determines the rates paid
based on a number of factors, including rates paid by competitors, Savings Bank
of Manchester's need for funds and cost of funds, borrowing costs and movements
of market interest rates. While certificate accounts in excess of $100,000 are
accepted by Savings Bank of Manchester, and may receive preferential rates,
Savings Bank of Manchester does not actively seek such deposits as they are more
difficult to retain than core deposits. Savings Bank of Manchester does not
utilize brokers to obtain deposits and at August 31, 1999 had no brokered
deposits.
In the unlikely event Savings Bank of Manchester is liquidated after the
conversion, depositors will be entitled to full payment of their deposit
accounts before any payment is made to Connecticut Bancshares as the sole
stockholder of Savings Bank of Manchester.
81
The following table presents the deposit activity of Savings Bank of
Manchester for the periods indicated.
Eight Months
Ended August 31, Year Ended December 31,
------------------------------- --------------------------------------------
1999 1998 1998 1997 1996
-------------- ------------- ------------- --------------- ----------
(In thousands)
Beginning balance............................... $855,117 $827,667 $827,667 $792,833 $764,789
Increase (decrease) before interest credited.... 11,959 (25,290) (4,969) 1,870 (3,552)
Interest credited............................... 20,246 21,854 32,419 32,964 31,596
Net increase (decrease)......................... 32,205 (3,436) 27,450 34,834 28,044
-------- -------- -------- -------- --------
Ending balance.................................. $887,322 $824,231 $855,117 $827,667 $792,833
======== ======== ======== ======== ========
At August 31, 1999, Savings Bank of Manchester had certificate of deposit
accounts in amounts of $100,000 or more maturing as follows:
Weighted
Average
Maturity Period Amount Rate
----------------- ---------------- ------------
(In thousands)
Three months or less................................... $13,805 4.72%
Over 3 months through 6 months......................... 11,500 4.75
Over 6 months through 12 months........................ 20,877 5.48
Over 12 months......................................... 13,382 5.83
-------
Total............................................ $59,564 5.24%
=======
82
The following table presents information concerning average balances
and weighted average interest rates for the periods indicated.
Year Ended December 31,
-------------------------------------
Eight Months Ended
August 31, 1999 1998
------------------------------------------- ------------------------------------
Percent
Percent Weighted of Total Weighted
Average of Total Average Average Average Average
Balance Deposits Rate Balance Deposits Rate
-------------- ------------ ----------- ---------- ------------ ---------
Savings accounts................... $227,504 26.3% 2.25% $215,769 25.8% 2.36%
Money market accounts.............. 44,711 5.2 3.32 33,146 4.0 2.87
NOW accounts....................... 109,116 12.6 1.37 94,394 11.2 1.38
Certificates of deposit............ 443,274 51.2 5.05 463,226 55.3 5.45
Demand deposits.................... 41,122 4.7 -- 30,985 3.7 --
-------- ----- -------- -----
Total........................... $865,727 100.0% 3.61% $837,520 100.0% 3.90%
======== ===== ======== =====
--------------------------------------------------------------------------------
1997 1996
------------------------------------------- ------------------------------------
Percent Percent
of Total Weighted of Total Weighted
Average Average Average Average Average Average
Balance Deposits Rate Balance Deposits Rate
-------------- ------------ ----------- ---------- ------------ ---------
(Dollars in thousands)
Savings accounts................... $207,423 25.4% 2.27% $206,344 26.6% 2.28%
Money market accounts.............. 30,709 3.8 2.56 30,089 3.9 2.37
NOW accounts....................... 80,445 9.9 1.37 71,657 9.2 1.44
Certificates of deposit............ 471,865 57.8 5.58 448,918 57.9 5.60
Demand deposits.................... 25,123 3.1 -- 18,836 2.4 --
-------- ----- -------- -----
Total............................. $815,565 100.0% 4.03% $775,844 100.0% 4.07%
======== ===== ======== =====
83
Certificates of Deposit by Rates and Maturities. The following table
presents by various rate categories, the amount of certificate outstanding at
the dates indicated and the periods to maturity of the certificate accounts
outstanding at August 31, 1999.
Period to Maturity from August 31, 1999
---------------------------------------------------------------------
One to Two to Over Total at
Less than Two Three Three August 31,
One Year Years Years Years 1999
-------------- ----------- ----------- ----------- --------------
(Dollars in thousands)
0.00 - 2.00%........... $ 30 $ -- $ -- $ -- $ 30
2.01 - 4.00%........... 2,982 -- -- -- 2,982
4.01 - 5.00%........... 237,669 12,954 2,563 12,779 265,965
5.01 - 6.00%........... 76,926 20,120 17,750 29,567 144,363
6.01 - 7.00%........... 18,288 8,686 1,352 138 28,464
7.01 - 8.00%........... 7,753 -- -- -- 7,753
8.01 - 9.00%........... -- -- -- -- --
-------- ------- ------- ------- --------
Total............... $343,648 $41,760 $21,665 $42,484 $449,557
======== ======= ======= ======= ========
Total at December 31,
---------------------------------
1998 1997
-------------- --------------
0.00 - 2.00%................................... $ 21 $ 30
2.01 - 4.00%................................... 2,598 2,743
4.01 - 5.00%................................... 222,709 74,900
5.01 - 6.00%................................... 178,662 335,908
6.01 - 7.00%................................... 32,907 52,072
7.01 - 8.00%................................... 9,227 10,100
8.01 - 9.00%................................... 15 13
-------- --------
Total....................................... $446,139 $475,766
======== ========
Borrowings. Savings Bank of Manchester may use advances from the Federal
Home Loan Bank of Boston to supplement its supply of lendable funds to meet
deposit withdrawal requirements. The Federal Home Loan Bank of Boston functions
as a central reserve bank providing credit for savings banks and certain other
member financial institutions. As a member of the Federal Home Loan Bank of
Boston, Savings Bank of Manchester is required to own capital stock in the
Federal Home Loan Bank of Boston and is authorized to apply for advances on the
security of the capital stock and certain of its mortgage loans and other
assets, principally securities that are obligations of, or guaranteed by, the
U.S. Government or its agencies, provided certain creditworthiness standards
have been met. Advances are made under several different credit programs. Each
credit program has its own interest rate and range of maturities. Depending on
the program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged to
secure the credit. At August 31, 1999, Savings Bank of Manchester had the
ability to borrow a total of approximately $385.0 million from the Federal Home
Loan Bank of Boston. At that date, Savings Bank of Manchester had outstanding
advances of $66.9 million. At August 31, 1999, Savings Bank of Manchester also
maintained an unused $15.0 million line of credit with a third party financial
institution.
Federal banking laws and regulations prohibit a bank from paying interest
on commercial checking accounts. However, Savings Bank of Manchester offers to
its commercial customers a transactional repurchase agreement, a form of
non-deposit borrowing by Savings Bank of Manchester, that is designed as a
mechanism to offer business customers the functional equivalent of a commercial
checking account that pays interest. This account, overseen by an outside agent,
is not an FDIC-insured deposit account, but is backed by a security interest in
U.S. Government and agency securities at a ratio of approximately 1.10 to 1.00.
At August 31, 1999, Savings Bank of Manchester had 1,593 of such accounts with
balances aggregating $97.9 million.
84
The following tables presents certain information regarding Savings Bank of
Manchester's Federal Home Loan Bank advances and short-term borrowed funds at
the dates or for the periods indicated.
At or For the Eight
Months
Ended August 31, At or For the Year Ended December 31,
----------------------------------- ----------------------------------------------
1999 1998 1998 1997 1996
--------------- --------------- --------------- -------------- -----------
(Dollars in thousands)
Average balance outstanding:
Federal Home Loan Bank advances.......... $48,422 $32,772 $36,534 $14,144 $15,319
Short-term borrowed funds................ 86,161 73,443 76,523 61,677 59,833
Maximum amount outstanding at any
month-end during the period:
Federal Home Loan Bank advances.......... 66,899 45,000 45,000 17,987 19,650
Short-term borrowed funds................ 97,848 85,050 87,790 72,780 63,609
Balance outstanding at end of period:
Federal Home Loan Bank advances.......... 66,899 45,000 45,000 17,987 15,000
Short-term borrowed funds................ 97,847 85,050 79,545 71,179 58,747
Weighted average interest rate
during the period:
Federal Home Loan Bank advances.......... 6.08% 6.28% 6.31% 6.90% 7.98%
Short-term borrowed funds................ 2.90 2.95 3.00 2.83 2.88
Weighted average interest rate
at end of period:
Federal Home Loan Bank advances.......... 6.10 6.35 6.21 6.54 7.38
Short-term borrowed funds................ 2.95 3.10 2.84 3.21 3.09
Subsidiary Activities
The following are descriptions of Savings Bank of Manchester's wholly owned
subsidiaries, which will be indirectly owned by Connecticut Bancshares following
the conversion.
SBM, Ltd. SBM, Ltd. was organized in February, 1983 for the purpose of
acquiring and holding real estate acquired by Savings Bank of Manchester. In
1990, the purpose changed to acquire, hold and dispose of real estate acquired
through foreclosure. At August 31, 1999, SBM held property consisting of one
residential subdivision with a book value of $197,000.
923 Main, Inc. 923 Main was incorporated in December, 1994 for the purpose
of maintaining an ownership interest in a third party registered broker-dealer,
Infinex Financial Group. Infinex maintains an office at Savings Bank of
Manchester and offers to customers a complete range of nondeposit investment
products, including mutual funds, debt, equity and government securities,
retirement accounts, insurance products and fixed and variable annuities.
Savings Bank of Manchester receives a portion of the commissions generated by
Infinex from sales to customers. For 1998 and the eight months ended August 31,
1999, Savings Bank of Manchester received fees of $1.2 million and $804,000,
respectively, through its relationship with Infinex.
Savings Bank of Manchester Mortgage Company, Inc. SBM Mortgage was
established in January 1999 to service and hold loans secured by real property.
SBM Mortgage was established and is managed to qualify as a "passive investment
company " for Connecticut income tax purposes. Income earned by a qualifying
passive investment company is exempt from Connecticut income tax. Income tax
savings to Savings Bank of Manchester from the use of a passive investment
company was approximately $541,000 for the eight months ended August 31, 1999.
85
Savings Bank of Manchester Foundation, Inc.
In 1998, Savings Bank of Manchester established a private charitable
foundation, the Savings Bank of Manchester Foundation, Inc. This foundation,
which is not a subsidiary of Savings Bank of Manchester, provides grants to
individuals and not-for-profit organizations within the communities that Savings
Bank of Manchester serves. In 1998, Savings Bank of Manchester contributed
marketable equity securities with a cost basis and fair market value of $763,000
and $3.0 million, respectively, at the date of contribution and transfer. At
August 31, 1999, the foundation had assets of approximately $2.9 million. The
foundation's five member Board of Trustees consists of current directors,
officers and employees of Savings Bank of Manchester. After the conversion,
Savings Bank of Manchester will continue to maintain the foundation, but does
not expect to make any further contributions to the foundation. The existence of
Savings Bank of Manchester's current foundation is not expected to impact the
business and affairs of the SBM Foundation which is being established in
connection with Savings Bank of Manchester's conversion. See "The Conversion--
Establishment of the Charitable Foundation."
86
Properties
Savings Bank of Manchester currently conducts its business through its main
office located in Manchester, Connecticut, and 22 other full-service banking
offices. Connecticut Bancshares believes that Savings Bank of Manchester's
facilities are adequate to meet the present and immediately foreseeable needs of
Savings Bank of Manchester and Connecticut Bancshares.
Net Book Value
of Property
Leased, Original or Leasehold
Licensed Year Date of Lease/ Improvements
or Leased License at August 31,
Location Owned or Acquired Expiration 1999
- -------- -------------- --------------- ---------------- ------------------
(In thousands)
Main Branch and Executive Office:
923 Main Street
Manchester, CT 06040 Owned 1932 -- $1,400
Branch Offices:
285 East Center Street
Manchester, CT 06040 Leased 1956 2001 114
220 North Main Street
Manchester, CT 06040 Leased 1970 2000/(1)/ 130
241 West Middle Turnpike
Manchester, CT 06040 /(2)/ 1983 2003 169
955 Sullivan Avenue
South Windsor, CT 06074 /(2)/ 1965 2010 515
477 Connecticut Boulevard
East Hartford, CT 06108 Leased 1996 2001 95
236 Spencer Street
Manchester, CT 06040 Leased 1974 2004 --
1 Main Street
East Hartford, CT 06118 Leased 1975 2000/(3)/ 11
62 Buckland Street
Manchester, CT 06040 Leased 1990 2004 104
Eastford Center, County Road
Eastford, CT 06242 Leased 1985 2004 9
122A Prospect Hill Road
East Windsor, CT 06088 Leased 1985 2004 18
6 Storrs Road
Mansfield, CT 06250 Leased 1986 2000/(4)/ 83
200 Merrow Road
Tolland, CT 06084 Leased 1989 2004 75
1320 Manchester Road
Glastonbury, CT 06033 /(2)/ 1987 2007 273
435 Hartford Turnpike
Vernon, CT 06066 Leased 1988 2003 75
1078 N. Main Street
Dayville (Killingly), CT 06241 Leased 1990 2000/(5)/ 48
Route 66
Columbia, CT 06237 Owned 1991 -- 243
87
Net Book Value
of Property
Leased, or Leasehold
Licensed Original Year Date of Lease/ Improvements
or Leased License at August 31,
Location Owned or Acquired Expiration 1999
- -------- -------------- --------------- ---------------- ------------------
(In thousands)
1671 Boston Turnpike
Coventry, CT 06238 Leased 1993 2003 83
574 & 596 Middle Turnpike
Storrs, CT 06268 Owned 1995 -- 785
49 Hazard Avenue
Enfield, CT 06082 Leased 1995 2007 114
2133 Poquonock Avenue
Windsor, CT 06095 Leased 1996 2001 176
44-48 Wells Road
Wethersfield, CT 06109 Leased 1996 2003 124
55 South Main Street
West Hartford, CT 06107 Leased 1997 2001 236
ATM Facilities:
Rt.6
Andover, CT 06232 Leased 1974 /(6)/ --
Junction 44 & 74
Ashford, CT 06278 Leased 1976 2001 2
Rt. 44A, 663 Boston Turnpike
Bolton, CT 06043 Leased 1968 2000/(7)/ 3
700 Burnside Ave.
East Hartford, CT 06108 Leased 1966 2000/(6)/ --
60 Bidwell Street
Manchester, CT 06040 Licensed/(8)/ 1990 /(9)/ --
Buckland Hills Mall
Manchester, CT 06040 Leased 1992 2004 --
31 Union Street
Rockville, CT 06066 Licensed/(8)/ 1995 /(9)/ --
469 Hartford Rd
Manchester, CT 06040 Leased 1970 2002 --
71 Haynes Street
Manchester, CT 06040 Licensed/(8)/ 1989 /(9)/ --
Administrative Offices:
469 Hartford Road
Manchester, CT 06040 Leased 1970 2002 35
50-56 Cottage Street
Manchester, CT 06040 Owned 1986 -- 465
881 Main Street
Manchester, CT 06040 Leased 1984 2001 61
935 Main Street
Manchester, CT 06040 Owned /(10)/ -- 2,590
935 Main Street
Units B102 & B102A
Manchester, CT 06040 Leased 1997 2000/(11)/ 89
88
Net Book Value
of Property
Leased, Original or Leasehold
Licensed Year Date of Lease/ Improvements
or Leased License at August 31,
Location Owned or Acquired Expiration 1999
- -------- -------------- --------------- ---------------- ------------------
(In thousands)
945 Main Street
Unit 102A
Manchester, CT 06040 Leased 1999 2001 --
945 Main Street
Unit 305
Manchester, CT 06040 Owned 1997 -- 137
945 Main Street
Unit 309
Manchester, CT 06040 Owned 1998 -- 77
35-43 Oak Street
Manchester, CT 06040 Owned 1995 -- 750
681 Main Street
Plantsville, CT 06479 Leased 1997 /(12)/ --
------
$9,089
======
______________________________
(1) Savings Bank of Manchester intends to exercise its option to renew this
lease for an additional five-year period.
(2) Savings Bank of Manchester owns the building and leases the land and only
owns the building as long as the lease is in effect.
(3) Savings Bank of Manchester does not have an option to renew the lease.
Savings Bank of Manchester is currently negotiating the terms of a new
lease.
(4) Savings Bank of Manchester intends to exercise its option to renew this
lease for three additional five-year periods.
(5) Savings Bank of Manchester intends to exercise its option to renew this
lease for two additional five-year periods.
(6) A new lease is currently under negotiation.
(7) Savings Bank of Manchester intends to renew this lease for one additional
one-year period.
(8) Savings Bank of Manchester maintains a license to possess the property.
Generally, the holder of a license has less property rights than the
possessor of a leasehold interest.
(9) A new license agreement is currently under negotiation.
(10) Savings Bank of Manchester owns sixteen commercial condominiums, which were
all acquired at various times between 1990 and 1999.
(11) Savings Bank of Manchester has an option to renew this lease for two
additional three-year periods.
(12) Savings Bank of Manchester possesses this property on a month-to-month
basis.
Personnel
As of August 31, 1999, Savings Bank of Manchester had 330 full-time
employees and 70 part-time employees, none of whom is represented by a
collective bargaining unit. Savings Bank of Manchester believes its relationship
with its employees is good.
Legal Proceedings
Periodically, there have been various claims and lawsuits involving Savings
Bank of Manchester, such as claims to enforce liens, condemnation proceedings on
properties in which Savings Bank of Manchester holds security interests, claims
involving the making and servicing of real property loans and other issues
incident to Savings Bank of Manchester's business. Savings Bank of Manchester is
not a party to any pending legal proceedings that it believes would have a
material adverse effect on the financial condition or operations of Savings Bank
of Manchester.
89
MANAGEMENT OF CONNECTICUT BANCSHARES
Directors are elected by the stockholders of Connecticut Bancshares for
staggered three-year terms, or until their successors are elected and qualified.
Connecticut Bancshares' Board of Directors consists of 15 persons divided into
three classes, each of which contains approximately one-third of the Board. One
class, consisting of Messrs. A. Paul Berte, John D. LaBelle, Jr., Jon L. Norris,
Laurence P. Rubinow and Gregory S. Wolff, has a term of office expiring at the
first annual meeting of stockholders; a second class, consisting of Messrs.
Thomas A. Bailey, Richard P. Meduski, Michael B. Lynch, John G. Sommers and
Thomas E. Toomey, has a term of office expiring at the second annual meeting of
stockholders; and a third class, consisting of Messrs. Timothy J. Devanney, M.
Adler Dobkin, Eric A. Marziali and William D. O'Neill and Ms. Sheila B.
Flanagan, has a term of office expiring at the third annual meeting of
stockholders. Connecticut Bancshares anticipates that its first annual meeting
of stockholders will be held in September 2000.
The officers of Connecticut Bancshares are elected annually and serve at
the Board's discretion. The officers of Connecticut Bancshares are:
Name Position Held With Connecticut Bancshares
----- -----------------------------------------
Thomas A. Bailey Chairman of the Board
Richard P. Meduski President and Chief Executive Officer
Charles L. Pike First Executive Vice President
Douglas K. Anderson Executive Vice President
Nicholas B. Mason Senior Vice President and Chief Financial
Officer
Carole L. Yungk Corporate Secretary
90
MANAGEMENT OF SAVINGS BANK OF MANCHESTER
Directors and Executive Officers
The Board of Directors of Savings Bank of Manchester is presently composed
of 15 members who are elected for terms of three years, approximately one third
of whom are elected annually as required by the Bylaws of Savings Bank of
Manchester. The executive officers of Savings Bank of Manchester are appointed
annually by the Board of Directors and hold office until their respective
successors are chosen and qualified, or until their death, earlier resignation
or removal from office. The following table presents information with respect to
the directors and executive officers of Savings Bank of Manchester.
Directors
Position Held With Savings Bank of Director Term
Name Age (1) Manchester Since Expires
- ----- ------- ---------------------------------- -------- -------
Thomas A. Bailey 69 Director and Chairman of the Board 1974 2001
Richard P. Meduski 54 Director, President and Treasurer 1983 2001
A. Paul Berte 58 Director 1993 2000
Timothy J. Devanney (2) 47 Director 1999 2002
M. Adler Dobkin 68 Director 1976 2002
Sheila B. Flanagan 59 Director 1987 2002
John D. LaBelle, Jr. 50 Director 1991 2000
Michael B. Lynch 60 Director 1986 2001
Eric A. Marziali (2) 40 Director 1999 2002
Jon L. Norris 58 Director 1996 2000
William D. O'Neill (2) 60 Director 1998 2002
Laurence P. Rubinow 55 Director 1996 2000
John G. Sommers 44 Director 1993 2001
Thomas E. Toomey 66 Director 1981 2001
Gregory S. Wolff 47 Director 1997 2000
Executive Officers Who Are Not Directors
Position Held With Savings Bank of
Name Age (1) Manchester
- ----- ------- ----------------------------------
Charles L. Pike 55 First Executive Vice President
Douglas K. Anderson 49 Executive Vice President
Nicholas B. Mason 54 Senior Vice President and Chief
Financial Officer
Roger A. Somerville 55 Senior Vice President
______________________
(1) As of August 31, 1999.
(2) All of the directors except Messrs. Devanney, Marziali and O'Neill are also
directors of Connecticut Bankshares, M.H.C.
91
Biographical Information
Below is certain information regarding the directors and executive officers
of Savings Bank of Manchester. Unless otherwise stated, each director and
executive officer has held his or her current occupation for the last five
years. There are no family relationships among or between the directors or
executive officers except as set forth below.
Thomas A. Bailey has served as the Chairman of the Board of Savings Bank of
Manchester since 1990. He is a retired attorney and formerly a partner in the
law firm of Gilman & Marks, Hartford, Connecticut.
Richard P. Meduski has served as the President and Treasurer of Savings
Bank of Manchester since 1988. He has served as the President and Chief
Executive Officer of Connecticut Bancshares since its formation.
A. Paul Berte is a self-employed attorney in Manchester, Connecticut.
Timothy J. Devanney is the President of Highland Park Market of Manchester
and Highland Park Market of Glastonbury, and a Member of Highland Park Market of
Farmington L.L.C., all three of which are retail grocery businesses. Mr.
Devanney is related to Mr. Toomey by marriage to Mr. Toomey's niece.
M. Adler Dobkin is Vice President of Rayco, Inc., a metal finishing
facility. He was previously the President of the company.
Sheila B. Flanagan is a retired attorney and acted as a consultant between
1996 and 1999. Before 1996, she served as in-house counsel to the Massachusetts
Mutual Life Insurance Company.
John D. LaBelle, Jr. is a principal with the law firm of LaBelle, LaBelle,
Naab & Horvath P.C., Manchester, Connecticut.
Michael B. Lynch is the President and Chief Executive Officer of Lynch
Motors, Inc., a Toyota-Pontiac automobile dealership located in Manchester,
Connecticut.
Eric A. Marziali has served as the President of United Abrasives, Inc. and
SAIT Overseas Trading and Technical Corp., and Vice President of United
Abrasives Canada, Inc., all related entities, which manufacture abrasive
products, since 1982.
Jon L. Norris is the co-owner and operator of Independent Insurance Center,
Inc., a full-service insurance agency in which he is also a principal financial
partner.
William D. O'Neill is a consultant to and was the President of Fuss &
O'Neill Inc. until June 1999. Fuss & O'Neill is a civil and environmental
engineering firm with headquarters in Manchester, Connecticut and offices in the
states of Massachusetts, Rhode Island and Vermont.
Laurence P. Rubinow is the President and Chief Executive Officer of the law
firm of Woodhouse, Rubinow & Macht, P.C., located in Manchester, Connecticut.
Mr. Rubinow is the son of Eleanor S. Rubinow, a Director Emeritus.
John G. Sommers is the President of Allied Printing Services Inc., a
commercial printing company, located in Manchester, Connecticut.
Thomas E. Toomey is the Executive Vice President of Marketing Specialists,
Inc., a marketing firm. Until 1997, he was the President of Toomey DeLong Food
Brokers, a wholesale grocer, which no longer operates. Mr. Toomey is related to
Mr. Devanney by marriage of his niece to Mr. Devanney.
92
Gregory S. Wolff is the Chairman of Wolff-Zackin & Associates Inc., an
insurance agency located in Vernon, Connecticut.
Executive Officers Who Are Not Directors
Charles L. Pike joined Savings Bank of Manchester in 1983 and serves as the
First Executive Vice President and Senior Loan Officer. Mr. Pike is also First
Vice President of Connecticut Bancshares.
Douglas K. Anderson joined Savings Bank of Manchester in 1987 and served
full-time as Executive Vice President until 1995, at which time he changed his
employment status to part-time in order to become President and Chief Executive
Officer of Open Solutions, Inc., a computer software provider, located in
Glastonbury, Connecticut and Savings Bank of Manchester's primary computer
software provider. In August 1999, Mr. Anderson resigned as President and Chief
Executive Officer of Open Solutions and returned to full-time employment with
Savings Bank of Manchester. Mr. Anderson is now Executive Vice President of
Savings Bank of Manchester and Connecticut Bancshares and Chairman of Open
Solutions.
Nicholas B. Mason joined Savings Bank of Manchester in 1988 as Chief
Financial Officer and Senior Vice President. In addition, he serves as a
Secretary to the Hartford Mutual Investment Fund and a Director on the Board of
Directors of Bankers' Bank Northeast.
Roger A. Somerville joined Savings Bank of Manchester in 1984 as a
commercial loan officer. He has been Senior Vice President of Commercial Lending
since 1988. In addition, Mr. Somerville is a director of The Greater Manchester
Chamber of Commerce, Genesis Center, Inc., Community Health Resources, Inc.,
Hartford Economic Development Co., Greater Hartford Business Development Corp.,
and the Greater Manchester United Way.
Meetings and Committees of the Board of Directors of Savings Bank of Manchester
and Connecticut Bancshares
The business of Savings Bank of Manchester is conducted through meetings
and activities of the Board of Directors and its committees. During the year
ended December 31, 1998 the Board of Directors held 12 regular meetings and
three special meetings. Except for Messrs. Dobkin and Toomey, no director
attended fewer than 75% of the total meetings of the Board of Directors and
committees on which the director served.
The Board of Directors has established the following committees:
The Audit & Examination Committee consists of Messrs. Berte, LaBelle,
Marziali, Norris, Wolff and Ms. Flanagan. This committee reviews Connecticut
Bankshares, M.H.C.'s consolidated financial statements, supervises the internal
auditor and engages the external auditors. The committee meets quarterly and
also in March to review the annual financial statements and met four times in
1998.
The Investment Committee consists of Messrs. Devanney, Dobkin, O'Neill,
Rubinow and Toomey and Ms. Flanagan. The Investment Committee oversees the
interest rate risk management of Savings Bank of Manchester and approves all
investment and asset/liability policies. The committee meets quarterly and met
four times in 1998.
The Compensation Committee consists of Messrs. Berte, Dobkin, Lynch,
Sommers and Wolff and Ms. Flanagan. This committee is responsible for all
matters regarding compensation and fringe benefits for executive officers. The
committee meets as necessary and met ten times in 1998.
The Board of Directors has also established an Executive Committee, Loan
Committee, Pension-Retirement Committee and Nominating Committee.
93
The Board of Directors of Connecticut Bancshares has established the
following committees: the Audit Committee consisting of Messrs. Berte, LaBelle,
Marziali and Wolff and Ms. Flanagan; the Pricing Committee consisting of the
entire Board of Directors of Connecticut Bancshares; the Compensation Committee
consisting of Messrs. Sommers, Berte, Dobkin, Lynch and Wolff and Ms. Flanagan;
and the Nominating Committee consisting of Messrs. Dobkin, Wolff and Berte, and
Ms. Flanagan.
Directors' Compensation
Fees. Non-employee directors of Savings Bank of Manchester each receive
$750 for each board meeting attended and $500 for each committee meeting
attended. Following the conversion, non-employee directors of Savings Bank of
Manchester will each receive an annual retainer of $15,000, $750 for each board
meeting attended and $200 for each committee meeting attended. In addition, non-
employee directors of Connecticut Bancshares will receive an annual retainer of
$15,000.
Directors' Consultation Plan. Savings Bank of Manchester has adopted a
post-retirement consultation program for incumbent non-employee directors to
ensure the continued availability of its retired directors as consultants to
management because of their significant knowledge of and involvement in Savings
Bank of Manchester's operations. A director who retires at age 70 with at least
10 years of service will receive an annual benefit equal to 50% of the average
cash board compensation (retainers and meeting fees) received by the director
over the three years preceding retirement. The benefit increases by 5% for each
additional year of service with a benefit equal to 100% of final average board
compensation payable after 20 years of service. The benefit will be payable
until the earlier to occur of the tenth anniversary of the director's retirement
or the director's death. A director with at least 10 years of service may elect
to retire before age 70 but after age 65 with a corresponding reduction in the
benefit equal to 5% for each year the director's age is less than age 70. The
plan provides that each married retired director is guaranteed at least five
annual payments. If a retired director dies before the receipt of at least five
annual payments, any remaining payments will be made to the retired director's
surviving spouse to ensure that a minimum of five payments are made. The plan
also provides that the surviving spouse of an active director with at least 10
years of service who dies before age 65 will receive a benefit payable for five
years equal to 50% of the benefit the director would have been eligible to
receive had the director attained age 70 before his death, and that the
surviving spouse of an active director with at least 10 years of service who
dies after attaining age 65 will receive a benefit payable for five years equal
to 100% of what that director would have received. In the event of a change in
control (as defined in the plan), each incumbent director will be deemed retired
for purposes of the plan and will be eligible to receive a lump sum benefit
equal to the present value of the normal retirement benefit with each director
assumed to have at least 10 years of service. Savings Bank of Manchester expects
to accrue an additional $239,000 in 2000 with respect to its anticipated
liability under the program.
94
Executive Compensation
Summary Compensation Table. The following information is furnished for the
President and chief executive officer and the four other highest paid executive
officers of Savings Bank of Manchester who received a salary and bonus of
$100,000 or more during the year ended December 31, 1999.
Annual Compensation (1)
------------------------------------------------
All Other
Name and Position Year (2) Salary Bonus (3) Compensation (4)
- ------------------ ------------ ------------- ------------ ------------------
Richard P. Meduski, 1999 $294,000 $110,000 $41,135
President and Treasurer
Charles L. Pike, 1999 195,848 37,300 4,800
First Executive Vice President
Douglas K. Anderson 1999 160,000 15,200 2,199
Executive Vice President
Roger A. Somerville, 1999 124,833 27,500 4,339
Senior Vice President
Nicholas B. Mason, 1999 122,911 16,000 4,455
Senior Vice President and
Chief Financial Officer
___________________
(1) Does not include the aggregate amount of perquisites and other personal
benefits, which was less than $50,000 or 10% of the total annual salary and
bonus reported.
(2) Compensation information for the years ended December 31, 1998 and 1997 has
been omitted because Savings Bank of Manchester was neither a public company
nor a subsidiary of a public company at that time.
(3) Represents board awarded discretionary cash bonus.
(4) Represents matching contributions under Savings Bank of Manchester's 401(k)
Plan in the amounts of $4,800, $4,800, $2,199, $4,339 and $4,455 for Messrs.
Meduski, Pike, Anderson, Somerville and Mason, respectively. Also includes
$36,335 paid to Mr. Meduski for premiums on an insurance policy.
Employment Agreements. Upon the completion of the conversion, Savings
Bank of Manchester and Connecticut Bancshares each intend to enter into
employment agreements with Messrs. Meduski, Pike, Anderson, Mason and
Somerville. The employment agreements are intended to ensure that Savings Bank
of Manchester and Connecticut Bancshares will be able to maintain a stable and
competent management base after the conversion. The continued success of Savings
Bank of Manchester and Connecticut Bancshares depends to a significant degree on
the skills and competence of officers.
The employment agreements will provide for a three-year term. The term of
the employment agreements will be extended on an annual basis unless written
notice of non-renewal is given by the Board of Directors of Connecticut
Bancshares or Savings Bank of Manchester. The employment agreements provide
that each executive's base salary will be reviewed annually. The base salaries
which will be effective for such employment agreements for Messrs. Meduski,
Pike, Anderson, Somerville and Mason will be $330,750, $220,329, $180,000,
$140,438 and $138,275 respectively. In addition to the base salary, the
employment agreements provide for, among other things, participation in stock
benefits plans and other fringe benefits applicable to executive personnel. The
employment agreements provide for termination by Savings Bank of Manchester or
Connecticut Bancshares for cause, as defined in the employment agreements, at
any time. If Savings Bank of Manchester or Connecticut Bancshares chooses to
terminate an executive's employment for reasons other than for cause, or if an
executive resigns from Savings Bank of Manchester or Connecticut Bancshares
after a: (1) failure to re-elect the executive to his/her current offices; (2)
material change in the executive's functions, duties or responsibilities; (3)
relocation of the executive's principal
95
place of employment by more than 35 miles; (4) reduction in the benefits and
perquisites being provided to the executive in the employment agreement; (5)
liquidation or dissolution of Savings Bank of Manchester or Connecticut
Bancshares; or (6) breach of the employment agreement by Savings Bank of
Manchester or Connecticut Bancshares, the executive or, if the executive dies,
his/her beneficiary, would be entitled to receive an amount equal to the
remaining base salary payments due to the executive for the remaining term of
the employment agreement and the contributions that would have been made on the
executive's behalf to any employee benefit plans of Savings Bank of Manchester
and Connecticut Bancshares during the remaining term of the employment
agreement. Savings Bank of Manchester and Connecticut Bancshares would also
continue and/or pay for the executive's life, health, dental and disability
coverage for the remaining term of the employment agreement. Upon termination of
the executive for reasons other than a change in control, the executive must
adhere to a one year non-competition restriction.
Under the employment agreements, if voluntary or involuntary termination
follows a change in control of Savings Bank of Manchester or Connecticut
Bancshares, the executive or, if the executive dies, his/her beneficiary, would
be entitled to a severance payment equal to the greater of: (1) the payments
due for the remaining terms of the agreement; or (2) three times the average of
the five preceding taxable years' annual compensation. Savings Bank of
Manchester and Connecticut Bancshares would also continue the executive's life,
health, dental and disability coverage for thirty-six months. Even though both
Savings Bank of Manchester and Connecticut Bancshares employment agreements
provide for a severance payment if a change in control occurs, the executive
would only be entitled to receive a severance payment under one agreement. The
executive would also be entitled to receive an additional tax indemnification
payment if payments under the employment agreements or any other payments
triggered liability under the Internal Revenue Code as an excise tax
constituting "excess parachute payments." Under applicable law, the excise tax
is triggered by change in control-related payments which equal or exceed three
times the executive's average annual compensation over the five years preceding
the change in control. The excise tax equals 20% of the amount of the payment
in excess of one times the executive's average compensation over the preceding
five-year period. If a change in control of Savings Bank of Manchester and
Connecticut Bancshares occurred, the total amount of payments due under the
agreements, based solely on the 1999 cash compensation and without regard to
future base salary adjustments or bonuses and excluding any benefits under any
employee benefit plan which may be payable, would be approximately $2.7 million.
Payments to the executive under Savings Bank of Manchester's employment
agreement will be guaranteed by Connecticut Bancshares if payments or benefits
are not paid by Savings Bank of Manchester. Payment under Connecticut
Bancshares' employment agreement would be made by Connecticut Bancshares. The
employment agreements also provide that Savings Bank of Manchester and
Connecticut Bancshares will indemnify the executive to the fullest extent
legally allowable.
In addition to the foregoing employment agreements, Savings Bank of
Manchester intends to enter into an employment agreement with Mr. Bailey in his
capacity as Chairman of the Board of Directors of Savings Bank of Manchester.
The Chairman's employment agreement will be in effect through 2000. The
Chairman's base salary under the agreement will be $90,000. In addition to those
terms and conditions generally contained in the employment agreements as
described above, Mr. Bailey's employment agreement also provides that upon the
Chairman's retirement as an employee of Savings Bank of Manchester, the Chairman
will be retained as a consultant for a ten year period at his then current base
salary.
Change in Control Agreements. Upon the completion of the conversion,
Savings Bank of Manchester intends to enter into change in control agreements
with seven senior officers who will not be covered by an employment agreement.
Each change in control agreement will be renewable on an annual basis. The
change in control agreements will have terms ranging from one to three years.
The change in control agreements will provide that if voluntary (upon the
occurrence of circumstances discussed in the agreements) or involuntary
termination, other than for cause, follows a change in control of Savings Bank
of Manchester and Connecticut Bancshares, the officers would be entitled to
receive a severance payment equal to one to three times their average annual
compensation for the five most recent taxable years. Savings Bank of Manchester
would also continue to pay for
96
the officers' life, health and disability coverage for 12 to 36 months following
termination. If a change in control of Savings Bank of Manchester and
Connecticut Bancshares occurred, the total payments that would be due under the
change in control agreements, based solely on the 1999 cash compensation paid to
the officers covered by the change in control agreements and excluding any
benefits under any employee benefit plan which may be payable, would equal
approximately $2.2 million.
Benefits
General. Savings Bank of Manchester currently pays 74% of the total costs
of the medical health and dental insurance plans and 100% of premiums for life
and disability benefits for full-time employees.
Pension Plan. Savings Bank of Manchester maintains a non-contributory
pension plan for its employees. Generally, employees of Savings Bank of
Manchester begin participation in the pension plan once they reach age 21 and
complete 1,000 hours of service in a consecutive 12-month period. A participant
in the pension plan becomes vested in his or her accrued benefit under the
pension plan upon the earlier of the: (i) attainment of the "normal retirement
age" (as described in the pension plan) while employed at Savings Bank of
Manchester; or (ii) completion of five vesting years with Savings Bank of
Manchester. Participants are credited with vesting years for each plan year in
which they complete at least 1,000 hours of service.
A participant's accrued benefit under the pension plan is determined by
multiplying 2% of the participant's annual compensation (defined as average
annual compensation for the three consecutive calendar years that produce the
highest average) by the number of years of service the participant has with
Savings Bank of Manchester up to thirty (30). However, pension benefits are
reduced 1/15th for each of the first five years and 1/30th for each of the next
five years, by which benefit commencement precedes normal retirement. Pension
benefits are payable in equal monthly installments for life, or for married
persons as a joint survivor annuity over the lives of the participant and
spouse. If a participant dies while employed by Savings Bank of Manchester, a
death benefit will be payable to either his or her spouse or estate, or named
beneficiary, equal to the entire amount of the participant's accrued benefit in
the plan. If a participant is terminated from employment with a vested benefit
and dies before starting to receive payments, the benefit will be payable on his
or her behalf. Married participants in the pension plan may elect, with spousal
consent where required by law, to receive their pension benefits in the form of
a 50%, 75% or 100% joint and survivor annuity or a life only payment option.
97
The following table indicates the annual retirement benefits that would be
payable under the pension plan and the related supplemental executive retirement
plan (see below) upon retirement at age 65 to a participant electing to receive
his or her pension benefit in the standard form of benefit, assuming various
specified levels of plan compensation and various specified years of credited
service. Under the Internal Revenue Code, maximum annual benefits under the
pension plan are limited to $130,000 per year and annual compensation for
calculation purposes is limited to $160,000 per year for the 1999 calendar year.
Average Annual Years of Service
---------------------------------------------------------------------------------------------
Compensation 5 10 15 20 25 30+
------------------ ------------ ------------ ------------- ------------ ------------ ------------
$ 25,000 $ 2,500 $ 5,000 $ 7,500 $ 10,000 $ 12,500 $ 15,000
50,000 5,000 10,000 15,000 20,000 25,000 30,000
75,000 7,500 15,000 22,500 30,000 37,500 45,000
100,000 10,000 20,000 30,000 40,000 50,000 60,000
125,000 12,500 25,000 37,500 50,000 62,500 75,000
150,000 15,000 30,000 45,000 60,000 75,000 90,000
175,000 17,500 35,000 52,500 70,000 87,500 105,000
200,000 20,000 40,000 60,000 80,000 100,000 120,000
250,000 25,000 50,000 75,000 100,000 125,000 150,000
300,000 30,000 60,000 90,000 120,000 150,000 180,000
350,000 35,000 70,000 105,000 140,000 175,000 210,000
At August 31, 1999, which is the date of the most recent pension plan
statement, the pension plan's assets exceeded the benefit obligation by
approximately $2.4 million. The pension plan benefits listed on the table above
are not subject to a deduction for Social Security benefits or any other offset
amount. As of January 1, 1999, Messrs. Meduski, Pike, Somerville and Mason had
15, 15, 14 and 10 years of service with Savings Bank of Manchester,
respectively, for purposes of the pension plan.
Supplemental Executive Retirement Programs. Savings Bank of Manchester
maintains a non-tax-qualified supplemental executive retirement plan to provide
key personnel with pension benefits that cannot be provided directly through
Savings Bank of Manchester's pension plan as result of Internal Revenue Code
limitations on the benefits available through a tax-qualified plan. Benefits
under the supplemental executive retirement plan are based on the same formula
as the employee pension plan, but without regard to the limitations on the
amount of salary that may be taken into account for benefits purposes under the
pension plan or the level of benefits permitted under the pension plan. The
benefits available under the supplemental executive retirement plan are reduced
by the benefits actually payable under the pension plan. Supplemental executive
retirement plan benefits are payable at the same times and in the same forms as
benefits payable under the pension plan. At present, the only participants in
the plan are Messrs. Meduski and Pike. At August 31, 1999, the plan's benefit
liability was $348,000.
In addition to this supplemental executive retirement plan, Savings Bank of
Manchester also provides Mr. Meduski with an annual supplemental payment of
$36,335 to cover the premiums on a life insurance policy in which Mr. Meduski is
the sole owner. The cash value of the policy is intended to provide Mr. Meduski
with an additional source of retirement income.
Upon the completion of the conversion, Savings Bank of Manchester intends
to amend and restate the supplemental executive retirement plan to provide for
similar supplemental benefits with respect to the 401(k) plan and the employee
stock ownership plan, as well as benefits otherwise limited by other provisions
of the Internal Revenue Code or the terms of the employee stock ownership plan
loan (see below). Specifically, the amended and restated plan will provide
benefits to eligible individuals (designated by the Board of Directors of
Savings Bank of Manchester or its affiliates) that cannot be provided under the
401(k) Plan and/or the employee stock ownership plan as a result of the
limitations imposed by the Internal Revenue Code, but that would have been
provided under
98
the 401(k) Plan and/or the employee stock ownership plan but for such
limitations. In addition to providing for benefits lost under tax-qualified
plans as a result of limitations imposed by the Internal Revenue Code, the
amended and restated plan will also provide supplemental benefits to designated
individuals who retire, who are participants at the time of a change in control,
or whose participation in the employee stock ownership plan ends due to
termination of the employee stock ownership plan (regardless of whether the
individual terminates employment) before the complete scheduled repayment of the
employee stock ownership plan loan. Generally, if an eligible individual retires
or a change in control of Savings Bank of Manchester or Connecticut Bancshares
occurs before complete repayment of the employee stock ownership plan loan, the
supplemental executive retirement plan will provide the individual with a
benefit equal to what the individual would have received under the employee
stock ownership plan had he remained employed throughout the term of the
employee stock ownership plan or had the employee stock ownership plan not been
terminated before the scheduled repayment of the employee stock ownership plan
loan less the benefits actually provided under the employee stock ownership plan
on behalf of such individual. An individual's benefits under the supplemental
executive retirement plan will generally become payable upon the participant's
retirement (in accordance with the standard retirement policies of Savings Bank
of Manchester), upon the change in control of Savings Bank of Manchester or
Connecticut Bancshares or as determined under the applicable tax-qualified
retirement plans sponsored by Savings Bank of Manchester. The Board of Directors
intends to designate Messrs. Meduski, Pike, Anderson and Bailey as participants
in the supplemental executive retirement plan.
The amended and restated supplemental executive retirement plan will also
provide the Board of Directors with the opportunity to provide a retention
incentive for key personnel in the form of enhanced early retirement benefits.
Upon selection by the Board, a designated officer would be eligible to retire at
age 60 with a retirement benefit equal to 60 percent of his final average
compensation (base salary and cash bonus) less benefits payable under Savings
Bank of Manchester pension plan and the pension provisions of the supplemental
executive retirement plan. However, no benefit would be payable under this
provision in the event of the officer's termination of employment before age 60,
other than in the event of the officer's death, disability or upon a change in
control of Savings Bank of Manchester or Connecticut Bancshares. The plan
further provides that a designated officer's spouse would receive a survivor's
benefit equal to 50 percent of the benefit provided to the officer during his
lifetime. It is anticipated that the Board will designate Mr. Meduski as a
participant under this provision in order to ensure that his overall
compensation reflects his significant role at Savings Bank of Manchester and to
provide an incentive for his continued employment. In connection with Mr.
Meduski's designation, it is anticipated that Savings Bank of Manchester will
accrue compensation expense of approximately $297,000 over the next five years.
Savings Bank of Manchester currently maintains a grantor trust in
connection with the supplemental executive retirement plan. It is anticipated
that Savings Bank of Manchester will amend this trust agreement to include the
amended and restated supplemental executive retirement plan. The assets of the
grantor trust are subject to the claims of Savings Bank of Manchester's general
creditors in the event of Savings Bank of Manchester's insolvency until paid to
the individual according to the terms of the supplemental executive retirement
plans.
Savings Plan. Savings Bank of Manchester has implemented the Savings Bank
of Manchester Savings Plan (the "Savings Plan"), a tax-qualified profit sharing
plan with a qualified cash or deferred arrangement under Section 401(k) of the
Internal Revenue Code for the benefit of its eligible employees. The Savings
Plan currently provides participants with savings and retirement benefits based
on employee deferrals of compensation, as well as discretionary matching
contributions made by Savings Bank of Manchester. Eligible employees may begin
participating in the Savings Plan upon the completion of six months of service
(as defined in the Savings Plan). Participants currently may make pre-tax salary
deferrals to the Savings Plan in amounts from 1% to 15% of their total
compensation, within a legally permissible limit ($10,000 for 1999). In
addition, the Savings Plan provides for post-tax salary deferrals up to 10% of a
participant's total compensation. Savings Bank of Manchester makes a regular
matching contribution equal to 50% of the elective deferrals made by each
participant up to 6% of a participant's base compensation. This match is
discretionary and may increase or decrease as determined by Savings Bank of
Manchester. A participant is always 100% vested in his or her account under the
Savings Plan.
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Currently, participants may invest their accounts under the Savings Plan in
seven investment vehicles with varying investment characteristics. Savings Bank
of Manchester intends to add, as an investment option, an employer stock fund in
which participants may invest a portion of their account balances primarily in
Connecticut Bancshares common stock within the limitations set forth in the
Savings Plan document. However, a participant's ability to acquire common stock
in the conversion will be based on his or her status as an eligible account
holder. Regardless of the source of funds, no eligible account holders may
elect to invest more than $250,000 in common stock.
Generally, distributions from the Savings Plan may commence upon a
participant's separation from service for any reason. However, participants may
request in-service distributions from the Savings Plan in the form of hardship
withdrawals, withdrawals of rollover contributions and the withdrawal of
unmatched after-tax contributions. Distributions from the Savings Plan
generally must comply with federal and state income tax withholding and
distributions made before a participant attains age 59 1/2 are generally subject
to a federal excise tax.
Incentive Compensation Programs. The Board of Directors of Savings Bank of
Manchester has typically authorized a discretionary annual cash incentive
compensation program for officers of Savings Bank of Manchester based on the
Board's evaluation of the fiscal year's operating results. The size of the
available incentive compensation pool is determined by the Board's executive
committee based upon the recommendation of the compensation committee. The
maximum bonus under the program is limited to 40% of base salary for the
President, 30% for senior officers and 20% for junior officers.
In May 1999, the Board authorized a long-term incentive compensation
program that provides cash incentive awards to eligible officers based on the
attainment of financial and individual performance objectives. All awards are
payable on a deferred basis upon the satisfaction of specific vesting
requirements. Under the long-term plan, vesting begins five years after the year
to which an award relates and such awards are forfeited in the event the officer
terminates employment for any reason, other than death, disability or retirement
prior to age 62. Vested awards are payable in installments over a three-year
period following the fifth anniversary of the award date. During the vesting
period and payment period, awards are credited interest at a rate equal to
Savings Bank of Manchester's five-year certificate of deposit rate. The program
authorizes the Board to establish a discretionary bonus pool annually. However,
no pool may be authorized if Savings Bank of Manchester's net income before
provision for income taxes and adjusted to exclude gains or losses on securities
does not reflect a four percent increase over Savings Bank of Manchester's
budgeted net income. If a pool is established, one-third of the pool is awarded
to eligible officers in proportion that their compensation bears to the
compensation of all eligible officers and two-thirds of the pool is awarded on a
discretionary basis to eligible officers.
Employee Stock Ownership Plan. Savings Bank of Manchester's Board of
Directors has authorized the adoption of an employee stock ownership plan for
employees of Savings Bank of Manchester to be effective upon the completion of
the conversion. Employees who are employed by Savings Bank of Manchester on the
conversion effective date will be eligible to participate in the plan
immediately. Thereafter, new employees of Connecticut Bancshares and Savings
Bank of Manchester who have been credited with at least six months of service
will be eligible to participate in the employee stock ownership plan.
The employee stock ownership plan intends to purchase 5% of the shares sold
in the conversion through the offering. Following the conversion, the employee
stock ownership plan expects to acquire an additional number of shares through
open market purchases so that the employee stock ownership plan will acquire in
the aggregate, together with shares purchased in the conversion, 8% of the
outstanding shares of common stock of Connecticut Bancshares. In total, the
employee stock ownership plan expects to acquire 8% of the shares issued in the
conversion, or between 844,560 shares, assuming 10,557,000 shares are issued in
the conversion, and 1,142,640 shares assuming 14,283,000 shares are issued in
the conversion. If the number of shares to be issued in the conversion is
increased to 16,425,450 shares, the employee stock ownership plan expects to
acquire 1,314,036 shares. It is anticipated that the employee stock ownership
plan will borrow funds from Connecticut Bancshares to purchase its stock. The
loan will equal 100% of the aggregate purchase price of the common stock. The
loan to the employee stock ownership plan will be repaid from Savings Bank of
Manchester's contributions to the employee stock ownership plan and, to a lesser
extent, from earnings on such contributions and dividends payable on Connecticut
Bancshares common stock held by the employee stock ownership plan over the
anticipated 15-year
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term of the loan. The interest rate for the employee stock ownership plan loan
is expected to be the prime rate as published in The Wall Street Journal on the
closing date of the conversion. See "Pro Forma Data." If the employee stock
ownership plan is unable to acquire 5% of the common stock sold in the
conversion through the offering, it is anticipated that these additional shares
will also be acquired following the conversion through open market purchases.
In any plan year, Savings Bank of Manchester may make additional
discretionary contributions to the employee stock ownership plan for the benefit
of plan participants in either cash or shares of Connecticut Bancshares common
stock, which may be acquired through the purchase of outstanding shares in the
market or from individual stockholders or which constitute authorized but
unissued shares or shares held in treasury by Connecticut Bancshares. The
timing, amount, and manner of discretionary contributions will be affected by
several factors, including applicable regulatory policies, the requirements of
applicable laws and regulations, and market conditions.
Shares purchased by the employee stock ownership plan with the proceeds of
the loan will be held in a suspense account and released on a pro rata basis as
the loan is repaid. Discretionary contributions to the employee stock ownership
plan and shares released from the suspense account will be allocated among
participants on the basis of each participant's proportional share of total
compensation. Any forfeitures will be reallocated among the remaining plan
participants.
Participants who are employed at the effective date of the conversion will
be fully vested upon the completion of one year of service, or immediately on
the effective date if such one-year period of service has already been
completed. Participants who are hired first after the conversion effective date
will vest in their accrued benefits under the employee stock ownership plan upon
the completion of five years of service. A participant is fully vested at
retirement, upon death or disability in the event of a change in control (as
defined in the plan) or upon termination of the employee stock ownership plan.
Benefits are distributable upon a participant's retirement, early retirement,
death, disability, or termination of employment. Savings Bank of Manchester's
contributions to the employee stock ownership plan are not fixed, so benefits
payable under the employee stock ownership plan cannot be estimated.
The Board of Directors of Savings Bank of Manchester expects to appoint an
independent trustee for the employee stock ownership plan. The trustee votes all
allocated shares held in the employee stock ownership plan as instructed by the
plan participants and unallocated shares and allocated shares for which no
instructions are received are voted in the same ratio on any matter as those
shares for which instructions are given.
Under applicable accounting requirements, compensation expense for a
leveraged employee stock ownership plan is recorded at the fair market value of
the employee stock ownership plan shares when committed to be released to
participants' accounts. See "Pro Forma Data."
The employee stock ownership plan must meet the requirements of the
Employee Retirement Income Security Act of 1974, as amended, and the regulations
of the Internal Revenue Service and the Department of Labor. Savings Bank of
Manchester intends to request a determination letter from the Internal Revenue
Service regarding the tax-qualified status of the employee stock ownership plan.
Savings Bank of Manchester expects to receive a favorable determination letter,
but cannot guarantee it.
Employee Severance Compensation Plan. Savings Bank of Manchester's Board of
Directors intends to adopt the Savings Bank of Manchester Employee Severance
Compensation Plan to provide benefits to eligible employees upon a change in
control of Connecticut Bancshares or Savings Bank of Manchester. Eligible
employees are those with a minimum of one year of service with Savings Bank of
Manchester. Generally, all eligible employees, other than officers who will
enter into separate employment agreements with Connecticut Bancshares and
Savings Bank of Manchester, will be eligible to participate in the severance
plan. Under the severance plan, if a change in control of Connecticut Bancshares
or Savings Bank of Manchester occurs, eligible employees who are terminated or
who terminate employment, but only upon the occurrence of events specified in
the severance plan, within 24 months of the effective date of a change in
control will be entitled to a payment equal to one month's
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compensation for each year of service with Savings Bank of Manchester with a
maximum payment equal to 24 months of compensation. However, employees of
Savings Bank of Manchester as of the effective date of the conversion will be
eligible to receive a minimum payment equal to one year's compensation without
regard to their length of service. Based solely on 1999 cash compensation and
assuming that a change in control had occurred at December 31, 1999, and all
eligible employees were terminated, the maximum aggregate payment due under the
severance plan would be approximately $12.5 million.
Stock-Based Incentive Plan. Following the completion of the conversion, the
Board of Directors of Connecticut Bancshares intends to adopt a stock-based
incentive plan which will provide for the granting of options to purchase common
stock ("Stock Options") and restricted stock ("Stock Awards"), to eligible
officers, employees, and directors of Connecticut Bancshares and Savings Bank of
Manchester. If the stock-based incentive plan is adopted within one year after
conversion, applicable regulations require such plan to be approved by a
majority of Connecticut Bancshares' stockholders at a meeting of stockholders to
be held no earlier than six months after the completion of the conversion.
Under the stock-based incentive plan, Connecticut Bancshares intends to
grant Stock Options in an amount equal to 10% of the shares of common stock
issued in the conversion. The amount granted would range from 1,055,700 shares,
assuming 10,557,000 shares are issued in the conversion, to 1,428,300 shares,
assuming 14,283,000 shares are issued in the conversion. If the number of shares
to be issued in the conversion is increased to 16,425,450, shares, the amount of
options granted would equal 1,642,545 shares. Additionally, Connecticut
Bancshares intends to grant Stock Awards in an amount equal to 4% of the shares
of common stock issued in the conversion. The amount granted would range from
422,280 shares, assuming 10,557,000 shares are issued in the conversion, to
571,320 shares, assuming 14,283,000 shares are issued in the conversion. If the
number of shares to be issued in the conversion is increased to 16,425,450
shares, the amount of awards granted would equal 657,018 shares. Any common
stock awarded under the stock-based incentive plan will be awarded at no cost to
the recipients. The plan may be funded through the purchase of common stock by a
trust established in connection with the stock-based incentive plan or from
authorized but unissued shares. Connecticut Bancshares intends to appoint an
independent fiduciary to serve as trustee of a trust to be established in
connection with the stock-based incentive plan. If additional authorized but
unissued shares are acquired by the stock-based incentive plan after the
conversion, the interests of existing shareholders would be diluted. See "Pro
Forma Data."
The grants of Stock Options and Stock Awards will be designed to attract
and retain qualified personnel in key positions, provide officers and key
employees with a proprietary interest in Connecticut Bancshares as an incentive
to contribute to the success of Connecticut Bancshares and reward key employees
for outstanding performance. All employees of Connecticut Bancshares and its
subsidiaries, including Savings Bank of Manchester, will be eligible to
participate in the stock-based incentive plan. It is expected that the committee
administering the plan will determine the terms of awards granted to officers
and employees. The committee will also determine whether Stock Options will be
Incentive Stock Options or Non-Statutory Stock Options, as defined below, the
number of shares available for each Stock Option and Stock Award, the exercise
price of each Non-Statutory Stock Option, whether Stock Options may be exercised
by delivering other shares of common stock, and when Stock Options become
exercisable or Stock Awards vest. Only employees may receive grants of Incentive
Stock Options. Therefore, under the stock-based incentive plan, non-employee
directors may receive only grants of non-statutory Stock Options. If such plan
is adopted within one year after the completion of the conversion, applicable
regulations provide that no individual officer or employee of Savings Bank of
Manchester may receive more than 25% of the stock options available under the
stock-based incentive plan (or any separate plan for officers and employees) and
non-employee directors may not receive more than 5% individually, or 30% in the
aggregate, of the stock options available under the stock-based incentive plan
(or any separate plan for directors). Federal regulations also provide that no
individual officer or employee of Savings Bank of Manchester may receive more
than 25% of the restricted stock awards available under the stock-based
incentive plan (or any separate plan for officers and employees) and non-
employee directors may not receive more than 5% individually, or 30% in the
aggregate, of the restricted stock awards available under the stock-based
incentive plan (or any separate plan for directors).
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The stock-based incentive plan will provide for the grant of: (1) Stock
Options intended to qualify as incentive Stock Options under Section 422 of the
Internal Revenue Code ("Incentive Stock Options"); and (2) Stock Options that do
not so qualify ("Non-Statutory Stock Options"). It is anticipated that all Stock
Options granted contemporaneously with stockholder approval of the stock-based
incentive plan will qualify as Incentive Stock Options to the extent permitted
under Section 422 of the Internal Revenue Code. Unless sooner terminated, the
stock-based incentive plan will be in effect for a period of ten years from the
earlier of adoption by the Connecticut Bancshares Board of Directors or approval
by Connecticut Bancshares stockholders. If the stockholders approve the Plan,
Connecticut Bancshares intends to grant Stock Options under the plan at an
exercise price equal to at least the fair market value of the underlying common
stock on the date of grant.
An individual will not be deemed to have received taxable income upon the
grant or exercise of any Incentive Stock Option, provided that such shares
received through the exercise of such option are not disposed of by the employee
for at least one year after the date the stock is received in connection with
the stock option exercise and two years after the date of grant of the stock
option (a "disqualifying disposition"). No compensation deduction will be
available to Connecticut Bancshares as a result of the grant or exercise of
Incentive Stock Options unless there has been a disqualifying disposition. In
the case of a Non-Statutory Stock Option and in the case of a disqualifying
disposition of an Incentive Stock Option, an individual will realize ordinary
income upon exercise of the stock option (or upon the disqualifying disposition)
in an amount equal to the amount by which the fair market value on the date of
exercise exceeds the exercise price of the option. The amount of any ordinary
income realized by an optionee upon the exercise of a Non-Statutory Stock Option
or due to a disqualifying disposition of an Incentive Stock Option will be a
deductible expense to Connecticut Bancshares for income tax purposes.
The stock-based incentive plan will provide for the granting of Stock
Awards. Grants of Stock Awards to officers and employees may be made in the form
of base grants and/or performance grants, the vesting of which would be
contingent upon performance goals established by the committee administering the
plan. In establishing any performance goals, the committee may utilize the
annual financial results of Savings Bank of Manchester, actual performance of
Savings Bank of Manchester as compared to targeted goals such as the ratio of
Savings Bank of Manchester's net worth to total assets, Savings Bank of
Manchester's return on average assets, or such other performance standards as
determined by the committee with the approval of the Connecticut Bancshares
Board of Directors.
When a participant becomes vested with respect to Stock Awards, the
participant will realize ordinary income equal to the fair market value of the
common stock at the time of vesting, unless the participant made an election
under Section 83(b) of the Internal Revenue Code. The amount of income
recognized by the participants will be a deductible expense for tax purposes for
Connecticut Bancshares. When restricted Stock Awards become vested and shares of
common stock are actually distributed to participants, the participants would
receive amounts equal to any accrued dividends with respect to the shares of
common stock. Before vesting, recipients of Stock Awards may direct the voting
of the shares awarded to them. Shares not subject to grants and shares allocated
subject to the achievement of performance goals will be voted by the trustee in
proportion to the directions provided with respect to shares subject to grants.
Vested shares will be distributed to recipients as soon as practicable following
the day on which they vest.
The vesting periods for awards under the stock-based incentive plan will be
determined by the committee administering the plan. If the stock-based incentive
plan is adopted within one year after the completion of the conversion, awards
would become vested and exercisable within the limits of applicable regulations,
which require that any awards begin vesting no earlier than one year from the
date of shareholder approval of the plan and, thereafter, vest at a rate of no
more than 20% per year and may not be accelerated except in the case of death or
disability. Stock Options could be exercisable for three months following the
date on which the employee or director ceases to perform services for Savings
Bank of Manchester or Connecticut Bancshares, except that if an employee or
director dies or becomes disabled, Stock Options accelerate and become fully
vested and could be exercisable for up to one year thereafter or such longer
period as determined by Connecticut Bancshares. In the case of death or
disability, Stock Options may be exercised for a period of 12 months. However,
any Incentive Stock Options exercised more than three months following the date
the employee ceases to perform services as an employee would be treated as a
Non-Statutory Stock Option. If the optionee continues to perform services as a
director or consultant on behalf of Savings Bank of Manchester, Connecticut
Bancshares or an affiliate after
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retirement, unvested Stock Options would continue to vest in accordance with
their original vesting schedule until the optionee ceases to serve as a
consultant or director. If a participant dies, is disabled or retires,
Connecticut Bancshares, if requested by the optionee, or the optionee's
beneficiary, could elect, in exchange for vested options, to pay the optionee,
or the optionee's beneficiary if the optionee dies, the amount by which the fair
market value of the common stock exceeds the exercise price of the Stock Options
on the date of the employee's termination of employment.
Within the limits of any applicable regulatory requirements, the stock-
based incentive plan may be amended after the first anniversary date of the
conversion to provide for accelerated vesting of previously granted Stock
Options or Stock Awards if a change in control of Connecticut Bancshares or
Savings Bank of Manchester occurs. A change in control would generally be
considered to occur when a person or group of persons acting in concert acquires
beneficial ownership of 20% or more of any class of equity security of
Connecticut Bancshares or Savings Bank of Manchester or if a tender or exchange
offer, merger or other form of business combination, sale of all or
substantially all of the assets of Connecticut Bancshares or Savings Bank of
Manchester or similar transaction occurs or a contested election of directors
which resulted in the replacement of a majority of the Connecticut Bancshares
Board of Directors by persons not nominated by the directors in office before
the contested election occurs.
Transactions with Related Persons
Loans and Extensions of Credit. Federal regulations require that all loans
or extensions of credit to executive officers and directors must generally be
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with other persons,
unless the loan or extension of credit is made under a benefit program generally
available to all other employees and does not give preference to any insider
over any other employee, and must not involve more than the normal risk of
repayment or present other unfavorable features. In addition, loans made to a
director or executive officer in an amount that, when aggregated with the amount
of all other loans to the person and his or her related interests, are in excess
of the greater of $25,000 or 5% of Savings Bank of Manchester's capital and
surplus, up to a maximum of $500,000, must be approved in advance by a majority
of the disinterested members of the Board of Directors. See "Regulation and
Supervision--Federal Regulations--Transactions with Affiliates."
Except for loans made to employees under the terms of Savings Bank of
Manchester's Employee Mortgage Rate, Savings Bank of Manchester currently makes
loans to its executive officers and directors on the same terms and conditions
offered to the general public. Savings Bank of Manchester's policy provides
that all loans made by Savings Bank of Manchester to its executive officers and
directors be made in the ordinary course of business, on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons and do not involve more than the
normal risk of collectibility or present other unfavorable features. The
aggregate amount of loans by Savings Bank of Manchester to its executive
officers and directors was approximately $16.4 million at August 31, 1999, all
of which were performing according to their original terms at August 31, 1999.
Other Transactions. Mr. Anderson, Savings Bank of Manchester's Executive
Vice President, is Chairman of the Board and a significant shareholder of Open
Solutions, Inc., Savings Bank of Manchester's computer software provider. For
the eight months ended August 31, 1999 and the year ended December 31, 1998,
Savings Bank of Manchester paid fees to Open Solutions of $294,000 and $156,000,
respectively.
In addition, Savings Bank of Manchester uses the services of the law firms
of LaBelle, LaBelle, Naab & Horvath, P.C. and Woodhouse, Rubinow & Macht, P.C.
Messrs LaBelle and Rubinow, directors of Savings Bank of Manchester, are
partners of each of their respective firms. Both law firms are used for a
variety of legal work in the ordinary course of Savings Bank of Manchester's
business. Total payments by Savings Bank of Manchester to Mr. LaBelle's law
firm totalled $230 for the eight months ended August 31, 1999 and there were no
fees paid to Mr. LaBelle's law firm for the year ended December 31, 1998. Total
payments by Savings Bank of Manchester to Mr. Rubinow's law firm totalled
$27,000 and $39,000 for the eight months ended August 31, 1999 and the year
ended December 31, 1998, respectively.
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REGULATION AND SUPERVISION
General
As a savings bank chartered by the State of Connecticut, Savings Bank of
Manchester is extensively regulated under state law by the Connecticut Banking
Commissioner with respect to many aspects of its banking activities. In
addition, as a bank whose deposits are insured by the Federal Deposit Insurance
Corporation through the Bank Insurance Fund, Savings Bank of Manchester must pay
deposit insurance assessments and is examined and supervised by the Federal
Deposit Insurance Corporation. These laws and regulations have been established
primarily for the protection of depositors, customers and borrowers of Savings
Bank of Manchester, not its stockholders.
Connecticut Bancshares will also be required to file reports with, and
otherwise comply with the rules and regulations of, the Office of Thrift
Supervision, the Connecticut Banking Commissioner, and the Securities and
Exchange Commission under the federal securities laws. The following discussion
of the laws and regulations material to the operations of Connecticut Bancshares
and Savings Bank of Manchester is a summary and is qualified in its entirety by
reference to such laws and regulations.
Savings Bank of Manchester is and Connecticut Bancshares, as a savings and
loan holding company, will be extensively regulated and supervised.
Regulations, which affect Savings Bank of Manchester on a daily basis, may be
changed at any time, and the interpretation of the relevant law and regulations
may also change because of new interpretations by the authorities who interpret
those laws and regulations. Any change in the regulatory structure or the
applicable statutes or regulations, whether by the Connecticut Banking
Commissioner, the State of Connecticut, the Office of Thrift Supervision, the
Federal Deposit Insurance Corporation or the U.S. Congress, could have a
material impact on Connecticut Bancshares, Savings Bank of Manchester, its
operations or the conversion.
Connecticut Banking Laws and Supervision
The Connecticut Banking Commissioner regulates Savings Bank of Manchester's
internal organization as well as its deposit, lending and investment activities.
The approval of the Connecticut Banking Commissioner is required for, among
other things, the establishment of branch offices and business combination
transactions. The Connecticut Banking Commissioner conducts periodic
examinations of Savings Bank of Manchester. The Federal Deposit Insurance
Corporation also regulates many of the areas regulated by the Connecticut
Banking Commissioner and federal law may limit some of the authority provided to
Savings Bank of Manchester by Connecticut law.
Lending Activities. Connecticut banking laws grant banks broad lending
authority. With certain limited exceptions, however, total secured and
unsecured loans made to any one obligor under this statutory authority may not
exceed 25% of Savings Bank of Manchester's equity capital and reserves for loan
and lease losses.
A savings bank may pay cash dividends out of its net profits. For purposes
of this restriction, "net profits" means the remainder of all earnings from
current operations. Further, the total amount of all dividends declared by a
savings bank in any calendar year may not exceed the sum of the bank's net
profits for the year in question combined with its retained net profits from the
preceding two calendar years. Additionally, earnings appropriated to reserves
for loan losses and deducted for federal income tax purposes are not available
for cash dividends without the payment of taxes at the then current income tax
rates on the amount used. Federal law also prevents an institution from paying
dividends or making other capital distributions if doing so would cause it to
become "undercapitalized." See "--Federal Regulations" and "--Prompt Corrective
Regulatory Action." The Federal Deposit Insurance Corporation may limit a
savings bank's ability to pay dividends. No dividends may be paid to Savings
Bank of Manchester's stockholders if such dividends would reduce stockholders'
equity below the amount of the liquidation account required by the Connecticut
conversion regulations.
105
Branching Activities. Any Connecticut-chartered bank meeting certain
statutory requirements may, with the Connecticut Banking Commissioner's
approval, establish and operate branches in any town or towns within the state.
In 1996, legislation was enacted which permits banks to establish mobile
branches with the Connecticut Banking Commissioner's approval.
Investment Activities. In 1996, legislation was enacted which requires the
board of directors of each Connecticut bank to adopt annually and to
periodically review an investment policy governing investments by such bank,
which policy must establish standards for the making of prudent investments. In
addition, Connecticut law now permits Connecticut banks to sell fixed and
variable rate annuities if licensed to do so by the Connecticut Insurance
Commissioner.
Further, legislation was enacted in 1996 which expands the ability of
Connecticut banks to invest in debt securities and debt mutual funds. Before the
legislation, Connecticut banks could invest in debt securities and debt mutual
funds without regard to any other liability to the Connecticut bank of the maker
or issuer of the debt securities and debt mutual funds, if the debt securities
and debt mutual funds were rated in the three highest rating categories or
otherwise deemed to be a prudent investment, and so long as the total amount of
debt securities and debt mutual funds of any one issuer did not exceed 15% of
Savings Bank of Manchester's total equity capital and reserves for loan and
lease losses and the total amount of all its investments in debt securities and
debt mutual funds did not exceed 15% of its assets. In 1996, these percentages
each were increased to 25%. In addition, before 1996, the percentage limitation
described above also applied to certain government and agency obligations. As a
result of the 1996 legislation, this limitation was deleted for such
obligations.
The 1996 legislation also expanded the ability of Connecticut banks to
invest in equity securities and equity mutual funds. Connecticut banks now may
invest in equity securities and equity mutual funds without regard to any other
liability to the Connecticut bank of the issuer of equity securities and equity
mutual funds, so long as the total amount of equity securities and equity mutual
funds of any one issuer does not exceed 25% of the bank's total equity capital
and reserves for loan and lease losses and the total amount of the bank's
investment in all equity securities and equity mutual funds does not exceed 25%
of its assets. Before the enactment of this legislation, Connecticut banks could
invest up to 15% of their assets in the equity securities and equity mutual
funds of corporations incorporated and doing a major portion of their business
in the United States.
Recent Legislation. Connecticut legislation enacted in 1999 authorizes a
new form of Connecticut bank to be known as an uninsured bank. An uninsured
bank does not accept retail deposits and is not required to insure deposits with
the Federal Deposit Insurance Corporation. The 1999 legislation also authorizes
Connecticut banks with the prior approval of the Connecticut Banking
Commissioner to engage in a broad range of activities related to the business of
banking, or that are financial in nature or that are permitted under the Bank
Holding Company Act or the Home Owners' Loan Act, both federal statutes, or the
regulations promulgated as a result of these statutes. The legislation also
authorizes a Connecticut bank to engage in any activity permitted for a national
bank or a federal savings association upon filing notice with the Connecticut
Banking Commissioner unless the Connecticut Banking Commissioner disapproves the
activity.
Enforcement. Under Connecticut law, the Connecticut Banking Commissioner
has extensive enforcement authority over Connecticut banks and, under certain
circumstances, affiliated parties, insiders, and agents. The Connecticut
Banking Commissioner's enforcement authority includes: cease and desist orders,
fines, receivership, conservatorship, removal of officers and directors,
emergency closures, dissolution, and liquidation.
Federal Regulations
Capital Requirements. Under Federal Deposit Insurance Corporation
regulations, federally insured state-chartered banks that are not members of the
Federal Reserve System ("state non-member banks"), such as Savings Bank of
Manchester, are required to comply with minimum leverage capital requirements.
For an institution determined by the Federal Deposit Insurance Corporation to
not be anticipating or experiencing significant growth and to be in general a
strong banking organization, rated composite 1 under the Uniform Financial
Institutions
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Ranking System (the rating system) established by the Federal Financial
Institutions Examination Council, the minimum capital leverage requirement is a
ratio of Tier 1 capital to total assets of 3%. For all other institutions, the
minimum leverage capital ratio is not less than 4%. Tier 1 capital is the sum of
common stockholders' equity, noncumulative perpetual preferred stock (including
any related surplus) and minority investments in certain subsidiaries, less
intangible assets (except for certain servicing rights and credit card
relationships).
Savings Bank of Manchester must also comply with the Federal Deposit
Insurance Corporation regulations. The Federal Deposit Insurance Corporation
regulations require state non-member banks to maintain certain levels of
regulatory capital in relation to regulatory risk-weighted assets. The ratio of
regulatory capital to regulatory risk-weighted assets is referred to as Savings
Bank of Manchester's "risk-based capital ratio." Risk-based capital ratios are
determined by allocating assets and specified off-balance sheet items to four
risk-weighted categories ranging from 0% to 100%, with higher levels of capital
being required for the categories perceived as representing greater risk. For
example, under the Federal Deposit Insurance Corporation's risk-weighting
system, cash and securities backed by the full faith and credit of the U.S.
government are given a 0% risk weight, loans secured by one- to four-family
residential properties generally have a 50% risk weight and commercial loans
have a risk weighting of 100%.
State non-member banks must maintain a minimum ratio of total capital to
risk-weighted assets of at least 8%, of which at least one-half must be Tier 1
capital. Total capital consists of Tier 1 capital plus Tier 2 or supplementary
capital items, which include allowances for loan losses in an amount of up to
1.25% of risk-weighted assets, cumulative preferred stock, a portion of the net
unrealized gain on equity securities and other capital instruments. The
includable amount of Tier 2 capital cannot exceed the amount of the
institution's Tier 1 capital.
The Federal Deposit Insurance Corporation Improvement Act required each
federal banking agency to revise its risk-based capital standards for insured
institutions to ensure that those standards take adequate account of interest-
rate risk, concentration of credit risk, and the risk of nontraditional
activities, as well as to reflect the actual performance and expected risk of
loss on multi-family residential loans. The Federal Deposit Insurance
Corporation, along with the other federal banking agencies, has adopted a
regulation providing that the agencies will take into account the exposure of a
bank's capital and economic value to changes in interest rate risk in assessing
a bank's capital adequacy. See "Historical and Pro Forma Regulatory Capital
Compliance."
As a savings and loan holding company regulated by the Office of Thrift
Supervision, Connecticut Bancshares will not, under current law, be subject to
any separate regulatory capital requirements.
Standards for Safety and Soundness. As required by statute, the federal
banking agencies adopted final regulations and Interagency Guidelines
Establishing Standards for Safety and Soundness to implement safety and
soundness standards. The guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
guidelines address internal controls and information systems, internal audit
system, credit underwriting, loan documentation, interest rate risk exposure,
asset growth, asset quality, earnings and compensation, and fees and benefits.
Most recently, the agencies have issued guidelines for Year 2000 computer
compliance. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard.
Investment Activities
Since the enactment of the Federal Deposit Insurance Corporation
Improvement Act, all state-chartered Federal Deposit Insurance Corporation
insured banks, including savings banks, have generally been limited to
activities as principal and equity investments of the type and in the amount
authorized for national banks, notwithstanding state law. The Federal Deposit
Insurance Corporation Improvement Act and the Federal Deposit Insurance
Corporation permit exceptions to these limitations. For example, state
chartered banks, such as Savings Bank of Manchester, may, with Federal Deposit
Insurance Corporation approval, continue to exercise state authority
107
to invest in common or preferred stocks listed on a national securities exchange
or the Nasdaq National Market and in the shares of an investment company
registered under the Investment Company Act of 1940, as amended. In addition,
the Federal Deposit Insurance Corporation is authorized to permit such
institutions to engage in state authorized activities or investments that do not
meet this standard (other than non-subsidiary equity investments) for
institutions that meet all applicable capital requirements if it is determined
that such activities or investments do not pose a significant risk to the Bank
Insurance Fund. The Federal Deposit Insurance Corporation has adopted revisions
to its regulations governing the procedures for institutions seeking approval to
engage in such activities or investments. These revisions, among other things,
streamline the application procedures for healthy banks and impose quantitative
and qualitative restrictions on a bank's dealings with its subsidiaries engaged
in activities not permitted for national bank subsidiaries. All non-subsidiary
equity investments, unless otherwise authorized or approved by the Federal
Deposit Insurance Corporation, must have been divested by December 19, 1996,
under a Federal Deposit Insurance Corporation-approved divestiture plan, unless
such investments were grandfathered by the Federal Deposit Insurance
Corporation. Savings Bank of Manchester received grandfathered authority from
the Federal Deposit Insurance Corporation in March 1993 to invest in listed
stocks and/or registered shares. However, the maximum permissible investment is
100% of Tier 1 capital, as specified by the Federal Deposit Insurance
Corporation's regulations, or the maximum amount permitted by Connecticut law,
whichever is less. Such grandfathered authority may be terminated upon the
Federal Deposit Insurance Corporation's determination that such investments pose
a safety and soundness risk to Savings Bank of Manchester or if Savings Bank of
Manchester converts its charter, other than a mutual to stock conversion, or
undergoes a change in control. As of August 31, 1999, Savings Bank of Manchester
had $43.0 million of securities which were held under such grandfathering
authority. See "Business of Savings Bank of Manchester--Investment Activities."
Interstate Branching
Until recently, branching across state lines was generally not available to
a state bank such as Savings Bank of Manchester. Out-of-state branches of
banking institutions are authorized under the Connecticut Banking Law, but
similar authority does not exist generally under the laws of most other states.
Beginning June 1, 1997, the Interstate Banking Act permitted the responsible
federal banking agencies to approve merger transactions between banks located in
different states, regardless of whether the merger would be prohibited under the
law of the two states. The Interstate Banking Act also permitted a state to
"opt in" to the provisions of the Interstate Banking Act before June 1, 1997,
and permitted a state to "opt out" of the provisions of the Interstate Banking
Act by adopting appropriate legislation before that date. In 1995, Connecticut
affirmatively "opted-in" to the provisions of the Interstate Banking Act.
Accordingly, beginning June 1, 1997, the Interstate Banking Act permitted a
bank, such as Savings Bank of Manchester, to acquire branches in a state other
than Connecticut unless the other state had opted out of the Interstate Banking
Act. The Interstate Banking Act also authorizes de novo branching into another
state if the host state enacts a law expressly permitting out of state banks to
establish such branches within its borders.
Prompt Corrective Regulatory Action
Federal law requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements. For these purposes, the law establishes five
capital categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
The Federal Deposit Insurance Corporation has adopted regulations to
implement the prompt corrective action legislation. An institution is deemed to
be "well capitalized" if it has a total risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 6% or greater and a leverage ratio
of 5% or greater. An institution is "adequately capitalized" if it has a total
risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of
4% or greater, and generally a leverage ratio of 4% or greater. An institution
is "undercapitalized" if it has a total risk-based capital ratio of less than
8%, a Tier 1 risk-based capital ratio of less than 4%, or generally a leverage
ratio of less than 4%. An institution is deemed to be "significantly
undercapitalized" if it has a total risk-based capital ratio of less than 6%, a
Tier 1 risk-based capital ratio of less than 3%, or a leverage ratio of less
than 3%. An institution is considered to be "critically undercapitalized" if it
has a ratio of tangible equity (as defined in the
108
regulations) to total assets that is equal to or less than 2%. As of August 31,
1999, Savings Bank of Manchester was a "well capitalized" institution and
immediately upon completion of the conversion expects to remain a "well
capitalized" institution.
"Undercapitalized" banks must adhere to growth, capital distribution
(including dividend) and other limitations and are required to submit a capital
restoration plan. A bank's compliance with such plan is required to be
guaranteed by any company that controls the undercapitalized institution in an
amount equal to the lesser of 5% of the institution's total assets when deemed
undercapitalized or the amount necessary to achieve the status of adequately
capitalized. If an "undercapitalized" bank fails to submit an acceptable plan,
it is treated as if it is "significantly undercapitalized." "Significantly
undercapitalized" banks must comply with one or more of a number of additional
restrictions, including but not limited to an order by the Federal Deposit
Insurance Corporation to sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets and cease receipt of deposits
from correspondent banks or dismiss directors or officers, and restrictions on
interest rates paid on deposits, compensation of executive officers and capital
distributions by the parent holding company. "Critically undercapitalized"
institutions must comply with additional sanctions including, subject to a
narrow exception, the appointment of a receiver or conservator within 270 days
after it obtains such status.
Transactions with Affiliates
Under current federal law, transactions between depository institutions and
their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. In a holding company context, at a minimum, the parent holding company of
a savings bank and any companies which are controlled by such parent holding
company are affiliates of the savings bank. Generally, Section 23A limits the
extent to which the savings bank or its subsidiaries may engage in "covered
transactions" with any one affiliate to 10% of such savings bank's capital stock
and surplus, and contains an aggregate limit on all such transactions with all
affiliates to 20% of capital stock and surplus. The term "covered transaction"
includes, among other things, the making of loans or other extensions of credit
to an affiliate and the purchase of assets from an affiliate. Section 23A also
establishes specific collateral requirements for loans or extensions of credit
to, or guarantees, acceptances on letters of credit issued on behalf of an
affiliate. Section 23B requires that covered transactions and a broad list of
other specified transactions be on terms substantially the same, or no less
favorable, to the savings bank or its subsidiary as similar transactions with
nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act restricts an institution
with respect to loans to directors, executive officers, and principal
stockholders ("insiders"). Under Section 22(h), loans to insiders and their
related interests may not exceed, together with all other outstanding loans to
such persons and affiliated entities, the institution's total capital and
surplus. Loans to insiders above specified amounts must receive the prior
approval of the board of directors. Further, under Section 22(h), loans to
directors, executive officers and principal shareholders must be made on terms
substantially the same as offered in comparable transactions to other persons,
except that such insiders may receive preferential loans made under a benefit or
compensation program that is widely available to Savings Bank of Manchester's
employees and does not give preference to the insider over the employees.
Section 22(g) of the Federal Reserve Act places additional limitations on loans
to executive officers.
Enforcement
The Federal Deposit Insurance Corporation has extensive enforcement
authority over insured savings banks, including Savings Bank of Manchester.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease and desist orders and to remove directors
and officers. In general, these enforcement actions may be initiated in
response to violations of laws and regulations and unsafe or unsound practices.
The Federal Deposit Insurance Corporation has authority under Federal law
to appoint a conservator or receiver for an insured bank under limited
circumstances. The Federal Deposit Insurance Corporation is required, with
certain exceptions, to appoint a receiver or conservator for an insured state
non-member bank if that bank was "critically undercapitalized" on average during
the calendar quarter beginning 270 days after the date on which the
109
institution became "critically undercapitalized." See "--Prompt Corrective
Regulatory Action." The Federal Deposit Insurance Corporation may also appoint
itself as conservator or receiver for an insured state non-member institution
under specific circumstances on the basis of the institution's financial
condition or upon the occurrence of other events, including: (1) insolvency; (2)
substantial dissipation of assets or earnings through violations of law or
unsafe or unsound practices; (3) existence of an unsafe or unsound condition to
transact business; and (4) insufficient capital, or the incurring of losses that
will deplete substantially all of the institution's capital with no reasonable
prospect of replenishment without federal assistance.
Insurance of Deposit Accounts
The Federal Deposit Insurance Corporation has adopted a risk-based
insurance assessment system. The Federal Deposit Insurance Corporation assigns
an institution to one of three capital categories based on the institution's
financial information consisting of (1) well capitalized, (2) adequately
capitalized or (3) undercapitalized, and one of three supervisory subcategories
within each capital group. The supervisory subgroup to which an institution is
assigned is based on a supervisory evaluation provided to the Federal Deposit
Insurance Corporation by the institution's primary federal regulator and
information which the Federal Deposit Insurance Corporation determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned. Assessment rates for
insurance fund deposits currently range from 0 basis points for the strongest
institution to 27 basis points for the weakest. Bank Insurance Fund members are
also required to assist in the repayment of bonds issued by the Financing
Corporation in the late 1980's to recapitalize the Federal Savings and Loan
Insurance Corporation. Bank Insurance Fund members are currently assessed about
1.2 basis points, which is generally 20% of the amount charged Savings
Association Insurance Fund members. Effective January 1, 2000, full pro rata
sharing of the payments between Bank Insurance Fund and Savings Association
Insurance Fund members will occur. The Federal Deposit Insurance Corporation is
authorized to raise the assessment rates. The Federal Deposit Insurance
Corporation has exercised this authority several times in the past and may raise
insurance premiums in the future. If such action is taken by the Federal Deposit
Insurance Corporation, it could have an adverse effect on the earnings of
Savings Bank of Manchester.
The Federal Deposit Insurance Corporation may terminate insurance of
deposits if it finds that the institution is in an unsafe or unsound condition
to continue operations, has engaged in unsafe or unsound practices, or has
violated any applicable law, regulation, rule, order or condition imposed by the
Federal Deposit Insurance Corporation. The management of Savings Bank of
Manchester does not know of any practice, condition or violation that might lead
to termination of deposit insurance.
Federal Reserve System
The Federal Reserve Board regulations require depository institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for that portion of transaction accounts
aggregating $44.3 million or less (which may be adjusted by the Federal Reserve
Board) the reserve requirement is 3%; and for accounts greater than $44.3
million, the reserve requirement is $1.33 million plus 10% (which may be
adjusted by the Federal Reserve Board between 8% and 14%) against that portion
of total transaction accounts in excess of $44.3 million. The first $5.0
million of otherwise reservable balances (which may be adjusted by the Federal
Reserve Board) are exempted from the reserve requirements. Savings Bank of
Manchester is in compliance with these requirements.
Community Reinvestment Act
Under the Community Reinvestment Act, as implemented by Federal Deposit
Insurance Corporation regulations, a state non-member bank has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The Community Reinvestment Act neither establishes specific
lending requirements or programs for financial
110
institutions nor limits an institution's discretion to develop the types of
products and services that it believes are best suited to its particular
community. The Community Reinvestment Act requires the Federal Deposit Insurance
Corporation, in connection with its examination of an institution, to assess the
institution's record of meeting the credit needs of its community and to
consider such record when it evaluates applications made by such institution.
The Community Reinvestment Act requires public disclosure of an institution's
Community Reinvestment Act rating. Savings Bank of Manchester's latest Community
Reinvestment Act rating from the Federal Deposit Insurance Corporation was
"Satisfactory." Savings Bank of Manchester's latest Community Reinvestment Act
rating from the Connecticut Banking Commissioner was "Outstanding."
Federal Home Loan Bank System
Savings Bank of Manchester is a member of the Federal Home Loan Bank
System, which consists of 12 regional Federal Home Loan Banks. The Federal Home
Loan Bank provides a central credit facility primarily for member institutions.
Savings Bank of Manchester, as a member of the Federal Home Loan Bank of Boston,
is required to acquire and hold shares of capital stock in the Federal Home Loan
Bank of Boston in an amount at least equal to 1% of the aggregate principal
amount of its unpaid residential mortgage loans and similar obligations at the
beginning of each year, or 1/20 of its advances (borrowings) from the Federal
Home Loan Bank of Boston, whichever is greater. Savings Bank of Manchester was
in compliance with this requirement with an investment in Federal Home Loan Bank
of Boston stock at August 31, 1999 of $5.9 million. At August 31, 1999, Savings
Bank of Manchester had $66.9 million in Federal Home Loan Bank of Boston
advances.
The Federal Home Loan Banks are required to provide funds for certain
purposes including contributing funds for affordable housing programs. These
requirements could reduce the amount of dividends that the Federal Home Loan
Banks pay to their members and result in the Federal Home Loan Banks imposing a
higher rate of interest on advances to their members. For the eight months
ended August 31, 1999 and 1998 and the years ended December 31, 1998, 1997 and
1996, cash dividends from the Federal Home Loan Bank of Boston to Savings Bank
of Manchester amounted to approximately $287,000, $275,000, $369,000, $351,000
and $341,000, respectively. Further, there can be no assurance that the impact
of recent or future legislation on the Federal Home Loan Banks will not also
cause a decrease in the value of the Federal Home Loan Bank stock held by
Savings Bank of Manchester.
Holding Company Regulation
Federal law allows a state savings bank that qualifies as a "Qualified
Thrift Lender," discussed below, to elect to be treated as a savings association
for purposes of the savings and loan holding company provisions of the Home
Owners' Loan Act. Such election allows its holding company to be regulated as a
savings and loan holding company by the Office of Thrift Supervision rather than
as a bank holding company by the Federal Reserve Board. Savings Bank of
Manchester has made such election and expects Connecticut Bancshares to receive
approval from the Office of Thrift Supervision to become a savings and loan
holding company. Connecticut Bancshares will be regulated as a savings and loan
holding company within the meaning of the Home Owners' Loan Act. As such,
Connecticut Bancshares will be required to register with the Office of Thrift
Supervision and will have to adhere to the Office of Thrift Supervision's
regulations and reporting requirements. In addition, the Office of Thrift
Supervision may examine and supervise Connecticut Bancshares and the Office of
Thrift Supervision has enforcement authority over Connecticut Bancshares and its
non-savings institution subsidiaries. Among other things, this authority
permits the Office of Thrift Supervision to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings institution.
Additionally, Savings Bank of Manchester will be required to notify the Office
of Thrift Supervision at least 30 days before declaring any dividend to
Connecticut Bancshares. By regulation, the Office of Thrift Supervision may
restrict or prohibit Savings Bank of Manchester from paying dividends.
Connecticut Bancshares will be a unitary savings and loan holding company
under federal law because Savings Bank of Manchester will be its only insured
subsidiary immediately after the conversion. Formerly, a unitary savings and
loan holding company was not restricted as to the types of business activities
in which it could
111
engage, provided that its subsidiary savings association continued to be a
qualified thrift lender. The Financial Services Modernization Act of 1999,
however, restricts unitary savings and loan holding companies not existing or
applied for before May 4, 1999 to activities permissible for a financial holding
company as defined under the legislation, including insurance and securities
activities, and those permitted for a multiple savings and loan holding company
as described below. Connecticut Bancshares will be subject to these activities
restrictions. Upon any non-supervisory acquisition by Connecticut Bancshares of
another savings association as a separate subsidiary, Connecticut Bancshares
would become a multiple savings and loan holding company. The Home Owners' Loan
Act limits the activities of a multiple savings and loan holding company and its
non-insured institution subsidiaries primarily to activities permissible for
bank holding companies under Section 4(c)(8) of the Bank Holding Company Act,
provided the prior approval of the Office of Thrift Supervision is obtained, and
to other activities authorized by Office of Thrift Supervision regulation.
Multiple savings and loan holding companies are generally prohibited from
acquiring or retaining more than 5% of a non-subsidiary company engaged in
activities other than those permitted by the Home Owners' Loan Act. See "Risk
Factors--Banking reform legislation restricts the activities in which
Connecticut Bancshares may engage compared to existing unitary holding
companies."
The Home Owners' Loan Act prohibits a savings and loan holding company
from, directly or indirectly, acquiring more than 5% of the voting stock of
another savings association or savings and loan holding company or from
acquiring such an institution or company by merger, consolidation or purchase of
its assets, without prior written approval of the Office of Thrift Supervision.
In evaluating applications by holding companies to acquire savings associations,
the Office of Thrift Supervision considers the financial and managerial
resources and future prospects of Connecticut Bancshares and the institution
involved, the effect of the acquisition on the risk to the insurance funds, the
convenience and needs of the community and competitive factors.
The Office of Thrift Supervision is prohibited from approving any
acquisition that would result in a multiple savings and loan holding company
controlling savings institutions in more than one state, except: (1) interstate
supervisory acquisitions by savings and loan holding companies; and (2) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions.
To be regulated as a savings and loan holding company by the Office of
Thrift Supervision (rather than as a bank holding company by the Federal Reserve
Board), Savings Bank of Manchester must qualify as a Qualified Thrift Lender.
To qualify as a Qualified Thrift Lender, Savings Bank of Manchester must
maintain compliance with the test for a "domestic building and loan
association," as defined in the Internal Revenue Code, or with a Qualified
Thrift Lender Test. Under the Qualified Thrift Lender Test, a savings
institution is required to maintain at least 65% of its "portfolio assets"
(total assets less: (1) specified liquid assets up to 20% of total assets; (2)
intangibles, including goodwill; and (3) the value of property used to conduct
business) in certain "qualified thrift investments" (primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities) in at least 9 months out of each 12 month period. As of August 31,
1999 Savings Bank of Manchester maintained in excess of 75% of its portfolio
assets in qualified thrift investments. Savings Bank of Manchester also met the
Qualified Thrift Lender test in each of the last 12 months and, therefore, met
the Qualified Thrift Lender test.
Connecticut Holding Company Regulations. Under Connecticut banking law, no
person may acquire beneficial ownership of more than 10% of any class of voting
securities of a Connecticut-chartered bank, or any bank holding company of such
a bank, without prior notification of, and lack of disapproval by, the
Connecticut Banking Commissioner. The Connecticut Banking Commissioner will
disapprove the acquisition if the bank or holding company to be acquired has
been in existence for less than five years, unless the Connecticut Banking
Commissioner waives this requirement, or if the acquisition would result in the
acquirer controlling 30% or more of the total amount of deposits in insured
depository institutions in Connecticut. Similar restrictions apply to any
person who holds in excess of 10% of any such class and desires to increase its
holdings to 25% or more of such class.
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Federal Securities Laws
Connecticut Bancshares has filed with the Securities and Exchange
Commission a registration statement under the Securities Act for the
registration of the common stock to be issued in the conversion. Upon
completion of the conversion, Connecticut Bancshares' common stock will be
registered with the Securities and Exchange Commission under the Exchange Act.
Connecticut Bancshares will then have to observe the information, proxy
solicitation, insider trading restrictions and other requirements under the
Exchange Act.
The registration under the Securities Act of shares of the common stock to
be issued in the conversion does not cover the resale of such shares. Shares of
the common stock purchased by persons who are not affiliates of Connecticut
Bancshares may be resold without registration. The resale restrictions of Rule
144 under the Securities Act govern shares purchased by an affiliate of
Connecticut Bancshares. If Connecticut Bancshares meets the current public
information requirements of Rule 144 under the Securities Act, each affiliate of
Connecticut Bancshares who complies with the other conditions of Rule 144
(including those that require the affiliate's sale to be aggregated with those
of other persons) would be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period, the
greater of (1) 1% of the outstanding shares of Connecticut Bancshares or (2) the
average weekly volume of trading in such shares during the preceding four
calendar weeks. Provision may be made in the future by Connecticut Bancshares
to permit affiliates to have their shares registered for sale under the
Securities Act under specific circumstances.
FEDERAL AND STATE TAXATION OF INCOME
Federal Income Taxation
General. Connecticut Bancshares and Savings Bank of Manchester intend to
report their income on a calendar year basis using the accrual method of
accounting. The federal income tax laws apply to Connecticut Bancshares and
Savings Bank of Manchester in the same manner as to other corporations with some
exceptions, including particularly Savings Bank of Manchester's reserve for bad
debts discussed below. The following discussion of tax matters is intended only
as a summary and does not purport to be a comprehensive description of the tax
rules applicable to Savings Bank of Manchester or Connecticut Bancshares.
Savings Bank of Manchester's federal income tax returns have been either audited
or closed under the statute of limitations through tax year 1995. For its 1998
tax year, Savings Bank of Manchester's maximum federal income tax rate was 35%.
Bad Debt Reserves. For fiscal years beginning before December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986, as amended, were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A reserve could be
established for bad debts on qualifying real property loans, generally secured
by interests in real property improved or to be improved, under the percentage
of taxable income method or the experience method. The reserve for
nonqualifying loans was computed using the experience method.
Federal legislation enacted in 1996 repealed the reserve method of
accounting for bad debts and the percentage of taxable income method for tax
years beginning after 1995 and require savings institutions to recapture or take
into income certain portions of their accumulated bad debt reserves.
Approximately $12.6 million of Savings Bank of Manchester accumulated bad debt
reserves would not be recaptured into taxable income unless Savings Bank of
Manchester makes a "non-dividend distribution" to Connecticut Bancshares as
described below.
Distributions. If Savings Bank of Manchester makes "non-dividend
distributions" to Connecticut Bancshares, they will be considered to have been
made from Savings Bank of Manchester's unrecaptured tax bad debt reserves,
including the balance of its reserves as of December 31, 1987, to the extent of
the "non-dividend distributions," and then from Savings Bank of Manchester's
supplemental reserve for losses on loans, to the extent of those reserves, and
an amount based on the amount distributed, but not more than the amount of those
reserves, will be included in Savings Bank of Manchester's taxable income. Non-
dividend distributions include distributions
113
in excess of Savings Bank of Manchester's current and accumulated earnings and
profits, as calculated for federal income tax purposes, distributions in
redemption of stock, and distributions in partial or complete liquidation.
Dividends paid out of Savings Bank of Manchester's current or accumulated
earnings and profits will not be so included in Savings Bank of Manchester's
taxable income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Therefore, if Savings Bank of Manchester makes a
non-dividend distribution to Connecticut Bancshares, approximately one and one-
half times the amount of the distribution not in excess of the amount of the
reserves would be includable in income for federal income tax purposes, assuming
a 35% federal corporate income tax rate. Savings Bank of Manchester does not
intend to pay dividends that would result in a recapture of any portion of its
bad debt reserves.
Connecticut Taxation
Connecticut Bancshares and its subsidiaries are subject to the Connecticut
corporation business tax. Connecticut Bancshares and its subsidiaries will be
eligible to file a combined Connecticut corporation business tax return and will
pay the regular corporation business tax (income tax).
The Connecticut corporation business tax is based on the federal taxable
income before net operating loss and special deductions of Connecticut
Bancshares and its subsidiaries and makes certain modifications to federal
taxable income to arrive at Connecticut taxable income. Connecticut taxable
income is multiplied by the state tax rate (8.5% for 1999 and 7.5% for 2000 and
thereafter) to arrive at Connecticut income tax.
In May 1998, the State of Connecticut enacted legislation permitting the
formation of passive investment company subsidiaries by financial institutions.
This legislation exempts qualifying passive investment companies from the
Connecticut corporation business tax and excludes dividends paid from a passive
investment company from the taxable income of the parent financial institution.
Savings Bank of Manchester's formation of a passive investment company in
January 1999 is expected to substantially eliminate the state income tax expense
of Connecticut Bancshares and its subsidiaries.
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SHARES TO BE PURCHASED BY MANAGEMENT WITH SUBSCRIPTION RIGHTS
The following table presents certain information as to the approximate
purchases of common stock by each director and executive officer of Savings Bank
of Manchester, including their associates, as defined by applicable regulations.
No individual has entered into a binding agreement to purchase these shares and,
therefore, actual purchases could be more or less than indicated. Directors and
executive officers and their associates may not purchase more than 30% of the
shares sold in the conversion. For purposes of the following table, sufficient
shares are assumed to be available to satisfy subscriptions in all categories.
Percent of Percent of
Anticipated Anticipated Shares at Shares at
Number of Dollar Minimum Maximum
Shares to be Amount to be of Estimated of Estimated
Name Purchased (1) Purchased (1) Valuation Range Valuation Range
- ---- ------------- ------------- --------------- ---------------
Thomas A. Bailey 7,500 $ 75,000 .08% .06%
Richard P. Meduski (2) 25,000 250,000 .26 .19
A. Paul Berte 5,000 50,000 .05 .04
Timothy J. Devanney 15,000 150,000 .15 .11
M. Adler Dobkin 6,000 60,000 .06 .04
Sheila B. Flanagan (2) 25,000 250,000 .26 .19
John D. LaBelle, Jr. 5,000 50,000 .05 .04
Michael B. Lynch 10,000 100,000 .10 .08
Eric A. Marziali (2) 25,000 250,000 .26 .19
Jon L. Norris 2,500 25,000 .02 .01
William D. O'Neill 20,000 200,000 .20 .15
Laurence P. Rubinow (2) 25,000 250,000 .26 .19
John G. Sommers 15,000 150,000 .15 .11
Thomas E. Toomey 15,000 150,000 .15 .11
Gregory S. Wolff (2) 25,000 250,000 .26 .19
Charles L. Pike (2) 25,000 250,000 .26 .19
Douglas K. Anderson (2) 25,000 250,000 .26 .19
Nicholas B. Mason 10,000 100,000 .10 .08
Roger A. Somerville 6,500 65,000 .06 .05
------- ---------- ---- ----
All Directors and Executive Officers 292,500 $2,925,000 2.99% 2.21%
as a Group (19 persons) (3) ======= ========== ==== ====
______________________________________
(1) Includes proposed purchases with funds contained in the individual's 401(k)
savings plan account. Does not include shares to be awarded under the
employee stock ownership plan and stock-based incentive plan or options to
acquire shares under the stock-based incentive plan.
(2) Such amount represents the maximum allowable purchase for such individual.
(3) Including the effect of shares issued to SBM Foundation, the aggregate
beneficial ownership of all directors and executive officers as a group
would be 2.77% and 2.05% at the minimum and maximum of the estimated
valuation range, respectively.
115
THE CONVERSION
The Boards of Directors of Connecticut Bankshares, M.H.C. and Savings Bank
of Manchester, the Connecticut Banking Commissioner and Connecticut Bankshares,
M.H.C.'s corporators have approved the Plan of Conversion subject to the
satisfaction of certain other conditions. However, any approvals by the
Connecticut Banking Commissioner are not a recommendation or endorsement of the
plan of conversion.
General
On August 30, 1999, the Boards of Directors of Savings Bank of Manchester
and Connecticut Bankshares, M.H.C. unanimously adopted and, on October 6, 1999
and October 26, 1999, unanimously amended the plan of conversion under which
Connecticut Bankshares, M.H.C. will convert from a mutual holding company to a
stock holding company. Following the conversion, Savings Bank of Manchester will
be held as a wholly owned subsidiary of Connecticut Bancshares, a recently
formed Delaware corporation. The following discussion of the plan of conversion
contains all material terms about the conversion. Nevertheless, readers are
urged to read carefully the plan of conversion, which is available from Savings
Bank of Manchester upon request. The plan of conversion is also filed as an
exhibit to the registration statement that Connecticut Bancshares has filed with
the Securities and Exchange Commission. See "Where You Can Find More
Information." The Connecticut Banking Commissioner has approved the plan of
conversion subject to certain conditions. Additionally, Connecticut Bankshares,
M.H.C.'s corporators approved the plan of conversion at a special meeting called
for that purpose and held on November 22, 1999.
In connection with the conversion, Savings Bank of Manchester will adopt
Amended and Restated Articles of Incorporation and Bylaws. As part of the
conversion, Savings Bank of Manchester will issue all of its outstanding capital
stock, 1,000 shares of common stock, to Connecticut Bancshares in exchange for
50% of the net proceeds from the sale of common stock by Connecticut Bancshares
in the offering. Connecticut Bancshares expects to receive approval from the
Office of Thrift Supervision to become a savings and loan holding company and to
acquire all of Savings Bank of Manchester's capital stock issued in the
conversion.
The plan of conversion provides that the Boards of Directors of Connecticut
Bankshares, M.H.C. and of Savings Bank of Manchester, at any time before the
completion of the conversion, may decide not to use the holding company form of
organization in implementing the conversion. This decision may be made to avoid
possible delays resulting from overlapping regulatory processing, or policies or
conditions, which could hurt the ability of Savings Bank of Manchester's,
Connecticut Bancshares' or Connecticut Bankshares, M.H.C.'s ability to complete
the conversion and transact its business after the conversion as is contemplated
and in accordance with Savings Bank of Manchester's operating policies. If such
a decision is made, Connecticut Bancshares will withdraw its registration
statement from the Securities and Exchange Commission and Savings Bank of
Manchester will take all steps necessary to complete the conversion without
Connecticut Bancshares, including filing any necessary documents. In such event,
if Savings Bank of Manchester determines to complete the conversion, if
permitted by the Connecticut Banking Commissioner, Savings Bank of Manchester
will issue and sell its common stock and subscribers will be notified of the
elimination of Connecticut Bancshares and be permitted to affirm, modify or
rescind their orders. Subscribers will need to reconfirm their subscriptions
before the end of the resolicitation offering or their funds will be refunded
with interest. The following description of the plan of conversion assumes that
a holding company form of organization will be used in the conversion. If a
holding company form of organization is not used, all other pertinent terms of
the plan of conversion as described below will apply to the conversion of
Savings Bank of Manchester from the mutual holding company to stock holding
company form of organization and the sale of Savings Bank of Manchester's common
stock.
The plan of conversion provides generally that: Connecticut Bankshares,
M.H.C. will convert from a Connecticut-chartered mutual holding company to an
interim stock bank and shall simultaneously combine or merge with and into
Savings Bank of Manchester, with Savings Bank of Manchester being the surviving
entity; the shares of Savings Bank of Manchester's common stock currently held
by Connecticut Bankshares, M.H.C. will be extinguished. Connecticut Bancshares
has been organized for the purpose of acquiring all of the outstanding shares
116
of Savings Bank of Manchester. The common stock of Connecticut Bancshares will
be offered in the subscription offering to persons having subscription rights;
if necessary, shares of common stock not subscribed for in the subscription
offering will be offered in a direct community offering to certain members of
the general public, with preference given to natural persons residing in
Hartford, Tolland and Windham Counties, Connecticut, and then to certain members
of the general public in a syndicated community offering through a syndicate of
registered broker-dealers under selected dealer agreements; and Connecticut
Bancshares will purchase all of the capital stock of Savings Bank of Manchester
to be issued in the conversion.
As part of the conversion, Connecticut Bancshares is making a subscription
offering of its common stock to holders of subscription rights in the following
order of priority: (1) holders of savings accounts with $50 or more on deposit
as of July 31, 1998; (2) Savings Bank of Manchester's employee stock ownership
plan; and (3) directors, officers and employees of Savings Bank of Manchester
without a higher subscription priority.
Shares of common stock not subscribed for in the subscription offering are
expected to be offered for sale in the direct community offering. The direct
community offering, if one is held, is expected to begin either at the same time
as or during or after the subscription offering. Shares of common stock not sold
in the subscription and direct community offerings may be offered in the
syndicated community offering. Regulations require that the direct community and
syndicated community offerings be completed within 45 days after completion of
the fully extended subscription offering unless extended by Savings Bank of
Manchester or Connecticut Bancshares with the approval of the regulatory
authorities. If the syndicated community offering is not feasible, the Board of
Directors of Savings Bank of Manchester will consult with the regulatory
authorities to determine an appropriate alternative method for selling the
unsubscribed shares of common stock, which may include a firm commitment public
offering. The plan of conversion provides that the conversion must be completed
within 24 months after the effective date of the approval of the plan of
conversion by the Boards of Directors of Connecticut Bankshares, M.H.C. and
Savings Bank of Manchester.
The completion of the offering, however, depends on market conditions and
other factors beyond Savings Bank of Manchester's control. No assurance can be
given as to the length of time that will be required to complete the direct
community or syndicated community offerings or other sale of the common stock.
If delays are experienced, significant changes may occur in the estimated pro
forma market value of Connecticut Bancshares and Savings Bank of Manchester, as
converted, together with corresponding changes in the net proceeds realized by
Connecticut Bancshares from the sale of the common stock. If the conversion is
terminated, Savings Bank of Manchester would be required to charge all
conversion expenses against current income.
Orders for shares of common stock will not be filled until at least
9,775,000 shares of common stock have been subscribed for, the Connecticut
Banking Commissioner and any other applicable bank regulatory authority approves
the final valuation and the conversion closes. Furthermore, the closing of the
stock offering and the completion of the conversion is subject to the receipt by
Savings Bank of Manchester of approval from the Federal Deposit Insurance
Corporation to merge with Connecticut Bankshares, M.H.C. in its converted form
as a Connecticut-chartered interim stock savings bank and to the receipt by
Connecticut Bancshares of approval from the Office of Thrift Supervision to
acquire all of the stock of Savings Bank of Manchester. If the conversion is not
completed within 45 days after the last day of the fully extended subscription
offering and the Connecticut Banking Commissioner consents to an extension of
time to complete the conversion, subscribers will be given the right to
increase, decrease or rescind their subscriptions. Unless an affirmative
indication is received from subscribers that they wish to continue to subscribe
for shares, the funds will be returned promptly, together with accrued interest
at Savings Bank of Manchester's passbook rate from the date payment is received
until the funds are returned to the subscriber. If the period is not extended,
or, in any event, if the conversion is not completed, all withdrawal
authorizations will be terminated and all funds held will be promptly returned
together with accrued interest at Savings Bank of Manchester's passbook rate
from the date payment is received until the conversion is terminated.
117
Establishment of the Charitable Foundation
General. In furtherance of Savings Bank of Manchester's commitment to its
local community, the plan of conversion provides for the establishment of a
charitable foundation in connection with the conversion. The plan of conversion
provides that Savings Bank of Manchester and Connecticut Bancshares will
establish SBM Foundation, and will fund it with Connecticut Bancshares common
stock, as further described below. Connecticut Bancshares and Savings Bank of
Manchester believe that the funding of SBM Foundation with Connecticut
Bancshares common stock is a means of establishing a common bond between Savings
Bank of Manchester and its community and thereby enables Savings Bank of
Manchester's community to share in the potential growth and success of
Connecticut Bancshares over the long-term. By further enhancing Savings Bank of
Manchester's visibility and reputation in its local community, Savings Bank of
Manchester believes that the foundation will enhance the long-term value of
Savings Bank of Manchester's community banking franchise.
Purpose of SBM Foundation. Savings Bank of Manchester emphasizes community
lending and community activities within its local community. In 1998, Savings
Bank of Manchester formed the Savings Bank of Manchester Foundation, Inc., a
foundation that provides grants to charitable organizations that focus primarily
on charitable causes and educational scholarships to qualified students in the
communities in which Savings Bank of Manchester operates. See "Business of
Savings Bank of Manchester--Savings Bank of Manchester Foundation, Inc."
SBM Foundation is being formed to complement, not to replace Savings Bank
of Manchester's existing community activities and its existing foundation's
activities. Savings Bank of Manchester intends to continue to emphasize
community lending and community activities following the conversion. However,
such activities are not Savings Bank of Manchester's sole corporate purpose. SBM
Foundation, conversely, will be completely dedicated to community activities and
the promotion of charitable causes, and may be able to support such activities
in manners that are not presently available to Savings Bank of Manchester.
Savings Bank of Manchester believes that SBM Foundation will enable Connecticut
Bancshares and Savings Bank of Manchester to assist within the communities in
which Savings Bank of Manchester operates in areas beyond community development
and lending and will enhance its current activities under the Community
Reinvestment Act. Savings Bank of Manchester received a "Satisfactory" Community
Reinvestment Act rating in its last Community Reinvestment Act examination by
the Federal Deposit Insurance Corporation. Savings Bank of Manchester's latest
Community Reinvestment Act rating from the Connecticut Banking Commissioner was
"Outstanding."
The Board of Directors believes the establishment of SBM Foundation is
consistent with Savings Bank of Manchester's commitment to community service.
The Board further believes that the funding of SBM Foundation with Connecticut
Bancshares common stock will allow Savings Bank of Manchester's community to
share in the potential growth and success of Connecticut Bancshares long after
the conversion. SBM Foundation will accomplish that goal by providing for
continued ties between it and Savings Bank of Manchester, thereby forming a
partnership within the communities in which Savings Bank of Manchester operates.
Savings Bank of Manchester, however, does not expect the contribution to
SBM Foundation to take the place of Savings Bank of Manchester's traditional
community lending and charitable activities. For the year ended 1998, Savings
Bank of Manchester contributed $3.2 million to community organizations and to
the Savings Bank of Manchester Foundation, Inc. Savings Bank of Manchester
expects to continue making charitable contributions within its communities. Upon
the completion of the conversion, Connecticut Bancshares intends to contribute
to SBM Foundation shares of its common stock equal to 8% of the common stock
sold in the conversion, or stock valued at approximately $10.6 million based on
the purchase price of $10.00 per share, if 13,225,000 shares are sold in the
conversion. If the number of shares sold in the conversion is increased to
15,208,750 shares, Connecticut Bancshares intends to contribute to SBM
Foundation stock valued at approximately $12.2 million, based on the purchase
price of $10.00 per share. If the number of shares sold in the conversion is
increased to 15,208,750 shares, the foundation would be funded with 1,216,700
shares of common stock. The conversion presents Savings Bank of Manchester and
Connecticut Bancshares with a unique opportunity to provide a substantial and
continuing benefit to the communities in which Savings Bank of Manchester
operates, and to receive the associated tax benefits,
118
without any significant cash outlay by Savings Bank of Manchester, and without
any significant adverse impact to the depositors of Savings Bank of Manchester.
Structure of SBM Foundation. SBM Foundation will be incorporated under
Delaware law as a non-stock corporation. Under its Bylaws, SBM Foundation's
Board of Directors will be comprised of between five and 12 members, all of whom
will be existing or former directors or officers of Connecticut Bancshares or
Savings Bank of Manchester. The Certificate of Incorporation of SBM Foundation
provides that the corporation is organized exclusively for charitable purposes
as set forth in Section 501(c)(3) of the Internal Revenue Code. SBM Foundation's
Certificate of Incorporation further provides that no part of the net earnings
of the foundation will inure to the benefit of, or be distributable to, its
directors, officers or members.
The Board of Directors of SBM Foundation will be responsible for
establishing its grant and donation policies, consistent with the purposes for
which it was established. As directors of a nonprofit corporation, directors of
SBM Foundation will at all times be bound by their fiduciary duty to advance SBM
Foundation's charitable goals, to protect its assets and to act in a manner
consistent with the charitable purposes for which SBM Foundation is established.
The Directors of SBM Foundation will also be responsible for directing the
activities of the foundation, including the management of the common stock of
Connecticut Bancshares held by SBM Foundation. However, all shares of common
stock held by SBM Foundation will be voted in the same ratio as all other shares
of the common stock on all proposals considered by stockholders of Connecticut
Bancshares.
SBM Foundation's place of business will be located at Connecticut
Bancshares' administrative offices. The Board of Directors of SBM Foundation
will appoint such officers and employees as may be necessary to manage its
operations.
SBM Foundation will receive working capital from any dividends that may be
paid on Connecticut Bancshares' common stock in the future, and within the
limits of applicable federal and state laws, loans collateralized by the common
stock or from the proceeds of the sale of any of the common stock in the open
market from time to time as may be permitted to provide it with additional
liquidity. As a private foundation under Section 501(c)(3) of the Internal
Revenue Code, SBM Foundation will be required to distribute annually in grants
or donations, a minimum of 5% of the average fair market value of its net
investment assets. One of the conditions imposed on the gift of common stock by
Connecticut Bancshares is that the amount of common stock that may be sold by
SBM Foundation in any one year shall not exceed 5% of the average market value
of the assets held by SBM Foundation, except where the Board of Directors of SBM
Foundation determines that the failure to sell an amount of common stock greater
than such amount would result in a long-term reduction of the value of its
assets and/or would otherwise jeopardize its capacity to carry out its
charitable purposes. Upon completion of the conversion and the contribution of
shares to SBM Foundation immediately following the conversion, Connecticut
Bancshares would have 10,557,000, 12,420,000, 14,283,000 and 16,425,450, shares
issued and outstanding at the minimum, midpoint, maximum and 15% above the
maximum of the estimated valuation range. Because of the gift of common stock to
SBM Foundation, Connecticut Bancshares will have an increased number of shares
outstanding and, therefore, the voting and ownership interests of stockholders
in Connecticut Bancshares will be diluted by 7.4%, compared to their interests
in Connecticut Bancshares if SBM Foundation were not established. For additional
discussion of the dilutive effect, see "Risk Factors--The contribution to SBM
Foundation means that a stockholder's total ownership interest will be 7.4% less
after the contribution" and "Pro Forma Data."
Tax Considerations. Connecticut Bancshares and Savings Bank of Manchester
have been advised by their independent tax advisors that an organization created
for the above purposes should qualify as a Section 501(c)(3) exempt organization
under the Internal Revenue Code, and should be classified as a private
foundation. SBM Foundation will submit a request to the Internal Revenue Service
to be recognized as an exempt organization. As long as SBM Foundation files its
application for tax-exempt status within 15 months from the date of its
organization, and provided the Internal Revenue Service approves the
application, its effective date as a Section 501(c)(3) organization will be the
date of its organization. Connecticut Bancshares' independent tax advisors,
however, have not rendered any advice on whether SBM Foundation's tax exempt
status will be affected by a condition of the gift instrument that all shares of
common stock of Connecticut Bancshares held by SBM
119
Foundation must be voted in the same ratio as all other outstanding shares of
common stock of Connecticut Bancshares on all proposals considered by
stockholders of Connecticut Bancshares. See "--Conditions Imposed on SBM
Foundation."
Under Delaware law, Connecticut Bancshares is authorized by statute to make
charitable contributions and case law has recognized the benefits of such
contributions to a Delaware corporation. Delaware case law provides that a
charitable gift must be within reasonable limits as to amount and purpose to be
valid. Connecticut Bancshares and Savings Bank of Manchester believe that the
conversion presents a unique opportunity to establish and fund a charitable
foundation given the substantial amount of additional capital being raised. In
making such a determination, Connecticut Bancshares and Savings Bank of
Manchester considered the dilutive impact of the contribution of common stock to
SBM Foundation on the amount of common stock to be sold in the conversion. Based
on such consideration, Connecticut Bancshares and Savings Bank of Manchester
believe that the contribution to SBM Foundation in excess of the 10% annual
limitation on charitable deductions described below is justified given Savings
Bank of Manchester's capital position and its earnings, the substantial
additional capital being raised in the conversion and the potential benefits of
SBM Foundation within the communities in which Savings Bank of Manchester
operates. See "Historical and Pro Forma Regulatory Capital Compliance,"
"Capitalization," and "Comparison of Independent Valuation and Pro Forma
Financial Information With and Without the Foundation." Thus, the amount of the
contribution will not adversely impact the financial condition of Connecticut
Bancshares and Savings Bank of Manchester. Connecticut Bancshares and Savings
Bank of Manchester therefore believe that the amount of the charitable
contribution is reasonable given Connecticut Bancshares' and Savings Bank of
Manchester's pro forma capital positions and does not raise safety and soundness
concerns.
Connecticut Bancshares and Savings Bank of Manchester have received an
opinion of their independent tax advisors that Connecticut Bancshares'
contribution of its own stock to SBM Foundation will not constitute an act of
self-dealing, and that Connecticut Bancshares will be entitled to a deduction in
the amount of the fair market value of the stock at the time of the contribution
less the nominal amount that SBM Foundation is required to pay Connecticut
Bancshares for such stock. A 10% limitation of Connecticut Bancshares' annual
taxable income before the charitable contribution deduction applies to such
deduction. Connecticut Bancshares should be able to carry forward for federal
and state income tax purposes any unused portion of the deduction for five years
following the contribution. Connecticut Bancshares is permitted under the
Internal Revenue Code to carry the excess contribution over the five year period
following the contribution to SBM Foundation. Connecticut Bancshares estimates
that substantially all of the contribution should be deductible over the six-
year period. However, Connecticut Bancshares does not have any assurance that
the Internal Revenue Service will grant tax-exempt status to the foundation.
Furthermore, even if the contribution is deductible, Connecticut Bancshares may
not have sufficient earnings to be able to use the deduction in full. Neither
Connecticut Bancshares nor Savings Bank of Manchester expect to make any further
contributions to SBM Foundation or the Savings Bank of Manchester Foundation,
Inc. within the first five years following the initial contribution, unless such
contributions would be deductible under the Internal Revenue Code. Any such
decisions would be based on an assessment of, among other factors, the financial
condition of Connecticut Bancshares and Savings Bank of Manchester at that time,
the interests of shareholders and depositors of Connecticut Bancshares and
Savings Bank of Manchester, and the financial condition and operations of SBM
Foundation.
Although Connecticut Bancshares and Savings Bank of Manchester have
received an opinion of their independent tax advisors that Connecticut
Bancshares will be entitled to a deduction for the charitable contribution,
there can be no assurances that the Internal Revenue Service will recognize SBM
Foundation as a Section 501(c)(3) exempt organization or that the deduction will
be permitted. In such event, Connecticut Bancshares' tax benefit related to the
contribution to SBM Foundation would be expensed without tax benefit, resulting
in a reduction in earnings in the year in which the Internal Revenue Service
makes such a determination. See "Risk Factors--Contribution to the SBM
Foundation may not be tax deductible which could hurt Connecticut Bancshares'
profits."
120
As a private foundation, earnings and gains, if any, from the sale of
common stock or other assets are exempt from federal and state income taxation.
However, investment income, such as interest, dividends and capital gains, is
generally taxed at a rate of 2.0%. SBM Foundation will be required to make an
annual filing with the Internal Revenue Service within four and one-half months
after the close of its fiscal year to maintain its tax-exempt status. SBM
Foundation will be required to make its annual information return available for
public inspection for a three-year period. The information return for a private
foundation must include, among other things, an itemized list of all grants made
or approved, showing the amount of each grant, the recipient, any relationship
between a grant recipient and the foundation's managers and a concise statement
of the purpose of each grant.
Conditions Imposed on SBM Foundation. The SBM Foundation is being
established and funded in a manner similar to that utilized in past conversions
of savings banks and savings associations. As a result, SBM Foundation will be
subject to the following:
1. examination by the Federal Deposit Insurance Corporation;
2. compliance with any supervisory directives imposed by the Federal
Deposit Insurance Corporation;
3. the foundation will operate according to written policies adopted by
its board of directors, including a conflict of interest policy;
4. the foundation will submit a proposed operating plan to the Federal
Deposit Insurance Corporation before the completion of the conversion;
5. the foundation will provide annual reports to the Federal Deposit
Insurance Corporation describing the grants made and the grant
recipients; and
6. any shares of Connecticut Bancshares common stock held by SBM
Foundation must be voted in the same ratio as all other shares of
Connecticut Bancshares common stock voted on each and every proposal
considered by the stockholders of Connecticut Bancshares.
Reasons for the Conversion
The Board of Directors and management believe that the conversion is in the
best interests of Savings Bank of Manchester, its customers, employees and the
communities it serves. Savings Bank of Manchester's Board of Directors has
formed Connecticut Bancshares to serve as a holding company, with Savings Bank
of Manchester as its subsidiary, after the conversion. By converting to the
stock holding company form of organization, Connecticut Bancshares and Savings
Bank of Manchester will be structured in the form used by holding companies of
commercial banks, most business entities and by a growing number of savings
institutions. Management of Savings Bank of Manchester believes that the
conversion offers a number of advantages which will be important to the future
growth and performance of Savings Bank of Manchester. The capital raised in the
conversion is intended to support Savings Bank of Manchester's future lending
and operational growth and may also support possible future branching activities
and the acquisition of other financial institutions or financial service
companies or their assets and to increase its ability to render services to the
communities it serves. There are no current specific plans, arrangements or
understandings, written or oral, regarding these activities. The conversion is
also expected to afford Savings Bank of Manchester's management, depositors and
others the opportunity to become stockholders of Connecticut Bancshares and
participate more directly in, and contribute to, any future growth of
Connecticut Bancshares and Savings Bank of Manchester. The conversion will also
enable Connecticut Bancshares and Savings Bank of Manchester to raise additional
capital in the public equity or debt markets should the need arise, although
there are no current specific plans, arrangements or understandings, written or
oral, regarding any such financing activities.
121
Effects of Conversion to Stock Form
General. Each depositor in Savings Bank of Manchester has both a deposit
account in the institution and a pro rata ownership interest in the net worth of
the institution through Connecticut Bankshares, M.H.C., based upon the balance
in his or her account, which interest may only be realized if the institution is
liquidated. However, this ownership interest is tied to the depositor's account
and has no value separate from such deposit account. Any depositor who opens a
deposit account obtains a pro rata ownership interest in the net worth of the
institution without any additional payment beyond the amount of the deposit. A
depositor who reduces or closes his account receives a portion or all of the
balance in the account but nothing for his ownership interest in the net worth
of the institution, which is lost to the extent that the balance in the account
is reduced.
Consequently, Savings Bank of Manchester's depositors would realize the
value of their ownership interest only in the unlikely event that the bank is
liquidated. In such event, the depositors of record at that time, as owners,
would be able to share in any residual surplus and reserves after the payment of
creditors' claims, including claims of depositors to the amounts of their
deposits.
When a mutual holding company converts to stock form, depositors lose all
rights to the net worth of the bank, except that eligible account holders at the
time of conversion obtain the right to claim a pro rata share of funds
representing the liquidation account established in connection with the
conversion. Additionally, permanent nonwithdrawable capital stock is created and
offered to depositors which represents the ownership of the institution's net
worth. The common stock is separate and apart from deposit accounts and cannot
be and is not insured by the Federal Deposit Insurance Corporation or any other
governmental agency. Certificates are issued to evidence ownership of the common
stock. The stock certificates are transferable, and therefore the stock may be
sold or traded if a purchaser is available with no effect on any deposit account
the seller may hold in the institution.
No assets of Connecticut Bancshares or Savings Bank of Manchester will be
distributed in connection with the conversion other than the payment of those
expenses incurred in connection with the conversion.
Continuity. While the conversion is being accomplished, the normal business
of Savings Bank of Manchester will continue without interruption, including
being regulated by the Connecticut Banking Commissioner and the Federal Deposit
Insurance Corporation. After conversion, Savings Bank of Manchester will
continue to provide services for depositors and borrowers under current policies
by its present management and staff.
The Directors of Savings Bank of Manchester at the time of conversion will
serve as Directors of Savings Bank of Manchester after the conversion. The
Directors of Connecticut Bancshares will be solely composed of individuals who
served on the Board of Directors of Savings Bank of Manchester. All officers of
Savings Bank of Manchester at the time of conversion will retain their positions
after the conversion.
Savings Accounts and Loans. Savings Bank of Manchester's savings accounts,
account balances and existing Federal Deposit Insurance Corporation insurance
coverage of savings accounts will not be affected by the conversion.
Furthermore, the conversion will not affect the loan accounts, loan balances or
obligations of borrowers under their individual contractual arrangements with
Savings Bank of Manchester.
Effect on Voting Rights of Corporators. Connecticut Bankshares, M.H.C.
presently maintains a governing board of corporators. Generally, corporators
consist of depositors of Savings Bank of Manchester who are residents of the
communities served by Savings Bank of Manchester. Corporators are nominated by
Connecticut Bankshares, M.H.C. nominating committee and elected by ballot at
corporators' meetings. Generally, corporators promote the goodwill of Savings
Bank of Manchester and consist, therefore, of individuals who are successful in
their occupations and respected in their communities. Corporators also possess
certain voting rights in Connecticut Bankshares, M.H.C. Upon conversion,
Connecticut Bankshares, M.H.C. and its governing body of corporators will no
longer exist. Instead, Connecticut Bancshares, as the sole stockholder of
Savings Bank of Manchester, will
122
possess all voting rights in Savings Bank of Manchester. The holders of the
common stock of Connecticut Bancshares will possess all voting rights in
Connecticut Bancshares.
Tax Effects. The conversion will be effected through a series of
contemporaneous transactions which result in Savings Bank of Manchester becoming
a wholly owned subsidiary of Connecticut Bancshares. To facilitate the
conversion, Connecticut Bankshares, M.H.C. will convert to an interim
Connecticut-chartered stock savings bank and merge with and into Savings Bank of
Manchester. In connection with the merger, shares of Savings Bank of Manchester
common stock previously held by Connecticut Bankshares, M.H.C. will be canceled.
Connecticut Bancshares will then contribute 50% of the net offering proceeds to
Savings Bank of Manchester in exchange for 100% of its common stock.
Savings Bank of Manchester has received an opinion from Muldoon, Murphy &
Faucette LLP, Washington, D.C., that addresses all the material federal income
tax consequences of the conversion. The opinion, which relies upon standard
factual representations given by Savings Bank of Manchester, concludes as
follows:
1. The conversion of Connecticut Bankshares, M.H.C. to a Connecticut-
chartered interim stock savings bank will constitute a tax-free reorganization
within the meaning of Section 368(a)(1)(F) of the Code.
2. The merger of the interim savings bank and Savings Bank of Manchester
will constitute a tax-free reorganization within the meaning of Section
368(a)(1)(A) of the Code.
3. Connecticut Bankshares, M.H.C. will not recognize any gain or loss on
the transfer of its assets to Savings Bank of Manchester as a consequence of the
merger of the interim savings bank and Savings Bank of Manchester in exchange
for an interest in a liquidation account established in Savings Bank of
Manchester for the benefit of eligible account holders who hold a liquidation
interest in Connecticut Bankshares, M.H.C. and who remain depositors of Savings
Bank of Manchester.
4. No gain or loss will be recognized by Savings Bank of Manchester upon
the receipt of the assets of Connecticut Bankshares, M.H.C. as a consequence of
the merger of the interim savings bank and Savings Bank of Manchester in
exchange for the transfer to the eligible account holders who hold a liquidation
interest in Connecticut Bankshares, M.H.C. of an interest in the liquidation
account.
5. The basis of the assets of Connecticut Bankshares, M.H.C. to be
received by Savings Bank of Manchester as a consequence of the merger of the
interim savings bank and Savings Bank of Manchester will be the same as the
basis of such assets in the hands of Connecticut Bankshares, M.H.C. immediately
prior to the transfer.
6. The holding period of the assets of Connecticut Bankshares, M.H.C. to
be received by Savings Bank of Manchester in connection with the merger of the
interim savings bank and Savings Bank of Manchester will include the holding
period of those assets in the hands of Connecticut Bankshares, M.H.C.
7. An eligible account holder will recognize no gain or loss upon the
receipt of an interest in the liquidation account in Savings Bank of Manchester
in exchange for the eligible account holder's liquidation interest in
Connecticut Bankshares, M.H.C.
8. Connecticut Bancshares will recognize no gain or loss upon the receipt
of cash in exchange for shares of common stock of Connecticut Bancshares issued
in the conversion offering.
9. Connecticut Bancshares will recognize no gain or loss upon the
transfer of a portion of the net offering proceeds to Savings Bank of Manchester
in exchange for common stock of Savings Bank of Manchester.
10. Savings Bank of Manchester will recognize no gain or loss upon the
receipt of a portion of the net offering proceeds from Connecticut Bancshares in
exchange for common stock of Savings Bank of Manchester.
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11. Assuming that the subscription rights have no value, no gain or loss
will be recognized by Connecticut Bancshares or by eligible account holders or
other persons described in the plan of conversion who will receive subscription
rights as a result of the distribution of subscription rights to purchase shares
of common stock. Additionally, eligible account holders or such other persons
shall not recognize gain or loss upon the exercise of subscription rights to
purchase shares of common stock, provided that the amount to be paid for the
common stock is equal to the fair market value of the common stock on the date
of purchase.
Unlike a private letter ruling issued by the Internal Revenue Service, an
opinion of counsel is not binding on the Internal Revenue Service and the
Internal Revenue Service could disagree with the conclusions reached in the
opinion. If there is a disagreement, no assurance can be given that the
conclusions reached in an opinion of counsel would be sustained by a court if
contested by the Internal Revenue Service.
The opinions regarding the tax consequences of the receipt of subscription
rights are based upon past rulings of the Internal Revenue Service and the
conclusion of RP Financial that such subscription rights have no value. RP
Financial, whose findings are not binding on the Internal Revenue Service, has
issued a letter indicating that the subscription rights do not have any value,
based on the fact that the rights are acquired by the recipients without cost,
are nontransferable and of short duration and afford the recipients the right
only to purchase shares of the common stock at a price equal to its estimated
fair market value, which will be the same price paid by purchasers in the direct
community offering for unsubscribed shares of common stock. If the subscription
rights are determined to have value, the receipt of the rights may only be
taxable to those persons who exercise their subscription rights. In such event,
Connecticut Bancshares or Savings Bank of Manchester could also recognize a gain
on the distribution of subscription rights. Holders of subscription rights are
encouraged to consult with their own tax advisors as to the tax consequences if
the subscription rights are deemed to have any value.
Savings Bank of Manchester has also received an opinion from Arthur
Andersen LLP, Hartford, Connecticut, that, assuming the conversion does not
result in any federal income tax liability to Savings Bank of Manchester, its
account holders, Connecticut Bankshares, M.H.C., or Connecticut Bancshares,
implementation of the plan of conversion will not result in any Connecticut
income tax liability to those entities or persons or Delaware corporate income
tax liability to Savings Bank of Manchester, Connecticut Bankshares, M.H.C. or
Connecticut Bancshares.
The opinions of Muldoon, Murphy & Faucette LLP and Arthur Andersen LLP, and
the letter from RP Financial relating to the value of the subscription rights,
are filed as exhibits to the registration statement that Connecticut Bancshares
has filed with the Securities and Exchange Commission. See "Where You Can Find
More Information."
Prospective investors are urged to consult with their own tax advisors
regarding the tax consequences of the conversion particular to them.
Liquidation Account. In the unlikely event of a complete liquidation of
Savings Bank of Manchester, before the conversion, each depositor in Savings
Bank of Manchester would receive a pro rata share of any assets of Savings Bank
of Manchester remaining after payment of claims of all creditors, including the
claims of all depositors up to the withdrawal value of their accounts. Each
depositor's pro rata share of the remaining assets would be in the same
proportion as the value of his or her deposit account to the total value of all
deposit accounts in Savings Bank of Manchester at the time of liquidation.
After the conversion, holders of withdrawable deposit(s) in Savings Bank of
Manchester, including certificates of deposit, will not be entitled to share in
any residual assets upon liquidation of Savings Bank of Manchester. However,
under Connecticut law, Savings Bank of Manchester will, at the time of the
conversion, establish a liquidation account in an amount equal to the amount of
its equity capital, less any subordinated debt approved as bona fide capital of
Savings Bank of Manchester, as of the latest practicable date before the
conversion.
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The liquidation account will be maintained by Savings Bank of Manchester
for a period of ten years after the conversion for the benefit of eligible
account holders who retain their deposit accounts in Savings Bank of Manchester.
Each eligible account holder will, with respect to each deposit account held,
have a related inchoate interest in a sub-account portion of the liquidation
account balance.
The initial subaccount balance for a deposit account held by an eligible
account holder will be determined by multiplying the opening balance in the
liquidation account by a fraction of which the numerator is the amount of the
holder's "qualifying deposit" in the deposit account on July 31, 1998 and the
denominator is the total amount of the "qualifying deposits" of all eligible
account holders on July 31, 1998. The initial subaccount balance shall not be
increased, and it will be decreased as provided below.
If the deposit balance in any deposit account of an eligible account holder
at the close of business on any annual fiscal year closing date of Savings Bank
of Manchester after July 31, 1998 is less than the lesser of the deposit balance
in such deposit account at the close of business on any other annual fiscal year
closing date after July 31, 1998 or the amount of the "qualifying deposit" in
such deposit account on July 31, 1998, then the subaccount balance for such
deposit account shall be adjusted by reducing the subaccount balance in an
amount proportionate to the reduction in the deposit balance. Once reduced, the
subaccount balance shall not be subsequently increased, notwithstanding any
increase in the deposit balance of the related deposit account. If any deposit
account is closed, the related subaccount balance shall be reduced to zero.
Only upon a complete liquidation of Savings Bank of Manchester, each
eligible account holder will be entitled to receive a liquidation distribution
from the liquidation account in the amount of the then current adjusted
subaccount balance(s) for deposit account(s) held by the holder before any
liquidation distribution may be made to stockholders. No merger, consolidation,
bulk purchase of assets with assumptions of deposit account and other
liabilities or similar transactions in which Savings Bank of Manchester is not
the surviving institution will be considered to be a complete liquidation. In
any of these transactions, the liquidation account will be assumed by the
surviving institution.
In the unlikely event Savings Bank of Manchester is liquidated after the
conversion, depositors will be entitled to full payment of their deposit
accounts before any payment is made to Connecticut Bancshares as the sole
stockholder of Savings Bank of Manchester.
The liquidation account will be a memorandum account on the books of
Savings Bank of Manchester and will not be reflected in the audited or unaudited
consolidated financial statements of Connecticut Bancshares or in Savings Bank
of Manchester's regulatory reports.
The Subscription, Direct Community and Syndicated Community Offerings
Subscription Offering. Under the plan of conversion, nontransferable
subscription rights to purchase the common stock have been issued to persons and
entities entitled to purchase the common stock in the subscription offering. The
amount of the common stock which these parties may purchase will depend on the
availability of the common stock for purchase under the categories described in
the plan of conversion. Subscription priorities have been established for the
allocation of stock that may be available. These priorities are as follows:
Category 1: Eligible Account Holders. Each depositor with a savings
account of $50 or more on deposit at Savings Bank of Manchester as of July 31,
1998 will receive nontransferable subscription rights to subscribe for up to a
maximum of $250,000 worth of common stock, so long as the share equivalent of
such dollar amount does not exceed one-half of one percent (0.50%) of the total
number of shares offered in the conversion. If the exercise of subscription
rights in this category results in an oversubscription, shares of common stock
will be allocated among subscribing eligible account holders so as to permit
each one, if possible, to purchase a number of shares sufficient to make the
person's total allocation equal 100 shares or the number of shares actually
subscribed for, whichever is less. After that, unallocated shares will be
allocated proportionately, based on the amount of the eligible account holder's
qualifying deposits compared to total qualifying deposits of all subscribing
eligible account holders whose
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subscriptions remain unsatisfied. If the amount so allocated exceeds the amount
subscribed for by any one or more eligible account holders, the excess shall be
reallocated, one or more times as necessary, among those eligible account
holders whose subscriptions are still not fully satisfied on the same principle
until all shares have been allocated or all subscriptions satisfied.
Nontransferable subscription rights received by officers, directors, corporators
and their associates in this category based on any increased deposits in Savings
Bank of Manchester in the one year period preceding July 31, 1998 are
subordinated to the subscription rights of other eligible account holders.
Category 2: Employee Stock Ownership Plan. The plan of conversion provides
that the employee stock ownership plan shall receive nontransferable
subscription rights to purchase up to 5% of the shares of common stock sold in
the conversion. If the plan's subscription is not filled in its entirety, the
employee stock ownership plan may purchase shares in the open market after the
conversion or may purchase shares directly from Connecticut Bancshares.
Additionally, the employee stock ownership plan currently intends to purchase
shares of common stock in the open market after the effective date of the
conversion to enable it to acquire, together with the shares acquired in the
subscription offering, up to 8% of the outstanding shares of Connecticut
Bancshares common stock, or 844,560 shares and 1,142,640 shares at the minimum
and maximum of the estimated valuation range.
Category 3: Directors, Officers and Employees. To the extent there are
sufficient shares of common stock remaining after the satisfaction of
subscriptions by eligible account holders and the employee stock ownership plan,
directors, officers and employees of Savings Bank of Manchester and Connecticut
Bankshares, M.H.C. who are not eligible account holders shall receive
nontransferable subscription rights to subscribe for up to $250,000 of common
stock, so long as the share equivalent of such dollar amount does not exceed
one-half of one percent (0.50%) of the total number of shares offered in the
conversion.
Subscription rights are nontransferable. Persons selling or otherwise
transferring their rights to subscribe for common stock in the subscription
offering or subscribing for common stock on behalf of another person may forfeit
those rights and may face possible further sanctions and penalties imposed by
the Connecticut Department of Banking, the Federal Deposit Insurance Corporation
or another agency of the U.S. Government. Stock purchased in the subscription
offering must be registered in the name(s) of the registered account holder(s)
and failure to do so will result in the rejection of the order. Joint
registrations will be allowed only if the qualifying account is so registered.
Each person exercising subscription rights will be required to certify that he
or she is purchasing shares solely for his or her own account and that he or she
has no agreement or understanding with any other person for the sale or transfer
of the shares. Once tendered, subscription orders cannot be revoked without the
consent of Savings Bank of Manchester and Connecticut Bancshares.
Connecticut Bancshares and Savings Bank of Manchester will make reasonable
attempts to provide a prospectus and related offering materials to holders of
subscription rights. However, the subscription offering and all subscription
rights under the plan of conversion will expire at 4:00 p.m., Eastern time, on
February 15, 2000, whether or not Savings Bank of Manchester has been able to
locate each person entitled to subscription rights. Orders for common stock in
the subscription offering received in hand by Savings Bank of Manchester after
that time will not be accepted. The subscription offering may be extended by
Connecticut Bancshares and Savings Bank of Manchester up to March 6, 2000
without regulatory approval. The Connecticut conversion regulations require that
Connecticut Bancshares complete the sale of common stock within 45 days after
the close of the subscription offering. If the direct community offering and the
syndicated community offerings are not completed within that period all funds
received will be promptly returned with interest at Savings Bank of Manchester's
passbook rate and all withdrawal authorizations will be canceled. If regulatory
approval of an extension of the time period has been granted, all subscribers
will be notified of the extension and of the duration of any extension that has
been granted, and will be given the right to increase, decrease or rescind their
orders. If an affirmative response to any resolicitation is not received by
Connecticut Bancshares from a subscriber, the subscriber's order will be
rescinded and all funds received will be promptly returned with interest, or
withdrawal authorizations will be canceled. No single extension can exceed 90
days.
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Direct Community Offering. Any shares of common stock which remain
unsubscribed for in the subscription offering will be offered by Connecticut
Bancshares to certain members of the general public in a direct community
offering, with preference given to natural persons residing in Hartford, Tolland
and Windham Counties, Connecticut. Purchasers in the direct community offering
are eligible to purchase up to $250,000 of common stock, which equals 25,000
shares. This amount may be increased up to 5% of the total offering of shares
without further approval of Connecticut Bankshares, M.H.C.'s corporators or a
resolicitation of subscribers unless required by the Connecticut Banking
Commissioner and any other applicable bank regulatory authority. If the
purchase limit is increased to 5% of the total offering of shares, orders
accepted in the direct community offering shall be filled up to a maximum of 2%
of the total offering and thereafter shall be allocated on a pro rata basis per
order until all orders have been filled or all of the remaining shares have been
allocated. The direct community offering, if held, may be concurrent with,
during or promptly after the subscription offering. The direct community
offering may terminate on or at any time after 4:00 p.m., Eastern time, on
February 15, 2000, but no later than 45 days after the close of the subscription
offering, unless extended by Connecticut Bancshares and Savings Bank of
Manchester, with the approval of the Connecticut Banking Commissioner and any
other applicable bank regulatory authority. If regulatory approval of an
extension of the time period has been granted, all subscribers will be notified
of the extension and of the duration of any extension that has been granted, and
will be given the right to increase, decrease or rescind their orders. If an
affirmative response to any resolicitation is not received by Connecticut
Bancshares from a subscriber, the subscriber's order will be rescinded and all
funds received will be promptly returned with interest. Connecticut Bancshares
and Savings Bank of Manchester have the absolute right to accept or reject in
whole or in part any orders to purchase shares in the direct community offering.
If an order is rejected in part, the purchaser does not have the right to cancel
the remainder of the order. Connecticut Bancshares presently intends to
terminate the direct community offering as soon as it has received orders for
all shares available for purchase in the conversion.
If all of the common stock offered in the subscription offering is
subscribed for, no common stock will be available for purchase in the direct
community offering.
Syndicated Community Offering. The plan of conversion provides that, if
necessary, all shares of common stock not purchased in the subscription offering
and direct community offering, if any, may be offered for sale to certain
members of the general public in a syndicated community offering through a
syndicate of registered broker-dealers to be formed and managed by Sandler
O'Neill acting as agent of Connecticut Bancshares. Connecticut Bancshares and
Savings Bank of Manchester have the right to reject orders, in whole or part, in
their sole discretion in the syndicated community offering. Neither Sandler
O'Neill nor any registered broker-dealer shall have any obligation to take or
purchase any shares of the common stock in the syndicated community offering;
however, Sandler O'Neill has agreed to use its best efforts in the sale of
shares in the syndicated community offering.
Stock sold in the syndicated community offering also will be sold at the
$10.00 purchase price. See "--Stock Pricing and Number of Shares to be Issued."
No person will be permitted to subscribe in the syndicated community offering
for shares of common stock with an aggregate purchase price of more than
$250,000 of common stock, which equals 25,000 shares. See "--Plan of
Distribution for the Subscription, Direct Community and Syndicated Community
Offerings" for a description of the commission to be paid to the selected
dealers and to Sandler O'Neill.
Sandler O'Neill may enter into agreements with selected dealers to assist
in the sale of shares in the syndicated community offering. During the
syndicated community offering, selected dealers may only solicit indications of
interest from their customers to place orders with Connecticut Bancshares as of
a certain date for the purchase of shares. When and if Sandler O'Neill and
Connecticut Bancshares believe that enough indications of interest and orders
have been received in the subscription offering, the direct community offering
and the syndicated community offering to consummate the conversion, Sandler
O'Neill will request, as of that certain date, selected dealers to submit orders
to purchase shares for which they have received indications of interest from
their customers. Selected dealers will send confirmations to customers on the
next business day after that certain date. Selected dealers may settle the trade
by debiting the accounts of their customers on a date which will be three
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business days from that certain date. Customers who authorize selected dealers
to debit their brokerage accounts are required to have the funds for payment in
their account on but not before the settlement date. On the settlement date,
selected dealers will remit funds to the account that Connecticut Bancshares
established for each selected dealer. Each customer's funds so forwarded to
Connecticut Bancshares, along with all other accounts held in the same title,
will be insured by the Federal Deposit Insurance Corporation up to the
applicable $100,000 legal limit. After payment has been received by Connecticut
Bancshares from selected dealers, funds will earn interest at Savings Bank of
Manchester's passbook rate until the completion of the offering. At the
completion of the conversion, the funds received will be used to purchase the
shares of common stock ordered. The shares issued in the conversion cannot and
will not be insured by the Federal Deposit Insurance Corporation or any other
government agency. If the conversion is not completed, funds with interest will
be returned promptly to the selected dealers, who, in turn, will promptly credit
their customers' brokerage accounts.
The syndicated community offering may terminate no more than 45 days after
the expiration of the subscription offering, unless extended by Connecticut
Bancshares and Savings Bank of Manchester, with approval of the Connecticut
Banking Commissioner and any other applicable bank regulatory authority.
If Savings Bank of Manchester is unable to find purchasers from the general
public for all unsubscribed shares, other purchase arrangements will be made by
the Board of Directors of Savings Bank of Manchester, if feasible. Any other
arrangements must be approved by the Connecticut Banking Commissioner and any
other applicable bank regulatory authority. The Connecticut Banking Commissioner
may grant one or more extensions of the offering period, provided that no single
extension exceeds 90 days, subscribers are given the right to increase, decrease
or rescind their subscriptions during the extension period, and the extensions
do not go more than two years beyond the date on which the Boards of Directors
approved the plan of conversion. If the conversion is not completed within 45
days after the close of the subscription offering, either all funds received
will be returned with interest, and withdrawal authorizations canceled, or, if
the Connecticut Banking Commissioner has granted an extension of time, all
subscribers will be given the right to increase, decrease or rescind their
subscriptions before the end of the extension period. If an extension of time
is obtained, all subscribers will be notified of the extension and of their
rights to modify their orders. If an affirmative response to any resolicitation
is not received by Connecticut Bancshares from a subscriber, the subscriber's
order will be rescinded and all funds received will be promptly returned with
interest or withdrawal authorizations will be canceled.
Persons in Non-Qualified States. Connecticut Bancshares and Savings Bank
of Manchester will make reasonable efforts to comply with the securities laws of
all states in the United States in which persons entitled to subscribe for stock
under the plan of conversion reside. However, Connecticut Bancshares and Savings
Bank of Manchester are not required to offer stock in the subscription offering
to any person who resides in a foreign country or who resides in a state of the
United States to which both of the following apply: (a) less than 100 persons
eligible to subscribe for shares reside; and (b) the granting of subscription
rights or the offer or sale of shares to these persons would require Connecticut
Bancshares or its employees under the securities laws of the state to register
as a broker, dealer or agent, or to register or otherwise qualify the shares for
sale in the state. Neither Connecticut Bancshares nor Savings Bank of
Manchester will make any payments to persons residing in these states in lieu of
granting subscription rights to them.
Plan of Distribution for the Subscription, Direct Community and Syndicated
Community Offerings
Savings Bank of Manchester and Connecticut Bancshares have retained Sandler
O'Neill to consult with and advise Savings Bank of Manchester and to assist
Savings Bank of Manchester and Connecticut Bancshares, on a best efforts basis,
in the distribution of shares in the offering. Sandler O'Neill is a broker-
dealer registered with the Securities and Exchange Commission and a member of
the National Association of Securities Dealers, Inc. Sandler O'Neill will
assist Savings Bank of Manchester in the conversion by acting as marketing
advisor with respect to the subscription offering and will represent Savings
Bank of Manchester as placement agent on a best efforts basis in the sale of the
common stock in the direct community offering if one is held; conducting
training sessions with directors, officers and employees of Savings Bank of
Manchester regarding the conversion process; and assisting in the establishment
and supervision of Savings Bank of Manchester's conversion center and, with
management's
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input, will train Savings Bank of Manchester's staff to record properly and
tabulate orders for the purchase of common stock and to respond appropriately to
customer inquiries.
Based on negotiations between Sandler O'Neill and Savings Bank of
Manchester and Connecticut Bancshares concerning the fee structure, Sandler
O'Neill will receive a fee equal to 1.50% of the aggregate dollar amount of all
common stock sold in the offerings. Such amount does not include any shares
sold to the employee stock ownership plan, directors, officers and employees of
Savings Bank of Manchester or Connecticut Bancshares or their immediate families
or any shares sold to SBM Foundation. Such fee will be paid upon completion of
the conversion. Sandler O'Neill shall be reimbursed up to $200,000 for its
reasonable out-of-pocket expenses, including legal fees. In addition, Sandler
O'Neill will perform conversion agent services and records management services
for Savings Bank of Manchester in the conversion and will receive a fee for
these services of $60,000.
Sandler O'Neill has not prepared any report or opinion constituting a
recommendation or advice to Connecticut Bancshares or Savings Bank of Manchester
or to persons who subscribe for stock, nor has it prepared an opinion as to the
fairness to Connecticut Bancshares or Savings Bank of Manchester of the purchase
price or the terms of the common stock to be sold. Sandler O'Neill expresses no
opinion as to the prices at which common stock to be issued may trade. Sandler
O'Neill will be paid a management fee equal to 1.50% of the aggregate dollar
amount of all common stock sold in the subscription and direct community
offerings. Total marketing fees to Sandler O'Neill are expected to be $1.5
million to $2.3 million at the minimum and 15% above the maximum of the
estimated valuation range, respectively. See "Pro Forma Data" for the
assumptions used to arrive at these estimates. Sandler O'Neill and selected
dealers participating in the syndicated community offering will receive a
commission for any common stock sold in the syndicated community offering in a
maximum amount to be agreed upon by Connecticut Bancshares and Savings Bank of
Manchester to reflect market requirements at the time of the allocation of
shares in the syndicated community offering. In addition, Sandler O'Neill will
be paid a management fee of 1.50% of the aggregate dollar amount of any common
stock sold in the syndicated community offering.
With certain limitations, Connecticut Bancshares and Savings Bank of
Manchester have also agreed to indemnify Sandler O'Neill against liabilities and
expenses, including legal fees, incurred in connection with certain claims or
litigation arising out of or based upon untrue statements or omissions contained
in the offering material for the common stock or with regard to allocations of
shares if there is an oversubscription, or determinations of eligibility to
purchase shares.
Description of Sales Activities
The common stock will be offered in the subscription offering and direct
community offering principally by the distribution of this prospectus and
through activities conducted at Savings Bank of Manchester's conversion center
at its administrative office. The conversion center is expected to operate
during normal business hours throughout the subscription offering and direct
community offering. It is expected that at any particular time one or more
Sandler O'Neill employees will be working at the conversion center. Employees
of Sandler O'Neill will be responsible for mailing from the Conversion Center
materials relating to the offering, responding to questions regarding the
conversion and the offering and processing stock orders.
Sales of common stock will be made by registered representatives affiliated
with Sandler O'Neill or by the selected dealers managed by Sandler O'Neill. The
management and employees of Savings Bank of Manchester may participate in the
offering in clerical capacities, providing administrative support in effecting
sales transactions or, when permitted by state securities laws, answering
questions of a mechanical nature relating to the proper execution of the order
form. Management of Savings Bank of Manchester may answer questions regarding
the business of Savings Bank of Manchester when permitted by state securities
laws. Other questions of prospective purchasers, including questions as to the
advisability or nature of the investment, will be directed to registered
representatives. The management and employees of Connecticut Bancshares and
Savings Bank of Manchester have been instructed not to solicit offers to
purchase common stock or provide advice regarding the purchase of common stock.
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No officer, director or employee of Connecticut Bankshares, M.H.C., Savings
Bank of Manchester or Connecticut Bancshares will be compensated, directly or
indirectly, for any activities in connection with the offer or sale of
securities issued in the conversion.
None of Savings Bank of Manchester's personnel participating in the
offering is registered or licensed as a broker or dealer or an agent of a broker
or dealer. Savings Bank of Manchester's personnel will assist in the above-
described sales activities under an exemption from registration as a broker or
dealer provided by Rule 3a4-1 promulgated under the Securities Exchange Act of
1934, as amended. Rule 3a4-1 generally provides that an "associated person of an
issuer" of securities shall not be deemed a broker solely by reason of
participation in the sale of securities of the issuer if the associated person
meets certain conditions. These conditions include, but are not limited to, that
the associated person participating in the sale of an issuer's securities not be
compensated in connection therewith at the time of participation, that the
person not be associated with a broker or dealer and that the person observe
certain limitations on his or her participation in the sale of securities. For
purposes of this exemption, "associated person of an issuer" is defined to
include any person who is a director, officer or employee of the issuer or a
company that controls, is controlled by or is under common control with the
issuer.
Procedure for Purchasing Shares in the Subscription and Direct Community
Offerings
To purchase shares in the subscription offering, an executed order form
with the required full payment for each share subscribed for, or with
appropriate authorization indicated on the stock order form for withdrawal of
full payment from the subscriber's deposit account with Savings Bank of
Manchester, must be received by Savings Bank of Manchester by 4:00 p.m., Eastern
time, on February 15, 2000. Savings Bank of Manchester and Connecticut
Bancshares are not required to accept order forms that are not received by that
time or are executed defectively, or are received without full payment or
without appropriate withdrawal instructions. In addition, Savings Bank of
Manchester and Connecticut Bancshares are not obligated to accept orders
submitted on photocopied or telecopied stock order forms and will not accept
stock order forms without an accompanying executed certification form.
Nevertheless, Savings Bank of Manchester and Connecticut Bancshares shall have
the right, each in their sole discretion, to permit institutional investors to
submit irrevocable orders together with a legally binding commitment for payment
and to pay for the shares of common stock for which they subscribe in the direct
community offering at any time up to 48 hours before the completion of the
conversion. Connecticut Bancshares and Savings Bank of Manchester have the
right to waive or permit a subscriber to correct an incomplete or improperly
executed order form, but do not represent that they will do so. Under the plan
of conversion, the interpretation by Connecticut Bankshares, M.H.C., Connecticut
Bancshares and Savings Bank of Manchester of the terms and conditions of the
plan of conversion and of the order form will be final subject to the authority
of the Connecticut Banking Commissioner and any other applicable bank regulatory
authority. In order to purchase shares in the direct community offering, the
order form, accompanied by the required payment for each share subscribed for,
must be received by Savings Bank of Manchester before the direct community
offering terminates, which may be on or at any time after the end of the
subscription offering. Once received, an executed order form may not be
modified, amended or rescinded without the consent of Savings Bank of Manchester
unless the conversion has not been completed within 45 days after the end of the
subscription offering.
In order to ensure that persons with subscription rights are properly
identified as to their stock purchase priorities, they must list all accounts on
the order form giving all names on each account and the account number. Failure
to list an account could result in fewer shares, or no shares, being allocated
to a subscribing member.
Full payment for subscriptions may be made by check, bank draft or money
order, or by authorization of withdrawal from deposit accounts maintained with
Savings Bank of Manchester. Appropriate means by which withdrawals may be
authorized are provided on the order form. No wire transfers will be accepted.
Interest will be paid on payments made by cash, check, bank draft or money order
at Savings Bank of Manchester's passbook rate from the date payment is received
until the completion or termination of the conversion. If payment is made by
authorization of withdrawal from deposit accounts, the funds authorized to be
withdrawn from a deposit account will continue to accrue interest at the
contractual rates until completion or termination of the conversion, unless the
certificate matures after the date of receipt of the order form but before
closing, in which case funds will earn
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interest at the passbook rate from the date of maturity until the conversion is
completed or terminated, but a hold will be placed on the funds, making them
unavailable to the depositor until completion or termination of the conversion.
When the conversion is completed, the funds received in the offering will be
used to purchase the shares of common stock ordered. The shares of common stock
issued in the conversion cannot and will not be insured by the Federal Deposit
Insurance Corporation or any other government agency. If the conversion is not
consummated for any reason, all funds submitted will be promptly refunded with
interest as described above.
If a subscriber authorizes Savings Bank of Manchester to withdraw the
amount of the purchase price from his or her deposit account, Savings Bank of
Manchester will do so as of the effective date of conversion, though the account
must contain the full amount necessary for payment at the time the subscription
order is received. Savings Bank of Manchester will waive any applicable
penalties for early withdrawal from certificate accounts. If the remaining
balance in a certificate account is reduced below the applicable minimum balance
requirement at the time funds are actually transferred under the authorization
the certificate will be canceled at the time of the withdrawal, without penalty,
and the remaining balance will earn interest at Savings Bank of Manchester's
passbook rate.
The employee stock ownership plan will not be required to pay for the
shares subscribed for at the time it subscribes, but rather may pay for shares
of common stock subscribed for at the $10.00 purchase price upon the completion
of the subscription and direct community offerings, if all shares are sold, or
upon the completion of the syndicated community offering; provided that there is
in force from the time of its subscription until that time, a loan commitment
from an unrelated financial institution or Connecticut Bancshares to lend to the
employee stock ownership plan, at that time, the aggregate purchase price of the
shares for which it subscribed.
Individual retirement accounts maintained in Savings Bank of Manchester do
not permit investment in the common stock. A depositor interested in using his
or her Individual Retirement Account funds to purchase common stock must do so
through a self-directed individual retirement account. Since Savings Bank of
Manchester does not offer those accounts, it will allow a depositor to make a
trustee-to-trustee transfer of the individual retirement account funds to a
trustee offering a self-directed individual retirement account program with the
agreement that the funds will be used to purchase Connecticut Bancshares' common
stock in the offering. There will be no early withdrawal or Internal Revenue
Service interest penalties for transfers. The new trustee would hold the common
stock in a self-directed account in the same manner as Savings Bank of
Manchester now holds the depositor's Individual Retirement Account funds. An
annual administrative fee may be payable to the new trustee. Depositors
interested in using funds in an individual retirement account at Savings Bank of
Manchester to purchase common stock should contact the conversion center as soon
as possible for assistance. In addition, federal laws and regulations require
that officers, directors and 10% shareholders who use self-directed individual
retirement account funds to purchase shares of common stock in the subscription
offering, make purchases for the exclusive benefit of individual retirement
accounts.
Certificates representing shares of common stock purchased, and any refund
due, will be mailed to purchasers at the address specified on the properly
completed order forms or to the last address of the persons appearing on the
records of Savings Bank of Manchester as soon as practicable following the sale
of all shares of common stock. Any certificates returned as undeliverable will
be disposed of as required by applicable law. Purchasers may not be able to sell
the shares of common stock which they purchased until certificates for the
common stock are available and delivered to them, even though trading of the
common stock may have begun.
To ensure that each purchaser receives a prospectus at least 48 hours
before the end of the offering as required by Rule 15c2-8 under the Securities
Exchange Act of 1934, as amended, no prospectus will be mailed any later than
five days before that date or hand delivered any later than two days before that
date. Execution of the order form will confirm receipt or delivery under Rule
15c2-8. Order forms will only be distributed with a prospectus. By executing
and returning the regulatory mandated certification form, you will be certifying
that you received this prospectus and acknowledging that the common stock is not
a deposit account and is not insured or guaranteed by any federal or state
governmental agency. You will also be acknowledging that you received
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disclosure concerning the risks involved in this Offering. The certification
form could be used as support to show that you understand the nature of this
investment.
Stock Pricing and Number of Shares to be Issued
The plan of conversion requires that the aggregate purchase price of the
securities sold in connection with the conversion be based upon an estimated pro
forma value of Connecticut Bancshares and Savings Bank of Manchester as
converted, as determined by an independent appraisal. Savings Bank of Manchester
and Connecticut Bancshares have retained RP Financial, which is experienced in
the evaluation and appraisal of business entities, to prepare an appraisal of
the pro forma market value of Connecticut Bancshares and Savings Bank of
Manchester as converted, as well as a business plan. RP Financial will receive a
fee expected to total approximately $47,500 for its appraisal services and
assistance in the preparation of a business plan, plus reasonable out-of-pocket
expenses incurred in connection with the appraisal. Savings Bank of Manchester
has agreed to indemnify RP Financial, its directors, officers, agents and
employees under certain circumstances against liabilities and expenses,
including legal fees, arising out of, related to, or based upon the conversion,
except where RP Financial's liability results from its own negligence or willful
misconduct.
RP Financial has prepared an appraisal of the estimated pro forma market
value of Connecticut Bancshares and Savings Bank of Manchester as converted
taking into account the formation of Connecticut Bancshares as the holding
company for Savings Bank of Manchester. For its analysis, RP Financial undertook
substantial investigations to learn about Savings Bank of Manchester's business
and operations. Management supplied financial information, including annual
financial statements, information on the composition of assets and liabilities,
and other financial schedules. In addition to this information, RP Financial
reviewed Savings Bank of Manchester's conversion application as filed with the
Connecticut Department of Banking and Connecticut Bancshares' registration
statement as filed with the Securities and Exchange Commission. Furthermore, RP
Financial visited Savings Bank of Manchester's facilities and had discussions
with Savings Bank of Manchester's management and its special conversion legal
counsel, Muldoon, Murphy & Faucette LLP. RP Financial did not perform a
detailed individual analysis of the separate components of Connecticut
Bancshares' or Savings Bank of Manchester's assets and liabilities.
RP Financial's analysis utilized three selected valuation procedures, the
Price/Book method, the Price/Earnings method, and Price/Assets method, all of
which are described in its report. RP Financial placed the greatest emphasis on
the Price/Earnings and Price/Book methods in estimating pro forma market value.
In applying these procedures, RP Financial reviewed, among other factors, the
economic make-up of Savings Bank of Manchester's primary market area, Savings
Bank of Manchester's financial performance and condition in relation to publicly
traded institutions that RP Financial deemed comparable to Savings Bank of
Manchester, the specific terms of the offering of Connecticut Bancshares' common
stock, the pro forma impact of the additional capital raised in the conversion,
conditions of securities markets in general, and the market for thrift
institution common stock in particular. RP Financial's analysis provides an
approximation of the pro forma market value of Connecticut Bancshares and
Savings Bank of Manchester as converted based on the valuation methods applied
and the assumptions outlined in its report. Included in its report were certain
assumptions as to the pro forma earnings of Connecticut Bancshares after the
conversion that were utilized in determining the appraised value. These
assumptions included estimated expenses and an assumed after-tax rate of return
on the net conversion proceeds as described under "Pro Forma Data," purchases by
the employee stock ownership plan of an amount equal to 8% of the common stock
issued in the conversion and purchases in the open market by the stock-based
incentive plan of a number of shares equal to 4% of the common stock issued in
the conversion at the $10.00 purchase price. See "Pro Forma Data" for additional
information concerning these assumptions. The use of different assumptions may
yield different results.
On the basis of the foregoing, RP Financial has advised Connecticut
Bancshares and Savings Bank of Manchester that, in its opinion, as of October
22, 1999, and updated as of December 31, 1999, the estimated pro forma market
value of the common stock to be sold in connection with the conversion is within
the valuation range of $97.8 million to $132.3 million with a midpoint of $115.0
million. After reviewing the methodology and the
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assumptions used by RP Financial in the preparation of the appraisal, the Board
of Directors established the estimated valuation range which is equal to the
valuation range of $97.8 million to $132.3 million with a midpoint of $115.0
million. Assuming that the shares are sold at $10.00 per share in the
conversion, the estimated number of shares would be between 9,775,000 and
13,225,000 with a midpoint of 11,500,000. The purchase price of $10.00 was
determined after discussion among the Boards of Directors of Savings Bank of
Manchester and Connecticut Bancshares and Sandler O'Neill, taking into account,
among other factors, the requirement under the Connecticut conversion
regulations that the common stock be offered in a manner that will achieve the
widest distribution of the stock, and desired liquidity in the common stock
after the conversion. Since the outcome of the offering relates in large measure
to market conditions at the time of sale, it is not possible to determine the
exact number of shares that will be issued by Connecticut Bancshares at this
time. The estimated valuation range may be amended, with the approval of the
Connecticut Banking Commissioner and any other applicable bank regulatory
authority, if necessitated by developments following the date of the appraisal
in, among other things, market conditions, the financial condition or operating
results of Savings Bank of Manchester, regulatory guidelines or national or
local economic conditions. RP Financial's appraisal report was an exhibit to the
registration statement that Connecticut Bancshares filed with the Securities and
Exchange Commission. See "Where You Can Find More Information."
If, upon completion of the subscription offering, at least the minimum
number of shares are subscribed for, RP Financial, after taking into account
factors similar to those involved in its prior appraisal, will determine its
estimate of the pro forma market value of Connecticut Bancshares and Savings
Bank of Manchester as converted, as of the close of the subscription offering.
No shares will be sold unless RP Financial confirms that, to the best of
its knowledge and judgment, nothing of a material nature has occurred that would
cause it to conclude that the actual total purchase price on an aggregate basis
was materially incompatible with its estimate of the total pro forma market
value of Connecticut Bancshares and Savings Bank of Manchester as converted at
the time of the sale. If, however, the facts do not justify that statement, the
offering may be canceled, a new estimated valuation range and price per share
set and new subscription, direct community and syndicated community offerings
held. Under those circumstances, subscribers would have the right to modify or
rescind their subscriptions and to have their subscription funds returned
promptly with interest and holds on funds authorized for withdrawal from deposit
accounts would be released or reduced.
Depending upon market or financial conditions following the commencement of
the subscription and direct community offerings, the total number of shares to
be sold in the conversion may be increased or decreased without a resolicitation
of subscribers, provided that the product of the total number of shares times
the price per share is not below the minimum of the estimated valuation range or
more than 15% above the maximum of the estimated valuation range. Based on a
purchase price of $10.00 per share and the RP Financial estimate of the pro
forma market value of the common stock ranging from a minimum of $97.8 million
to a maximum, as increased by 15%, of $152.1 million, the number of shares of
common stock expected to be sold is between a minimum of 9,775,000 shares and a
maximum, as adjusted by 15%, of 15,208,750 shares. The actual number of shares
issued between this range will depend on a number of factors and shall be
determined by Savings Bank of Manchester and Connecticut Bancshares.
If market or financial conditions change so as to cause the aggregate
purchase price of the shares to be below the minimum of the estimated valuation
range or more than 15% above the maximum of the estimated valuation range, if
the plan of conversion is not terminated by Connecticut Bancshares and Savings
Bank of Manchester after consultation with the Connecticut Banking Commissioner
and any other applicable bank regulatory authority, purchasers will be
resolicited, in which case they will need to reconfirm, rescind, or modify their
subscriptions. Any change of more than 15% above the estimated valuation range
must be approved by the Connecticut Banking Commissioner and any other
applicable bank regulatory authority. If the number of shares issued in the
conversion is increased due to an increase of up to 15% in the estimated
valuation range to reflect changes in market or financial conditions, persons
who subscribed for the maximum number of shares will not be given the
opportunity to subscribe for an adjusted maximum number of shares. See "--
Limitations on Purchases of Shares."
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An increase in the number of shares to be issued in the conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and Connecticut Bancshares' pro forma net
earnings and stockholders' equity on a per share basis while increasing pro
forma net earnings and stockholders' equity on an aggregate basis. A decrease
in the number of shares to be issued in the conversion would increase both a
subscriber's ownership interest and Connecticut Bancshares' pro forma net
earnings and stockholders' equity on a per share basis while decreasing pro
forma net earnings and stockholder's equity on an aggregate basis. For a
presentation of the effects of such changes, see "Pro Forma Data."
The number of shares to be issued and outstanding as a result of the sale
of common stock in the conversion will be increased by the number of shares
contributed to the SBM Foundation, which is expected to be 8% of the common
stock sold in the conversion. Assuming the sale of shares at the maximum of the
estimated valuation range, Connecticut Bancshares will issue 1,058,000 shares of
its common stock from authorized but unissued shares to SBM Foundation
immediately following the completion of the conversion. In that event,
Connecticut Bancshares will have total shares of common stock outstanding of
14,283,000 shares. Of that amount, SBM Foundation will own 7.4%. Funding SBM
Foundation with authorized but unissued shares will have the effect of diluting
the ownership and voting interests of persons purchasing shares in the
conversion by 7.4% since a greater number of shares will be outstanding upon
completion of the conversion than would be if SBM Foundation were not
established. See "Risk Factors--The contribution to SBM Foundation means that a
stockholder's total ownership interest will be 7.4% less after the contribution"
and "Pro Forma Data."
In formulating its appraisal, RP Financial relied upon the truthfulness,
accuracy and completeness of all documents Savings Bank of Manchester furnished
to it. RP Financial also considered financial and other information from
regulatory agencies, other financial institutions, and other public sources, as
appropriate. While RP Financial believes this information to be reliable, RP
Financial does not guarantee the accuracy or completeness of the information and
did not independently verify the financial statements and other data provided by
Savings Bank of Manchester and Connecticut Bancshares or independently value the
assets or liabilities of Connecticut Bancshares and Savings Bank of Manchester.
The appraisal is not intended to be, and must not be interpreted as, a
recommendation of any kind as to the advisability of purchasing shares of common
stock. Moreover, because the appraisal must be based on many factors which
change periodically, there is no assurance that purchasers of shares in the
conversion will be able to sell shares after the conversion at prices at or
above the purchase price.
Copies of the appraisal report of RP Financial including any amendments
thereto, and the detailed memorandum of the appraiser setting forth the method
and assumptions for such appraisal are available for inspection at the main
office of Savings Bank of Manchester and the other locations specified under
"Where You Can Find More Information."
Limitations on Purchases of Shares
The plan of conversion provides for certain limitations to be placed upon
the purchase of common stock by eligible subscribers and others in the
conversion. Each subscriber must subscribe for a minimum of 25 shares subject to
adjustment as provided in the Plan of Conversion. The plan of conversion
provides for the following purchase limitations:
1. The maximum purchase in the subscription offering by any person or
group of persons through a single deposit account or similarly titled
deposit accounts is $250,000, which equals 25,000 shares, so long as
the share equivalent of such dollar amount does not exceed one-half of
one percent (0.50%) of the total number of shares offered in the
conversion;
2. No person, related persons or persons acting together may purchase
more than $250,000, which equals 25,000 shares, in the direct
community offering;
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3. The employee stock ownership plan may purchase, in the aggregate, up
to 5% of the shares of common stock offered for sale in the
conversion;
4. Directors and officers of Connecticut Bankshares, M.H.C., Savings Bank
of Manchester and Connecticut Bancshares and their associates, in the
aggregate, may not purchase more than 30% of the total number of
shares sold in the conversion;
5. Persons purchasing shares of common stock in the syndicated community
offering, together with associates of and persons acting in concert
with such persons, may purchase up to $250,000 of common stock subject
to the overall maximum purchase limitation described below; and
6. The maximum number of shares of common stock which may be subscribed
for or purchased in all categories of the conversion by any person,
together with associates of and groups of persons acting in concert
with such persons, except for the employee stock ownership plan, shall
not exceed 1.0% of the shares of common stock sold in the conversion.
For purposes of the plan of conversion, directors and officers are not deemed to
be acting in concert solely by reason of their being directors or officers of
Savings Bank of Manchester or Connecticut Bancshares. Pro rata reductions within
each subscription rights category will be made in accordance with the procedures
outlined in the plan of conversion.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the corporators
or subscribers for common stock, unless required by the Connecticut Banking
Commissioner or the Federal Deposit Insurance Corporation, both the individual
amount permitted to be subscribed for and the overall maximum purchase
limitation may be increased to up to a maximum of 5% of the common stock to be
issued at the sole discretion of Connecticut Bancshares and Savings Bank of
Manchester. If such amount is increased, subscribers for the maximum amount
will be, and certain other large subscribers in the sole discretion of Savings
Bank of Manchester may be, given the opportunity to increase their subscriptions
up to the then applicable limit. Savings Bank of Manchester and Connecticut
Bancshares do not intend to increase the maximum purchase limitation unless
market conditions warrant that an increase in the maximum purchase limitation is
necessary to sell a number of shares in excess of the minimum of the estimated
valuation range.
The plan of conversion defines "acting in concert" to include a combination
or pooling of voting or other interests in the securities of an issuer for a
common purpose under any contract, understanding, relationship, agreement or
other arrangement, whether written or otherwise. In general, a person who acts
in concert with another party shall also be deemed to be acting in concert with
any person who is also acting in concert with that other party. Connecticut
Bancshares and Savings Bank of Manchester may presume that certain persons are
acting in concert based upon, among other things, joint account relationships
and the fact that persons may have filed joint Schedules 13D with the Securities
and Exchange Commission with respect to other companies.
The plan of conversion defines "associate," when used to indicate a
relationship with any person, to mean any corporation or organization other than
Connecticut Bankshares, M.H.C., Connecticut Bancshares, Savings Bank of
Manchester or a majority-owned subsidiary of Connecticut Bankshares, M.H.C.,
Connecticut Bancshares or Savings Bank of Manchester of which a person is an
officer or partner or is, directly or indirectly, the beneficial owner of 10% or
more of any class of equity securities; any trust or other estate in which a
person has a substantial beneficial interest or as to which a person serves as
trustee or in a similar fiduciary capacity; and any relative or spouse of a
person, or any relative of a spouse, who either has the same home as a person or
who is a director or officer of Connecticut Bankshares, M.H.C., Connecticut
Bancshares or Savings Bank of Manchester or any of its parents or subsidiaries.
The term "associate," however, does not include, for purposes of determining the
stock purchase limitations in the conversion, any stock benefit plan of Savings
Bank of Manchester in which such person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary capacity, and, for purposes of
determining the total shares that may be held by officers and directors of
Connecticut Bankshares, M.H.C., Connecticut Bancshares and Savings Bank of
Manchester, does not include any tax-qualified employee stock
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benefit plan of Savings Bank of Manchester. For example, a corporation of which
a person serves as an officer would be an associate of a person and, therefore,
all shares purchased by such corporation would be included with the number of
shares which such person could purchase individually under the above
limitations.
The plan of conversion defines "officer" to mean the Chairman of the Board,
President, Vice President, Secretary, Treasurer or principal financial officer,
comptroller or principal accounting officer, and any other person performing
similar functions of Connecticut Bankshares, M.H.C., Savings Bank of Manchester
or Connecticut Bancshares.
Common stock purchased in the conversion will be freely transferable,
except for shares purchased by directors and officers of Connecticut Bankshares,
M.H.C., Savings Bank of Manchester and Connecticut Bancshares and by NASD
members. See "--Restrictions on Transferability by Directors and Officers and
NASD Members."
Restrictions on Repurchase of Stock
Under the Connecticut conversion regulations, savings banks and their
holding companies may not for a period of three years from the date of an
institution's conversion repurchase any of its common stock from any person,
except for: (1) a repurchase, on a pro rata basis pursuant to an offer approved
by the Connecticut Banking Commissioner, made to all stockholders, or (2) a
repurchase in the open market by a tax-qualified or non-tax-qualified stock
benefit plan in an amount reasonable and appropriate to fund such plans.
Furthermore, repurchases of any common stock are prohibited if they would cause
Savings Bank of Manchester's regulatory capital to be reduced below the amount
required for the liquidation account or if the repurchases would cause Savings
Bank of Manchester to become "undercapitalized" within the meaning of the
Federal Deposit Insurance Corporation prompt corrective action regulation. At
this time, Connecticut Bancshares has no intention to repurchase stock.
Restrictions on Transferability by Directors and Officers and NASD Members
Shares of common stock purchased by directors and officers of Connecticut
Bankshares, M.H.C., Connecticut Bancshares and Savings Bank of Manchester, and
their associates either directly from Connecticut Bancshares or from an
underwriter, may not be sold for a period of one year following the conversion,
except upon the death of the officer or director or unless approved by the
Connecticut Banking Commissioner. Any stock purchased after the conversion is
free of this restriction. Accordingly, shares of common stock issued by
Connecticut Bancshares to directors and officers of Connecticut Bancshares and
Savings Bank of Manchester, and their associates, shall bear a legend giving
appropriate notice of the restriction and, in addition, Connecticut Bancshares
will give appropriate instructions to the transfer agent for Connecticut
Bancshares' common stock with respect to the restriction on transfers. Any
shares issued to directors and officers of Connecticut Bankshares, M.H.C.,
Connecticut Bancshares and Savings Bank of Manchester, and their associates, as
a stock dividend, stock split or otherwise with respect to restricted common
stock shall also be restricted.
Purchases of outstanding shares of common stock of Connecticut Bancshares
by directors and officers of Connecticut Bancshares and Savings Bank of
Manchester, or any person who was an executive officer or director of
Connecticut Bancshares and Savings Bank of Manchester after adoption of the plan
of conversion, and their associates during the three-year period following the
conversion may be made only through a broker or dealer registered with the
Securities and Exchange Commission or the Connecticut Department of Banking,
except with the prior written approval of the Connecticut Banking Commissioner.
This restriction does not apply, however, to negotiated transactions involving
more than 1% of Connecticut Bancshares' outstanding common stock or to the
purchase of stock under the stock-based incentive plan.
Connecticut Bancshares has filed with the Securities and Exchange
Commission a registration statement under the Securities Act of 1933, as
amended, for the registration of the common stock to be issued in the
conversion. This registration does not cover the resale of the shares. Shares of
common stock purchased by persons who are not affiliates of Connecticut
Bancshares may be resold without registration. Shares purchased by an affiliate
of Connecticut Bancshares will have resale restrictions under Rule 144 of the
Securities Act, as amended. If
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Connecticut Bancshares meets the current public information requirements of Rule
144, each affiliate of Connecticut Bancshares who complies with the other
conditions of Rule 144, including those that require the affiliate's sale to be
aggregated with those of certain other persons, would be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of 1% of the outstanding shares of Connecticut
Bancshares or the average weekly volume of trading in the shares during the
preceding four calendar weeks. Provision may be made in the future by
Connecticut Bancshares to permit affiliates to have their shares registered for
sale under the Securities Act of 1933, as amended, under certain circumstances.
Under the guidelines of the National Association of Securities Dealers,
members of that organization and their associates face certain restrictions on
the transfer of securities purchased with subscription rights and to certain
reporting requirements upon purchase of the securities.
Interpretation, Amendment and Termination
To the extent permitted by law, all interpretations of the plan of
conversion by the Boards of Directors of Connecticut Bankshares, M.H.C. and
Savings Bank of Manchester will be final; however, such interpretations have no
binding effect on the Connecticut Banking Commissioner and any other applicable
bank regulatory authority. The plan of conversion provides that, if deemed
necessary or desirable by such Boards of Directors, the plan of conversion may
be substantively amended by Boards of Directors with concurrence of the
Connecticut Banking Commissioner and, if necessary, any other applicable bank
regulatory authority or as a result of comments from regulatory authorities,
without the further approval of Connecticut Bankshares, M.H.C.'s corporators
unless required by the Connecticut Banking Commissioner.
Completion of the conversion requires the sale of all shares of the common
stock within 24 months following the effective date of the adoption of the plan
of conversion by the Boards of Directors of Connecticut Bankshares, M.H.C. and
Savings Bank of Manchester. If this condition is not satisfied, the plan of
conversion will be terminated and Savings Bank of Manchester will continue its
business in the mutual holding company form of organization. The plan of
conversion may be terminated by such Boards of Directors at any time.
RESTRICTIONS ON ACQUISITION OF CONNECTICUT BANCSHARES
AND SAVINGS BANK OF MANCHESTER
General
Savings Bank of Manchester's plan of conversion provides for the conversion
of Connecticut Bankshares, M.H.C.'s legal form of organization from a mutual
holding company to a stock holding company and, in connection with the
conversion, the adoption by Connecticut Bankshares, M.H.C.'s corporators of
Amended and Restated Articles of Incorporation and Bylaws of Savings Bank of
Manchester. See "The Conversion--General." As described below and elsewhere in
this prospectus, certain provisions in Connecticut Bancshares' Certificate of
Incorporation and Bylaws and in its management compensation plans adopted in
connection with the conversion, together with provisions of Delaware corporate
law, may have anti-takeover effects. In addition, Savings Bank of Manchester's
Amended and Restated Articles of Incorporation and Bylaws and management
compensation plans adopted in connection with the conversion may also have
"anti-takeover" effects. Finally, regulatory restrictions may make it difficult
for persons or companies to acquire control of Connecticut Bancshares and
Savings Bank of Manchester.
Restrictions in Connecticut Bancshares' Certificate of Incorporation and Bylaws
General. The following discussion is a general summary of the material
provisions of Connecticut Bancshares' Certificate of Incorporation and Bylaws
and other statutory and regulatory provisions relating to stock ownership and
transfers, the Board of Directors and business combinations, which might be
deemed to have a potential anti-takeover effect. These provisions may have the
effect of discouraging a future takeover attempt
137
which is not approved by the Board of Directors but which individual
stockholders may deem to be in their best interests. As a result, stockholders
who might desire to participate in such a transaction may not have an
opportunity to do so. Such provisions will also render the removal of the
current Board of Directors or management of Connecticut Bancshares more
difficult. The following summary is general and reference should be made to the
Certificate of Incorporation and Bylaws. See "Where You Can Find More
Information" as to how to obtain a copy of these documents.
Limitation on Voting Rights. The Certificate of Incorporation of
Connecticut Bancshares provides that in no event shall any record owner of any
outstanding common stock which is beneficially owned, directly or indirectly, by
a person who beneficially owns in excess of 10% of the then outstanding shares
of common stock be entitled or permitted to any vote in respect of the shares
held in excess of such 10% limit. Additionally, the Certificate of
Incorporation provides that in no event shall any record owner of any
outstanding common stock which is beneficially owned, directly or indirectly, by
a person who beneficially owns in excess of 5% of the then outstanding shares of
common stock, be entitled to vote in respect of the shares held in excess of
such 5% limit unless such beneficial owner owns, controls or holds such shares
of common stock in the ordinary course of business and not with the purpose nor
with the effect of changing or influencing control of Connecticut Bancshares.
Beneficial ownership is determined by Rule 13d-3 of the General Rules and
Regulations of the Securities Exchange Act of 1934, as amended, and includes
shares beneficially owned by that person or any of his affiliates, shares which
that person or his affiliates have the right to acquire under any agreement,
arrangement or understanding or upon the exercise of conversion rights, exchange
rights, warrants or options or otherwise and shares as to which that person and
his affiliates have sole or shared voting or investment power. Beneficial
ownership does not include shares under a publicly solicited revocable proxy or
shares that are not otherwise deemed to be beneficially owned by such person and
his affiliates. No director or officer (or any affiliate thereof) of
Connecticut Bancshares shall, solely by reason of any or all of such directors
or officers acting in their capacities as such, be deemed to beneficially own
any shares beneficially owned by any other director or officer (or affiliate
thereof) nor will the employee stock ownership plan or any similar plan of
Connecticut Bancshares or Savings Bank of Manchester or any director with
respect thereto (solely by reason of such director's capacity) be deemed to
beneficially own any shares held under any such plan. The Certificate of
Incorporation of Connecticut Bancshares further provides that the provisions
limiting voting rights may only be amended upon the vote of the holders of at
least 80% of the voting power of all then outstanding shares of capital stock
entitled to vote thereon after giving effect to the provision limiting voting
rights.
Board of Directors. The Board of Directors of Connecticut Bancshares is
divided into three classes, each of which contains approximately one-third of
the whole number of the members of the Board. Each class shall serve a
staggered term, with approximately one-third of the total number of Directors
being elected each year. Connecticut Bancshares' Certificate of Incorporation
and Bylaws provide that the size of the Board shall be determined by a majority
of the whole Board of Directors. The Certificate of Incorporation and the
Bylaws provide that any vacancy occurring in the Board, including a vacancy
created by an increase in the number of Directors or resulting from death,
resignation, retirement, disqualification, removal from office or other cause,
shall be filled for the remainder of the unexpired term exclusively by a
majority vote of the Directors then in office. The classified Board is intended
to provide for continuity of the Board of Directors and to make it more
difficult and time consuming for a stockholder group to fully use its voting
power to gain control of the Board of Directors without the consent of the
incumbent Board of Directors of Connecticut Bancshares. Directors may be
removed by the shareholders only for cause by the affirmative vote of the
holders of at least 80% of the voting power of all then outstanding shares of
capital stock entitled to vote after giving effect to the voting limitation
applicable to stockholders owning more than 10% of the outstanding shares. In
the absence of these provisions, the vote of the holders of a majority of the
shares could remove any director or the entire Board, with or without cause, and
replace such director or the entire board with persons of such holders choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of Connecticut Bancshares
may be called only by a resolution adopted by a majority of the whole Board of
Directors of Connecticut Bancshares. The Certificate of Incorporation also
provides that any action required or permitted to be
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taken by the stockholders of Connecticut Bancshares may be taken only at an
annual or special meeting and prohibits stockholder action by written consent in
lieu of a meeting.
Authorized Shares. The Certificate of Incorporation authorizes the
issuance of 45,000,000 shares of common stock and 1,000,000 shares of preferred
stock. The shares of common stock and preferred stock were authorized in an
amount greater than that to be issued in the conversion to provide Connecticut
Bancshares' Board of Directors with as much flexibility as possible to effect,
among other transactions, financings, acquisitions, stock dividends, stock
splits and employee stock options. However, these additional authorized shares
may also be used by the Board of Directors consistent with its fiduciary duty to
deter future attempts to gain control of Connecticut Bancshares. The Board of
Directors also has sole authority to determine the terms of any one or more
series of preferred stock, including voting rights, conversion rates, and
liquidation preferences. As a result of the ability to fix voting rights for a
series of preferred stock, the Board has the power to the extent consistent with
its fiduciary duty to issue a series of preferred stock to persons friendly to
management to attempt to block a post-tender offer merger or other transaction
by which a third party seeks control, and thereby assist management to retain
its position. Connecticut Bancshares' Board currently has no plans for the
issuance of additional shares, other than the issuance of shares in the
conversion, including shares contributed to SBM Foundation, and the issuance of
additional shares upon exercise of stock options.
Stockholder Vote Required to Approve Business Combinations with Interested
Stockholders. The Certificate of Incorporation requires the approval of the
holders of at least 80% of Connecticut Bancshares' outstanding shares of voting
stock entitled to vote to approve certain "Business Combinations" with an
"Interested Stockholder," and related transactions (subject to the limitations
on voting). Under Delaware law, absent this provision, business combinations,
including mergers, consolidations and sales of all or substantially all of the
assets of a corporation must be approved by the vote of the holders of only a
majority of the outstanding shares of common stock of Connecticut Bancshares and
any other affected class of stock unless the transaction is with a person who
owns 15% or more of the corporation's voting stock. Under Connecticut
Bancshares' Certificate of Incorporation, the approval of the holders of at
least 80% of the shares of capital stock entitled to vote is required for any
business combination involving an Interested Stockholder (as defined below)
except (1) in cases where the proposed transaction has been approved by a
majority of those members of Connecticut Bancshares' Board of Directors who are
unaffiliated with the Interested Stockholder and were directors before the time
when the Interested Stockholder became an Interested Stockholder or (2) if the
proposed transaction meets certain conditions which are designed to afford the
stockholders a fair price in consideration for their shares. In each such case,
where stockholder approval is required, the approval of only a majority of the
outstanding shares of voting stock is sufficient. The term "Interested
Stockholder" is defined to include, among others, any individual, a group acting
in concert, corporation, partnership, association or other entity (other than
Connecticut Bancshares or its subsidiary) who or which is the beneficial owner,
directly or indirectly, of 10% or more of the outstanding shares of voting stock
of Connecticut Bancshares.
This provision of the Certificate of Incorporation applies to any "Business
Combination," which is defined to include:
1. any merger or consolidation of Connecticut Bancshares or any of its
subsidiaries with any Interested Stockholder or affiliate of an
Interested Stockholder or any corporation which is, or after such
merger or consolidation would be, an Affiliate of an Interested
Stockholder;
2. any sale, lease, exchange, mortgage, pledge, transfer, or other
disposition to or with any Interested Stockholder or Affiliate of 25%
or more of the assets of Connecticut Bancshares or combined assets of
Connecticut Bancshares and its subsidiary;
3. the issuance or transfer to any Interested Stockholder or its
affiliate by Connecticut Bancshares (or any subsidiary) of any
securities of Connecticut Bancshares (or any subsidiary) in exchange
for any cash, securities or other property the value of which equals
or exceeds 25% of the fair market value of the common stock of
Connecticut Bancshares;
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4. the adoption of any plan for the liquidation or dissolution of
Connecticut Bancshares proposed by or on behalf of any Interested
Stockholder or affiliate thereof; and
5. any reclassification of securities, recapitalization, merger or
consolidation of Connecticut Bancshares with any of its subsidiaries
which has the effect of increasing the proportionate share of common
stock or any class of equity or convertible securities of Connecticut
Bancshares or subsidiary owned directly or indirectly, by an
Interested Stockholder or affiliate thereof.
The directors and executive officers of Savings Bank of Manchester are
purchasing approximately 2.21% of the shares of the common stock to be sold in
the conversion based on the maximum of the estimated valuation range. In
addition, the employee stock ownership plan intends to purchase 8% of the common
stock issued in connection with the conversion, including shares issued to SBM
Foundation. Additionally, if stockholders approve the proposed stock-based
incentive plan, Connecticut Bancshares expects to acquire 4% of the common stock
issued in connection with the conversion, including shares issued to SBM
Foundation, and expects to issue options to purchase up to 10% of the common
stock issued in connection with the conversion, including shares issued to SBM
Foundation, to directors and executive officers. As a result, directors,
executive officers and employees may control the voting of approximately 23.12%
of Connecticut Bancshares' common stock on a diluted basis at the maximum of the
estimated valuation range, thereby enabling them to prevent the approval of the
transactions requiring the approval of at least 80% of Connecticut Bancshares'
outstanding shares of voting stock described above. Furthermore, the ability of
directors, executive officers and employees to prevent the approval of
transactions requiring the approval of at least 80% of the outstanding shares of
voting stock of Connecticut Bancshares will be enhanced by the regulatory
condition imposed on SBM Foundation that any shares held by it must be voted in
the same ratio as all other shares of Connecticut Bancshares common stock voted
on each and every proposal considered by stockholders.
Evaluation of Offers. The Certificate of Incorporation of Connecticut
Bancshares further provides that the Board of Directors of Connecticut
Bancshares, when evaluating an offer, to (1) make a tender or exchange offer for
any equity security of Connecticut Bancshares, (2) merge or consolidate
Connecticut Bancshares with another corporation or entity or (3) purchase or
otherwise acquire all or substantially all of the properties and assets of
Connecticut Bancshares, may, in connection with the exercise of its judgment in
determining what is in the best interest of Connecticut Bancshares and the
stockholders of Connecticut Bancshares, give consideration to those factors that
directors of any subsidiary (including Savings Bank of Manchester) may consider
in evaluating any action that may result in a change or potential change of
control of such subsidiary, and the social and economic effects of acceptance of
such offer on: Connecticut Bancshares' present and future customers and
employees and those of its subsidiaries (including Savings Bank of Manchester);
the communities in which Connecticut Bancshares and Savings Bank of Manchester
operate or are located; the ability of Connecticut Bancshares to fulfill its
corporate objectives as a savings and loan holding company; and the ability of
Savings Bank of Manchester to fulfill the objectives of a stock savings bank
under applicable statutes and regulations. By having these standards in the
Certificate of Incorporation of Connecticut Bancshares, the Board of Directors
may be in a stronger position to oppose such a transaction if the Board
concludes that the transaction would not be in the best interest of Connecticut
Bancshares, even if the price offered is significantly greater than the then
market price of any equity security of Connecticut Bancshares.
Amendment of Certificate of Incorporation and Bylaws. Amendments to
Connecticut Bancshares' Certificate of Incorporation must be approved by a
majority of its Board of Directors and also by a majority of the outstanding
shares of its voting stock, provided, however, that an affirmative vote of the
holders of at least 80% of the outstanding voting stock entitled to vote (after
giving effect to the provision limiting voting rights) is required to amend or
repeal specific provisions of the Certificate of Incorporation, including the
provision limiting voting rights, the provisions relating to approval of certain
business combinations, calling special meetings, the number and classification
of directors, director and officer indemnification by Connecticut Bancshares and
amendment of Connecticut Bancshares' Bylaws and Certificate of Incorporation.
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Connecticut Bancshares' Bylaws may be amended by a majority of the whole
Board of Directors, or by a vote of the holders of at least 80% (after giving
effect to the provision limiting voting rights) of the total votes eligible to
be voted at a duly constituted meeting of stockholders.
Bylaw Provisions. The Bylaws of Connecticut Bancshares also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at an annual stockholder meeting to give at
least 90 days' advance notice to the Secretary of Connecticut Bancshares. The
notice provision requires a stockholder who desires to raise new business to
provide information to Connecticut Bancshares concerning the nature of the new
business, the stockholder and the stockholder's interest in the business matter.
Similarly, a stockholder wishing to nominate any person for election as a
director must provide Connecticut Bancshares with information concerning the
nominee and the proposing stockholder.
Anti-Takeover Effects of Connecticut Bancshares' Certificate of Incorporation
and Bylaws and Management Remuneration Adopted in Conversion
The provisions described above are intended to reduce Connecticut
Bancshares' vulnerability to takeover attempts and other transactions which have
not been negotiated with and approved by members of its Board of Directors.
Provisions of the stock-based incentive plan provide for accelerated benefits to
participants if a change in control of Connecticut Bancshares or Savings Bank of
Manchester occurs or a tender or exchange offer for their stock is made. See
"Management of Savings Bank of Manchester--Benefits--Stock-Based Incentive
Plan." Connecticut Bancshares and Savings Bank of Manchester have also entered
into agreements with key officers and intends to establish the Employee
Severance Compensation Plan which will provide such officers and eligible
employees with additional payments and benefits on the officer's termination in
connection with a change in control of Connecticut Bancshares or Savings Bank of
Manchester. See "Management of Savings Bank of Manchester--Executive
Compensation--Employment Agreements," and "--Benefits--Employee Severance
Compensation Plan." The foregoing provisions and limitations may make it more
difficult for companies or persons to acquire control of Connecticut Bancshares.
Additionally, the provisions could deter offers to acquire the outstanding
shares of Connecticut Bancshares which might be viewed by stockholders to be in
their best interests.
Connecticut Bancshares' Board of Directors believes that the provisions of
the Certificate of Incorporation and Bylaws are in the best interest of
Connecticut Bancshares and its stockholders. An unsolicited non-negotiated
takeover proposal can seriously disrupt the business and management of a
corporation and cause it great expense. Accordingly, the Board of Directors
believes it is in the best interests of Connecticut Bancshares and its
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts.
Delaware Corporate Law
The State of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The Delaware
takeover statute is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in certain transactions
with the target company.
In general, the statute provides that a "Person" who owns 15% or more of
the outstanding voting stock of a Delaware corporation (an Interested
Stockholder) may not consummate a merger or other business combination
transaction with such corporation at any time during the three-year period
following the date such "Person" became an Interested Stockholder. The term
"business combination" is defined broadly to cover a wide range of corporate
transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
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The statute exempts the following transactions from the requirements of the
statute:
1. any business combination if, before the date a person became an
Interested Stockholder, the board of directors approved either
the business combination or the transaction which resulted in the
stockholder becoming an Interested Stockholder;
2. any business combination involving a person who acquired at least
85% of the outstanding voting stock in the transaction in which
he became an Interested Stockholder, excluding, for purposes of
determining the number of shares outstanding, shares owned by the
corporation's directors who are also officers and specific
employee stock plans;
3. any business combination with an Interested Stockholder that is
approved by the board of directors and by a two-thirds vote of
the outstanding voting stock not owned by the Interested
Stockholder; and
4. certain business combinations that are proposed after the
corporation had received other acquisition proposals and which
are approved or not opposed by a majority of certain continuing
members of the board of directors.
A corporation may exempt itself from the requirements of the statute by
adopting an amendment to its certificate of incorporation or bylaws electing not
to be governed by the statute Connecticut Bancshares' Certificate of
Incorporation and Bylaws do not currently contain such provision and, at the
present time, the Board of Directors does not intend to propose any such
amendment.
Restrictions in Savings Bank of Manchester's Amended and Restated Articles of
Incorporation and Bylaws
Although the Board of Directors of Savings Bank of Manchester is not aware
of any effort that might be made to obtain control of Savings Bank of Manchester
after the conversion, the Board of Directors believes that it is appropriate to
adopt provisions permitted by Connecticut law to protect the interests of the
converted bank and its stockholders from any hostile takeover. Such provisions
may, indirectly, inhibit a change in control of Connecticut Bancshares, as
Savings Bank of Manchester's sole stockholder. See "Risk Factors--Anti-takeover
provisions and statutory provisions could make takeover attempts more difficult
to achieve and may decrease the market price of common stock."
Savings Bank of Manchester's stock Articles of Incorporation will contain a
provision whereby the acquisition of beneficial ownership of more than 5% or 10%
of the issued and outstanding shares of any class of equity securities of
Savings Bank of Manchester by any person (i.e., any individual, corporation,
group acting in concert, trust, partnership, joint stock company or similar
organization), either directly or through an affiliate thereof, will be
prohibited for a period of five years following the date of completion of the
conversion without the prior written approval of the Board of Directors of
Savings Bank of Manchester, and, in the case of the 10% limit, the additional
approval of the Connecticut Banking Commissioner. If shares are acquired in
violation of this provision of Savings Bank of Manchester's stock Articles of
Incorporation, all shares beneficially owned by any person in excess of the 5%
or 10% limits shall be considered "excess shares" and shall not be counted as
shares entitled to vote and shall not be voted by any person or counted as
voting shares in connection with any matters submitted to the stockholders for a
vote. These limitations shall not apply to any transaction in which Savings
Bank of Manchester forms a holding company without a change in the respective
beneficial ownership interests of its stockholders other than by the exercise of
any dissenter or appraisal rights. If holders of revocable proxies for more
than 10% of the shares of the common stock of Connecticut Bancshares seek, among
other things, to elect one-third or more of Connecticut Bancshares' Board of
Directors, to cause Connecticut Bancshares' stockholders to approve the
acquisition or corporate reorganization of Connecticut Bancshares or to exert a
continuing influence on a material aspect of the business operations of
Connecticut Bancshares, which actions could indirectly result in a change in
control of Savings Bank of Manchester, the Board of Directors of Savings Bank of
Manchester will be
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able to assert this provision of Savings Bank of Manchester's Amended and
Restated Articles of Incorporation against such holders. Although the Board of
Directors of Savings Bank of Manchester is not currently able to determine when
and if it would assert this provision of Savings Bank of Manchester's Amended
and Restated Articles of Incorporation, the Board, in exercising its fiduciary
duty, may assert this provision if it were deemed to be in the best interests of
Savings Bank of Manchester, Connecticut Bancshares and its stockholders. It is
unclear, however, whether this provision, if asserted, would be successful
against such persons in a proxy contest which could result in a change in
control of Savings Bank of Manchester indirectly through a change in control of
Connecticut Bancshares.
In addition, stockholders will not be permitted to cumulate their votes in
the election of Directors. Furthermore, Savings Bank of Manchester's Bylaws
provide for the election of three classes of directors to staggered terms. The
staggered terms of the Board of Directors could have an anti-takeover effect by
making it more difficult for a majority of shares to force an immediate change
in the Board of Directors since only one-third of the Board is elected each
year. The purpose of these provisions is to assure stability and continuity of
management of Savings Bank of Manchester in the years immediately following the
conversion. Moreover, the Bylaws limit persons eligible for election as
Directors to residents of Connecticut, which may limit candidates in a proxy
contest.
Finally, the Amended and Restated Articles of Incorporation provide for the
issuance of shares of preferred stock on such terms, including conversion and
voting rights, as may be determined by Savings Bank of Manchester's Board of
Directors without stockholder approval. Although Savings Bank of Manchester has
no arrangements, understandings or plans at the present time for the issuance or
use of the shares of undesignated preferred stock proposed to be authorized, the
Board believes that the availability of such shares will provide Savings Bank of
Manchester with increased flexibility in structuring possible future financings
and acquisitions and in meeting other corporate needs which may arise. If a
proposed merger, tender offer or other attempt to gain control of Savings Bank
of Manchester occurs of which management does not approve, the Board can
authorize the issuance of one or more series of preferred stock with rights and
preferences which could impede the completion of such a transaction. An effect
of the possible issuance of such preferred stock, therefore, may be to deter a
future takeover attempt. The Board does not intend to issue any preferred stock
except on terms which the Board deems to be in the best interest of Savings Bank
of Manchester and its then existing stockholders.
Regulatory Restrictions
Connecticut Conversion Regulations. Regulations issued by the Connecticut
Banking Commissioner provide that for a period of three years following the date
of the completion of the conversion, no person, acting singly or together with
associates in a group of persons acting in concert, shall directly or indirectly
offer to acquire or acquire the beneficial ownership of more than ten percent
(10%) of any class of any equity security of Connecticut Bancshares without the
prior written approval of the Connecticut Banking Commissioner. Where any
person, directly or indirectly, acquires beneficial ownership of more than ten
percent (10%) of any class of any equity security of Connecticut Bancshares
without the prior written approval of the Connecticut Banking Commissioner, the
securities beneficially owned by such person in excess of ten percent (10%)
shall not be voted by any person or counted as voting shares in connection with
any matter submitted to the stockholders for a vote, and shall not be counted as
outstanding for purposes of determining the affirmative vote necessary to
approve any matter submitted to the stockholders for a vote.
Change in Bank Control Act. The acquisition of ten percent (10%) or more
of the common stock outstanding may trigger the provisions of the Change in Bank
Control Act. The Federal Deposit Insurance Corporation has also adopted a
regulation under the Change in Bank Control Act which generally requires persons
who at any time intend to acquire control of a Federal Deposit Insurance
Corporation-insured state-chartered non-member bank, including a converted
savings bank such as Savings Bank of Manchester, to provide at least 60 days'
prior written notice and certain financial and other information to the Federal
Deposit Insurance Corporation.
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The 60-day notice period does not commence until the information is deemed
to be substantially complete. Control for the purpose of this Act exists in
situations in which the acquiring party has voting control of at least twenty-
five percent (25%) of any class of Savings Bank of Manchester's voting stock or
the power to direct the management or policies of Savings Bank of Manchester.
However, under Federal Deposit Insurance Corporation regulations, control is
presumed to exist where the acquiring party has voting control of at least ten
percent (10%) of any class of Savings Bank of Manchester's voting securities if
Savings Bank of Manchester has a class of voting securities which is registered
under Section 12 of the Exchange Act, or the acquiring party would be the
largest holder of a class of voting shares of Savings Bank of Manchester. The
statute and underlying regulations authorize the Federal Deposit Insurance
Corporation to disapprove a proposed acquisition on certain specified grounds.
Federal Reserve Board Regulations. If Savings Bank of Manchester does not
maintain its qualification as a qualified thrift lender, attempts to acquire
control of Savings Bank of Manchester will trigger the regulations of the
Federal Reserve Board under the Change in Bank Control Act.
Connecticut Banking Law. Under Connecticut banking law, no person may
acquire beneficial ownership of more than 10% of any class of voting securities
of a Connecticut-chartered bank, or any bank holding company of such a bank,
without prior notification of, and lack of disapproval by, the Connecticut
Banking Commissioner. Similar restrictions apply to any person who holds in
excess of 10% of any such class and desires to increase its holdings to 25% or
more of such class. Additionally, an out-of-state company which already
directly or indirectly controls voting power of 25% or more of the voting stock
of any bank or any bank holding company may not also acquire direct or indirect
ownership or control of more than 10% of the voting stock of another Connecticut
bank or Connecticut bank holding company unless such bank or holding company has
been in existence for at least five years and the Connecticut Banking
Commissioner approves the acquisition. Finally, for a period of three years
following completion of a conversion to stock form, no person may directly or
indirectly offer to acquire or acquire beneficial ownership of more than 10% of
any class of equity security of a converting mutual savings bank without prior
written approval of the Connecticut Banking Commissioner.
Prior approval of the Connecticut Banking Commissioner is also required
before any action is taken that causes any Connecticut stock bank to organize a
holding company to acquire the shares of the Connecticut stock bank. The
Connecticut Banking Commissioner will approve such a plan of acquisition,
following approval by a majority vote of the boards of directors of the acquiror
and the acquiree and a two-thirds approval of the stockholders of the acquiree,
provided the Connecticut Banking Commissioner finds that the terms of such plan
of acquisition are reasonable and in accordance with the law and sound public
policy. Any such company shall engage directly or indirectly only in such
activities as are now or may hereafter be proper activities for holding
companies under Connecticut law.
DESCRIPTION OF CONNECTICUT BANCSHARES STOCK
General
Connecticut Bancshares is authorized to issue 45,000,000 shares of common
stock having a par value of $.01 per share and 1,000,000 shares of preferred
stock having a par value of $.01 per share. Connecticut Bancshares currently
expects to issue up to 16,425,450, shares of common stock at the maximum of the
estimated valuation range, as adjusted by 15% and including shares issued to SBM
Foundation. Connecticut Bancshares will not issue any shares of preferred stock
in the conversion. Each share of Connecticut Bancshares' common stock will have
the same relative rights as, and will be identical in all respects with, each
other share of common stock. Upon payment of the purchase price for the common
stock, as required by the plan of conversion, all stock will be duly authorized,
fully paid and nonassessable.
The common stock of Connecticut Bancshares will represent nonwithdrawable
capital, will not be an account of any type, and will not be insured by the
Federal Deposit Insurance Corporation or any other government agency.
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Common Stock
Dividends. Connecticut Bancshares can pay dividends out of statutory
surplus or from certain net profits if, as and when declared by its Board of
Directors. The payment of dividends by Connecticut Bancshares is limited by law
and applicable regulation. See "Dividend Policy" and "Regulation and
Supervision." The holders of common stock of Connecticut Bancshares will be
entitled to receive and share equally in dividends as may be declared by the
Board of Directors of Connecticut Bancshares out of funds legally available for
the payment of dividends. If Connecticut Bancshares issues preferred stock, the
holders of preferred stock may have a priority over the holders of the common
stock with respect to dividends.
Voting Rights. After the completion of the conversion, the holders of
common stock of Connecticut Bancshares will possess exclusive voting rights in
Connecticut Bancshares. They will elect Connecticut Bancshares' Board of
Directors and act on other matters as are required to be presented to them under
Delaware law or as are otherwise presented to them by the Board of Directors.
Except as discussed in "Restrictions on Acquisition of Connecticut Bancshares
and Savings Bank of Manchester," each holder of common stock will be entitled to
one vote per share and will not have any right to cumulate votes in the election
of directors. If Connecticut Bancshares issues preferred stock, holders of
Connecticut Bancshares preferred stock may also possess voting rights. Certain
matters require a vote of 80% of the outstanding shares entitled to vote. See
"Restrictions on Acquisition of Connecticut Bancshares and Savings Bank of
Manchester."
As a subsidiary of a Connecticut mutual holding company, corporate powers
and control of Savings Bank of Manchester are indirectly vested in the
corporators of Connecticut Bankshares, M.H.C., who elect Connecticut Bankshares,
M.H.C.'s directors, and who, in turn, elect the directors of Savings Bank of
Manchester. Savings Bank of Manchester's directors then appoint the officers of
Savings Bank of Manchester. After the completion of the conversion, voting
rights will be vested exclusively in Connecticut Bancshares, which will own all
of the outstanding capital stock of Savings Bank of Manchester, and will be
voted at the direction of Connecticut Bancshares' Board of Directors.
Consequently, the holders of the common stock of Connecticut Bancshares will not
have direct control of Savings Bank of Manchester.
Liquidation. If there is any liquidation, dissolution or winding up of
Savings Bank of Manchester, Connecticut Bancshares, as the holder of Savings
Bank of Manchester's capital stock, would be entitled to receive all of Savings
Bank of Manchester's assets available for distribution after payment or
provision for payment of all debts and liabilities of Savings Bank of
Manchester, including all deposit accounts and accrued interest, and after
distribution of the balance in the special liquidation account to eligible
account holders. Upon liquidation, dissolution or winding up of Connecticut
Bancshares, the holders of its common stock would be entitled to receive all of
the assets of Connecticut Bancshares available for distribution after payment or
provision for payment of all its debts and liabilities. If Connecticut
Bancshares issues preferred stock, the preferred stock holders may have a
priority over the holders of the common stock upon liquidation or dissolution.
Indemnification and Limit on Liability. Connecticut Bancshares'
Certificate of Incorporation contains provisions which limit the liability of
and indemnify its directors, officers and employees. Such provisions provide
that each person who was or is made a party or is threatened to be made a party
to or is otherwise involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he or she
is or was a director or officer of Connecticut Bancshares shall be indemnified
and held harmless by Connecticut Bancshares to the fullest extent authorized by
the Delaware General Corporation Law against all expense, liability and loss
reasonably incurred. Under certain circumstances, the right to indemnification
shall include the right to be paid by Connecticut Bancshares the expenses
incurred in defending any such proceeding in advance of its final disposition.
In addition, a director of Connecticut Bancshares shall not be personally liable
to Connecticut Bancshares or its stockholders for monetary damages except for
liability for any breach of the duty of loyalty, for acts or omissions not in
good faith or which involve intentional misconduct or knowing violation of the
law, under Section 174 of the Delaware General Corporation Law, or for any
transaction from which the director derived an improper personal benefit.
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Preemptive Rights; Redemption. Holders of the common stock of Connecticut
Bancshares will not be entitled to preemptive rights with respect to any shares
that may be issued. The common stock cannot be redeemed.
Preferred Stock
Connecticut Bancshares will not issue any preferred stock in the conversion
and it has no current plans to issue any preferred stock after the conversion.
Preferred stock may be issued with designations, powers, preferences and rights
as the Board of Directors may from time to time determine. The Board of
Directors can, without stockholder approval, issue preferred stock with voting,
dividend, liquidation and conversion rights that could dilute the voting
strength of the holders of the common stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
Restrictions on Acquisition
Acquisitions of Connecticut Bancshares are restricted by provisions in its
Certificate of Incorporation and Bylaws and by rules and regulations of various
regulatory agencies. See "Regulation and Supervision " and "Restrictions on
Acquisition of Connecticut Bancshares and Savings Bank of Manchester."
DESCRIPTION OF SAVINGS BANK OF MANCHESTER STOCK
General
If the holding company form of organization is not utilized in connection
with the conversion, Savings Bank of Manchester may offer shares of its common
stock in connection with the conversion. The following is a discussion of its
stock.
The Amended and Restated Articles of Incorporation of Savings Bank of
Manchester, to be effective upon the conversion, authorize the issuance of
capital stock consisting of 10,000 shares of common stock, without par value,
and 1,000 shares of preferred stock, without par value. Savings Bank of
Manchester stock will represent non-withdrawable capital, will not be an account
of an insurable type and will not be insured by the Federal Deposit Insurance
Corporation or any other government agency. If the holding company form of
organization is not utilized in connection with the conversion, Savings Bank of
Manchester would increase the number of shares of common stock authorized by the
Amended and Restated Articles of Incorporation to an amount sufficient to cover
the shares of common stock to be issued in connection with the conversion. The
preferred stock may be issued in series and classes having such rights,
preferences, privileges and restrictions as the Board of Directors may
determine. Each share of common stock of Savings Bank of Manchester will have
the same relative rights as, and will be identical in all respects with, each
other share of common stock. After the completion of the conversion, the Board
of Directors will be authorized to approve the issuance of common stock up to
the amount authorized by the Amended and Restated Articles of Incorporation
without the approval of Savings Bank of Manchester's stockholders. Assuming
that the holding company form of organization is utilized, all of the issued and
outstanding common stock of Savings Bank of Manchester will be held by
Connecticut Bancshares.
Common Stock
Dividends. The holders of Savings Bank of Manchester's common stock will
be entitled to receive and to share equally in such dividends as may be declared
by the Board of Directors of Savings Bank of Manchester out of its legally
available funds. See "Dividend Policy" for certain restrictions on the payment
of dividends and "Federal and State Taxation of Income--Federal Income Taxation"
for a discussion of the consequences of the payment of cash dividends from
income appropriated to bad debt reserves.
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Voting Rights. Immediately after the conversion, the holders of Savings
Bank of Manchester's common stock will possess exclusive voting rights in
Savings Bank of Manchester. Each holder of shares of common stock will be
entitled to one vote for each share held. Shareholders shall not be entitled to
cumulate their votes for the election of directors. See "Restrictions on
Acquisition of Connecticut Bancshares and Savings Bank of Manchester--Anti-
Takeover Effects of Connecticut Bancshares' Certificate of Incorporation and
Bylaws and Management Remuneration Adopted in Conversion."
Liquidation. In the event of any liquidation, dissolution, or winding up
of Savings Bank of Manchester, the holders of common stock will be entitled to
receive, after payment of all Savings Bank of Manchester's debts and liabilities
(including all deposit accounts and accrued interest thereon), and distribution
of the balance in the special liquidation account to eligible account holders,
all assets of Savings Bank of Manchester available for distribution in cash or
in kind. If additional preferred stock is issued after the conversion, the
holders thereof may also have priority over the holders of common stock in the
event of liquidation or dissolution.
Preemptive Rights; Redemption. Holders of Savings Bank of Manchester's
common stock will not be entitled to preemptive rights with respect to any
shares of Savings Bank of Manchester which may be issued. Upon receipt by
Savings Bank of Manchester of the full specified purchase price therefor, the
common stock will be fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company, New York, New York.
REGISTRATION REQUIREMENTS
Connecticut Bancshares has registered the common stock with the Securities
and Exchange Commission under Section 12(g) of the Securities Exchange Act of
1934, as amended, and will not deregister its common stock for a period of at
least three years following the conversion. As a result of registration, the
proxy and tender offer rules, insider trading reporting and restrictions, annual
and periodic reporting and other requirements of that statute will apply.
LEGAL AND TAX OPINIONS
The legality of the common stock has been passed upon for Connecticut
Bancshares by Muldoon, Murphy & Faucette LLP, Washington, D.C. The federal tax
consequences of the conversion have been opined upon by Muldoon, Murphy &
Faucette LLP and the Connecticut tax consequences of the conversion have been
opined upon by Arthur Andersen LLP, Hartford, Connecticut. Muldoon, Murphy &
Faucette LLP and Arthur Andersen LLP have consented to the references to their
opinions in this prospectus. Certain legal matters in connection with this
offering will be passed upon for Sandler O'Neill by Shipman & Goodwin LLP,
Hartford, Connecticut.
EXPERTS
The financial statements included in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
147
RP Financial has consented to the summary in this prospectus of its report
to Savings Bank of Manchester setting forth its opinion as to the estimated pro
forma market value of Connecticut Bancshares and Savings Bank of Manchester, as
converted, and its letter with respect to subscription rights, and to the use of
its name and statements with respect to it appearing in this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
Connecticut Bancshares has filed with the Securities and Exchange
Commission a Registration Statement on Form S-1 (File No. 333-90865) under the
Securities Act of 1933, as amended, with respect to the common stock offered in
the conversion. This prospectus does not contain all the information contained
in the registration statement, certain parts of which are omitted as permitted
by the rules and regulations of the Securities and Exchange Commission. This
information may be inspected at the public reference facilities maintained by
the Securities and Exchange Commission at 450 Fifth Street, NW, Room 1024,
Washington, D.C. 20549 and at its regional offices at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies may be obtained at prescribed rates from the Public
Reference Room of the Securities and Exchange Commission at 450 Fifth Street,
NW, Washington, D.C. 20549. The public may obtain information on the operation
of the Public Reference Room by calling the Securities and Exchange Commission
at 1-800-SEC-0330. The registration statement also is available through the
Securities and Exchange Commission's World Wide Web site on the Internet at
http://www.sec.gov.
Following the completion of the conversion, Connecticut Bancshares will
also file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission, all of which can be
inspected and copied at the Securities Exchange Commission's Public Reference
Room. Copies of these materials can also be obtained, upon payment of a copying
fee, by writing to the Securities and Exchange Commission.
Savings Bank of Manchester has filed an application for approval of
conversion with the Connecticut Banking Commissioner and has provided copies of
the conversion application to the Federal Deposit Insurance Corporation and the
Federal Reserve Bank of Boston. This prospectus omits certain information
contained in that application. The conversion application may be examined at
the Office of the Connecticut Banking Commissioner, Connecticut Department of
Banking, 260 Constitution Plaza, Hartford, Connecticut 06103. Copies of the
conversion application may be examined at the Federal Deposit Insurance
Corporation's offices at 15 Braintree Hill Office Park, Suite 100, Braintree,
Massachusetts 02184 and at the Federal Reserve Bank of Boston's offices at 600
Atlantic Avenue, Boston, Massachusetts 02106.
Connecticut Bancshares has filed with the Office of Thrift Supervision an
application to become the holding company for Savings Bank of Manchester. This
prospectus omits certain information contained in that application. The
application may be inspected, without charge, at the offices of the Office of
Thrift Supervision, 1700 G Street, NW, Washington, D.C. 20552 and at the offices
of the Regional Director of the Office of Thrift Supervision at the Northeast
Regional Office of the Office of Thrift Supervision, 10 Exchange Place, 18/th/
Floor, Jersey City, New Jersey 07302.
A copy of the plan of conversion, Connecticut Bancshares' Certificate of
Incorporation and Bylaws, and Savings Bank of Manchester's Amended and Restated
Articles of Incorporation and Bylaws are available without charge from Savings
Bank of Manchester by contacting the conversion center at (860) 645-5300.
A copy of RP Financial's appraisal report is available for inspection at
Savings Bank of Manchester's administrative offices located at 923 Main Street,
Manchester, Connecticut.
148
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
CONNECTICUT BANKSHARES, M.H.C. AND SUBSIDIARY
---------------------------------------------
Page
----
Report of Independent Public Accountants F-2
Consolidated Statements of Condition as of August 31, 1999
(unaudited) and December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the Eight
Months Ended August 31, 1999 and 1998 (unaudited)
and for the Years Ended December 31, 1998, 1997 and 1996 43
Consolidated Statements of Changes in Capital for the Eight
Months Ended August 31, 1999 (unaudited) and for the
Years Ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows for the Eight
Months Ended August 31, 1999 and 1998 (unaudited) and
for the Years Ended December 31, 1998, 1997 and 1996 F-5
Notes to Consolidated Financial Statements F-6
All schedules, except those set forth above, are
omitted as the required information either
is not applicable or is included in the
Consolidated Financial Statements or related Notes.
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors of
Connecticut Bankshares, M.H.C.:
We have audited the accompanying consolidated statements of condition of
Connecticut Bankshares, M.H.C. (a Connecticut mutual holding company) and its
subsidiary, The Savings Bank of Manchester (collectively, the Bank), as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, changes in capital and cash flows for each of the three years in the
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Connecticut
Bankshares, M.H.C. and subsidiary as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
Hartford, Connecticut /s/ Arthur Andersen LLP
January 15, 1999, except
for Note 14 as to which the
date is October 26, 1999
F-2
CONNECTICUT BANKSHARES, M.H.C. AND SUBSIDIARY
---------------------------------------------
CONSOLIDATED STATEMENTS OF CONDITION
------------------------------------
(In Thousands)
August 31, December 31, December 31,
ASSETS 1999 1998 1997
------ ---- ---- ----
(Unaudited)
Cash and cash equivalents $ 42,823 $ 45,048 $ 14,660
Securities available for sale (cost of
$147,956 at August 31, 1999 (unaudited),
$153,346 at December 31, 1998 and $119,762
at December 31, 1997) 159,464 168,151 131,589
Securities held to maturity (market value
of $44,120 at August 31, 1999 (unaudited),
$53,054 at December 31, 1998 and $50,536
at December 31, 1997) 44,865 52,597 50,283
Loans held for sale 35 121 266
Loans, net 899,692 806,787 798,292
Federal Home Loan Bank stock, at cost 5,909 5,909 5,571
Premises and equipment, net 14,735 15,621 15,709
Accrued interest receivable 6,905 6,435 6,724
Other real estate owned 901 1,759 4,708
Excess of purchase price over fair value
on branch acquisitions 2,542 2,830 3,262
Other assets 3,798 3,029 2,022
---------- ---------- ----------
Total assets $1,181,669 $1,108,287 $1,033,086
========== ========== ==========
LIABILITIES AND CAPITAL
-----------------------
Deposits $ 887,322 $ 855,117 $ 827,667
Short-term borrowed funds 97,847 79,545 71,179
Mortgagors' escrow accounts 5,059 7,627 7,540
Advances from Federal Home Loan Bank 66,899 45,000 17,987
Current and deferred income taxes 186 1,019 1,157
Other liabilities 6,722 7,172 6,365
---------- ---------- ----------
Total liabilities 1,064,035 995,480 931,895
---------- ---------- ----------
Commitments and contingencies (Notes 8, 11 and 14)
Capital:
Surplus 14,957 14,957 14,957
Undivided profits 94,852 88,597 79,279
Accumulated other comprehensive income 7,825 9,253 6,955
---------- ---------- ----------
Total capital 117,634 112,807 101,191
---------- ---------- ----------
Total liabilities and capital $1,181,669 $1,108,287 $1,033,086
========== ========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
CONNECTICUT BANKSHARES, M.H.C. AND SUBSIDIARY
---------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL
---------------------------------------------
(In Thousands)
Accumulated
Other
Undivided Comprehensive
Surplus Profits Income Total
------- ------- ------ -----
BALANCE, December 31, 1995 $15,160 $59,443 $ 2,539 $ 77,142
------- ------- ------- --------
Comprehensive income:
Net income - 9,431 - 9,431
Change in unrealized
gain on securities
available for sale,
net of taxes - - 1,962 1,962
------- ------- ------- --------
Total comprehensive income - 9,431 1,962 11,393
------- ------- ------- --------
Transfers, net (99) 99 - -
------- ------- ------- --------
BALANCE, December 31, 1996 15,061 68,973 4,501 88,535
------- ------- ------- --------
Comprehensive income:
Net income - 10,202 - 10,202
Change in unrealized
gain on securities
available for sale,
net of taxes - - 2,454 2,454
------- ------- ------- --------
Total comprehensive income - 10,202 2,454 12,656
------- ------- ------- --------
Transfers, net (104) 104 - -
------- ------- ------- --------
BALANCE, December 31, 1997 14,957 79,279 6,955 101,191
------- ------- ------- --------
Comprehensive income:
Net income - 9,318 - 9,318
Change in unrealized
gain on securities
available for sale,
net of taxes - - 2,298 2,298
------- ------- ------- --------
Total comprehensive income - 9,318 2,298 11,616
------- ------- ------- --------
BALANCE, December 31, 1998 14,957 88,597 9,253 112,807
------- ------- ------- --------
Comprehensive income:
Net income - 6,255 - 6,255
Change in unrealized
gain on securities
available for sale,
net of taxes - - (1,428) (1,428)
------- ------- ------- --------
Total comprehensive income - 6,255 (1,428) 4,827
------- ------- ------- --------
BALANCE, August 31, 1999
(unaudited) $14,957 $94,852 $ 7,825 $117,634
======= ======= ======= ========
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
CONNECTICUT BANKSHARES, M.H.C. AND SUBSIDIARY
---------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In Thousands)
For the Eight Months Ended
August 31, For the Year Ended December 31,
--------------------------- -------------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,255 $ 6,518 $ 9,318 $ 10,202 $ 9,431
Adjustments:
Provision for loan losses 400 800 1,200 1,200 1,200
Depreciation 1,717 1,685 2,295 1,645 1,386
Provision for loss on other real estate owned 44 322 385 903 1,129
Deferred income tax provision (benefit) 201 (368) 495 (199) (525)
Amortization/accretion -
Premium on deposits 288 288 407 407 402
Premium on loans and bonds 442 293 538 725 755
Net losses (gains) on sales of other real estate owned 41 319 (324) 404 135
Gains on sale of securities, net (246) (3,035) (2,621) (4,007) (842)
Net gains on mortgage loan sales (438) (1,079) (2,415) (410) (924)
Changes in operating assets and liabilities -
Accrued interest receivable (470) 182 289 (442) 465
Other assets (769) (800) (1,007) (1,663) (1,217)
Other liabilities (450) (1,054) 807 914 658
-------- ------- -------- ------- -------
Net cash provided by operating activities 7,015 4,071 9,367 9,679 12,054
-------- ------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations and purchases, net of repayments (108,668) (58,559) (103,303) (83,211) (67,852)
Proceeds from sales of loans 15,450 66,086 94,332 12,139 27,886
Proceeds from maturities of held to maturity securities 3,500 2,000 3,500 9,375 12,925
Proceeds from maturities of available for
sale securities 17,000 5,000 5,000 18,815 21,106
Proceeds from sales of available for sale securities 5,469 9,507 20,753 66,119 9,351
Purchases of held to maturity securities (2,971) (17,304) (17,304) (12,040) (17,181)
Purchases of available for sale securities (19,402) (38,669) (61,694) (89,583) (42,080)
Proceeds from principal payments of
mortgage-backed securities 9,678 9,664 16,510 12,643 7,340
Proceeds from sales of other real estate owned 1,085 2,891 3,503 3,530 1,487
Purchases of premises and equipment (219) (2,263) (3,192) (5,263) (2,526)
-------- ------- -------- ------- -------
Net cash used in investing activities (79,078) (21,647) (41,895) (67,476) (49,544)
-------- ------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in savings, money market, NOW and demand deposits 28,787 23,610 57,077 16,033 13,262
Net increase (decrease) in time and other deposits 3,418 (27,046) (29,627) 18,801 14,782
Net increase (decrease) in short-term borrowed funds 18,302 5,884 379 19,918 (5,515)
(Decrease) increase in mortgagors' escrow accounts (2,568) (3,528) 87 (145) 432
Increase (decrease) in advances from Federal Home Loan Bank 21,899 35,000 35,000 (5,000) (2,593)
-------- ------- -------- ------- -------
Net cash provided by financing activities 69,838 33,920 62,916 49,607 20,368
-------- ------- -------- ------- -------
Net (decrease) increase in cash and cash equivalents (2,225) 16,344 30,388 (8,190) (17,122)
CASH AND CASH EQUIVALENTS, beginning of period 45,048 14,660 14,660 22,850 39,972
-------- ------- -------- ------- -------
CASH AND CASH EQUIVALENTS, end of period $ 42,823 $ 31,004 $ 45,048 $ 14,660 $ 22,850
======== ======= ======== ======= =======
SUPPLEMENTAL INFORMATION:
Cash paid for -
Interest and dividends $ 23,940 $ 24,664 $ 37,214 $ 33,101 $ 34,881
Income taxes 2,100 3,275 5,025 6,550 7,525
Non-cash transactions -
Transfers from loans to other real estate owned 213 841 1,164 3,878 1,830
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
CONNECTICUT BANKSHARES, M.H.C. AND SUBSIDIARY
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AUGUST 31, 1999 AND 1998 (UNAUDITED) AND
----------------------------------------
DECEMBER 31, 1998, 1997 AND 1996
--------------------------------
1. Organization and Significant Accounting Policies:
------------------------------------------------
Organization -
------------
The accompanying consolidated financial statements include the accounts
of Connecticut Bankshares, M.H.C. (Connecticut Bankshares or the MHC)
and its wholly-owned subsidiary, The Savings Bank of Manchester (SBM),
and its wholly-owned subsidiaries, SBM, Ltd. and 923 Main, Inc.
(collectively, the Bank). Savings Bank of Manchester Mortgage Company,
Inc. (SBM Mortgage), a passive investment company for Connecticut
income tax purposes, was established in January 1999 to service and
hold loans secured by real property. SBM Mortgage is included in the
consolidated financial statements as of August 31, 1999 and for the
eight months then ended. All material intercompany balances and
transactions have been eliminated in consolidation.
The Bank with its main office located in Manchester, Connecticut
operates through twenty-three branches located primarily in eastern
Connecticut. The Bank's primary source of income is interest received
on loans to customers, which include small and middle market businesses
and individuals residing within the Bank's service area. As discussed
in Note 13, the Bank adopted a Plan of Conversion pursuant to which
Connecticut Bankshares will merge into the Bank, with the Bank being
the surviving corporation, and the Bank will continue as a state-
chartered stock bank.
In 1998, the Bank contributed securities with a fair market value of
approximately $3 million to the newly formed Savings Bank of Manchester
Foundation, Inc. (the Foundation), a not-for-profit organization. The
Foundation was formed to provide charitable contributions for the
surrounding community. In connection with the contribution, the Bank
realized a gain of approximately $2.3 million on the transfer of
securities.
Unaudited interim financial statements -
--------------------------------------
The consolidated financial statements and related notes as of August
31, 1999 and for the eight months ended August 31, 1999 and 1998 are
unaudited. All adjustments, consisting of only normal recurring
adjustments, which in the opinion of management are necessary for fair
presentation of financial condition, results of operations, statements
of changes in capital and cash flows, have been made. The results of
operations for the eight months ended August 31, 1999 are not
necessarily indicative of the results which may be expected for a full
year.
F-6
Use of estimates in the preparation of financial statements -
-----------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and the reported amounts of income
and expenses during the reporting periods. Operating results in the
future could vary from the amounts derived from management's estimates
and assumptions. A material estimate that is particularly susceptible
to changes in the near term relates to the determination of the
allowance for loan losses (see Note 4).
Cash flows -
----------
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks.
Investment and mortgage-backed securities -
-----------------------------------------
Investments are classified into one of three categories and accounted
for as follows:
Category Accounting Treatment
-------- --------------------
Trading, representing debt, Reported at fair value, with
equity and mortgage-backed unrealized gains and losses
securities which are held for included in noninterest income
resale in the near term
Held to maturity, representing Reported at amortized cost
debt and mortgage-backed
securities for which the Bank
has the positive intent and
ability to hold to maturity
Available for sale, Reported at fair value, with
representing debt, equity and unrealized gains and losses, net
mortgage-backed securities of tax, reported as a separate
not classified as trading component of accumulated other
or held to maturity comprehensive income
Any security that experiences a decline in value that management
believes is other than temporary is reduced to its net realizable value
by a charge to noninterest income. Realized gains and losses from the
sale of investments are recorded on the trade date by specific
identification of the security sold.
Loans held for sale -
-------------------
Loans held for sale are valued at the lower of acquisition cost (less
principal payments received) or estimated market value. Market is
determined by reference to outstanding commitments from investors
calculated on an individual loan basis. Net unrealized losses are
recognized in a valuation allowance established by charges to
noninterest income.
F-7
Loans -
-----
Loans are stated at their principal amounts outstanding net of unearned
income. Interest on loans is recorded as income based on rates applied
to principal amounts outstanding. Some installment and commercial loans
are made on a discounted basis, and the unearned discount is recorded
in income by use of a method that approximates the effective interest
method. In determining income recognition on loans, generally no
interest is recognized with respect to loans on which a default of
interest or principal has occurred for a period of ninety days or more
and collection of any portion of the loan is considered to be doubtful,
or for a lesser period if circumstances indicate collection of any
portion of the loan is doubtful.
Loan origination fees and certain direct loan origination costs are
capitalized, and the net fee or cost is recognized in interest income
using the effective interest method over the contractual life of the
loans. When loans are prepaid, sold or participated out, the
unamortized portion of deferred fees is recognized as income at that
time. As of August 31, 1999 and December 31, 1998 and 1997, net
deferred loan fees were approximately $1,472,000, $1,021,000 and
$960,000, respectively.
The allowance for loan losses is established through a provision
charged to expense. Loans are charged against the allowance for loan
losses when management believes the collectibility of principal is
unlikely. The allowance represents an amount which, in management's
judgment, will be adequate to absorb losses on existing loans that may
become uncollectible. Management's judgment in determining the adequacy
of the allowance is based on the evaluation of individual performing
and impaired loans, risk characteristics of the loan portfolios,
assessment of current economic and real estate market conditions,
estimates of the current value of underlying collateral, past and
current loan loss experience and other relevant factors.
The Bank has identified certain loans as impaired based upon
management's belief it is probable that the borrower will be unable to
pay all principal and interest amounts in accordance with the loan
agreement's contractual terms. The Bank is required to account for the
time value of money when determining the adequacy of the Bank's
allowance for loan losses for certain impaired loans.
Certain impaired loans are required to be measured based on the present
value of expected future cash flows discounted at the loan's original
effective interest rate. As a practical expedient, impairment also may
be measured based on the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. When the
measure of the impaired loan is less than the recorded investment in
the loan, the impairment is recorded through a valuation allowance.
Interest payments received on impaired loans are recorded as interest
income unless collection of the remaining recorded investment is
doubtful, at which time payments received are recorded as reductions of
principal.
Premises and equipment -
----------------------
Premises and equipment are stated at cost, less accumulated
depreciation of approximately $10,076,000, $12,925,000 and $10,630,000
as of August 31, 1999 and December 31, 1998 and 1997, respectively.
Depreciation of premises and equipment and amortization of leasehold
improvements are computed using the straight-line basis over the
estimated useful lives of the assets (5-39 years) or in the case of
leasehold improvements, the lease term if shorter.
F-8
Excess of purchase price over fair value on branch acquisitions -
---------------------------------------------------------------
In 1997, the Bank acquired certain assets of a branch in West Hartford,
Connecticut. The premium of $250,000, for lease rights acquired, is
being amortized over the remaining term of the lease (10 years) using
the straight-line method.
In 1995, the Bank acquired certain fixed assets and assumed certain
deposit liabilities of two branches in Storrs and Enfield, Connecticut.
In consideration of the assumption of approximately $47,408,000 of
deposit liabilities, the Bank received approximately $42,392,000 in
cash and $1,553,000 in other assets. The resultant core deposit premium
intangible of approximately $4,062,000 is being amortized over 10 years
using the straight-line method.
Other real estate owned -
-----------------------
Other real estate owned, comprised of real estate acquired through
foreclosure or acceptance of a deed in lieu of foreclosure, is carried
at the lower of cost or fair market value, net of estimated costs to
sell. Property is transferred to other real estate owned at the lower
of cost or fair market value, with any excess over cost charged to the
allowance for loan losses. Any further decline in value based on
subsequent changes to estimated fair market value or any loss upon
ultimate disposition of the property is charged to other real estate
owned expenses.
Mortgage servicing rights -
-------------------------
The Bank applies the provisions of Statement of Financial Accounting
Standards (SFAS) No. 122, "Accounting for Mortgage Servicing Rights,"
which requires that the cost of mortgage servicing rights to be
amortized in proportion to, and over the period of, estimated net
servicing revenues. Impairment of mortgage servicing rights is assessed
based on the fair value of those rights. Fair values are estimated
using discounted cash flows based on a current market interest rate.
The amount of impairment recognized is the amount by which the
capitalized mortgage servicing rights for a stratum exceed their fair
value.
Effective January 1, 1997, the Bank adopted SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," (as amended by SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125 (an amendment of
FASB Statement No. 125)"), which supersedes SFAS No. 122 and
establishes standards to account for transfers and servicing of
financial assets and extinguishment of liabilities. The standards are
based on consistent application of a financial-components approach that
focuses on control.
Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control
has been surrendered, and derecognizes liabilities when extinguished.
The adoption of this statement had no effect on the Bank's financial
condition or results of operations.
When participating interests in loans sold have an average contractual
interest rate, adjusted for normal servicing fees, that differs from
the agreed yield to the purchaser, gains or losses are recognized equal
to the present value of such differential over the estimated remaining
life of such loans. The resulting "excess servicing receivable" or
"deferred servicing revenue" is amortized over the estimated life using
a method approximating the effective interest method.
F-9
Quoted market prices are not available for the excess servicing
receivables. Thus, the excess servicing receivables and the
amortization thereon periodically are evaluated in relation to
estimated future servicing revenues, taking into consideration changes
in interest rates, current prepayment rates and expected future cash
flows. The Bank evaluates the carrying value of the excess servicing
receivables by estimating the future servicing income of the excess
servicing receivables based on management's best estimate of remaining
loan lives and discounted at the original discount rate.
Short-term borrowed funds -
-------------------------
Short-term borrowings are comprised of uninsured accounts which are
secured by investment securities.
Income taxes -
------------
Items of income and expense recognized in different time periods for
financial reporting purposes and for purposes of computing income taxes
currently payable (temporary differences) give rise to deferred income
taxes which are reflected in the financial statements. A deferred tax
liability or asset is recognized for the estimated future tax effects,
based upon enacted law, attributed to temporary differences. If
applicable, the deferred tax asset is reduced by the amount of any tax
benefits that, based on available evidence, are not likely to be
realized.
Related party transactions -
--------------------------
Directors and officers of the Bank and their associates have been
customers of, and have had transactions with the Bank, and management
expects that such persons will continue to have such transactions in
the future. All deposit accounts, loans, services and commitments
comprising such transactions were made in the ordinary course of
business, on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions
with other customers who are not directors or officers and, in the
opinion of management, the transactions did not involve more than
normal risks of collectibility, favored treatment or terms, or present
other unfavorable features (see Note 4 for further details regarding
related party transactions).
Comprehensive income -
--------------------
SFAS No. 130, "Reporting Comprehensive Income" establishes standards
for separately reporting comprehensive income and its components.
Components of comprehensive income represent changes in equity
resulting from transactions and other events and circumstances from
non-owner sources. Comprehensive income for the eight months ended
August 31, 1999 and the years ended December 31, 1998, 1997 and 1996 is
as follows (in thousands):
For the Eight For the Year Ended
Months Ended December 31,
----------------------------
August 31, 1999 1998 1997 1996
---------------- -------- -------- --------
Net income $ 6,255 $ 9,318 $10,202 $ 9,431
Unrealized gains on securities:
Change in unrealized holding gains
arising during the period (1,182) 4,919 6,461 2,804
Less: reclassification adjustment
for gains included in net
income (246) (2,621) (4,007) (842)
------- ------- ------- -------
Comprehensive income $ 4,827 $11,616 $12,656 $11,393
======= ======= ======= =======
F-10
Segment information -
-------------------
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" requires public companies to report certain financial
information about significant revenue-producing segments of the
business for which such information is available and utilized by the
chief operating decision-maker. Specific information to be reported for
individual operating segments includes a measure of profit and loss,
certain revenue and expense items and total assets. As a community-
oriented financial institution, substantially all of the Bank's
operations involve the delivery of loan and deposit products to
customers. Management makes operating decisions and assesses
performance based on an ongoing review of these community-banking
operations, which constitutes that Bank's only operating segment for
financial reporting purposes under SFAS No. 131.
New accounting standards -
------------------------
Effective January 1, 1999 the Bank adopted SFAS No. 134, "Accounting
for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, an
amendment of SFAS No. 65." This statement requires that after the
securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities shall classify the resulting mortgage-
backed securities or other retained interests based on its ability and
intent to sell or hold those investments. The adoption did not have any
effect on the Bank's financial condition or results of operations.
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair
value. The statement requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the
hedged item in the statement of income and requires that an entity
formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. This statement was amended
by SFAS No. 137, "Accounting for Derivatives and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133." As a result,
SFAS No. 133 will be effective in 2001 for the Bank. Management does
not expect that the adoption of this statement will have a material
impact on the Bank's financial position or results of operations.
Reclassifications -
-----------------
Certain prior year amounts have been reclassified to conform to the
current year presentation.
F-11
2. Regulatory Matters:
------------------
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a
direct material effect on the Bank's consolidated financial statements. The
regulations require the Bank to meet specific capital adequacy guidelines
that involve quantitative measures of assets, liabilities and certain off-
balance sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the banking regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum capital ratios (set forth in the table
below) of Tier I leverage capital (as defined in the regulations) to total
average assets (as defined), and minimum ratios of Tier I and total capital
(as defined) to risk weighted assets (as defined). To be considered
adequately capitalized (as defined) under the regulatory framework from
Prompt Corrective Action, the Bank must maintain minimum Tier I leverage,
Tier I risk-based and total risk-based ratios as set forth in the table.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
categorizes banks based on capital levels and triggers certain mandatory and
discretionary supervisory responses for institutions that fall below certain
capital levels. A bank generally is categorized as "well capitalized" if it
maintains a leverage capital ratio of at least 5%, a Tier I risk-based
capital ratio of at least 6% and a total risk-based capital ratio of at
least 10%, and it is not subject to a written agreement, order or capital
directive.
As of August 31, 1999 and December 31, 1998 and 1997, management believes
that the Bank met all capital adequacy requirements to which they are
subject. As of the most recent notification from the Federal Deposit
Insurance Corporation, the Bank was categorized as well capitalized under
the regulatory framework for Prompt Corrective Action, and the highest
capital category, as defined in the FDICIA regulations. Management believes
that there are no events or conditions which have occurred subsequent to the
notification that would change its category.
Actual capital amounts and ratios for the Bank, which are substantially the
same as the amounts and ratios for SBM, were (dollars in thousands):
To Be Well Capitalized Under
Capital Adequacy Prompt Corrective Action
---------------------------------- ---------------------------
Required Actual Required
Amount (Ratio) Amount (Ratio) Amount (Ratio)
--------------- ----------------- --------------
August 31, 1999:
Tier I Capital
(to Total
Average Assets) $45,672 (4.0%) $106,665 (9.3%) $57,090 (5.0%)
Tier I Capital
(to Risk
Weighted Assets) 32,520 (4.0%) 106,665 (13.1%) 48,780 (6.0%)
Total Capital (to
Risk Weighted
Assets) 65,039 (8.0%) 116,835 (14.4%) 81,299 (10.0%)
F-12
To Be Well Capitalized Under
Capital Adequacy Prompt Corrective Action
---------------------------------- ---------------------------
Required Actual Required
Amount (Ratio) Amount (Ratio) Amount (Ratio)
--------------- ----------------- --------------
December 31, 1998:
Tier I Capital
(to Total
Average Assets) $43,320 (4.0%) $100,719 (9.3%) $54,150 (5.0%)
Tier I Capital
(to Risk
Weighted Assets) 31,974 (4.0%) 100,719 (12.6%) 47,961 (6.0%)
Total Capital (to
Risk Weighted
Assets) 57,951 (8.0%) 110,689 (13.9%) 72,438 (10.0%)
December 31, 1997:
Tier I Capital
(to Total
Average Assets) $40,679 (4.0%) $ 90,511 (8.9%) $50,849 (5.0%)
Tier I Capital
(to Risk
Weighted Assets) 29,197 (4.0%) 90,511 (12.4%) 43,796 (6.0%)
Total Capital (to
Risk Weighted
Assets) 58,362 (8.0%) 99,726 (13.7%) 72,952 (10.0%)
3. Investment Securities:
---------------------
As of August 31, 1999 and December 31, 1998 and 1997, the amortized cost and
market value of investment securities were (in thousands):
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ----------- --------
August 31, 1999
---------------
Available for Sale:
U.S. Government and
agency obligations $ 68,201 $ 125 $ (573) $ 67,753
Corporate securities 36,574 38 (444) 36,168
Marketable equity
securities 30,258 14,213 (1,503) 42,968
Mortgage-backed
securities 12,491 132 (480) 12,143
Other equity securities 432 - - 432
-------- ------- ------- --------
Total $147,956 $14,508 $(3,000) $159,464
======== ======= ======= ========
Held to Maturity:
Other securities $ 3,130 $ 8 $ (1) $ 3,137
Asset-backed securities 19,258 190 (209) 19,239
Mortgage-backed
securities 22,477 22 (755) 21,744
-------- ------- ------- --------
Total $ 44,865 $ 220 $ (965) $ 44,120
======== ======= ======= ========
F-13
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ----------- --------
December 31, 1998
-----------------
Available for Sale:
U.S. Government and
agency obligations $ 70,563 $ 1,164 $ (24) $ 71,703
Corporate securities 40,128 348 (56) 40,420
Marketable equity
securities 29,427 13,625 (279) 42,773
Mortgage-backed
securities 12,832 279 (252) 12,859
Other equity securities 396 - - 396
-------- ------- ----- --------
Total $153,346 $15,416 $(611) $168,151
======== ======= ===== ========
Held to Maturity:
U.S. Government and
agency obligations $ 3,506 $ 18 $ - $ 3,524
Other securities 3,145 102 (1) 3,246
Asset-backed securities 23,204 339 (157) 23,386
Mortgage-backed
securities 22,742 226 (70) 22,898
-------- ------- ----- --------
Total $ 52,597 $ 685 $(228) $ 53,054
======== ======= ===== ========
December 31, 1997
-----------------
Available for Sale:
U.S. Government and
agency obligations $ 48,534 $ 287 $ (54) $ 48,767
Corporate securities 23,771 256 (17) 24,010
Marketable equity
securities 29,389 11,764 (518) 40,635
Other equity securities 192 - - 192
Mortgage-backed
securities 17,876 319 (210) 17,985
-------- ------- ----- --------
Total $119,762 $12,626 $(799) $131,589
======== ======= ===== ========
Held to Maturity:
U.S. Government and
agency obligations $ 7,055 $ 29 $ (13) $ 7,071
Asset-backed securities 25,674 235 (157) 25,752
Other securities 3,145 80 (1) 3,224
Mortgage-backed
securities 14,409 84 (4) 14,489
-------- ------- ----- --------
Total $ 50,283 $ 428 $(175) $ 50,536
======== ======= ===== ========
As of August 31, 1999 and December 31, 1998, the amortized cost and market
values of debt securities, by contractual maturity, are shown below (in
thousands). Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
F-14
Held to Maturity Available for Sale
----------------- ------------------
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
August 31, 1999
------------------------
Due in one year or less $ 95 $ 95 $ 31,187 $ 31,146
Due after one year
through five years 4,901 5,007 68,180 67,462
Due after five years
through ten years 3,754 3,714 5,408 5,313
Due after ten years 13,638 13,560 - -
------- ------- ------- -------
22,388 22,376 104,775 103,921
Mortgage-backed
securities 22,477 21,744 12,491 12,143
------ ------ -------- --------
Total $44,865 $44,120 $117,266 $116,064
======= ======= ======== ========
December 31, 1998
-----------------
Due in one year or less $ 3,506 $ 3,524 $ 34,605 $ 34,725
Due after one year
through five years 2,920 3,045 74,714 75,965
Due after five years
through ten years 5,964 5,994 1,372 1,433
Due after ten years 17,465 17,593 - -
------ ------ ------- --------
29,855 30,156 110,691 112,123
Mortgage-backed
securities 22,742 22,898 12,832 12,859
------ ------ ------- -------
Total $52,597 $53,054 $123,523 $124,982
======= ======= ======== ========
For the eight months ended August 31, 1999 and the years ended December 31,
1998 and 1997, proceeds from the sales of available for sale securities were
approximately $5,469,000, $20,753,000 and $66,119,000, respectively. Gross
gains of approximately $676,000, $3,980,000 and $4,360,000, respectively,
and gross losses of approximately $430,000, $1,359,000 and $353,000,
respectively, were realized on those sales for the eight months ended August
31, 1999, and the years ended December 31, 1998 and 1997.
As of August 31, 1999 and December 31, 1998, investment securities with a
book value of approximately $97,576,000 and $107,358,000 were pledged as
security for short-term borrowed funds, U.S. Treasury tax and loan payments
and municipal deposits held by the Bank, respectively.
4. Loans:
-----
As of August 31, 1999 and December 31, 1998 and 1997, the Bank's residential
mortgage loan portfolio was entirely secured by one to four family homes,
located primarily in central and eastern Connecticut. The commercial
mortgage loan portfolio was secured primarily by multi-family, commercial
and manufacturing properties located in Connecticut and surrounding states.
A variety of different assets, including business assets, rental income
properties, and manufacturing and commercial properties, secured a majority
of the commercial loans. The composition of the Bank's loan portfolio as of
August 31, 1999 and December 31, 1998 and 1997 is as follows (in thousands):
F-15
August 31, December 31,
1999 --------------------
----------- 1998 1997
---- ----
Residential mortgages $519,960 $464,623 $489,105
Commercial real estate mortgages 186,107 167,577 141,146
Commercial business loans 131,362 114,650 106,874
Installment loans 73,054 70,522 71,112
-------- -------- --------
Total loans 910,483 817,372 808,237
Less - Allowance for loan losses (10,791) (10,585) (9,945)
-------- -------- --------
Total loans, net $899,692 $806,787 $798,292
======== ======== ========
The Bank services certain loans that it has sold without recourse to third
parties. The aggregate amount of loans serviced for others approximated
$213,235,000, $218,660,000, $152,768,000, and $154,856,000 as of August 31, 1999
and December 31, 1998, 1997 and 1996, respectively. Income from servicing loans
for others was approximately $386,000 and $309,000 for the eight months ended
August 31, 1999 and 1998, respectively, and $503,000, $402,000 and $355,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. Mortgage
servicing rights of approximately $2,575,000, $2,480,000, $783,000 and $536,000
were capitalized as of August 31, 1999 and December 31, 1998, 1997 and 1996,
respectively. Amortization of mortgage servicing rights was approximately
$308,000, $276,000, $54,000 and $40,000 for the eight months ended August 31,
1999 and the years ended December 31, 1998, 1997 and 1996, respectively.
As of August 31, 1999 and December 31, 1998 and 1997, loans to related parties
totaled approximately $16,400,000, $16,200,000 and $14,300,000, respectively.
Related parties include directors and officers of the Bank, their respective
affiliates in which they have a controlling interest and their immediate family
members. For the eight months ended August 31, 1999 and the years ended December
31, 1998 and 1997, all loans to related parties were performing.
Allowance for loan losses -
- -------------------------
The allowance for loan losses is maintained at a level determined by management
to be the best estimate of losses incurred in the loan portfolio. The allowance
is increased or decreased by provisions or credits charged to operations, which
represent an estimate of losses that occurred during the period and a correction
of estimates of losses recorded in prior periods. Confirmed losses, net of
recoveries, are charged directly to the allowance and the loans are written
down.
The determination of the adequacy of loan losses by management is based on an
assessment of risk elements in the portfolio, identified factors affecting
specific loans and available information about the current economic environment
in which the Bank and its borrowers operates. Management reviews overall
portfolio quality through an analysis of current levels and trends in
chargeoffs, delinquency and nonaccruing loan data and the credit risk profile of
each component of the portfolio.
The allowance for loan losses consists of a formula allowance for various loan
portfolio classifications and a valuation allowance for loans identified as
impaired, if necessary. The allowance is an estimate, and ultimate losses may
vary from current estimates. Changes in the estimate are recorded in the results
of operations in the period in which they become known, along with provisions
for estimated losses incurred during that period.
F-16
A loan is considered to be impaired when it is probable that a creditor will
be unable to collect all amounts due according to the contractual terms of
the loan agreement. Impaired loans, as defined, may be measured based on the
present value of expected future cash flows, discounted at the loan's
original effective interest rate or on the loan's observable market price or
the fair value of the collateral if the loan is collateral-dependent. When
the measurement of the impaired loan is less than the recorded investment in
the loan, the impairment is recorded through a valuation allowance.
For the eight months ended August 31, 1999 and 1998 and the years ended
December 31, 1998, 1997 and 1996, an analysis of the allowance for loan
losses is (in thousands):
For the
Eight Months Ended For the Year Ended
August 31, December 31,
-------------------- ---------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
Balance, beginning of period $10,585 $ 9,945 $ 9,945 $9,131 $ 8,484
Provision for loan losses 400 800 1,200 1,200 1,200
Loans charged off (332) (411) (1,087) (946) (1,762)
Recoveries 138 350 527 560 1,209
------- ------- ------- ------ -------
Balance, end of period $10,791 $10,684 $10,585 $9,945 $ 9,131
======= ======= ======= ====== =======
5. Nonperforming Assets:
--------------------
Nonperforming assets include loans for which the Bank does not accrue
interest ("nonaccrual loans"), loans 90 days past due and still accruing
interest and other real estate owned. Nonaccrual loans and loans 90 days
past due and still accruing interest represent the Bank's impaired loans.
For the eight months ended August 31, 1999 and 1998 and the years ended
December 31, 1998, 1997 and 1996, the average recorded investment in
impaired loans was approximately $3,744,000, $2,699,000, $2,200,000,
$5,000,000 and $8,000,000, respectively. As of August 31, 1999 and December
31, 1998 and 1997, nonperforming assets were (in thousands):
August 31, December 31,
1999 -----------------------
---- 1998 1997
---- ----
Nonaccrual loans $5,050 $ 784 $2,077
Loans 90 days past due and
accruing interest 912 740 758
Other real estate owned 901 1,759 4,708
------ ------ ------
Total nonperforming assets $6,863 $3,283 $7,543
====== ====== ======
The increase in nonaccrual loans from December 31, 1998 to August 31, 1999 is
primarily due to a $4.3 million commercial real estate loan which is in
foreclosure as of October 1999.
For the eight months ended August 31, 1999 and 1998 and the years ended
December 31, 1998, 1997 and 1996, had interest income been accrued on
nonaccrual loans at contractual rates, interest income would have increased
by approximately $181,000, $108,000, $136,000, $337,000 and $379,000,
respectively. For the eight months ended August 31, 1999 and 1998 and the
years ended December 31, 1998, 1997 and 1996, interest income on impaired
loans of approximately $99,000, $47,000, $80,000, $32,000 and $225,000,
respectively, was recognized. As of the eight months ended August 31, 1999
and 1998 and the years ended December 31, 1998, 1997 and 1996, no
significant additional funds were committed to customers whose loans were
nonperforming.
F-17
As of August 31, 1999 and December 31, 1998 and 1997, the Bank had impaired
loans of approximately $5,962,000, $1,524,000 and $2,835,000, respectively,
for which no valuation allowance was required. For the eight months ended
August 31, 1999 and 1998 and the years ended December 31, 1998, 1997 and
1996, no chargeoffs occurred on impaired loans.
6. Deposits:
--------
As of August 31, 1999 and December 31, 1998 and 1997, deposits consisted of
(in thousands):
August 31, December 31,
1999 ------------------
---- 1998 1997
---- ----
Certificates of Deposit:
One to twelve-month certificates $170,449 $127,195 $135,719
One to five year certificates 219,544 261,973 283,760
Time certificates in denominations
of $100,000 or more 59,564 56,971 56,287
-------- -------- --------
449,557 446,139 475,766
-------- -------- --------
Savings accounts 226,934 220,653 206,568
Money market accounts 58,455 38,387 32,221
NOW accounts 106,482 110,841 86,193
Demand deposits 45,894 39,097 26,919
-------- -------- --------
Total deposits $887,322 $855,117 $827,667
======== ======== ========
For the eight months ended August 31, 1999 and 1998 and the years ended
December 31, 1998, 1997 and 1996, interest expense on time deposits in
denominations greater than $100,000 was approximately $1,913,000,
$2,019,000, $2,921,000, $3,022,000 and $2,724,000, respectively.
7. Advances from Federal Home Loan Bank and Short-Term Borrowed Funds:
------------------------------------------------------------------
As of August 31, 1999 and December 31, 1998 and 1997, the Bank had the
following borrowings from Federal Home Loan Bank of Boston (FHLB) (in
thousands):
Interest August 31, December 31,
Rate Maturity Date 1999 1998 1997
---- ------------- ---- ---- ----
8.28% January 2, 1998 $ - $ - $ 7,987
5.65% February 5, 1998 - - 5,000
8.96% August 23, 1999 - 2,000 2,000
5.96% September 1, 1999 23,899 - -
8.91% September 7, 1999 1,000 1,000 1,000
8.76% September 20, 1999 2,000 2,000 2,000
6.05% May 2, 2005 30,000 30,000 -
4.99% January 8, 2008 (1) 10,000 10,000 -
------- ------- -------
Total advances from Federal
Home Loan Bank $66,899 $45,000 $17,987
======= ======= =======
(1) Advance was callable quarterly and was called subsequent to August
31, 1999.
F-18
The Bank's FHLB stock collateralizes these advances. In addition, mortgage
loans and otherwise unencumbered investment securities qualified as
collateral available to the FHLB were pledged to secure these advances,
unused credit lines and letters of credit issued by the FHLB.
The Bank maintains a line of credit of $34,000,000 with the FHLB which
accrues interest at variable rates determined by the FHLB on a daily basis.
Amounts drawn against the line of credit are due within one day of
withdrawal, however, such amounts are automatically renewed provided that
the Bank has sufficient cash balances deposited with the FHLB. Borrowings
under the line of credit are secured by U.S. Government treasury and/or
agency bonds. The outstanding borrowings on the FHLB line of credit of
approximately $23,899,000, $0, and $7,987,000 are included in advances from
Federal Home Loan Bank in the accompanying consolidated statements of
condition at August 31, 1999 and December 31, 1998 and 1997, respectively.
The Bank also maintains a $15,000,000 line of credit with a correspondent
bank. No amounts were outstanding on the correspondent line as of August
31, 1999 or December 31, 1998 and 1997.
Short-term borrowed funds represents commercial transactional repurchase
accounts (business checking accounts which are not Federal Deposit Insurance
Corporation insured).
8. Pension Plans:
-------------
The Bank has a non-contributory defined benefit pension plan (the Plan)
covering substantially all employees. The benefits are based on years of
service and average compensation, as defined in the Plan. The Bank's
funding policy is to contribute annually the maximum amount allowed by
federal tax regulations.
The following table sets forth changes in benefit obligation, changes in
plan assets and the funded status of the Bank's pension plan for the periods
indicated. The table also provides a reconciliation of the plan's funded
status and the amounts recognized in the Bank's consolidated statements of
condition (in thousands):
August 31, December 31,
1999 1998 1997
---- ---- ----
Change in benefit obligations:
Benefit obligation, beginning of
period $18,082 $13,275 $11,090
Service cost 944 989 784
Interest cost 774 980 845
Actuarial (gain) loss (2,183) 3,251 947
Benefits paid (399) (413) (391)
------- ------- -------
Benefit obligation, end of period 17,218 18,082 13,275
------- ------- -------
Change in plan assets:
Fair value of plan assets,
beginning of period 17,163 16,747 13,713
Actual return on plan assets 2,847 715 3,425
Employer contribution - 114 -
Benefits paid (399) (413) (391)
------- ------- -------
Fair value of plan assets, end of period 19,611 17,163 16,747
------- ------- -------
Funded status 2,393 (919) 3,472
Unrecognized transition asset (296) (348) (425)
Unrecognized prior service cost 109 115 123
Unrecognized net actuarial gain (5,813) (1,648) (5,189)
------- ------- -------
Net prepaid recognized $(3,607) $(2,800) $(2,019)
======= ======= =======
F-19
The components of net periodic pension cost for the periods indicated were
as follows (in thousands):
For the Eight Months
Ended August 31,
------------------------------
For the Year Ended December 31,
----------------------------------------------
1999 1998 1998 1997 1996
------------- --------------- -------------- ------------- ---------------
Service cost $ 944 $ 659 $ 989 $ 785 $ 808
Interest cost 774 653 980 844 815
Expected return on
plan assets (865) (715) (1,119) (1,001) (872)
Amortization and
deferral (46) (77) (69) (69) (69)
---- ----- ------- ------- -----
Net periodic pension
cost $ 807 $ 520 $ 781 $ 559 $ 682
==== ===== ======= ======= =====
Significant actuarial assumptions used in determining the actuarial present
value of the projected benefit obligation and the net periodic pension cost
were as follows:
For the Eight
Months Ended
August 31, For the Year Ended December 31,
-------------------------------
1999 1998 1997 1996
-------------- -------- -------- --------
Discount rate 7.5% 6.5% 7.5% 7.75%
Rate of increase in compensation
levels 4.5 4.5 4.5 4.5
Long-term rate of return on assets 8.0 8.0 8.0 8.0
The Bank has entered into deferred compensation agreements with certain
officers providing for benefits after retirement. The liabilities under
these agreements are being accrued over the officers' remaining periods of
employment so that, on the date of retirement, the then-present value of the
benefits will have been accrued. As of August 31, 1999 and December 31, 1998
and 1997, approximately $348,000, $276,000 and $176,000, respectively, had
been accrued under these agreements.
In addition to providing pension benefits, the Bank provides certain health
care benefits for retired employees (the Health Care Plan). Only employees
retiring before January 1, 1989 are eligible for these benefits, provided
they attain age 55 while working for the Bank. In addition, all employees
who have attained age 55 and have ten years of vested service are covered
under the Health Care Plan until age 65. Effective January 1, 1993, the
Bank began to accrue for the estimated costs of these benefits through
charges to expense during the years that the employees earn these benefits.
The following table reconciles the Health Care Plan's funded status to the
accrued postretirement cost (in thousands):
August 31, December 31,
-----------------------
1999 1998 1997
----------- ----------- ----------
Accumulated postretirement benefit
obligation:
Retirees $ 459 $ 490 $ 757
Other fully eligible participants 135 94 46
Other active participants 390 384 236
------ ------ ------
984 968 1,039
Unrecognized actuarial gain 570 588 491
Unrecognized prior service cost (172) (181) (194)
------ ------ ------
Prepaid postretirement cost $1,382 $1,375 $1,336
====== ====== ======
F-20
For the eight months ended August 31, 1999 and the years ended December 31,
1998, 1997 and 1996, net postretirement health care cost included the
following components (in thousands):
For the Eight For the Years Ended
Months Ended December 31,
------------------------------------
August 31, 1999 1998 1997 1996
---------------- --------- --------- ---------
Service cost $ 43 $ 39 $ 34 $ 35
Interest cost 40 75 71 74
Amortization and deferral (11) (9) (15) (10)
---- ----- ----- -----
$ 72 $ 105 $ 90 $ 99
==== ===== ===== =====
Significant actuarial assumptions used in determining the actuarial present
value of the projected benefit obligation and the net postretirement health
care cost are as follows:
August 31, December 31,
---------------------
1999 1998 1997 1996
----------- ------ ------ -----
Discount rate 7.5% 6.5% 7.5% 7.75%
Rate of increase in
compensation levels 4.0 4.0 4.0 4.0
The health care cost trend rate used to measure the accumulated
postretirement benefit obligation is 7% as of August 31, 1999 and December
31, 1998. Increasing the health care cost trend rate by 1% would increase
the accumulated postretirement benefit cost by approximately $66,000 and
$84,000, respectively, and the net postretirement benefit cost by
approximately $6,000 and $13,000, respectively, (pretax) annually as of
August 31, 1999 and December 31, 1998.
9. Income Taxes:
------------
The provision for income taxes for the eight months ended August 31, 1999
and 1998 is based on the estimated effective tax rate for the years then
ended. For the years ended December 31, 1998, 1997 and 1996, the provision
(benefit) for income taxes consisted of the following (in thousands):
Year Ended December 31,
-------------------------
1998 1997 1996
------- ------- -------
Current tax provision:
Federal $3,156 $5,766 $4,731
State 557 1,017 1,647
------ ------ ------
Total current 3,713 6,783 6,378
------ ------ ------
Deferred tax provision (benefit):
Federal 421 (169) (419)
State 74 (30) (106)
------ ------ ------
Total deferred 495 (199) (525)
------ ------ ------
Total provision for income
taxes $4,208 $6,584 $5,853
====== ====== ======
F-21
As of December 31, 1998 and 1997, the components of the net deferred income
tax liability included in current and deferred income taxes in the
accompanying consolidated statements of condition were (in thousands):
December 31,
1998 1997
-------- --------
Total deferred tax assets $ 7,541 $ 6,429
Total deferred tax liabilities (7,949) (6,602)
Total state valuation allowance (704) (1,124)
------- -------
Net deferred tax liability $(1,112) $(1,297)
======= =======
The deferred tax assets are primarily the result of financial accruals not
currently deductible for tax return purposes and the allowance for loan
losses reflected as a current expense for financial reporting purposes and a
future charge-off for tax return purposes. The deferred tax liabilities are
primarily attributed to accelerated deprecation on premises and equipment
for tax return purposes and unrealized gains in the securities available for
sale portfolio.
Effective for taxable years commencing after December 31, 1998, financial
service companies are permitted to establish in the State of Connecticut a
passive investment company (PIC) to hold and manage loans secured by real
property. Income earned by the PIC will be exempt from Connecticut
corporation business tax and dividends received by the financial service
company from the PIC will not be taxable. In 1999, the Bank established a
PIC, as a wholly-owned subsidiary, and transferred a portion of its real
estate mortgage portfolio from the Bank to the PIC. During 1999, the
deferred state tax assets that the valuation allowance was established for
were written off upon the transfer to the PIC and the valuation allowance
was eliminated. Prior to 1999, all state deferred tax assets were reserved
for due to uncertainty of realization.
For the years ended December 31, 1998, 1997 and 1996, the provision for
income taxes differed from the amount computed by applying the statutory
federal income tax rate (35%) to income before income taxes for the
following reasons (in thousands):
December 31,
1998 1997 1996
------- ------- -------
Tax provision at statutory rate $4,734 $5,875 $5,349
Increase (decrease) in tax
resulting from:
State income taxes, net of
federal tax benefit 817 1,037 1,043
Gain on contribution of
securities to Savings Bank of
Manchester Foundation, Inc. (921) - -
Dividends received deduction (409) (409) (341)
Federal and state refunds and
credit carryforwards, net of
valuation allowance provided
of $97,149 in 1996 - - (378)
Reduction in state tax rate - 65 50
Change in valuation allowance (420) (63) 80
Other, net 407 79 50
------ ------ ------
$4,208 $6,584 $5,853
====== ====== ======
F-22
As of December 31, 1998, the Bank's allowance for loan losses for federal
income tax return purposes was approximately $13,000,000. Of this allowance,
if $12,600,000 or any portion thereof is used for purposes other than to
absorb loan losses and write-downs of other real estate owned, such amounts
will become subject to income tax at the then current tax rate. Management
does not anticipate that retained income will be used in such a way so as to
require the payment of taxes on taxable income resulting from the recapture
of the tax allowance. As a result, in accordance with SFAS No. 109, no
provision for such tax has been provided in the accompanying consolidated
financial statements.
10. Merchant Credit Card Operations:
-------------------------------
In 1994, the Bank entered into an agreement with a merchant credit card
processing servicer to provide processing services for the Bank. In July
1996, this processor sold its operations to a third party. In connection
with this sale, the Bank received $1.5 million as compensation for its
acknowledgement and consent related to such sale and its assignment of
rights under its agreement to another bank which amount is reflected as gain
in sale of credit card operations in the 1996 consolidated statement of
operations.
11. Commitments and Contingencies:
-----------------------------
Cash and due from banks withdrawal and usage reserve requirements -
-----------------------------------------------------------------
The Bank is required to maintain reserves against its transaction accounts
and non-personal time deposits. As of August 31, 1999 and December 31, 1998
and 1997, cash and due from banks withdrawal/usage reserve requirements of
approximately $6,612,000, $5,600,000 and $2,347,000, respectively, existed
as a result of Federal Reserve requirements to maintain certain average
balances.
Lease commitments -
-----------------
The Bank leases certain of its premises and equipment under lease agreements
which expire at various dates through June 2010. The Bank has the option to
renew certain of the leases at fair rental values. Rental expense was
approximately $760,000 and $741,000 for the eight months ended August 31,
1999 and 1998, respectively and approximately $1,120,000, $1,136,000 and
$974,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
As of August 31, 1999 and December 31, 1998, minimum rental commitments
under noncancellable operating leases were (in thousands):
August 31, December 31,
Year 1999 1998
---- ---- ----
1999 $ 141 $ 901
2000 775 775
2001 659 659
2002 661 661
2003 563 563
Thereafter 3,883 3,883
------ ------
$6,682 $7,442
====== ======
F-23
Loan commitments and letters of credit -
--------------------------------------
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments included commitments to extend credit of
approximately $179,857,000, $153,725,000 and $130,589,000 as of August 31,
1999 and December 31, 1998 and 1997, respectively, and standby letters of
credit of approximately $4,978,000, $6,556,000 and $6,389,000 as of August
31, 1999 and December 31, 1998 and 1997, respectively.
These consolidated financial instruments involve, to varying degrees,
elements of credit and interest rate risk. The Bank's exposure to credit
loss in the event of non-performance by the other party to the financial
instrument is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments as it does for
existing loans. Management believes that the Bank controls the credit risk
of these financial instruments through credit approvals, lending limits,
monitoring procedures and the receipt of collateral when deemed necessary.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
could expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Bank management evaluates
each customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank, upon extension of
credit is based on management's credit evaluation of the customer.
Collateral held varies but may include income producing commercial
properties, accounts receivable, inventory and property, plant and
equipment.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in existing loan facilities to customers. The Bank holds real
estate and marketable securities as collateral supporting those commitments
for which collateral is deemed necessary.
12. Parent Company Financial Information:
------------------------------------
Connecticut Bankshares, M.H.C. has conducted no activities other than board
of director meetings for the period from inception to August 31, 1999.
Summarized information relative to the statements of condition as of August
31, 1999 and December 31, 1998 and 1997 and statements of operations and
cash flows for the eight months ended August 31, 1999 and 1998, the years
ended December 31, 1998 and 1997 and the period from July 29, 1996
(inception) to December 31, 1996 of Connecticut Bankshares, M.H.C. (parent
company only) are presented as follows (in thousands):
F-24
December 31,
August 31, ------------------
Statements of Condition 1999 1998 1997
--------------- ---- ----
Assets:
Cash $ 50 $ 50 $ 50
Investment in banking subsidiaries 117,584 112,757 101,141
------- -------- --------
Total assets $ 117,634 $112,807 $101,191
======= ======== ========
Liabilities and stockholder's investment:
Stockholder's investment $ 117,634 $112,807 $101,191
------- -------- --------
Total liabilities and
stockholder's investment $ 117,634 $112,807 $101,191
======= ======== ========
For the Eight
Months Ended For the Period
August 31, Ended December 31,
--------------- -------------------------
Statements of Operations 1999 1998 1998 1997 1996
---- ---- ---- ---- ----
Undistributed equity in earnings
of subsidiary $ 6,255 $ 6,855 $ 9,318 $ 10,202 $ 9,431
------- ------- -------- -------- -------
Net income $ 6,255 $ 6,855 $ 9,318 $ 10,202 $ 9,431
======= ======= ======== ======== =======
For the Eight
Months Ended For the Period
August 31, Ended December 31,
------------- -------------------------
Statements of Cash Flows 1999 1998 1998 1997 1996
---- ---- ---- ---- ----
Cash Flows from Operating Activities:
Net income $ 6,255 $ 6,855 $ 9,318 $ 10,202 $ 9,431
Adjustments:
Undistributed equity in earnings of
subsidiary (6,255) (6,855) (9,318) (10,202) (9,431)
------- ------- -------- -------- -------
Net cash provided by operating
activities - - - - -
------- ------- -------- -------- -------
Cash Flows from Investing Activities:
Equity transfer - - - - 50
------- ------- -------- -------- -------
Net cash provided by financing
activities - - - - 50
------- ------- -------- -------- -------
Net increase in cash - - - - 50
Cash, beginning of period 50 50 50 50 -
------- ------- -------- -------- -------
Cash, end of period $ 50 $ 50 $ 50 $ 50 $ 50
======= ======= ======== ======== =======
The Bank has paid no dividends to the parent company for the eight months
ended August 31, 1999 and 1998 and the years ended December 31, 1998, 1997
and 1996.
F-25
13. Disclosures about Fair Values of Financial Instruments:
------------------------------------------------------
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires entities to disclose the estimated fair value of financial
instruments, both assets and liabilities recognized and not recognized in
the consolidated statements of condition, for which it is practicable to
estimate fair value.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value.
Cash and due from banks and accrued interest receivable -
-------------------------------------------------------
The carrying amount is a reasonable estimate of fair value.
Securities -
----------
For marketable equity securities and other securities held for investment
purposes, fair values are based on quoted market prices or dealer quotes if
available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Loans held for sale -
-------------------
The fair value of residential mortgage loans held for sale is estimated
using quoted market prices provided by government agencies.
Loans -
-----
The fair value of the net loan portfolio is estimated by discounting the
loans' future cash flows using the prevailing interest rates as of yearend
at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.
The book and fair values of unrecognized commitments to extend credit and
standby letters of credit were not significant as of August 31, 1999,
December 31, 1998 and 1997.
Deposits -
--------
The fair value of savings, NOW, demand and certain money market deposits is
the amount payable on demand as of yearend. The fair value of certificates
of deposit is estimated by discounting the future cash flows using the rates
offered for deposits of similar remaining maturities as of yearend.
Advances from Federal Home Loan Bank -
------------------------------------
The fair value of the advances is based on the estimated costs to prepay the
debt (prior to maturity) as of yearend.
Values not determined -
---------------------
SFAS No. 107 excludes certain financial, as well as non-financial,
instruments from its disclosure requirements, including premises and
equipment, the intangible value of the Bank's portfolio of loans serviced
(both for itself and for others) and related servicing network, and the
intangible value inherent in the Bank's deposit relationships (i.e., core
deposits), among other assets and liabilities. Accordingly, the aggregate
fair value amounts presented do not represent the underlying value of the
Bank.
F-26
As of August 31, 1999 and December 31, 1998 and 1997, the estimated fair
values and recorded book balances of the Bank's financial instruments were
(in thousands):
December 31,
------------------------------------------------
August 31, 1999 1998 1997
------------------- ---------------- ----------------
Recorded Recorded Recorded
Book Fair Book Fair Book Fair
Balance Value Balance Value Balance Value
------- ----- ------- ----- ------- -----
Assets:
Cash and cash equivalents $ 42,823 $ 42,823 $ 45,048 $ 45,048 $ 14,660 $ 14,660
Securities available for sale 159,464 159,464 168,151 168,151 131,589 131,589
Securities held to maturity 44,865 44,120 52,597 53,054 50,283 50,536
Loans held for sale 35 35 121 122 266 266
Loans, net 899,692 901,312 806,787 822,418 798,292 806,497
Federal Home Loan Bank stock 5,909 5,909 5,909 5,909 5,571 5,571
Accrued interest receivable 6,905 6,905 6,435 6,435 6,724 6,724
December 31,
--------------------------------------------------
August 31, 1999 1998 1997
--------------- ---------------- ----------------
Recorded Recorded Recorded
Book Fair Book Fair Book Fair
Balance Value Balance Value Balance Value
------- ----- ------- ------ ------- ----
Liabilities:
Deposits -
Savings $226,934 $226,934 $220,653 $220,653 $206,568 $206,568
Money market 58,455 58,455 38,387 38,387 32,221 32,221
Certificates of deposit 449,557 449,375 446,139 449,360 475,765 475,806
NOW 106,482 106,482 110,841 110,841 86,193 86,193
Demand 45,894 45,894 39,097 39,097 26,919 26,919
Short-term borrowed funds 97,847 97,847 79,545 79,545 79,166 79,166
Mortgagors' escrow accounts 5,059 5,053 7,627 7,637 7,540 7,548
Advances from Federal Home
Loan Bank 66,899 65,786 45,000 44,504 10,000 10,222
14. Conversion of MHC to Stock Form of Ownership:
--------------------------------------------
On August 30, 1999, the Boards of Directors of the MHC and the Bank adopted
a Plan of Conversion and, on October 6, 1999 and October 26, 1999,
unanimously amended the Plan of Conversion (as amended, the Plan), pursuant
to which the MHC will reorganize from the mutual holding company form to the
stock holding company form. SBM will be held as a wholly-owned subsidiary
of Connecticut Bancshares, Inc., a recently formed Delaware Corporation.
All of the outstanding common stock of the Bank will be sold to a newly
chartered holding company (the Company) which will issue and sell its stock
pursuant to the Plan. All of the stock of the Company to be issued in the
conversion is being offered to eligible account holders, employee benefit
plans of the Bank and certain other eligible subscribers in a subscription
offering pursuant to subscription rights in order of priority as set forth
in the Plan. The Bank plans to establish an Employee Stock Ownership Plan
("ESOP") for the benefit of eligible employees, to become effective upon the
conversion. The ESOP may borrow the proceeds necessary to fund the purchase
of an amount up to 8% of the common stock outstanding upon consummation of
the conversion; however, the ESOP may not purchase in the conversion more
than 5% of the common stock sold. The Bank expects to make annual
contributions adequate to fund the repayment of any indebtedness of the
ESOP.
The Plan provides for the establishment of an additional charitable
foundation (the "New Foundation") in connection with the conversion. The New
Foundation will be funded with a contribution of common shares by the
Company equal to 8% of the total shares of common stock sold in the
conversion. This contribution will result in the recognition of expense,
equal to the fair value of the shares contributed, in the period in which
the contribution is made. The New Foundation will be dedicated to charitable
purposes within the Bank's local community, including community development
activities.
F-27
Effective upon the conversion, the Company intends to enter into employment
agreements with certain executives. The agreements will include, among
other things, provisions for minimum annual compensation and certain lump-
sum severance payments in the event of a "change in control."
Conversion costs will be deferred and deducted from the proceeds of the
shares sold in the conversion. If the conversion is not completed, all
costs incurred will be charged to expense. The Bank had approximately
$85,000 in conversion costs as of August 31, 1999.
The deposit accounts of the Bank's depositors will continue to be insured by
the FDIC and will not be affected by the conversion. The Plan provides for
the establishment, upon the completion of the conversion, of a special
"liquidation account" for the benefit of eligible account holders and
supplemental eligible account holders (if any) in an amount equal to the
equity capital of the Bank less any subordinated debt approved as bona fide
capital of the Bank, as of the date of its latest statement of condition
contained in the final prospectus used in connection with the conversion.
Account holders who continue to maintain deposit accounts at the Bank would
be entitled, on a complete liquidation of the Bank after the conversion, to
an interest in the liquidation account prior to any payment to the
stockholders of the Bank. Upon completion of the conversion, the Bank's
surplus will be substantially restricted with respect to payment of
dividends to stockholders due to the liquidation account. The liquidation
account will terminate on the tenth anniversary of the consummation date of
the conversion.
Subsequent to the offering, the Bank may not declare or pay dividends on,
nor repurchase any of its shares of common stock, if the effect thereof
would cause stockholders' equity to be reduced below applicable regulatory
capital maintenance requirements or if such declaration, payment or
repurchase would otherwise violate regulatory requirements.
F-28
You should rely only on the information contained in this prospectus. Neither
Connecticut Bancshares nor Savings Bank of Manchester has authorized anyone to
provide you with different information. This prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any of the securities offered
by this prospectus to any person or in any jurisdiction in which an offer or
solicitation is not authorized or in which the person making an offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make an offer or solicitation in those jurisdictions. Neither the delivery of
this prospectus nor any sale hereunder shall under any circumstances imply that
there has been no change in the affairs of Connecticut Bancshares or Savings
Bank of Manchester since any of the dates as of which information is furnished
in this prospectus or since the date of this prospectus.
(Proposed Holding Company for The Savings Bank of Manchester)
13,225,000 Shares of Common Stock
--------
Prospectus
--------
SANDLER O'NEILL & PARTNERS, L.P.
January 12, 2000
DEALER PROSPECTUS DELIVERY OBLIGATION
Until February 15, 2000, all dealers that buy, sell or trade these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.