UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number 0-28389
CONNECTICUT BANCSHARES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1564613
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
923 Main Street, Manchester, Connecticut 06040
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(860) 646-1700
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changes since
last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: the Issuer had 11,232,000
shares of common stock, par value $0.01 per share, outstanding as of November 4,
2001.
CONNECTICUT BANCSHARES, INC.
FORM 10-Q
INDEX
Page
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Condition as of
September 30, 2001 and December 31, 2000 (unaudited) ............................................. 1
Condensed Consolidated Statements of Operations for the Three
Months Ended September 30, 2001 and 2000 (unaudited) ............................................. 2
Condensed Consolidated Statements of Operations for the Nine
Months Ended September 30, 2001 and 2000 (unaudited) ............................................. 3
Condensed Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 2001 (unaudited) ......................................... 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2001 and 2000 (unaudited) ........................................ 5
Notes to Condensed Consolidated Financial Statements (unaudited) ................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................................................. 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk ....................................... 30
PART II: OTHER INFORMATION
Item 1. Legal Proceedings ................................................................................ 31
Item 2. Changes in Securities and Use of Proceeds ........................................................ 31
Item 3. Defaults Upon Senior Securities .................................................................. 31
Item 4. Submission of Matters to a Vote of Security Holders .............................................. 31
Item 5. Other Information ................................................................................ 31
Item 6. Exhibits and Reports on Form 8-K ................................................................. 31
SIGNATURES ................................................................................................. 33
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Condition
(Dollars in thousands)
September 30, December 31,
ASSETS 2001 2000
------------- -------------
(unaudited)
Cash and cash equivalents $ 50,704 $ 64,797
Securities available for sale (cost of $811,783 at September 30,
2001 and $287,830 at December 31, 2000) 834,038 308,081
Loans held for sale 318 290
Loans, net 1,366,418 995,764
Federal Home Loan Bank Stock, at cost 30,783 6,654
Premises and equipment, net 18,227 13,197
Accrued interest receivable 13,862 8,747
Other real estate owned 70 125
Cash surrender value of life insurance 40,797 -
Current and deferred income taxes 2,634 -
Goodwill 19,970 -
Other intangible assets 13,642 1,967
Other assets 23,324 3,689
------------ -----------
Total assets $ 2,414,787 $ 1,403,311
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 1,585,470 $ 933,370
Short-term borrowed funds 119,833 106,493
Mortgagors' escrow accounts 6,288 8,896
Advances from Federal Home Loan Bank 436,258 100,000
Current and deferred income taxes - 419
Accrued benefits and other liabilities 35,091 21,594
------------ -----------
Total liabilities 2,182,940 1,170,772
------------ -----------
Commitments and Contingencies
Stockholders' equity:
Common stock ($.01 par value; 45,000,000 authorized
shares; 11,232,000 shares issued and outstanding) 112 112
Additional paid-in capital 108,077 108,257
Retained earnings 124,207 119,691
ESOP unearned compensation (8,220) (8,685)
Restricted stock unearned compensation (6,795) -
Accumulated other comprehensive income 14,466 13,164
------------ -----------
Total stockholders' equity 231,847 232,539
------------ -----------
Total liabilities and stockholders' equity $ 2,414,787 $ 1,403,311
============ ===========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
1
CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations
(Dollars in thousands, except for per share data)
For the Three Months Ended
--------------------------------
September 30, September 30,
2001 2000
-------------- ------------
(unaudited)
Interest and dividend income:
Interest income on loans $ 21,870 $ 19,577
Interest and dividends on investment securities 7,665 4,935
------------ ------------
Total interest and dividend income 29,535 24,512
------------ ------------
Interest expense:
Interest on deposits 9,090 8,439
Interest on short-term borrowed funds 750 958
Interest on Advances from Federal Home Loan Bank 3,375 1,884
------------ ------------
Total interest expense 13,215 11,281
------------ ------------
Net interest income 16,320 13,231
Provision for loan losses 875 375
------------ ------------
Net interest income after provision for loan losses 15,445 12,856
------------ ------------
Noninterest income:
Service charges and fees 2,430 2,037
(Losses) gains on sales of securities, net (230) 794
Other than temporary impairment of securities (Note 6) (3,916) -
Gains on mortgage loan sales, net 76 118
Other 761 468
------------ ------------
Total noninterest (loss) income (879) 3,417
------------ ------------
Noninterest expense:
Salaries 4,444 4,005
Employee benefits 2,217 1,506
Director and employee retirement expenses (Notes 3 and 7) 1,419 -
Fees and services 1,336 1,308
Relocation and branch closing costs (Note 8) 872 -
Occupancy, net 815 752
Furniture and equipment 784 722
Amortization 503 108
Marketing 440 219
Foreclosed real estate expense 44 53
Net (gains) losses on sales of other real estate owned, net (21) 2
Other operating expenses 1,671 1,327
------------ ------------
Total noninterest expense 14,524 10,002
------------ ------------
Income before provision for income taxes 42 6,271
Provision for income taxes - 2,073
------------ ------------
Net income $ 42 $ 4,198
------------ ------------
Earnings per share:
Basic $ 0.00 $ 0.40
Diluted $ 0.00 $ 0.40
Weighted average shares outstanding:
Basic 10,031,410 10,370,880
Diluted 10,647,938 10,370,880
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
2
CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations
(Dollars in thousands, except for per share data)
For the Nine Months Ended
-------------------------------------
September 30, September 30,
2001 2000
---------------- -----------------
(unaudited)
Interest and dividend income:
Interest income on loans $ 61,599 $ 56,311
Interest and dividends on investment securities 18,023 13,668
------------ ------------
Total interest and dividend income 79,622 69,979
------------ ------------
Interest expense:
Interest on deposits 26,039 24,862
Interest on short-term borrowed funds 2,288 2,756
Interest on Advances from Federal Home Loan Bank 6,683 4,843
------------ ------------
Total interest expense 35,010 32,461
------------ ------------
Net interest income 44,612 37,518
Provision for loan losses 1,625 825
------------ ------------
Net interest income after provision for loan losses 42,987 36,693
------------ ------------
Noninterest income:
Service charges and fees 6,903 5,666
Gains (losses) on sales of securities, net 81 (990)
Other than temporary impairment of securities (Note 6) (3,916) -
Gains on mortgage loan sales, net 290 207
Other 1,649 1,475
------------ ------------
Total noninterest income 5,007 6,358
------------ ------------
Noninterest expense:
Salaries 12,464 11,985
Employee benefits 6,456 4,328
Director and employee retirement expenses (Notes 3 and 7) 1,419 -
Fees and services 4,003 3,454
Relocation and branch closing costs (Note 8) 872 -
Occupancy, net 2,397 2,291
Furniture and equipment 2,278 2,209
Amortization 719 324
Marketing 1,320 1,438
Foreclosed real estate expense 111 204
Net gains on sales of other real estate owned, net (27) (40)
Securities contributed to SBM Charitable Foundation, Inc. - 8,316
Other operating expenses 4,226 3,958
------------ ------------
Total noninterest expense 36,238 38,467
------------ ------------
Income before provision for income taxes 11,756 4,584
Provision for income taxes 3,983 1,520
------------ ------------
Net income $ 7,773 $ 3,064
============ ============
Earnings per share (1):
Basic $ 0.77 $ 0.17
Diluted $ 0.73 $ 0.17
Weighted average shares outstanding:
Basic 10,121,549 10,359,648
Diluted 10,705,598 10,359,648
(1) Earnings per share and weighted average shares outstanding shown above for
2000 are calculated for the seven months ended September 30, 2000. The
Company converted to stock form on March 1, 2000, therefore per share
amounts for the first two months of 2000 are not meaningful.
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statement of Changes in Stockholders' Equity
For the Nine Months Ended September 30, 2001 (unaudited)
(Dollars in thousands)
Restricted
ESOP Stock
Additional Unearned Unearned
Common Stock Paid-In Retained Compen- Compen-
Shares Amount Capital Earnings sation sation
----------- ------------ ----------- --------- --------- ----------
BALANCE, December 31, 2000
(unaudited) 11,232,000 $ 112 $ 108,257 $ 119,691 $ (8,685) $ -
Granting of restricted stock awards 460,512 5 8,470 - - (8,199)
Funding of trustee repurchase
of restricted stock (460,512) (5) (9,615) - - -
Change in ESOP unearned
compensation - - 539 - 465 -
Change in restricted stock
unearned compensation - - - - - 1,230
Granting of stock options to former
Chairman of the Board - - 266 - - -
Accelerated vesting of restricted stock - - 40 - - 174
Accelerated vesting of stock options - - 120 - - -
Dividends declared ($0.29 per share) - - - (3,257) - -
Comprehensive income:
Net income - - - 7,773 - -
Change in unrealized gain
on securities available for
sale, net of taxes - - - - - -
------------ ----------- ----------- --------- ---------- -----------
Total comprehensive income - - - 7,773 - -
------------ ----------- ----------- --------- ---------- -----------
BALANCE, September 30, 2001 11,232,000 $ 112 $ 108,077 $ 124,207 $ (8,220) $ (6,795)
============ =========== =========== ========= ========== ===========
(unaudited)
Accumulated
Other
Comprehensive
Income Total
------------- ---------
BALANCE, December 31, 2000
(unaudited) $ 13,164 $ 232,539
Granting of restricted stock awards - 276
Funding of trustee repurchase
of restricted stock - (9,620)
Change in ESOP unearned
compensation - 1,004
Change in restricted stock
unearned compensation - 1,230
Granting of stock options to former
Chairman of the Board - 266
Accelerated vesting of restricted stock - 214
Accelerated vesting of stock options - 120
Dividends declared ($0.29 per share) - (3,257)
Comprehensive income:
Net income - 7,773
Change in unrealized gain
on securities available for
sale, net of taxes 1,302 1,302
----------- ---------
Total comprehensive income 1,302 9,075
----------- ---------
BALANCE, September 30, 2001 $ 14,466 $ 231,847
=========== =========
(unaudited)
4
CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(In thousands)
For the Nine Months Ended
---------------------------------
September 30, September 30,
2001 2000
------------ -------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,773 $ 3,064
Adjustments to reconcile net income to net cash
provided by operating activities:
Securities contributed to SBM Charitable Foundation, Inc. - 8,316
Provision for loan losses 1,625 825
Depreciation 1,887 1,940
Amortization 719 324
(Discount) premium on loans and bonds (250) 191
Net gains on sales of other real estate owned (27) (40)
Net loss on disposal of fixed assets 9 -
(Gains) losses on sales of securities, net (81) 990
Other than temporary impairment of equity investment securities 3,916 -
Gains on mortgage loan sales, net (290) (207)
Deferred income tax benefit (3,370) -
Granting of restricted stock to former Chairman of the Board 276 -
Granting of stock options to former Chairman of the Board 266 -
Accelerated vesting of restricted stock 214 -
Accelerated vesting of stock options 120 -
Employee retirement expenses 508 -
Change in ESOP unearned compensation 1,004 597
Change in restricted stock unearned compensation 1,230 -
Relocation and branch closing costs 872 -
Changes in operating assets and liabilities, net of amounts acquired-
Accrued interest receivable 198 (1,683)
Other assets (3,295) 735
Other liabilities 2,056 (433)
--------- ---------
Net cash provided by operating activities 15,360 14,619
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations and purchases, net of repayments (94,675) (69,031)
Proceeds from sales of loans 4,916 4,848
Proceeds from maturities of available for sale securities 26,606 27,729
Proceeds from sales of available for sale securities 47,295 86,209
Purchases of available for sale securities (57,383) (182,814)
Purchases of Federal Home Loan Bank stock (4,846) (745)
Proceeds from principal payments of mortgage-
backed securities and collateralized mortgage obligations 40,301 7,469
Acquisition of First Federal Savings and Loan Association
of East Hartford, net of cash acquired (4,389) -
Proceeds from sales of other real estate owned 305 620
Purchase of cash surrender value life insurance (20,000) -
Purchases of premises and equipment (3,362) (1,133)
--------- ---------
Net cash used in investing activities (65,232) (126,848)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock - 90,513
Funding of trustee purchases of restricted stock (9,620) -
Dividends paid (2,021) -
Net increase in savings, money market, NOW and
demand deposits 48,319 19,700
Net decrease in certificates of deposit (30,392) (22,103)
Net increase in short-term borrowed funds 13,340 13,275
Decrease in mortgagors' escrow accounts (3,558) (4,173)
Increase in advances from Federal Home Loan Bank 19,711 40,000
--------- ---------
Net cash provided by financing activities 35,779 137,212
--------- ---------
Net (decrease) increase in cash
and cash equivalents (14,093) 24,983
CASH AND CASH EQUIVALENTS, beginning of period 64,797 26,678
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 50,704 $ 51,661
========= =========
SUPPLEMENTAL INFORMATION:
Cash paid for -
Interest and dividends $ 34,902 $ 32,811
Income taxes 7,350 2,250
Non-cash transactions -
Transfers from loans to other real estate owned 220 79
Dividends declared not paid 1,236 -
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
5
CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statements Presentation
The accompanying condensed consolidated financial statements were
prepared in accordance with instructions to Form 10-Q and, therefore, do
not include information or notes necessary for a complete presentation of
financial position, results of operations and cash flows in conformity
with accounting principles generally accepted in the United States.
However, all normal recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the financial
statements have been included. These condensed consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and the notes thereto for Connecticut Bancshares,
Inc. ("CTBS") and subsidiary included in Connecticut Bancshares, Inc.'s
Form 10-K for the year ended December 31, 2000. The results for the nine
months ended September 30, 2001 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2001.
Principles of consolidation and presentation
The accompanying condensed consolidated financial statements include the
accounts of CTBS and its wholly-owned subsidiary, The Savings Bank of
Manchester ("SBM" or the "Bank"), and its wholly-owned subsidiaries
(collectively, the "Company"). All material intercompany balances and
transactions have been eliminated in consolidation.
Business
CTBS, a Delaware corporation, was organized in October 1999 for the
purpose of becoming the holding company for the Bank, upon the conversion
of the Bank's former parent mutual holding company, Connecticut
Bankshares, M.H.C. ("MHC") from a mutual to stock form of organization
(the "Conversion"). The Conversion was completed on March 1, 2000. CTBS
used 50% of the net proceeds from the Conversion to buy all of the common
stock of SBM and retained the remaining 50%, which primarily were
invested in fixed income securities. The Bank, with its main office
located in Manchester, Connecticut, operates through twenty-eight
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.
On August 31, 2001, the Company acquired First Federal Savings and Loan
Association of East Hartford ("First Federal") (see Note 9). The Bank
acquired all of the outstanding common stock of First Federal for cash of
$106.75 million. Immediately after the completion of the acquisition,
First Federal was merged into the Bank.
On September 24, 2001, CTBS declared a quarterly cash dividend of $0.11
per share on outstanding shares of its common stock. This represents an
increase of 22% in the Company's quarterly dividend. The dividend was
paid on October 23, 2001 to stockholders of record as of the close of
business on October 9, 2001.
6
Earnings per share
Basic earnings per share represents income available to stockholders divided by
the weighted-average number of common shares outstanding during the period.
Diluted earnings per share reflects additional common shares that would have
been outstanding if dilutive potential shares had been issued or earned.
Earnings per share data are presented for the three months ended September 30,
2001 and 2000, the nine months ended September 30, 2001 and the seven months
ended September 30, 2000. The Company converted to stock form on March 1, 2000;
therefore, per share information for the first two months of 2000 are not
meaningful.
The following table sets forth the calculation of basic and diluted earnings per
share for the periods indicated (dollars in thousands, except per share
amounts):
For the Three Months Ended
September 30, 2001 September 30, 2000
------------------ ------------------
(unaudited)
Net income $ 42 $ 4,198
================== ==================
Weighted average shares outstanding:
Weighted average shares outstanding 11,232,000 11,232,000
Less: unearned ESOP shares (803,604) (861,120)
Less: unearned restricted stock (396,986) -
------------------ ------------------
Basic 10,031,410 10,370,880
------------------ ------------------
Dilutive impact of:
Stock options 216,856 -
Restricted stock 399,672 -
------------------ ------------------
Diluted 10,647,938 10,370,880
------------------ ------------------
Earnings per share:
Basic $ 0.00 $ 0.40
Diluted $ 0.00 $ 0.40
7
For the Nine For the Seven
Months Ended Months Ended
September 30, 2001 September 30, 2000
------------------ ------------------
(unaudited)
Net income $ 7,773 $ 1,799
================== ==================
Weighted average shares outstanding:
Weighted average shares outstanding 11,232,000 11,232,000
Less: unearned ESOP shares (818,432) (872,352)
Less: unearned restricted stock (292,019) -
------------------ ------------------
Basic 10,121,549 10,359,648
------------------ ------------------
Dilutive impact of:
Stock options 165,750 -
Restricted stock 418,299 -
------------------ ------------------
Diluted 10,705,598 10,359,648
================== ==================
Earnings per share:
Basic $ 0.77 $ 0.17
Diluted $ 0.73 $ 0.17
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period presentation.
(2) RECENT ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities - a Replacement of FASB
Statement No. 125." SFAS No. 140 replaces SFAS No. 125. Certain
disclosure provisions required by SFAS No. 140 were effective
immediately. Additional requirements related to SFAS No. 140 became
effective beginning March 31, 2001. These additional requirements had no
effect on the Company's consolidated financial position or results of
operations.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS
No. 141 requires all business combinations initiated after June 30, 2001
to be accounted for using the purchase method. The acquisition of First
Federal was accounted for under the purchase method of accounting.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangibles." With the adoption of SFAS No. 142, goodwill will no longer
be subject to amortization over its estimated useful life, but will be
subject to annual assessment for impairment by applying a
fair-value-based test. Recognized
8
intangible assets, such as core deposit intangibles, will be amortized
over their useful lives. The Company has recorded goodwill of $19.97
million as of September 30, 2001. Under the new standard, this goodwill
which is entirely associated with the First Federal acquisition will not
be amortized but will be subject to an annual fair value based impairment
test. The Company will continue to amortize other intangible assets of
$13.64 million as of September 30, 2001 relating to core deposit
intangibles and noncompete agreements over their estimated useful lives
on a straight line basis.
In July 2001, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 102 ("SAB No. 102"), "Selected Loan Loss
Methodology and Documentation Issues." SAB No. 102 provides detailed
guidance on the development, documentation and application of a
systematic methodology in determining an allowance for loan losses. The
additional documentation requirements did not have any effect on the
Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 modifies the
rules for accounting for the impairment or disposal of long-lived assets.
The new rules become effective for fiscal years beginning after December
15, 2001, with earlier application encouraged. These new rules will have
no effect on the Company's consolidated financial statements.
In September 2001, The Emerging Issues Task Force ("EITF") issued EITF
No. 01-10, "Accounting for the Impact of the September 11, 2001 Terrorist
Acts," which provides guidance on how the costs related to the terrorist
acts should be classified, how to determine whether an asset impairment
should be recognized and how liabilities for losses and other costs
should be recognized. EITF No. 01-01 did not have any effect on the
Company's consolidated financial statements.
(3) COMMON STOCK
On January 2, 2001 the Company awarded 449,280 restricted shares of
common stock to various employees and non-employee directors of the
Company in accordance with the Connecticut Bancshares, Inc. 2000
Stock-Based Incentive Plan (the "Stock Plan"). These awards represent
100% of the restricted shares available in the Stock Plan. The shares
were awarded with a vesting schedule of five years, with 20% of the
shares vesting each year to the recipient. The first 20% installment
vests on January 2, 2002. The closing market price of the Company's
common stock on the date of the awards was $18.25. The Company is
amortizing the unearned restricted stock compensation on a straight-line
basis over the vesting period.
In conjunction with the restricted stock awards, the Company established
a trust and hired an independent trustee (the "Trustee") to administer
and maintain records of the restricted stock awards. From March 8, 2001
to March 30, 2001 the Trustee purchased in the open market 449,280 shares
of common stock of the Company for the benefit of the restricted stock
award recipients. These shares were purchased during the first quarter of
2001 at prices ranging from $20.13 to $21.13 per share, resulting in an
average cost of $20.84 per share.
On August 27, 2001 the Company awarded 11,232 restricted shares of common
stock outside of the Stock Plan to the former Chairman of the Board of
Directors of the Company. The shares were awarded with a vesting schedule
of five years, with 20% of the shares vesting each year. The first 20%
installment vests on January 2, 2002. The shares are not subject to any
performance requirements and the former Chairman does not provide any
services to the Company. The closing market price of the Company's common
stock on the date of the grant was $24.45. The Company recorded a charge
of $274,622 in the quarter ended September 30, 2001 as a director
retirement expense.
In conjunction with the August 27, 2001 restricted stock award, the
Company established a trust and
9
hired the Trustee to administer and maintain records of the restricted
stock award. On September 18, 2001, the Trustee purchased in the open
market 11,232 shares of common stock of the Company for the benefit of
the restricted stock award recipient. These shares were purchased at a
price of $22.74 per share.
On September 24, 2001 the Company granted 28,080 non-qualified stock
options outside of the Stock Plan to the former Chairman of the Board of
Directors of the Company. The shares were awarded with a vesting schedule
of five years, with 20% of the shares vesting each year. The first 20%
installment vests on December 15, 2001. The options are not subject to
any performance requirements and the former Chairman does not provide any
services to the Company. The closing market price of the Company's common
stock on the date of the awards was $21.80. The exercise price of the
stock options granted is $17.625 per share. The Black-Scholes model
results in a fair value of $9.48 per option. The Company recorded a
charge of $266,283 in the quarter ended September 30, 2001 as a director
retirement expense.
On September 24, 2001 the Company accelerated the vesting of 11,232
shares of restricted stock awarded on January 2, 2001 and 28,080
non-qualified stock options awarded on December 15, 2000 to an existing
director who is retiring from the Bank's Board on December 31, 2001. The
closing market price of the Company's common stock on the date of the
acceleration was $21.80. The exercise price for the stock options are
$17.625 per share. As a result of the modification, the Company recorded
charges of $214,110 for the restricted stock and $117,234 for the stock
options in the quarter ended September 30, 2001 as director retirement
expenses.
On September 14, 2001 CTBS announced that its Board of Directors has
authorized the repurchase of up to 561,600 shares, or approximately 5% of
its outstanding shares of common stock. It is intended that such shares
will be repurchased in open market transactions, including unsolicited
block purchases, over the next six to twelve months, subject to market
conditions. CTBS had not repurchased any shares under this plan as of
November 4, 2001.
(4) LOANS
Loans are summarized as follows:
September 30, December 31,
2001 2000
------------- ------------
(in thousands)
One-to four-family mortgages $ 835,369 $ 586,536
Construction mortgages 57,008 32,590
Commercial and multi-family mortgages 211,575 162,411
Commercial business loans 152,959 146,360
Installment loans 124,826 79,561
------------- ------------
Total loans 1,381,737 1,007,458
Less: Allowance for loan losses (15,319) (11,694)
------------- ------------
Total loans, net $ 1,366,418 $ 995,764
============= ============
10
A summary of the allowance for loan losses is as follows:
For the Nine For the
Months Ended Year Ended
September 30, December 31,
2001 2000
----------- -----------
(in thousands)
Balance, beginning of period $ 11,694 $ 10,617
Acquisition of First Federal Savings and Loan
Association of East Hartford 2,174 -
Provision for loan losses 1,625 1,200
Loans charged off (624) (433)
Recoveries 450 310
----------- -----------
Balance, end of period $ 15,319 $ 11,694
=========== ===========
Nonperforming loans were approximately $6.06 million and $6.92 million at
September 30, 2001 and December 31, 2000, respectively. Nonperforming
assets were approximately $6.13 million and $7.05 million at September 30,
2001 and December 31, 2000, respectively. The Bank had no troubled debt
restructurings at either September 30, 2001 or December 31, 2000.
Nonperforming loans as a percentage of gross loans was 0.44% and 0.69% at
September 30, 2001 and December 31, 2000, respectively. Nonperforming
assets as a percentage of total assets was 0.25% and 0.50% at September 30,
2001 and December 31, 2000, respectively.
The allowance for loan losses as a percentage of total loans was 1.11% and
1.16% at September 30, 2001 and December 31, 2000, respectively. The
allowance for loan losses as a percentage of nonperforming loans was
252.91% and 168.96% at September 30, 2001 and December 31, 2000,
respectively.
(5) DEPOSITS
Deposits were as follows:
11
September 30, December 31,
2001 2000
----------- -----------
(in thousands)
Certificates of Deposit:
Original maturity of less than one year $ 164,405 $ 94,481
Original maturity of one year or more 500,814 287,596
Time certificates in denominations of $100,000 or more (1) 97,637 57,762
----------- -----------
Total certificates of deposit 762,856 439,839
----------- -----------
Savings accounts 345,471 219,498
Money market accounts 171,271 73,202
Now accounts 207,674 131,536
Demand deposits 98,198 69,295
----------- -----------
Total deposits $ 1,585,470 $ 933,370
=========== ===========
(1) Deposit balances in excess of $100,000 are not federally insured.
(6) OTHER THAN TEMPORARY IMPAIRMENT OF SECURITIES
On a quarterly basis, the Bank reviews available-for-sale investment
securities with unrealized depreciation for six consecutive months to
assess whether the decline in fair value is temporary or other than
temporary. The Bank judges whether the decline in value is from
company-specific events, industry developments, general economic conditions
or other reasons. Once the estimated reasons for the decline are
identified, further judgments are required as to whether those causal
events are likely to reverse and, if so, whether that reversal is likely to
result in a recovery of the fair value of the investment in the near term.
In accordance with this policy, during the three months ended September 30,
2001 the Bank recorded other than temporary impairment of 18 equity
securities totaling $3.92 million.
(7) DIRECTOR AND EMPLOYEE RETIREMENT EXPENSES
During the third quarter of 2001, the Company recorded $1.42 million of
director and employee retirement expenses which represents $872,000 of
director and $547,000 of employee retirement expenses. See Note 3 for
further information concerning director retirement expenses. In September
2001 the Bank offered an early retirement package to eligible employees.
Ten Bank employees opted for the package. The employee retirement expenses
include a pension charge of $264,000 and vacation time of $283,000.
(8) RELOCATION AND BRANCH CLOSING COSTS
During the third quarter of 2001, the Bank recorded $872,000 of relocation
and branch closing costs. In conjunction with the acquisition of First
Federal, the Bank closed five of its existing branch offices which were
located near First Federal branch locations. The Bank expensed $431,000 in
future lease payments, $172,000 in furniture and equipment and $164,000 in
leasehold improvements relating to these branch location closings. In
addition, the Bank is relocating certain back office operational
departments from a building that is currently leased to a building that the
Bank owns. The
12
Bank expensed $105,000 in the third quarter of 2001 relating to leasehold
improvements which will no longer be used.
(9) ACQUISITION OF FIRST FEDERAL
On August 31, 2001, the Bank acquired all of the outstanding common stock
of First Federal for cash of $106.75 million, excluding transaction costs.
As of September 30, 2001 $10.53 million had yet to be paid to First Federal
shareholders and is included in other liabilities. The Bank expects the
remaining amount to be paid during the fourth quarter of 2001. The purchase
was funded primarily with proceeds from Advances from Federal Home Loan
Bank prior to the acquisition. Immediately after the completion of the
acquisition, First Federal was merged into the Bank.
The acquisition was accounted for as a purchase and the purchase price was
allocated based on the estimated fair market values of the assets and
liabilities acquired. The preliminary allocation of the purchase price is
as follows (in thousands):
Cash and cash equivalents $ 91,826
Investment securities 612,493
Loans 282,481
FHLB stock 19,283
Cash surrender value life insurance 20,364
Goodwill 19,970
Core deposit intangible 8,846
Noncompete agreement intangible 3,548
Other assets 8,413
Deposits (635,123)
FHLB Advances (316,547)
Other liabilities (8,808)
-----------
Total purchase price $ 106,746
===========
In connection with the acquisition, the Company recorded goodwill of $19.97
million, a core deposit intangible asset of $8.85 million, and a noncompete
intangible asset of $3.55 million. The core deposit intangible is being
amortized over eight years on a straight line basis and the noncompete
intangible is being amortized over the term of the agreement of twelve
months on a straight line basis. In accordance with SFAS No. 142, "Goodwill
and Other Intangibles", goodwill will not be amortized but will be subject
to an annual fair value based impairment test.
The results of First Federal are included in the historical results of the
Company subsequent to August 31, 2001. The pro forma information below is
theoretical in nature and not necessarily indicative of future consolidated
results of operations of the Company or the consolidated results of
operations which would have resulted had the Company acquired the stock of
First Federal during the periods presented.
The Company's unaudited pro forma condensed consolidated statements of
operations for the nine months ended September 30, 2001 and 2000, assuming
First Federal had been acquired as of January 1, 2001 and 2000,
respectively are as follows (in thousands, except per share amounts):
13
For the Nine For the Nine
Months Ended Months Ended
September 30, 2001 September 30, 2000
------------------ ------------------
Interest income $ 125,239 $ 122,947
Interest expense 71,380 68,757
------------------ ------------------
Net interest income 53,859 54,190
Provision for loan losses 1,625 1,035
Noninterest income 10,454 8,763
Noninterest expense 50,104 53,708
------------------ ------------------
Income before provision for income taxes 12,584 8,210
Provision for income taxes 4,407 2,037
------------------ ------------------
Net income $ 8,177 $ 6,173
================== ==================
Earnings per share-diluted $ 0.76 $ 0.60
================== ==================
Weighted average shares outstanding-
diluted 10,705,598 10,359,648
================== ==================
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations.
-------------
The following analysis discusses changes in the financial condition and results
of operations for the three and nine months ended September 30, 2001 and 2000,
and should be read in conjunction with Connecticut Bancshares, Inc. and
subsidiary's condensed consolidated financial statements and the notes thereto,
appearing elsewhere herein.
Forward Looking Statements
This Form 10-Q contains forward-looking statements that are based on assumptions
and describe future plans, strategies and expectations of the Company. These
forward looking statements are generally identified by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project," or similar
expressions. The Company's 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 the Company 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 or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Bank's market area and accounting principles and guidelines. These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements. Subject to applicable
laws and regulations, the Company does not undertake - and specifically
disclaims 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. Further information concerning the Company and its
business, including additional factors that could materially affect the
Company's financial results, is included in the Company's Form 10-K filing for
the year ended December 31, 2000.
14
Acquisition of First Federal
On August 31, 2001, the Company completed its acquisition of First Federal in a
transaction accounted for under the purchase method of accounting. Accordingly,
the assets and liabilities of First Federal are reflected in the Company's
consolidated balance sheet at September 30, 2001, and the results of operations
of First Federal for the one month ended September 30, 2001 are included in the
consolidated statements of operations for the three and nine months ended
September 30, 2001, as required by the purchase method of accounting. The
results of operations of First Federal for the three and nine months ended
September 30, 2000 are not included in the consolidated statements of income for
that period. The impact of this acquisition on the consolidated statements of
income for the three and nine months ended September 30, 2001 is included in the
accompanying discussion of the comparison of operating results for the three and
nine months ended September 30, 2001 and 2000.
General
The Company's results of operations depend primarily on net interest income,
which represents the difference between interest income earned on
interest-earning assets, such as loans and securities, and interest expense on
interest-bearing liabilities, such as deposits and borrowings. The Bank
generates noninterest 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. The Bank's noninterest expenses primarily
consist of employee compensation and benefits, occupancy expense, marketing and
other operating expenses. The Company's results of operations are also affected
by general economic and competitive conditions, notably changes in market
interest rates, government policies and regulations. The Bank exceeded all of
its regulatory capital requirements at September 30, 2001.
Comparison of Financial Condition at September 30, 2001 and December 31, 2000
- -----------------------------------------------------------------------------
Total assets increased $1.01 billion, or 72.14%, to $2.41 billion at September
30, 2001 as compared to $1.40 billion at December 31, 2000. The increase was
primarily due to the acquisition of First Federal which added $960.48 million in
assets. The major increases were due to a $525.96 million increase in
securities, a $370.66 million increase in net loans, a $40.80 million increase
in the cash surrender value of life insurance, and a $31.64 million increase in
intangible assets, including goodwill. Securities acquired from First Federal
totaled $612.49 million which was partially offset by sales, maturities and
principal payments. The increase in loans was primarily due to real estate
loans, as one-to four-family mortgages increased $248.83 million ($204.81
million from First Federal) and commercial and multi-family mortgages increased
$49.17 million ($28.96 million from First Federal). Installment loans increased
$45.27 million as $42.60 million were acquired from First Federal. During June
2001, the Bank purchased $20.00 million in life insurance and the Bank acquired
$20.36 million in life insurance from First Federal. In conjunction with the
acquisition of First Federal, the Bank recorded intangible assets of $32.37
million, consisting of $19.97 million of goodwill, $8.85 million of core deposit
intangibles and $3.55 million of non-compete agreements with former First
Federal executives. The growth in assets was funded by an increase in deposits
of $652.10 million ($634.17 million from First Federal) and Advances from
Federal Home Loan Bank ("FHLB") of $336.26 million ($316.55 million from First
Federal). Stockholders' equity decreased $692,000, primarily due to unearned
compensation associated with the January 2, 2001 restricted stock awards under
the Company's 2000 Stock-Based Incentive Plan, partially offset by increases in
retained earnings.
The following table presents the amortized cost and fair value of the Bank's
investment securities, by type, at the dates indicated:
15
At September 30, 2001 At December 31, 2000
----------------------- ----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ---------- ----------- ----------
(in thousands)
Debt securities available for sale:
Asset-backed securities $ 24,317 $ 25,829 $ 32,717 $ 33,816
U.S. Government and agency
obligations 133,932 139,903 82,068 85,254
Municipal obligations 23,865 23,689 2,915 2,949
Debt mutual funds 13,722 13,735 - -
Corporate securities 54,017 56,587 55,398 56,263
------------ ---------- ----------- ----------
Total 249,853 259,743 173,098 178,282
------------ ---------- ----------- ----------
Equity securities available for sale:
Marketable equity securities 28,871 36,899 35,221 49,144
Other equity securities 965 965 432 432
------------ ---------- ----------- ----------
Total 29,836 37,864 35,653 49,576
------------ ---------- ----------- ----------
Total debt and equity securities 279,689 297,607 208,751 227,858
Collateralized mortgage obligations 362,229 363,212 - -
Mortgage-backed securities 169,865 173,219 79,079 80,223
------------ ---------- ----------- ----------
Total investment securities $ 811,783 $ 834,038 $ 287,830 $ 308,081
============ ========== =========== ==========
Investment securities increased $525.96 million, or 170.72%, from a fair value
of $308.08 million at December 31, 2000 to a fair value of $834.04 million at
September 30, 2001. The Company acquired $612.49 million in investment
securities from First Federal. The Company also had proceeds from sales of
$47.30 million (including net gains of $81,000), maturities of $26.61 million
and principal payments of $40.30 million of securities during the nine months
ended September 30, 2001. The Company also experienced an increase in unrealized
gains on securities of $2.00 million and recorded other than temporary
impairment of equity securities of $3.92 million during the nine months ended
September 30, 2001. Offsetting these reductions were investment purchases of
$57.38 million during the nine months ended September 30, 2001.
Net loans increased $370.66 million, or 37.22%, from $995.76 million at December
31, 2000 to $1.37 billion at September 30, 2001. Residential mortgages
(including residential construction mortgages) increased $260.38 million, or
43.96%, from $592.35 million to $852.73 million due to the acquisition of First
Federal ($208.62 million) and increased loan demand mainly due to an increase in
refinancing activity due to lower interest rates. Commercial real estate,
commercial construction and business loans increased $68.63 million, or 20.45%,
from $335.55 million at December 31, 2000, to $404.18 million at September 30,
2001, primarily due to the First Federal acquisition ($33.44 million) and an
increase in commercial mortgage originations. As of September 30, 2001,
commercial loans represented 29.25% of the Bank's loan portfolio. Installment
loans increased $45.27 million, or 56.90%, from $79.56 million at December 31,
2000 to $124.83 million at September 30, 2001. The increase in installment loans
was primarily due to the First Federal acquisition, and consisted mainly of home
equity and indirect auto loans.
Deposits totaled $1.59 billion at September 30, 2001, an increase of $652.10
million, or 69.87%, compared
16
to $933.37 million at December 31, 2000. The deposit increase reflects the
acquisition of First Federal ($634.17 million) with increases in certificates of
deposit of $323.02 million, savings and money market accounts of $224.04 million
and checking accounts of $105.04 million. The net increase in deposits excluding
the acquisition may be partially due to customers looking for financial
stability while the stock markets remain volatile. In addition, the Bank offers
a short-term transactional repurchase agreement (repo) account to commercial
businesses and retail customers. These repo accounts are shown as short-term
borrowed funds in the accompanying condensed consolidated statements of
condition. Short-term borrowed funds increased $13.34 million, or 12.53%, from
$106.49 million to $119.83 million during the first nine months of 2001. With
interest rates low, commercial customers have few attractive alternatives to
invest their funds. Advances from the Federal Home Loan Bank increased $336.26
million, or 336.26%, from $100.00 million to $436.26 million as the Company
acquired $316.55 million in advances as a result of the First Federal
acquisition.
Nonperforming assets totaled $6.13 million at September 30, 2001, compared to
$7.05 million at December 31, 2000, a decrease of $919,000, or 13.04%. The
majority of the decrease in nonperforming assets was in commercial business
loans, due to the full payment of a nonperforming loan of $2.09 million. This
decrease was partially offset by increases in nonperforming residential,
installment and other commercial business loans. Other real estate owned
declined $55,000, or 44.00%, from $125,000 to $70,000 during the first nine
months of 2001 due to the sale of three residential properties, partially offset
by the foreclosure on two residential properties. Total nonperforming loans as a
percentage of gross loans was 0.44% at September 30, 2001 down from 0.69% at
December 31, 2000. Total nonperforming assets as a percentage of total assets
was 0.25% at September 30, 2001 down from 0.50% at December 31, 2000.
The allowance for loan losses was $15.32 million at September 30, 2001, an
increase of $3.63 million from the $11.69 million recorded at December 31, 2000.
The allowance for loan losses as a percentage of gross loans was 1.11% at
September 30, 2001 as compared to 1.16% at December 31, 2000. The allowance for
loan losses as a percentage of nonperforming loans was 252.91% at September 30,
2001 up from 168.96% at December 31, 2000. The Bank devotes significant
attention to maintaining high loan quality through its underwriting standards,
active servicing of loans and aggressive management of nonperforming assets. The
allowance for loan losses is maintained at a level estimated by management to
provide adequately for possible loan losses which are inherent in the loan
portfolio. Possible loan losses are estimated based on a quarterly review of the
loan portfolio, loss experience, specific problem loans, economic conditions and
other pertinent factors. In assessing risks inherent in the portfolio,
management considers the risk of loss on nonperforming and classified loans
including an analysis of collateral in each situation. The Banks methodology for
assessing the appropriateness of the allowance includes several key elements.
Problem loans are identified and analyzed individually to detect specific
losses. The loan portfolio is also segmented into pools of loans that are
similar in type and risk characteristics (i.e. commercial, consumer and mortgage
loans). Loss factors are applied using the Banks historic experience and may be
adjusted for significant factors that in management's judgement affect the
collectability of the portfolio as of the evaluation date. Additionally, the
portfolio is segmented into pools based on internal risk ratings with loss
factors applied to each rating category. Other factors considered in determining
possible loan losses are:
- - the impact of larger concentrations in the portfolio,
- - trends in loan growth,
- - the relationship and trends in recent years of recoveries as a percentage of
prior chargeoffs, and
- - peer bank loss experience.
While management believes that, based on information currently available, the
allowance for loan losses is sufficient to cover probable losses inherent in its
loan portfolio at this time, no assurances can be given that the Bank's level of
allowance for loan losses will be sufficient to cover loan losses incurred by
the Bank 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.
17
The following table sets forth information regarding nonperforming loans and
other real estate owned:
September 30, December 31,
2001 2000
------------- ------------
Nonperforming loans: (in thousands)
Real estate:
One-to four-family $ 883 $ 485
Commercial and multi-family 3,577 3,685
------- -------
Total real estate loans 4,460 4,170
Commercial 1,158 2,528
Consumer 439 223
------- -------
Total nonperforming loans 6,057 6,921
Other real estate owned 70 125
------- -------
Total nonperforming assets $ 6,127 $ 7,046
======= =======
Total nonperforming loans as a
percentage of gross loans 0.44% 0.69%
======= =======
Total nonperforming assets as a
percentage of total assets 0.25% 0.50%
======= =======
Federal Home Loan Bank Stock increased $24.13 million from $6.65 million at
December 31, 2001 to $30.78 million at September 30, 2001. The increase in stock
was primarily due to the acquisition of First Federal. The Bank believes this
stock provides above average dividend yields for the risk characteristics of
such investments.
Cash surrender value life insurance increased $40.80 million or 100.00% from $0
at December 31, 2000 to $40.80 million at September 30, 2001. The Bank acquired
$20.36 million from First Federal during the third quarter of 2001.
Additionally, on June 15, 2001 the Bank purchased $20.00 million of life
insurance with cash surrender value of $20.00 million. The life insurance was
purchased on key Bank officers. The income earned on these policies will be used
to offset the projected cost of the Bank's current and post-retirement benefit
plans for all employees.
Goodwill increased $19.97 million from $0 at December 31, 2000 to $19.97 million
at September 30, 2001. The increase is due solely to the acquisition of First
Federal, and is not subject to amortization. Other intangible assets increased
$11.67 million from $1.97 million at December 31, 2000 to $13.64 million at
September 30, 2001. The increase is due to the acquisition of First Federal and
consists of a core deposit intangible totaling $8.75 million and a noncompete
intangible asset totaling $3.25 million at September 30, 2001. These increases
were partially offset by the amortization of an existing branch premium of
$325,000 for the nine months ended September 30, 2001. The First Federal core
deposit intangible is being amortized
18
over eight years on a straight line basis and the noncompete intangible is being
amortized over the term of the noncompete agreement of twelve months on a
straight line basis.
Other assets increased $19.63 million from $3.69 million at December 31, 2000 to
$23.32 million at September 30, 2001. The increase was primarily due to $18.06
million in unsettled security sales at September 30, 2001. The applicable gains
and losses relating to these unsettled sales were recognized during the third
quarter of 2001.
Other liabilities increased $13.50 million from $21.59 million at December 31,
2000 to $35.09 million at September 30, 2001. The increase included $10.53
million of funds due to First Federal shareholders. These funds are expected to
be paid out during the fourth quarter of 2001 by the Bank's transfer agent.
Other increases in other liabilities included severance, executive and other
employee benefits resulting from the acquisition of First Federal that have not
yet been paid.
Total stockholders' equity decreased $692,000, or 0.30%, to $231.85 million at
September 30, 2001 compared to $232.54 million on December 31, 2000. The
decrease is due primarily to the open market purchases of 449,280 shares of the
Company's Common Stock to acquire shares for the Company's Restricted Stock
Plan. The Company funded the plan trustee's purchase of the shares at market
prices during the first quarter of 2001 for a total of $9.36 million.
Accumulated other comprehensive income increased $1.30 million due to increases
in the unrealized gains in the Company's investment portfolio. In addition, the
Company declared three quarterly cash dividends totaling $0.29 per share during
the first nine months of 2001. These net reductions in stockholders' equity were
partially offset by net income of $7.73 million for the nine months ended
September 30, 2001.
Comparison of Operating Results for the Three Months Ended September 30, 2001
- -----------------------------------------------------------------------------
and 2000
- --------
Net Income. Net income for the quarter ended September 30, 2001 was $42,000
compared to net income of $4.20 million for the third quarter of 2000. During
the third quarter of 2001, the Company recorded charges totaling $6.21 million
($4.03 million, net of tax) that are nonrecurring in nature. These charges
included $3.92 million of other than temporary impairment of equity investment
securities, $1.42 million of director and employee retirement expenses, and
$872,000 of relocation and branch closing costs resulting from the acquisition
of First Federal. The operating results for the quarter ended September 30, 2001
include a $3.09 million, or 23.36%, increase in net interest income, primarily
due to higher net average interest-earning assets and a lower cost of funds,
partially offset by lower asset yields. Net income was also impacted by higher
service charge and fee income of $393,000, an increase in income from the cash
surrender value life insurance of $384,000, higher employee benefit expenses of
$711,000 and higher marketing costs of $221,000.
Net Interest Income. Net interest income increased $3.09 million, or 23.36%, to
$16.32 million for the third quarter of 2001 compared to $13.23 million for the
third quarter of 2000. The increase was primarily a result of higher interest
income from an increase in average interest-earning assets. Total interest and
dividend income increased $5.03 million, or 20.52%, to $29.54 million for the
third quarter of 2001 from $24.51 million for the third quarter of 2000.
Interest income on loans increased $2.29 million, or 11.70%, to $21.87 million
for the three months ended September 30, 2001 compared to $19.58 million for the
three months ended September 30, 2000. The increase was primarily due to loans
acquired from First Federal resulting in a $166.06 million increase in the
average balance of loans outstanding, the effect of which was partially offset
by a 32 basis point decrease in the average yield on such loans. Interest and
dividend income from investment securities, short-term investments and Federal
Home Loan Bank stock increased $2.73 million, or 55.26%, to $7.67 million for
the three months ended September 30, 2001 compared to $4.94 million for the
three months ended September 30, 2000 primarily due to investments acquired from
First Federal. The increase in interest and dividend income from investment
securities, short-term investments and Federal Home Loan Bank stock was due to
an increase in the average balance of $239.45 million, or 73.41%, to $565.65
million for the quarter ended September 30, 2001 as compared to $326.20 million
for the quarter ended September
19
30, 2000. Partially offsetting this increase, the yields on investment
securities, short-term investments and Federal Home Loan Bank stock decreased 63
basis points to 5.41% for the quarter ended September 30, 2001 as compared to
6.04% for the quarter ended September 30, 2000.
Interest expense increased $1.94 million, or 17.20%, to $13.22 million for the
three months ended September 30, 2001 compared to $11.28 million for the quarter
ended September 30, 2000. The increase was primarily due to deposits and FHLB
Advances acquired from First Federal. The increase was due to an increase in
average deposit balances of $235.88 million and an increase in average
outstanding Advances from Federal Home Loan Bank of $152.35 million. This
increase was partially offset by a decrease in the overall cost of funds for
interest-bearing liabilities of 57 basis points. The cost of funds for the third
quarter of 2001 was 3.59% as compared to 4.16% for the third quarter of 2000.
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. The yields and rates include fees which are considered
adjustments to yields.
20
For the Three Months Ended September 30,
-----------------------------------------------------------------------------------
2001 2000
--------------------------------------- -----------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------- ------------ --------- ------------ ------------ ----------
Interest-earning assets:
Loans (1):
Real estate $ 923,229 $ 16,748 7.26% $ 783,416 $ 14,698 7.50%
Consumer 96,589 1,868 7.74 77,312 1,603 8.29
Commercial 150,483 3,254 8.58 143,513 3,276 9.06
----------- -------- ----------- --------
Total loans 1,170,301 21,870 7.47 1,004,241 19,577 7.79
----------- -------- ----------- --------
Mortgage-backed securities (2) 109,503 1,737 6.35 69,682 1,449 8.32
Collateralized mortgage obligations (2) 120,941 1,754 5.80 - - 0.00
Investment securities (2):
U.S. Government and
agency obligations 98,301 1,363 5.50 87,940 1,331 6.00
Municipal obligations 9,590 129 5.38 2,921 43 5.89
Corporate securities 52,547 912 6.94 59,329 998 6.73
Common stock and mutual funds 49,195 340 2.76 50,586 252 1.99
Other investment securities 868 1 0.46 432 - 0.00
Asset-backed securities 27,826 484 6.96 34,350 525 6.11
Other interest-bearing assets
Federal Home Loan Bank stock 15,689 221 5.63 6,654 124 7.45
Short-term investments 81,187 724 3.54 14,308 213 5.91
----------- -------- ----------- --------
Total interest-earning assets 1,735,948 $ 29,535 6.80% 1,330,443 $ 24,512 7.36%
======== ========
Noninterest-earning assets 69,718 37,220
----------- -----------
Total assets $ 1,805,666 $ 1,367,663
=========== ===========
Interest-bearing liabilities:
Deposits:
NOW accounts $ 150,315 $ 314 0.83% $ 116,619 $ 350 1.19%
Savings and money market accounts 390,944 2,161 2.19 298,267 2,076 2.76
Certificates of deposit 533,881 6,575 4.89 425,679 5,982 5.58
Escrow deposits 5,393 40 2.94 4,087 31 3.01
----------- -------- ------ ----------- -------- --------
Total interest-bearing-deposits 1,080,533 9,090 3.34 844,652 8,439 3.96
Short-term borrowed funds 113,707 750 2.62 114,128 958 3.33
Advances from Federal
Home Loan Bank 268,204 3,375 4.99 115,847 1,884 6.45
----------- -------- ----------- --------
Total interest-bearing liabilities 1,462,444 $ 13,215 3.59% 1,074,627 $ 11,281 4.16%
======== ========
Noninterest-bearing liabilities 111,494 69,721
----------- -----------
Total liabilities 1,573,938 1,144,348
Stockholders' equity 231,728 223,315
----------- -----------
Total liabilities and
stockholders' equity $ 1,805,666 $ 1,367,663
=========== ===========
Net interest-earning assets $ 273,504 $ 255,816
=========== ===========
Net interest income $ 16,320 $ 13,231
======== ========
Interest rate spread (3) 3.21% 3.20%
Net interest margin (4) 3.78% 3.99%
Ratio of interest-earning assets to interest-
bearing liabilities 118.70% 123.81%
_______________________
(1) Balances are net of undisbursed proceeds of construction loans in process
and include nonperforming loans.
(2) Amounts are at fair market value.
(3) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of interest-
bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
Rate/Volume Analysis. The following table presents the effects of changing rates
and volumes on the interest income and interest expense of the Company. 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 rate/vol
column shows the effects attributable to changes in both rate and volume, which
cannot be segregated. The net column represents the sum of the prior columns.
21
For the Three Months Ended
Ended September 30, 2001
Compared to the Three
Months Ended September 30, 2000
Increase (Decrease)
Due to
Rate Volume Rate/Vol Net
------ ------- -------- -------
Interest-earning assets: (In thousands)
Loans:
Real estate $ (486) $2,623 $ (87) $ 2,050
Consumer (108) 400 (27) 265
Commercial (169) 156 (9) (22)
------- ------ ----- -------
Total loans (763) 3,179 (123) 2,293
Mortgage-backed securities (344) 828 (196) 288
Collateralized mortgage obligations - 1,754 - 1,754
Investment securities (24) 1,173 (461) 688
------- ------ ----- -------
Total interest-earning assets (1,131) 6,934 (780) 5,023
------- ------ ----- -------
Interest-bearing liabilities:
Deposits:
NOW accounts (104) 99 (31) (36)
Savings and money mkt accounts (418) 631 (128) 85
Certificates of deposit (723) 1,487 (171) 593
Other (1) 10 - 9
------- ------ ----- -------
Total deposits (1,246) 2,227 (330) 651
Short-term borrowed funds (201) (3) (4) (208)
Advances from Federal Home Bank (417) 2,424 (516) 1,491
------- ------ ----- -------
Total interest-bearing
liabilities (1,864) 4,648 (850) 1,934
------- ------ ----- -------
Increase in net interest income $ 733 $2,286 $ 70 $ 3,089
======= ====== ===== =======
Provision for Loan Losses. The provision for loan losses was $875,000 for the
quarter ended September 30, 2001 compared to $375,000 for the quarter ended
September 30, 2000. The increase in provision is due to the loan loss reserve
ratios at First Federal being lower than the Bank's ratios, and uncertainty in
the economy. At June 30, 2001 (last quarter-end prior to the acquisition) the
Bank's allowance for loan losses was 1.14% of total loans as compared to First
Federal's allowance for loan losses as a percentage of total loans of 0.74%.
Although First Federal had a different loan mix, management deemed it prudent to
record a one-time increase in the loan loss provision during the third quarter
of 2001. Based on current information, management believes the provision for
loan losses will return to the previous quarter level for the foreseeable
future. The allowance for loan losses was 1.11% of total loans and 252.91% of
nonperforming loans at September 30, 2001 compared to 1.14% and 122.59%,
respectively, at September 30, 2000.
Noninterest Income. Noninterest income totaled a loss of $879,000 and income of
$3.42 million for the three months ended September 30, 2001 and 2000,
respectively. The decrease was primarily due to the other than temporary
impairment of equity investment securities of $3.92 million, losses on sales of
securities in the third quarter of 2001 of $230,000, gains on sales of
securities in the third quarter of 2000 of $794,000,
22
partially offset by increased service charge and fee income, and increases in
the cash surrender value of life insurance in the third quarter of 2001. On a
quarterly basis, the Bank reviews available-for-sale investment securities with
unrealized depreciation for six consecutive months to assess whether the decline
in fair value is temporary or other than temporary. The Bank judges whether the
decline in value is from company-specific events, industry developments, general
economic conditions or other reasons. Once the estimated reasons for the decline
are identified, further judgments are required as to whether those causal events
are likely to reverse and, if so, whether that reversal is likely to result in a
recovery of the fair value of the investment in the near term. In accordance
with this policy, during the three months ended September 30, 2001 the Bank
recorded other than temporary impairment of 18 equity securities totaling $3.92
million. At September 30, 2001, the Bank had net unrealized gains of $8.03
million remaining in its equity security portfolio. Service charges and fees
were $2.43 million for the three months ended September 30, 2001 compared to
$2.04 million for the three months ended September 30, 2000. Income from service
charges and fees increased $274,000 from increased fees on demand deposit
accounts and $176,000 from increased ATM fees. Other fee income increased from
$468,000 for the three months ended September 30, 2000 to $761,000 for the three
months ended September 30, 2001. The increase in other fee income was primarily
due to earnings on life insurance, including life insurance acquired from First
Federal.
Noninterest Expense. Noninterest expense increased $4.52 million, or 45.20%,
from $10.00 million for the three months ended September 30, 2000 to $14.52
million for the three months ended September 30, 2001. During the third quarter
of 2001, the Company recorded noninterest expenses totaling $2.29 million that
are nonrecurring in nature. The Company recorded director and employee
retirement expenses of $1.42 million during the quarter. The Bank offered an
early retirement package to certain employees resulting in a charge of $547,000.
CTBS granted stock options and restricted stock to the former Chairman of the
Board, incurring $541,000 of expense. CTBS also accelerated the vesting of
previously granted stock options and restricted stock to a director who is
retiring on December 31, 2001. The charge incurred with the vesting acceleration
was $331,000. The Bank recorded $872,000 of relocation and branch closing costs
primarily due to the closing of five SBM branches that were no longer necessary
due to overlap of market areas caused by the acquisition of First Federal. Other
increases in noninterest expense for the quarter included employee benefit
costs, salaries, amortization of other intangible assets, and other operating
expenses. Employee benefit costs increased by $711,000 from the year earlier
period. The increase was due to the granting of restricted stock under the 2000
Stock-Based Incentive Plan resulting in a charge of $410,000 in the third
quarter of 2001, increased ESOP expense of $112,000 due to a higher average
stock price, increased costs of non-qualified benefit plans of $72,000 and
increased health insurance costs of $38,000. Salaries increased $439,000 due
mainly to the cost of former First Federal employees, both permanent and
temporary. Due to the acquisition of First Federal, the Company recorded other
intangible assets for noncompete agreements with former First Federal executives
and a core deposit intangible. The noncompete agreement intangible totaled $3.25
million at September 30, 2001, and is being amortized on a straight-line basis
over its term of twelve months. The core deposit intangible totaled $8.75
million at September 30, 2001, and is being amortized on a straight-line basis
over its estimated life of eight years. Other operating expenses increased
$344,000, or 25.86%, from $1.33 million for the third quarter of 2000 to $1.67
million for the third quarter of 2001. The increase in this category was mainly
due to higher telephone, office supply, check loss, and annual report expenses.
Provision for Income Taxes. Income tax expense decreased $2.07 million from
$2.07 million for the third quarter of 2000 to $0 for the quarter ended
September 30, 2001. No tax provision was recorded in the 2001 period since the
effective tax rate of 33.88% in the year to date period approximates the rate
expected for the year.
Comparison of Operating Results for the Nine Months Ended September 30, 2001 and
- --------------------------------------------------------------------------------
2000
- ----
Net Income. Net income for the nine months ended September 30, 2001 was $7.77
million compared to net income of $3.06 million for the nine months ended
September 30, 2000. The increase over the prior year is mainly due to the first
quarter 2000 contribution of securities to SBM Charitable Foundation, Inc. of
$8.32 million, higher net interest income during the first nine months of 2001
and higher service charge and fee
23
income. Partially offsetting these increases was the 2001 other than temporary
impairment of investment securities of $3.92 million, higher employee benefit
costs and the nonrecurring charges related to director and employee retirement
expenses and relocation and branch closing costs recognized during 2001.
Net Interest Income. Net interest income increased $7.09 million, or 18.90%, to
$44.61 million for the first nine months of 2001 compared to $37.52 million for
the first nine months of 2000. The increase was primarily a result of higher
interest income from an increase in average interest-earning assets partially
offset by an increase in the average balance of interest-bearing liabilities.
Total interest and dividend income increased $9.64 million, or 13.78%, to $79.62
million for the first nine months of 2001 from $69.98 million for the first nine
months of 2000. The average yield on interest-earning assets decreased 12 basis
points to 7.09% for the nine months ended September 30, 2001 from 7.21% for the
nine months ended September 30, 2000. Interest income on loans increased $5.29
million, or 9.39%, to $61.60 million for the nine months ended September 30,
2001 compared to $56.31 million for the nine months ended September 30, 2000.
The increase was due to a $95.40 million increase in the average balance of
loans outstanding of which $76.45 million were loans secured by real estate.
Interest and dividend income from investment securities, short-term investments
and Federal Home Loan Bank stock increased $4.35 million, or 31.82%, to $18.02
million for the nine months ended September 30, 2001 compared to $13.67 million
for the nine months ended September 30, 2000. The increase in interest and
dividend income from investment securities, short-term investments and Federal
Home Loan Bank stock was due to an increase in the average balance of $106.32
million, or 34.03%, to $418.78 million for the nine months ended September 30,
2001 as compared to $312.46 million for the nine months ended September 30,
2000. The increase in average balance is primarily due to the acquisition of
First Federal.
Interest expense increased $2.55 million, or 7.86%, to $35.01 million for the
nine months ended September 30, 2001 from $32.46 million for the nine months
ended September 30, 2000. The increase is primarily due to an increase in the
average balance of interest-bearing liabilities. Average interest-bearing
deposits increased $95.97 million and average outstanding Advances from the
Federal Home Loan Bank increased $63.71 million for the nine months ending
September 30, 2001 as compared to the nine months ending September 30, 2000. The
increase in average balance is primarily due to the acquisition of First
Federal. Partially offsetting this increase was a lower overall cost of funds.
The overall cost of funds for interest-bearing liabilities for the first nine
months of 2001 was 3.83% as compared to 4.08% for the first nine months of 2000.
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. The yields and rates include fees which are considered
adjustments to yields.
24
For the Nine Months Ended September 30,
--------------------------------------------------------------------------------
2001 2000
-------------------------------------- --------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------- -------- ------- ----------- -------- -------
Interest-earning assets:
Loans (1):
Real estate $ 843,583 $ 46,934 7.42% $ 767,125 $ 42,331 7.36%
Consumer 85,789 5,040 7.83 75,785 4,626 8.14
Commercial 149,290 9,625 8.62 140,351 9,354 8.91
----------- -------- ----------- --------
Total loans 1,078,662 61,599 7.62 983,261 56,311 7.64
----------- -------- ----------- --------
Mortgage-backed securities (2) 87,263 4,444 6.79 58,178 3,309 7.58
Collateralized mortgage obligations (2) 41,296 1,754 5.66 - - 0.00
Investment securities (2):
U.S. Government and
agency obligations 86,000 3,955 6.15 85,045 3,907 6.14
Municipal obligations 5,059 214 5.64 2,925 130 5.93
Corporate securities 52,967 2,884 7.26 50,900 2,574 6.74
Common stock and mutual funds 44,826 796 2.37 48,077 688 1.91
Other investment securities 579 1 0.23 432 - 0.00
Asset-backed securities 29,330 1,555 7.07 25,885 1,212 6.24
Other interest-bearing assets
Federal Home Loan Bank stock 9,984 475 6.34 6,418 326 6.77
Short-term investments 61,480 1,945 4.23 34,604 1,522 5.88
----------- -------- ----------- --------
Total interest-earning assets 1,497,446 $ 79,622 7.09% 1,295,725 $ 69,979 7.21%
Noninterest-earning assets 41,722 ======== 39,462 ========
----------- -----------
Total assets $ 1,539,168 $ 1,335,187
=========== ===========
Interest-bearing liabilities:
Deposits:
NOW accounts $ 132,437 $ 753 0.76% $ 115,804 $ 1,169 1.35%
Savings and money market accounts 334,506 5,933 2.37 297,937 6,062 2.72
Certificates of deposit 474,233 19,211 5.42 432,153 17,365 5.37
Escrow deposits 6,428 142 2.95 5,732 266 6.20
----------- -------- ------- ----------- -------- -------
Total interest-bearing-deposits 947,604 26,039 3.67 851,626 24,862 3.90
Short-term borrowed funds 107,065 2,288 2.86 110,456 2,756 3.34
Advances from Federal
Home Loan Bank 165,929 6,683 5.38 102,221 4,843 6.33
----------- -------- ----------- --------
Total interest-bearing liabilities 1,220,598 $ 35,010 3.83% 1,064,303 $ 32,461 4.08%
Noninterest-bearing liabilities 88,493 ======== 74,049 ========
----------- -----------
Total liabilities 1,309,091 1,138,352
Stockholders' equity 230,077 196,835
----------- -----------
Total liabilities and
stockholders' equity $ 1,539,168 $ 1,335,187
=========== ===========
Net interest-earning assets $ 276,848 $ 231,422
=========== ===========
Net interest income $ 44,612 $ 37,518
======== ========
Interest rate spread (3) 3.26% 3.13%
Net interest margin (4) 3.97% 3.86%
Ratio of interest-earning assets to
interest-bearing liabilities 122.68% 121.74%
_______________________________________
(1) Balances are net of undisbursed proceeds of construction loans in process
and include nonperforming loans.
(2) Amounts are at fair market value.
(3) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
Rate/Volume Analysis. The following table presents the effects of changing rates
and volumes on the interest income and interest expense of the Company. 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 rate/vol
column shows the effects attributable to changes in both rate and volume, which
cannot be segregated. The net column represents the sum of the prior columns.
25
For the Nine Months Ended
Ended September 30, 2001
Compared to the Nine
Months Ended September 30, 2000
Increase (Decrease)
Due to
Rate Volume Rate/Vol Net
-------- ------------ -------- -------
Interest-earning assets: (In thousands)
Loans:
Real estate $ 116 $ 1,407 $ 3,080 $ 4,603
Consumer (58) 204 268 414
Commercial (101) 197 175 271
-------- ------- -------- -------
Total loans (43) 1,808 3,523 5,288
Mortgage-backed securities (115) 551 699 1,135
Collateralized mortgage obligations - 1,754 - 1,754
Investment securities 26 570 870 1,466
------- ------- -------- -------
Total interest-earning assets (132) 4,683 5,092 9,643
------- ------- -------- -------
Interest-bearing liabilities:
Deposits:
NOW accounts (168) 55 (303) (416)
Savings and money mkt accounts (256) 245 (118) (129)
Certificates of deposit 47 557 1,242 1,846
Other (46) 11 (89) (124)
------- ------- -------- -------
Total deposits (423) 868 732 1,177
Short-term borrowed funds (130) (28) (310) (468)
Advances from Federal Home Bank (239) 995 1,084 1,840
------- ------- -------- -------
Total interest-bearing liabilities (792) 1,835 1,506 2,549
------- ------- -------- -------
Increase in net interest income $ 660 $ 2,848 $ 3,586 $ 7,094
======= ======= ======== =======
Provision for Loan Losses. The provision for loan losses was $1.63 million for
the nine months ended September 30, 2001 compared to $825,000 for the nine
months ended September 30, 2000. The increase in provision is due to the loan
loss reserve ratios at First Federal being lower than the Bank's ratios, and
uncertainty in the economy. At June 30, 2001 (last quarter-end prior to the
acquisition) the Bank's allowance for loan losses was 1.14% of total loans as
compared to First Federal's allowance for loan losses as a percentage of total
loans of 0.74%. Although First Federal had a different loan mix, management
deemed it prudent to increase the loan loss provision during the third quarter
of 2001. Based on current information, management believes the provision for
loan losses will return to the previous quarter level for the foreseeable
future. The allowance for loan losses was 1.11% of total loans and 252.91% of
nonperforming loans at September 30, 2001 compared to 1.14% and 122.59%,
respectively at September 30, 2000.
Noninterest Income. Noninterest income totaled $5.01 million and $6.36 million
for the nine months ended September 30, 2001 and 2000, respectively. The
decrease was primarily due to the other than temporary impairment of equity
investment securities of $3.92 million, partially offset by increased service
charge and
26
fee income in the first nine months of 2001 and losses on sales of securities in
the year earlier period. On a quarterly basis, the Bank reviews
available-for-sale investment securities with unrealized depreciation for six
consecutive months to assess whether the decline in fair value is temporary or
other than temporary. The Bank judges whether the decline in value is from
company-specific events, industry developments, general economic conditions or
other reasons. Once the estimated reasons for the decline are identified,
further judgments are required as to whether those causal events are likely to
reverse and, if so, whether that reversal is likely to result in a recovery of
the fair value of the investment in the near term. In accordance with this
policy, during the three months ended September 30, 2001 the Bank recorded other
than temporary impairment of 18 equity securities totaling $3.92 million. At
September 30, 2001, the Bank had net unrealized gains of $8.03 million remaining
in its equity security portfolio. Service charges and fees were $6.90 million
for the nine months ended September 30, 2001 compared to $5.67 million for the
nine months ended September 30, 2000. Income from service charges and fees
increased $555,000 due to increased fees on demand deposit accounts, $357,000
from increased ATM fees, $197,000 from increased Visa and MasterCard fees and
$113,000 due to growth in merchant services operations. During the first nine
months of 2000, the Company sold securities resulting in net losses of $990,000
as compared to security gains in the current nine-month period of $81,000. In
the prior year period, the Company restructured its security portfolio in
anticipation of becoming a public entity. Gains on sales of mortgage loans
increased from $207,000 for the first nine months of 2000 to $290,000 for the
first nine months of 2001. Other fee income increased from $1.48 million for the
nine months ended September 30, 2000 to $1.65 million for the nine months ended
September 30, 2001. The increase was primarily due to higher income from the
purchase of life insurance of $433,000, partially offset by lower fees earned
from brokerage services of $237,000.
Noninterest Expense. Noninterest expense decreased $2.23 million, or 5.80%, for
the nine months ended September 30, 2001 from $38.47 million for the nine months
ended September 30, 2000 to $36.24 million for the nine months ended September
30, 2001. The decrease in noninterest expense for the first nine months of 2001
was primarily due to the expense of $8.32 million of securities contributed to
SBM Charitable Foundation, Inc. in connection with the Company's March 2000
initial public offering, partially offset by the nonrecurring charges pertaining
to director and employee retirement expenses ($1.42 million) and relocation and
branch closing costs ($872,000). Excluding these nonrecurring expenses,
noninterest expense increased $3.80 million, or 12.60%, from $30.15 million for
first nine months of 2000 to $33.95 million for first nine months of 2001.
During the third quarter of 2001, the Company recorded noninterest expenses
totaling $2.29 million that are nonrecurring in nature. The Company recorded
director and employee retirement expenses of $1.42 million during the quarter.
The Bank offered an early retirement package to certain employees resulting in a
charge of $547,000. CTBS granted stock options and restricted stock to the
former Chairman of the Board, incurring $541,000 of expense. CTBS also
accelerated the vesting of previously granted stock options and restricted stock
to a director who is retiring on December 31, 2001. The charge incurred with the
vesting acceleration was $331,000. The Bank recorded $872,000 of relocation and
branch closing costs primarily due to the closing of five SBM branches that were
no longer necessary due to overlap of market areas caused by the acquisition of
First Federal. Employee benefits increased $2.13 million, or 49.19%, from $4.33
million for the nine months ended September 30, 2000 to $6.46 million for the
nine months ended September 30, 2001. The increase was due to the granting of
restricted stock under the 2000 Stock-Based Incentive Plan resulting in a charge
of $1.23 in the first nine months of 2001, increased ESOP expense of $407,000
due to a higher average stock price, and an increase in health insurance costs
of $297,000. Fees and services increased $549,000, or 15.91%, from $3.45 million
for the first nine months of 2000 to $4.00 million for the first nine months of
2001. The increase in this category was mainly due to increased legal, director,
and franchise tax fees. Many of these increases resulted directly and indirectly
from the conversion from mutual holding company form to stock holding company
form. Amortization of other intangible assets increased $395,000 or 121.91%
during the first nine months of 2001. Due to the acquisition of First Federal,
the Company recorded other intangible assets for noncompete agreements with
former First Federal executives and a core deposit intangible. The noncompete
agreement intangible totaled $3.25 million at September 30, 2001, and is being
amortized on a straight-line basis over its term of twelve months. The core
deposit intangible totaled $8.75 million at September 30, 2001, and is being
amortized on a straight-line basis over its estimated life of eight years.
27
Provision for Income Taxes. Income tax expense increased $2.46 million from
$1.52 million for the first nine months of 2000 to $3.98 million for the nine
months ended September 30, 2001. The effective tax rate was 33.88% for the nine
months ended September 30, 2001 and 33.16% for the nine months ended September
30, 2000.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a
short-term nature. The Company 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, sales
of collateralized mortgage obligations, investment and mortgage-backed
securities and advances from 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 influenced by general
interest rates, economic conditions and competition.
The Company'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, collateralized mortgage obligations, 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 Advances from Federal Home
Loan Bank of Boston. During the nine months ended September 30, 2001, the Bank's
loan originations, net of repayments, totaled $94.68 million. The Bank also
acquired $284.66 million in gross loans from First Federal. For the nine months
ended September 30, 2001, the Bank purchased investments in mortgage-backed
securities, U.S. Government and agency obligations and corporate equity
securities and debt obligations totaling $57.38 million. The Bank also acquired
$612.49 million in investment securities from First Federal. The Bank
experienced a net increase in total deposits of $652.10 million (of which
$635.12 million were the result of the First Federal acquisition) for the nine
months ended September 30, 2001. Deposit flows are affected by the overall level
of interest rates, the interest rates and products offered by the Bank and its
local competitors and other factors. The Company closely monitors its liquidity
position on a daily basis. If the Company should require additional funds,
additional funds are available through Advances from the Federal Home Loan Bank
and through repurchase agreement borrowing facilities.
Outstanding commitments for all loans and unadvanced construction loans and
lines of credit totaled $246.37 million at September 30, 2001. Management of the
Bank 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 September 30, 2001 totaled $513.98 million. The Bank
relies primarily on competitive rates, customer service, and long-standing
relationships with customers to retain deposits. Occasionally, the Bank will
also offer special competitive promotions to its customers to increase retention
and promote deposit growth. Based upon the Bank's historical experience with
deposit retention, management believes that a significant portion of its
deposits will remain with the Bank.
SBM must satisfy 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 September 30, 2001, SBM
exceeded all of its regulatory capital requirements with a leverage capital
level of $150.68 million, or 8.85% of average assets, which is above the
required level of $68.12 million, or 4.0%, and total risk-based capital of
$166.00 million, or 11.10% of risk weighted assets, which is above the required
level of $119.62 million, or 8.0%. SBM is considered "well capitalized" under
regulatory guidelines.
28
Impact of Inflation and Changing Prices
The condensed consolidated financial statements and related data presented in
this report have been prepared in conformity with accounting principles
generally accepted in the United States, 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 the Company are monetary in nature. As a result, interest rates
have a more significant impact on the Company'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
In September 2000, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - a Replacement of FASB Statement No. 125." SFAS
No. 140 replaces SFAS No. 125. Certain disclosure provisions required by SFAS
No. 140 were effective immediately. Additional requirements related to SFAS No.
140 became effective beginning March 31, 2001. These additional requirements had
no effect on the Company's consolidated financial position or results of
operations.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No.
141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. The acquisition of First Federal was
accounted for under the purchase method of accounting.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangibles."
With the adoption of SFAS No. 142, goodwill will no longer be subject to
amortization over its estimated useful life, but will be subject to annual
assessment for impairment by applying a fair-value-based test. Recognized
intangible assets, such as core deposit intangibles, will be amortized over
their useful lives. The Company has recorded goodwill of $19.97 million as of
September 30, 2001. Under the new standard, this goodwill associated with the
First Federal acquisition will not be amortized but will be subject to an annual
impairment test. The Company will continue to amortize other intangible assets
of $13.64 million as of September 30, 2001 relating to core deposit intangibles
and noncompete agreements over their estimated useful lives on a straight line
basis.
In July 2001, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 102 ("SAB No. 102"), "Selected Loan Loss Methodology and
Documentation Issues." SAB No. 102 provides detailed guidance on the
development, documentation and application of a systematic methodology in
determining an allowance for loan losses. The additional documentation
requirements did not have any effect on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 modifies the rules for accounting
for the impairment or disposal of long-lived assets. The new rules become
effective for fiscal years beginning after December 15, 2001, with earlier
application encouraged. These new rules will have no effect on the Company's
consolidated financial statements.
In September 2001, The Emerging Issues Task Force ("EITF") issued EITF No.
01-10, "Accounting for the Impact of the September 11, 2001 Terrorist Acts,"
which provides guidance on how the costs related to the terrorist acts should be
classified, how to determine whether an asset impairment should be recognized
and how liabilities for losses and other costs should be recognized. EITF No.
01-01 did not have any effect on the Company's consolidated financial
statements.
29
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
-----------------------------------------------------------
At September 30, 2001 there have been no material changes in information
regarding quantitative and qualitative disclosure about market risk from the
information presented as of December 31, 2000 in the Company's Form 10-K.
30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
Periodically, there have been various claims and lawsuits involving the Company,
such as claims to enforce liens, condemnation proceedings on properties in which
the Company holds security interests, claims involving the making and servicing
of real property loans and other issues incident to the Company's business. The
Company is not a party to any pending legal proceedings that it believes would
have a material adverse effect on the consolidated financial condition or
operations of the Company.
Item 2. Changes in Securities and Use of Proceeds.
-----------------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities.
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None.
Item 5. Other Information.
-----------------
On September 14, 2001 CTBS announced that its Board of Directors has
authorized the repurchase of up to 561,600 shares, or approximately 5% of
its outstanding shares of common stock. It is intended that such shares
will be repurchased in open market transactions, including unsolicited
block purchases, over the next six to twelve months, subject to market
conditions. CTBS had not repurchased any shares under this plan as of
November 4, 2001.
On September 24, 2001, CTBS declared a quarterly cash dividend of $0.11
per share on outstanding shares of its common stock. The dividend was
paid on October 23, 2001 to stockholders of record as of the close of
business on October 9, 2001.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
3.1 Certificate of Incorporation of Connecticut Bancshares, Inc. (1)
3.2 Second Amended and Restated Bylaws of Connecticut Bancshares,
Inc. (2)
4.0 Stock Certificate of Connecticut Bancshares, Inc. (1)
11.0 Computation of Per Share Earnings (Incorporated by reference in
Part I, hereto)
-----------------------------
(1) Incorporated by reference into this document from the Exhibits
filed with the Registration Statement on Form S-1, and any
amendments thereto, Registration No. 333-90865.
(2) Incorporated by reference into this document from the Quarterly
Report on Form 10-Q dated March 31, 2001 and filed with the
Securities and Exchange Commission on May 4, 2001.
31
(b) Reports on Form 8-K
On September 5, 2001, the Company filed a Form 8-K to announce the
acquisition of First Federal Savings and Loan Association of East
Hartford, a federally chartered savings association. The press releases
announcing the completion of the acquisition were filed by exhibit.
32
CONFORMED
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CONNECTICUT BANCSHARES, INC.
Dated: November 10, 2001 By: /s/ Richard P. Meduski
---------------------------------------
Richard P. Meduski
President and Chief Executive Officer
(principal executive officer)
Dated: November 10, 2001 By: /s/ Michael J. Hartl
----------------------------------------
Michael J. Hartl
Senior Vice President and Chief Financial
Officer (principal financial and accounting
officer)
33