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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-28389
CONNECTICUT BANCSHARES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-1564613
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
923 Main Street, Manchester, Connecticut 06040
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (860) 646-1700
---------------------
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g)of the Act:
Common Stock, par value $0.01 per share.
Indicate by check mark whether the registrant 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 has been subject to such
filing requirements for the past 90 days. YES X NO ______
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ___
The aggregate market value of the voting and non-voting common equity held
by non-affiliates as of March 9, 2001 was $204,409,485.
As of March 9, 2001, there were 11,232,000 shares of the registrant's
common stock outstanding.
Documents Incorporated by Reference:
Part III of this 10-K incorporates information by reference from the
registrant's definitive proxy statement which will be filed no later than 120
days after December 31, 2000.
INDEX
PART I
Page No.
--------
Item 1. Business................................................... 1
Item 2. Properties................................................. 34
Item 3. Legal Proceedings.......................................... 36
Item 4. Submission of Matters to a Vote of Security Holders........ 37
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters............................ 37
Item 6. Selected Consolidated Financial Data....................... 38
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 40
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk....................................................... 50
Item 8. Financial Statements and Supplementary Data................ 54
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure........................ 54
PART III
Item 10. Directors and Executive Officers of the Registrant......... 54
Item 11. Executive Compensation..................................... 54
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 54
Item 13. Certain Relationships and Related Transactions............. 54
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................ 55
SIGNATURES
Forward Looking Statements
This Form 10-K contains forward looking statements that are based on
assumptions and describe future plans, strategies, and expectations of the Bank.
These forward looking statements are generally identified by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project," or similar
expressions. The Bank'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 Bank and the subsidiaries
include, but are not limited to, changes in interest rates, general economic
conditions, legislative/regulatory changes, monetary and fiscal policies of the
U.S. Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality and composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Bank's market area and changes in relevant 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. The Bank 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.
PART I
Item 1. Business.
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Connecticut Bancshares, Inc. (the "Company"), a Delaware corporation, was
organized in October 1999 for the purpose of becoming the holding company for
Savings Bank of Manchester ("SBM"), (collectively, "the Bank"), upon the
conversion of the Bank's former parent holding company, Connecticut Bankshares,
M.H.C. ("M.H.C."), from a mutual to stock form of organization (the
"Conversion"). The Conversion was completed on March 1, 2000. In connection with
the Conversion, the Company sold 10,400,000 shares of its common stock, par
value $0.01 per share ("Common Stock") at a purchase price of $10 per share, to
depositors of the Bank in a subscription offering. In addition, the Company
issued an additional 832,000 shares, representing 8% of the shares sold in the
subscription offering, to SBM Charitable Foundation, Inc., a charitable
foundation established by the Bank. The Company used 50% of the net proceeds
from the conversion to buy all of the common stock of SBM and retained the
remaining 50% which were primarily invested in fixed income securities.
Accordingly, the information set forth in this report, including financial
statements and related data, relates primarily to the Bank. The Company, SBM and
its wholly-owned subsidiaries are referred to herein as the Bank.
SBM was founded in 1905 as a Connecticut-chartered mutual savings bank. In
1996, SBM converted to stock form as part of M.H.C.'s mutual holding company
formation. SBM is regulated by the Connecticut Department of Banking and the
Federal Deposit Insurance Corporation. SBM's deposits are insured to the maximum
allowable amount by the Bank Insurance Fund of the Federal Deposit Insurance
Corporation. SBM has been a member of the Federal Home Loan Bank System since
1977.
The Bank is a traditional savings association that accepts retail deposits
from the general public in the areas surrounding its 23 full-service banking
offices and uses those funds, together with funds generated from operations and
borrowings, to originate residential mortgage loans, commercial loans and
consumer loans, primarily home equity loans and lines of credit. The Bank
primarily holds the loans that it originates for investment. However, the Bank
also sells loans, primarily fixed-rate mortgage loans, in the secondary market,
while generally retaining the servicing rights. The Bank also invests in
mortgage-backed securities, debt and equity securities and other permissible
investments. The Bank's revenues are derived principally from the generation of
interest and fees on loans originated and, to a lesser extent, interest and
dividends on investment and mortgage-backed securities. The Bank's primary
sources of funds are deposits, principal and interest payments on loans and
investments and mortgage-backed securities and advances from the Federal Home
Loan Bank of Boston.
Pending Acquisition
1
On February 7, 2001, the Company and First Federal Savings and Loan
Association of East Hartford ("First Federal") entered in a definitive agreement
(the "Agreement") under which the Company will acquire all of the outstanding
common stock of First Federal for cash equal to approximately $110 million.
Immediately after the completion of the acquisition, First Federal will be
merged into SBM, a wholly-owned subsidiary of the Company. The Board of
Directors of the Company expects the transaction to close in the third quarter
of 2001. The transaction is subject to approval by the First Federal
shareholders and federal and state regulatory agencies.
Under certain circumstances, if the Agreement is terminated by the Company
for the reasons set forth in the Agreement before the consummation of the
merger, First Federal may be required to pay the Company cash of $4.50 million
plus out-of-pocket expenses.
Market Area
The Bank is headquartered in Manchester, Connecticut in Hartford County.
The Bank's primary deposit gathering and lending areas are concentrated in the
communities surrounding its 23 banking offices located in Hartford, Tolland and
Windham Counties.
Hartford County is located in central Connecticut approximately two hours
from both Boston and New York City and contains the City of Hartford. The region
serves as the governmental and as a financial center of Connecticut. Hartford
County has a diversified mix of industry groups, including insurance and
financial services, manufacturing, service, government and retail. The major
employers in the area include several prominent international and national
insurance and manufacturing companies, such as Aetna, Inc., The Hartford
Financial Services Group, Inc., United Technologies Corp., Stanley Works, as
well as many regional banks and the Connecticut State Government.
Competition
The Bank faces intense competition in attracting deposits and loans in its
primary market area. Historically, the Bank's most direct competition for
deposits came from commercial and savings banks operating in its primary market
area and, to a lesser extent, from other financial institutions, such as
brokerage firms, credit unions and insurance companies. Although these entities
continue to provide a source of competition for deposits, the Bank faces
increasingly significant competition for deposits from the mutual fund industry
as customers seek alternative sources of investment for their funds. The Bank
also must compete for investors' funds which may be used to purchase short-term
money market securities and other corporate and government securities. While the
Bank faces competition for loans from the significant number of traditional
financial institutions, primarily savings banks and commercial banks in its
market area, its most significant competition comes from other financial service
providers, such as the mortgage companies and mortgage brokers operating in its
primary market area. Additionally, the Bank expects competition to increase as a
result of recent regulatory actions and legislative changes, most notably the
recent enactment of the Financial Services Modernization Act of 1999. These
changes have eased and likely will continue to ease restrictions on interstate
banking and entry into the financial services market by non-depository and non-
traditional financial services providers, including insurance companies,
securities brokerage and underwriting firms, and specialty financial services
companies such as internet-based providers.
Lending Activities
General. The types of loans that the Bank may originate are limited by
federal and state laws and regulations. Interest rates charged by the Bank on
loans are affected principally by the Bank's current asset/liability strategy,
the demand for such loans, the supply of money available for lending purposes
and the rates offered by competitors. These factors are, in turn, affected by
general and economic conditions, monetary policies of the federal government,
including the Federal Reserve Board, legislative tax policies and governmental
budgetary matters.
2
Loan Portfolio Analysis. The following table sets forth the composition of
the Bank's loan portfolio in dollar amounts and as a percentage of the portfolio
at the dates indicated.
At December 31,
-------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------- ------------------- -------------------- ------------------ ------------------
Percent of Percent of Percent of Percent of Percent of
Amount Total Amount Total Amount Total Amount Total Amount Total
-------------------- ------------------- -------------------- ------------------ ------------------
(Dollars in thousands)
Real estate loans:
One- to four-family $ 586,536 58.22% $544,732 57.40% $464,623 56.85% $489,105 60.53% $457,168 61.66%
Construction (1) 33,422 3.32 40,690 4.29 35,860 4.39 23,524 2.90 16,900 2.27
Commercial and multi-family 161,579 16.04 155,085 16.34 131,717 16.11 117,622 14.55 104,364 14.07
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans 781,537 77.58 740,507 78.03 632,200 77.35 630,251 77.98 578,432 78.00
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial loans 146,360 14.53 134,637 14.19 114,650 14.03 106,874 13.22 97,117 13.10
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer loans:
Home equity loans and lines
of credit 27,203 2.70 23,019 2.43 21,605 2.64 20,559 2.54 18,959 2.56
Other 52,358 5.20 50,794 5.35 48,917 5.98 50,553 6.26 47,071 6.34
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans 79,561 7.90 73,813 7.78 70,522 8.62 71,112 8.80 66,030 8.90
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans 1,007,458 100.00% 948,957 100.00% 817,372 100.00% 808,237 100.00% 741,579 100.00%
====== ====== ====== ====== ======
Allowance for loan losses (11,694) (10,617) (10,585) (9,945) (9,131)
---------- -------- -------- -------- --------
Total loans, net $ 995,764 $938,340 $806,787 $798,292 $732,448
========== ======== ======== ======== ========
(1) Includes residential and commercial real estate loans.
3
One- to Four-Family Real Estate Loans. The Bank's primary lending activity
is to originate loans secured by one- to four-family residences located in its
primary market area. At December 31, 2000, $586.54 million, or 58.22%, of the
Bank's total loans consisted of one- to four-family mortgage loans. Of the one-
to four-family loans outstanding at that date, 50.75% were fixed-rate mortgage
loans and 49.25% were adjustable-rate loans.
The Bank originates fixed-rate fully amortizing loans with maturities
ranging between ten and 30 years. Management establishes the loan interest rates
based on market conditions. The Bank offers mortgage loans that conform to
Fannie Mae and Freddie Mac guidelines, as well as jumbo loans, which are
presently loans in amounts over $275,000. Fixed-rate conforming loans are
generally originated for portfolio. However, the Bank may sell such loans from
time to time. Management periodically determines whether or not to sell loans
based on changes in prevailing market interest rates. Loans that are sold are
generally sold to Freddie Mac, with the servicing rights retained.
Currently, the Bank also offers adjustable-rate mortgage loans, with an
interest rate based on the one year Constant Maturity Treasury index, which is
adjusted annually at the outset of the loan or which is adjusted annually after
a three or five year initial fixed period and with terms of up to 30 years.
Interest rate adjustments on such loans are limited to no more than 2% during
any adjustment period and 6% over the life of the loan. Adjustable-rate loans
may possess a conversion option, whereby the borrower may opt to convert the
loan to a fixed interest rate after a predetermined period of time, generally
within the first 60 months of the loan term. Included in the Bank's adjustable-
rate mortgage loan portfolio are adjustable-rate loans which are originated at
an interest rate below the fully indexed rate. During 2000, the Bank originated
$16.43 million of these discounted adjustable-rate mortgage loans, or 1.63% of
the total loan portfolio, with an average yield of 5.89%. The time period in
which such loans will reprice to their fully indexed rate may be longer than the
Bank's other fully indexed adjustable-rate loans. However, the Bank's
experience, which cannot be guaranteed in future periods, is that these
discounted adjustable-rate loans tend to be more stable and less susceptible to
prepayment activity in a falling interest rate environment and less subject to
default in a rising interest environment.
Adjustable-rate mortgage loans help reduce the Bank's exposure to changes
in interest rates. There are, however, unquantifiable credit risks resulting
from the potential of increased costs due to changed rates to be paid by
borrowers. It is possible that during periods of rising interest rates the risk
of default on adjustable-rate mortgage loans may increase as a result of
repricing and the increased payments required to be paid by borrowers. In
addition, although adjustable-rate mortgage loans allow the Bank to adjust the
sensitivity of its asset base to changes in interest rates, the extent of this
interest sensitivity is limited by the annual and lifetime interest rate
adjustment limits. Because of these considerations, the Bank has no assurance
that yields on adjustable-rate mortgage loans will be sufficient to offset
increases in the Bank's cost of funds during periods of rising interest rates.
The Bank believes these risks, which have not had a material adverse effect on
the Bank to date, are generally less than the risks associated with holding
fixed-rate loans in its portfolio in a rising interest rate environment.
The Bank underwrites fixed- and variable-rate one- to four-family
residential mortgage loans with loan-to-value ratios of up to 97% and 95%,
respectively, provided that a borrower obtains private mortgage insurance on
loans that exceed 80% of the appraised value or sales price, whichever is less,
of the secured property. The Bank also requires fire, casualty, title, hazard
insurance and, if appropriate, flood insurance be maintained on all properties
securing real estate loans made by the Bank. An independent licensed appraiser
generally appraises all properties.
In an effort to provide financing for moderate income and first-time home
buyers, the Bank offers FHA and CHFA (Connecticut Housing Finance Authority)
loans and has its own First-Time Home Buyer loan program. These programs offer
residential mortgage loans to qualified individuals. These loans are offered
with adjustable- and fixed-rates of interest and terms of up to 30 years. Such
loans may be secured by one- to four-family residential property, in the case of
FHA and CHFA loans, and must be secured by a single family owner-occupied unit
in the case of First-Time Home Buyer loans. All of these loans are originated
using modified underwriting guidelines. FHA loans are closed in the name of SBM
and immediately sold on the secondary market to Countrywide Mortgage Company
with the loan servicing released. CHFA loans are immediately assigned after
closing to the Connecticut Housing Finance Authority with servicing rights
retained by the Bank. Countrywide Mortgage and CHFA establish their respective
rates and terms upon which such loans are offered. First-Time Home Buyer loans
are offered with a
4
discounted interest rate (approximately 50 basis points) and usually with no
application or loan origination fees. All such loans are originated in amounts
of up to 97% of the lower of the property's appraised value or the sale price.
Private mortgage insurance is required on all such loans.
The Bank also offers to its full-time employees who satisfy certain
criteria and the general underwriting standards of the Bank fixed and
adjustable-rate mortgage loans with reduced interest rates, which are currently
50 to 100 basis points below the rates offered to the Bank's other customers.
The Employee Mortgage Rate is limited to the purchase, construction or
refinancing of an employee's owner-occupied primary residence. The Employee
Mortgage Rate normally ceases upon termination of employment or if the property
no longer is the employee's primary residence. Upon termination of the Employee
Mortgage Rate, the interest rate reverts to the contract rate in effect at the
time that the loan was extended. All other terms and conditions contained in the
original mortgage and note continue to remain in effect. As of December 31,
2000, the Bank had $6.82 million of Employee Mortgage Rate loans, or 0.68% of
total loans.
Construction Loans. The Bank originates construction loans to individuals
for the construction and acquisition of personal residences. At December 31,
2000, residential construction loans amounted to $5.84 million, or 0.58% of the
Bank's total loans. At December 31, 2000, the unadvanced portion of construction
loans totalled $5.62 million.
The Bank's residential construction loans generally provide for the payment
of interest only during the construction phase, which is usually twelve months.
At the end of the construction phase, the loan converts to a permanent mortgage
loan. Loans can be made with a maximum loan-to-value ratio of 90%, provided that
the borrower obtains private mortgage insurance on the loan if the loan balance
exceeds 80% of the appraised value or sales price, whichever is less, of the
secured property. At December 31, 2000, the largest outstanding residential
construction loan commitment was for $750,000, $3,200 of which was outstanding.
This loan was performing according to its terms at December 31, 2000.
Construction loans to individuals are generally made on the same terms as the
Bank's one- to four-family mortgage loans.
Before making a commitment to fund a residential construction loan, the
Bank requires an appraisal of the property by an independent licensed appraiser.
The Bank also reviews and inspects each property before disbursing any funds
during the term of the construction loan. Loan proceeds are disbursed after each
inspection based on the percentage of completion method.
The Bank also originates residential development loans primarily to finance
the construction of single-family homes and subdivisions. At December 31, 2000,
residential development loans totalled $20.24 million, or 2.01% of the Bank's
total loans. These loans are generally offered to experienced builders with whom
the Bank has an established relationship. Residential development loans are
typically offered with terms of up to 24 months. The maximum loan-to-value limit
applicable to these loans is 80% for contract sales and 70% for speculative
properties. Construction loan proceeds are disbursed periodically in increments
as construction progresses and as inspection by an approved appraiser of the
Bank warrants. At December 31, 2000, the Bank's largest residential development
loan was a nonperforming loan for $3.68 million secured by a retirement facility
located in Central New England. That facility is part of a larger development,
that also had a loan which matured on June 30, 1999 in the amount of $563,000
secured by eight residential units. Interest payments were kept current on the
latter loan, and the latter loan was repaid in 2000. Proceeds from the sale of
units were used to reduce the amount outstanding on the overall lending
relationship by $2.05 million in 2000.
The Bank also makes construction loans for commercial development projects.
The projects include multi-family, apartment, industrial, retail and office
buildings. These loans generally have an interest-only phase during construction
and then convert to permanent financing. Disbursement of funds are at the sole
discretion of the Bank and are based on the progress of construction. The
maximum loan-to-value limit applicable to these loans is 75%. At December 31,
2000, commercial construction loans totalled $7.34 million, or 0.73%, of total
loans.
The Bank also originates land loans to local contractors and developers for
the purpose of improving the property, or for the purpose of holding or
developing the land for sale. Such loans are secured by a lien on the property,
are limited to 70% of the lower of the acquisition price or the appraised value
of the land and have a term
5
of up to two years with a floating interest rate based on the Bank's internal
base rate. The Bank's land loans are generally secured by property in its
primary market area. The Bank requires title insurance and, if applicable, a
hazardous waste survey reporting that the land is free of hazardous or toxic
waste.
Construction and development financing is generally considered to involve a
higher degree of credit risk than long-term financing on improved, owner-
occupied real estate. Risk of loss on a construction loan depends largely upon
the accuracy of the initial estimate of the property's value at completion of
construction compared to the estimated cost (including interest) of construction
and other assumptions. If the estimate of construction cost proves to be
inaccurate, the Bank may be required to advance funds beyond the amount
originally committed in order to protect the value of the property.
Additionally, if the estimate of value proves to be inaccurate, the Bank may be
confronted with a project, when completed, having a value which is insufficient
to assure full repayment.
Commercial and Multi-Family Real Estate Loans. The Bank originates multi-
family and commercial real estate loans that are generally secured by five or
more unit apartment buildings and properties used for business purposes such as
small office buildings, industrial facilities or retail facilities primarily
located in the Bank's primary market area. At December 31, 2000, the Bank had
$161.58 million in commercial and multi-family real estate loans which amounted
to 16.04% of total loans. The Bank's multi-family and commercial real estate
underwriting policies provide that such real estate loans may be made in amounts
of up to 75% of the appraised value of the property provided such loan complies
with the Bank's current loans-to-one-borrower limit, which at December 31, 2000
was $36.63 million. The Bank's multi-family and commercial real estate loans may
be made with terms of up to 25 years and are offered with interest rates that
adjust periodically and are generally indexed to the one, three or five year
Constant Maturity Treasury index. In reaching its decision on whether to make a
multi-family or commercial real estate loan, the Bank considers the net
operating income of the property, the borrower's expertise, credit history and
profitability and the value of the underlying property. In addition, with
respect to commercial real estate rental properties, the Bank will also consider
the term of the lease and the quality of the tenants. The Bank has generally
required that the properties securing these real estate loans have debt service
coverage ratios (the ratio of earnings before debt service to debt service) of
at least 1.20x. Environmental surveys are generally required for commercial real
estate loans. Generally, multi-family and commercial real estate loans made to
corporations, partnerships and other business entities require personal
guarantees by the principals. The largest multi-family or commercial real estate
relationship in the Bank's portfolio was performing with $10.65 million
committed of which $7.49 million was outstanding at December 31, 2000. The
relationship was secured mainly by office and industrial buildings located in
Glastonbury, Berlin, Bloomfield and Avon, Connecticut.
Loans secured by multi-family and commercial real estate properties
generally involve larger principal amounts and a greater degree of risk than
one- to four-family residential mortgage loans. Because payments on loans
secured by multi-family and commercial real estate properties often depend on
the successful operation or management of the properties, repayment of such
loans may be affected by adverse conditions in the real estate market or the
economy. The Bank tries to minimize these risks through its underwriting
standards.
Commercial Loans. At December 31, 2000, the Bank had $146.36 million in
commercial loans which amounted to 14.53% of total loans. In addition, at such
date, the Bank had $63.19 million of unadvanced commercial lines of credit. The
Bank makes commercial business loans primarily in its market area to a variety
of professionals, sole proprietorships and small businesses. The Bank offers a
variety of commercial lending products, including term loans for fixed assets
and working capital, revolving lines of credit, letters of credit, and Small
Business Administration guaranteed loans. The maximum amount of a commercial
business loan is limited by the Bank's loans-to-one-borrower limit which at
December 31, 2000, was $36.63 million. Term loans are generally offered with
initial fixed rates of interest for one to five years and with terms of up to
ten years. Business lines of credit have adjustable rates of interest and are
payable on demand, subject to annual review and renewal. Business loans with
variable rates of interest adjust on a daily basis and are indexed to the Bank's
internal base rate.
When making commercial business loans, the Bank considers the financial
statements of the borrower, the Bank's lending history with the borrower, the
debt service capabilities of the borrower, the projected cash flows of the
business and the value of the collateral. Commercial business loans are
generally secured by a variety of collateral, primarily accounts receivable,
inventory and equipment, and are supported by personal guarantees. Depending on
the collateral used to secure the loans, commercial loan relationships are made
in amounts of up to
6
90% of the value of the collateral securing the loan. The Bank generally does
not make unsecured commercial loans.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment or other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial loans are of higher risk and typically are made
on the basis of the borrower's ability to make repayment from the cash flow of
the borrower's business. As a result, the availability of funds for the
repayment of commercial loans may depend substantially on the success of the
business itself. Further, any collateral securing such loans may depreciate over
time, may be difficult to appraise and may fluctuate in value. At December 31,
2000, the Bank's largest commercial loan relationship had $6.68 million
committed with $5.43 million outstanding and was secured by commercial real
estate located in Windham, Connecticut and operating as a mobile home park. This
loan was performing according to its original terms at December 31, 2000.
Consumer Loans. The Bank offers a variety of consumer loans, including
second mortgage loans and home equity lines of credit, both of which are secured
by owner-occupied one- to four-family residences. At December 31, 2000, second
mortgage loans and equity lines of credit totalled $55.45 million, or 5.50% of
the Bank's total loans and 69.70% of consumer loans. Additionally, at December
31, 2000, the unadvanced amounts of home equity lines of credit totalled $26.90
million. The underwriting standards employed by the Bank for second mortgage
loans and equity lines of credit include a determination of the applicant's
credit history, an assessment of the applicant's ability to meet existing
obligations and payments on the proposed loan and the value of the collateral
securing the loan. Home equity lines of credit have adjustable rates of interest
which are indexed to the prime rate as reported in The Wall Street Journal.
Interest rate adjustments on home equity lines of credit are limited to no more
than a maximum of 17%. Generally, the maximum loan-to-value ratio on home equity
lines of credit is 90%. A home equity line of credit may be drawn down by the
borrower for a period of 10 years from the date of the loan agreement. During
this period, the borrower has the option of paying, on a monthly basis, either
principal and interest or only the interest. The borrower has to pay back the
amount outstanding under the line of credit at the end of a 20 year period. The
Bank offers fixed- and adjustable-rate second mortgage loans with terms up to 20
years. The loan-to-value ratios of both fixed-rate and adjustable-rate home
equity loans are generally limited to 90%.
The Bank offers fixed-rate automobile loans for new or used vehicles with
terms of up to 72 months and loan-to-value ratios of the lesser of the purchase
price or the retail value shown in the NADA Used Car Guide. At December 31,
2000, automobile loans totalled $10.38 million, or 1.03% of the Bank's total
loans and 13.05% of consumer loans.
Other consumer loans at December 31, 2000 amounted to $13.73 million, or
1.36% of the Bank's total loans and 17.26% of consumer loans. These loans
include unsecured personal loans, collateral loans, credit card loans and
education loans. Unsecured personal loans generally have a fixed-rate, a maximum
borrowing limitation of $25,000 and a maximum term of five years. Collateral
loans are generally secured by a passbook account, a certificate of deposit or
marketable securities.
Consumer loans entail greater risk than residential mortgage loans,
particularly in the case of loans that are unsecured or secured by rapidly
depreciating assets such as automobiles. In these cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections depend on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Loans to One Borrower. The maximum amount that the Bank may lend to one
borrower is limited by statute. At December 31, 2000, the Bank's statutory limit
on loans to one borrower was $36.63 million. At that date, the Bank's largest
amount of loans to one borrower, including the borrower's related interests, was
$10.65 million committed, of which $7.49 million was outstanding and consisted
of ten loans secured by various residential and commercial properties. These
loans were performing according to their original terms at December 31, 2000.
7
Maturity of Loan Portfolio. The following table shows the remaining
contractual maturity of the Bank's total loans at December 31, 2000, excluding
the effect of future principal prepayments.
At December 31, 2000
--------------------------------------------------------------------------------
Commercial
One- and Multi-
to Four- Construction family
family (1) Real Estate Commercial Consumer Total
--------------------------------------------------------------------------------
(In thousands)
Amounts due in:
One year or less $ 24 $ 17,619 $ 1,277 $ 35,963 $ 1,311 $ 56,194
After one year:
More than one year to three years 2,336 3,659 3,247 26,155 7,877 43,274
More than three years to five years 3,538 - 4,645 26,688 15,793 50,664
More than five years to 10 years 22,074 - 34,862 29,178 17,938 104,052
More than 10 years to 15 years 75,580 2,832 49,680 10,881 9,845 148,818
More than 15 years 482,984 9,312 67,868 17,495 26,797 604,456
---------- --------- --------- ---------- ---------- -----------
Total amounts due $ 586,536 $ 33,422 $ 161,579 $ 146,360 $ 79,561 $ 1,007,458
========== ========= ========= ========== ========== ===========
(1) Includes residential and commercial real estate loans.
The following table sets forth, at December 31, 2000, the dollar amount of
loans contractually due after December 31, 2001, and whether such loans have
fixed interest rates or adjustable interest rates.
Due After December 31, 2001
--------------------------------------
Fixed Adjustable Total
--------------------------------------
(In thousands)
Real estate loans:
One- to four-family $ 297,882 $ 288,630 $ 586,512
Construction (1) 5,464 10,339 15,803
Commercial and multi-family 12,221 148,081 160,302
--------- --------- ---------
Total real estate loans 315,567 447,050 762,617
Commercial loans 39,852 70,545 110,397
Consumer loans 54,572 23,678 78,250
--------- --------- ---------
Total loans $ 409,991 $ 541,273 $ 951,264
========= ========= =========
(1) Includes residential and commercial real estate loans.
Scheduled contractual principal repayments of loans do not reflect the
actual life of the loans. The average life of a loan is substantially less than
its contractual term because of prepayments. In addition, due-on-sale clauses on
loans generally give the Bank the right to declare loans immediately due and
payable if, among other things, the borrower sells the real property with the
mortgage and the loan is not repaid. The average life of a mortgage loan tends
to increase, however, when current mortgage loan market rates are substantially
higher than rates on existing mortgage loans and, conversely, tends to decrease
when rates on existing mortgage loans are substantially higher than current
mortgage loan market rates.
Loan Approval Procedures and Authority. The Bank's lending activities
follow written, non-discriminatory, underwriting standards and loan origination
procedures established by the Bank's Board of Directors and management. The
Bank's policies and loan approval limits are established by management and are
approved by the Board of Directors. The Board of Directors has designated
certain individuals of the Bank and certain branch managers to consider and
approve loans within their designated authority.
8
All one- to four-family mortgage loans secured by the borrower's primary
residence in amounts of up to $500,000 and all residential construction and
second mortgage loans and home equity lines of credit in amounts of up to
$250,000 may be approved by any two designated individuals. All residential
construction and second mortgage loans and home equity lines of credit in excess
of $250,000 and up to $500,000 require the approval of the Bank's loan
committee. All residential loans in excess of $500,000 and up to $1.00 million
require the approval of the Bank's loan committee. All residential loans in
excess of $1.00 million require the approval of the Executive Committee of the
Board of Directors.
All commercial loans, including commercial real estate loans, multi-family
loans, commercial construction and development loans and commercial business
loans in amounts of up to $500,000 may be approved by any two of the designated
individuals with the appropriate authority. All commercial loans in excess of
$500,000 and up to $1.00 million require the approval of the Bank's loan
committee; and all commercial loans where an individual loan is in excess of
$1.00 million or the aggregate indebtedness exceeds $3.00 million require the
approval of the Executive Committee of the Board of Directors.
With regard to consumer loans, automobile loans in amounts of up to $50,000
and unsecured personal loans in amounts of up to $25,000 may be approved by
either one or two of the designated individuals depending on the credit score;
automobile loans in excess of $50,000 and unsecured personal loans in excess of
$25,000 must be approved by the Bank's loan committee. Collateral loans of up to
$25,000 may be approved by any branch manager.
Loan Originations, Purchases and Sales. The Bank's lending activities are
conducted by its salaried and commissioned loan personnel and through non-bank
third-party correspondents. Currently, the Bank uses 17 loan originators who
solicit and originate mortgage loans on behalf of the Bank. These loan
originators accounted for approximately three quarters of the adjustable-rate
and fixed-rate mortgage loans originated by the Bank in 2000. Loan originators
are compensated by a commission that is based on product, mortgage type, and new
or existing customer relationship. The commission currently ranges from 30 to 60
basis points of the loan amount. All loans originated by the loan originators
are underwritten in conformity with the Bank's loan underwriting policies and
procedures. At December 31, 2000, the Bank serviced $210.15 million of
residential mortgage loans for others.
From time to time, the Bank will purchase loans primarily secured by one-
to four-family residential properties located outside of the Bank's primary
market area, usually in Fairfield County, Connecticut or in Massachusetts.
Purchased loans are underwritten according to the Bank's own underwriting
criteria and procedures and are generally purchased without the accompanying
servicing rights. Amounts outstanding related to loan purchases totalled $88.22
million at December 31, 2000.
9
Substantially all of the Bank's adjustable-rate mortgage loans are
originated for inclusion in the Bank's loan portfolio. Historically, the Bank
originated fixed-rate mortgage loans for sale in the secondary market. However,
since 1998 and due to the low demand for adjustable-rate mortgage loans, the
Bank has begun to retain for its portfolio a significant portion of fixed-rate
mortgage loans. Sales are generally to Freddie Mac, with servicing rights
retained. Loan sale decisions are made by the Bank's management and are
generally based on prevailing market interest rates and the Bank's asset-
liability position.
The following table presents total loans originated, sold, purchased and
repaid during the periods indicated.
For the Year Ended December 31,
---------------------------------------
2000 1999 1998
---------------------------------------
(In thousands)
Loans at beginning of year $ 948,957 $ 817,372 $ 808,237
----------- ----------- ----------
Originations:
Real estate:
One-to four-family 81,722 128,630 160,974
Construction (1) 53,376 60,500 55,492
Commercial and multi-family 15,915 31,571 24,948
----------- ----------- ----------
Total real estate loans 151,013 220,701 241,414
Commercial 93,537 97,246 88,170
Consumer 35,485 33,926 30,684
----------- ----------- ----------
Total loans originated 280,035 351,873 360,268
Loans purchased 27,337 36,911 17,281
----------- ----------- ----------
Total loans originated and purchased 307,372 388,784 377,549
----------- ----------- ----------
Deduct:
Principal loan repayments and prepayments 228,245 236,869 274,246
Loan sales 19,989 18,646 91,917
Charge-offs 433 1,360 1,087
Transfers to other real estate owned 204 324 1,164
----------- ----------- ----------
Total deductions 248,871 257,199 368,414
----------- ----------- ----------
Net increase in loans 58,501 131,585 9,135
----------- ----------- ----------
Loans at end of year $ 1,007,458 $ 948,957 $ 817,372
=========== =========== ==========
(1) Includes residential and commercial real estate loans.
Loan Commitments. The Bank issues loan commitments to prospective
borrowers on the condition that certain events occur. Commitments are made in
writing on specified terms and conditions and are generally honored for up to 60
days from approval. At December 31, 2000, the Bank had loan commitments and
unadvanced loans and lines of credit totalling $176.67 million.
Loan Fees. In addition to interest earned on loans, the Bank receives
income from fees derived from loan originations, loan modifications, late
payments and for miscellaneous services related to its loans. Income from these
activities varies from period to period depending upon the volume and type of
loans made and competitive conditions. On loans originated by third-party
originators, the Bank may pay a premium to compensate an originator for loans
where the borrower is paying a higher rate on the loan.
The Bank charges loan origination fees which are calculated as a
percentage of the amount borrowed. As required by applicable accounting
principles, loan origination fees, discount points and certain loan origination
costs are deferred and recognized over the contractual remaining lives of the
related loans on a level yield basis. At December 31, 2000, the Bank had
approximately $1.20 million of net deferred loan fees. The Bank amortized
approximately $301,000 of net deferred loan fees during the year ended December
31, 2000.
10
Nonperforming Assets, Delinquencies and Impaired Loans. All loan
payments are due on the first day of each month. When a borrower fails to make a
required loan payment, the Bank attempts to cure the deficiency by contacting
the borrower and seeking the payment. A late notice is mailed on the 16/th/ day
of the month. In most cases, deficiencies are cured promptly. If a delinquency
continues beyond the 30/th/ day of the month, the account is referred to an in-
house collector. The Bank generally prefers to work with borrowers to resolve
problems, but the Bank will institute foreclosure or other proceedings, as
necessary, to minimize any potential loss.
On a monthly basis, management informs the Board of Directors of the
amount of loans delinquent for more than 30 days, all loans in foreclosure, and
all foreclosed and repossessed property that the Bank owns. The Bank ceases
accruing interest on mortgage loans when principal or interest payments are
delinquent 90 days or more unless management determines that the loan principal
and interest is fully secured and in the process of collection. Once the accrual
of interest on a loan is discontinued, all interest previously accrued is
reversed against current period interest income once management determines that
interest is uncollectible.
On January 1, 1995, the Bank adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended by SFAS No. 118 "Accounting by
Creditors for Impairment of a Loan--an amendment to SFAS No. 114." At December
31, 2000 and 1999, the Bank had a $6.77 million and $11.49 million,
respectively, recorded investment in impaired loans all of which had no specific
allowances.
At December 31, 2000, the Bank's largest residential development loan
was a nonperforming loan for $3.68 million secured by a retirement facility
located in Central New England. That facility is part of a larger development,
that also had a loan which matured on June 30, 1999 in the amount of $563,000
secured by eight residential units. Interest payments were kept current on the
latter loan, and the latter loan was repaid in 2000. Proceeds from the sale of
units were used to reduce the amount outstanding on the overall lending
relationship by $2.05 million in 2000.
The following table sets forth information regarding nonperforming
loans, troubled debt restructurings and other real estate owned at the dates
indicated.
At December 31,
----------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------
(Dollars in thousands)
Nonperforming loans:
One- to four-family real estate $ 485 $ 501 $ 456 $ 1,732 $ 5,181
Commercial and multi-family real estate 3,685 10,513 388 408 1,076
Commercial 2,528 454 665 680 992
Consumer 74 17 15 15 29
-------- -------- -------- -------- --------
Total nonperforming loans 6,772 11,485 1,524 2,835 7,278
Other real estate owned 125 604 1,759 4,708 5,482
-------- -------- -------- -------- --------
Total nonperforming assets 6,897 12,089 3,283 7,543 12,760
Troubled debt restructurings - - - - -
-------- -------- -------- -------- --------
Total nonperforming assets and troubled
debt restructurings $ 6,897 $ 12,089 $ 3,283 $ 7,543 $ 12,760
======== ======== ======== ======== ========
Total nonperforming loans and troubled
debt restructurings as a percentage
of total loans 0.67% 1.21% 0.19% 0.35% 0.98%
Total nonperforming assets and troubled
debt restructurings as a percentage
of total assets 0.49% 0.98% 0.30% 0.73% 1.32%
Interest income that would have been recorded for the years ended December
31, 2000, 1999 and 1998 had nonaccruing loans been current according to their
original terms amounted to approximately $568,000, $635,000 and $136,000,
respectively. No interest related to these loans was included in interest income
in either year.
11
The following tables set forth the delinquencies in the Bank's loan
portfolio as of the dates indicated.
At December 31, 2000 At December 31, 1999
------------------------------------------ -------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
---------- --------------- ---------- ---------------
Principal Principal Principal Principal
Number Balance of Number Balance of Number Balance of Number Balance of
of Loans Loans of Loans Loans of Loans Loans of Loans Loans
------------------------------------------ -------------------------------------------
(Dollars in thousands)
Real estate loans:
One-to four-family 2 $ 42 6 $ 301 1 $ 32 3 $ 227
Commercial and multi-family - - - - - - - -
--------- -------- -------- -------- --------- -------- -------- -------
Total real estate loans 2 42 6 301 1 32 3 227
--------- -------- -------- -------- --------- -------- -------- -------
Commercial loans 7 310 3 139 5 223 3 124
--------- -------- -------- -------- --------- -------- --------- -------
Consumer loans:
Home equity loans and lines of credit - - - - - - - -
Other 7 16 7 64 3 5 7 7
--------- -------- -------- -------- --------- -------- -------- -------
Total consumer loans 7 16 7 64 3 5 7 7
--------- -------- -------- -------- --------- -------- -------- -------
Total 16 $ 368 16 $ 504 9 $ 260 13 $ 358
========= ======== ======== ======== ======== ======== ======== =======
Delinquent loans to total loans 0.04% 0.05% 0.03% 0.04%
======== ======== ======== =======
At December 31, 1998
--------------------------------------------------------------
60-89 Day 90 Days or More
--------- ---------------
Principal Principal
Number Balance of Number Balance of
of Loans Loans of Loans Loans
---------------------------------------------------------------
(Dollars in thousands)
Real estate loans:
One-to four-family 1 $ 1 4 $ 151
Commercial and multi-family - - 1 279
--------- -------- -------- --------
Total real estate loans 1 1 5 430
--------- -------- -------- --------
Commercial loans 7 137 6 294
--------- -------- -------- --------
Consumer loans:
Home equity loans and lines of credit 1 15 - -
Other 5 7 3 16
--------- -------- -------- --------
Total consumer loans 6 22 3 16
--------- -------- -------- --------
Total 14 $ 160 14 $ 740
========= ======== ======== ========
Delinquent loans to total loans 0.02% 0.09%
======== ========
Real Estate Owned. Real estate acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until sold. When property is acquired, it is recorded at fair market value at
the date of foreclosure, establishing a new cost basis. Holding costs and
declines in fair value after acquisition are expensed. At December 31, 2000, the
Bank had $125,000 of real estate owned consisting of a one- to four-family
residence.
Asset Classification. Banking regulators have adopted various regulations
and practices regarding problem assets of savings institutions. Under such
regulations, federal and state examiners have authority to identify problem
assets during examinations and, if appropriate, require their classification.
There are three classifications for problem assets: substandard, doubtful
and loss. Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that its continued status as an asset of the institution is
not warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified as loss. All or a portion of general loan
loss allowances established to cover probable losses related to assets
classified substandard or doubtful can be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do
12
not qualify as regulatory capital. Assets that do not currently expose the
insured institution to sufficient risk to warrant classification in one of the
aforementioned categories but possess weaknesses are designated "special
mention." The Bank performs an internal analysis of its loan portfolio and
assets to classify such loans and assets similar to the manner in which such
loans and assets are classified by the federal banking regulators. In addition,
the Bank regularly analyzes the losses inherent in its loan portfolio and its
nonperforming loans in determining the appropriate level of the allowance for
loan losses.
Allowance for Loan Losses. In originating loans, the Bank recognizes that
losses will be experienced on loans and that the risk of loss will vary with,
among other things, the type of loan being made, the creditworthiness of the
borrower over the term of the loan, general economic conditions and, in the case
of a secured loan, the quality of the security for the loan. The Bank maintains
an allowance for loan losses to absorb losses inherent in the loan portfolio.
The allowance for loan losses represents management's estimate of probable
losses based on information available as of the date of the financial
statements. The allowance for loan losses is based on management's evaluation of
the collectibility of the loan portfolio, including past loan loss experience,
known and inherent risks in the nature and volume of the portfolio, information
about specific borrower situations and estimated collateral values, and economic
conditions.
The loan portfolio and other credit exposures are regularly reviewed by
management to evaluate the adequacy of the allowance for loan losses. The
methodology for assessing the appropriateness of the allowance includes
comparison to actual losses, peer group comparisons, industry data and economic
conditions. In addition, the regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses
and may require the Bank to make additional provisions for estimated losses
based upon judgments different from those of management.
In assessing the allowance for loan losses, loss factors are applied to
various pools of outstanding loans and certain unused commitments. The Bank
segregates the loan portfolio according to risk characteristics (i.e., mortgage
loans, home equity, consumer). Loss factors are derived using the Bank's
historical loss experience and may be adjusted for significant factors that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date.
In addition, management assesses the allowance using factors that cannot be
associated with specific credit or loan categories. These factors include
management's subjective evaluation of local and national economic and business
conditions, portfolio concentration and changes in the character and size of the
loan portfolio. The allowance methodology reflects management's objective that
the overall allowance appropriately reflects a margin for the imprecision
necessarily inherent in estimates of expected credit losses.
At December 31, 2000, the Bank had an allowance for loan losses of $11.69
million which represented 1.16% of total loans and 172.68% of nonperforming
loans. Although management believes that it uses the best information available
to establish the allowance for loan losses, future adjustments to the allowance
for loan losses may be necessary and results of operations could be adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations. Furthermore, while the Bank believes it has
established its existing allowance for loan losses consistent with generally
accepted accounting principles, there can be no assurance that regulators, in
reviewing the Bank's loan portfolio, will not request the Bank to increase its
allowance for loan losses. In addition, because future events affecting
borrowers and collateral cannot be predicted with certainty, there can be no
assurance that the existing allowance for loan losses is adequate or that
increases will not be necessary should the quality of any loans deteriorate as a
result of the factors discussed above. Any material increase in the allowance
for loan losses may adversely affect the Bank's financial condition and results
of operations.
13
The following table presents an analysis of the Bank's allowance for loan
losses at and for the periods indicated.
At or For the Year Ended December 31,
-----------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------
(Dollars in thousands)
Allowance for loan losses, beginning of year $ 10,617 $ 10,585 $ 9,945 $ 9,131 $ 8,484
-------- --------- --------- --------- ---------
Charged-off loans:
One- to four-family real estate 84 110 340 299 695
Commercial and multi-family real estate 14 790 112 133 326
Commercial 244 337 483 311 366
Consumer 91 123 152 203 375
-------- --------- --------- --------- ---------
Total charged-off loans 433 1,360 1,087 946 1,762
-------- --------- --------- --------- ---------
Recoveries on loans previously charged off:
One- to four-family real estate 153 55 146 215 38
Commercial and multi-family real estate 80 98 12 10 18
Commercial 26 96 283 229 939
Consumer 51 43 86 106 214
-------- --------- --------- --------- ---------
Total recoveries 310 292 527 560 1,209
-------- --------- --------- --------- ---------
Net loans charged-off 123 1,068 560 386 553
-------- --------- --------- --------- ---------
Provision for loan losses 1,200 1,100 1,200 1,200 1,200
-------- --------- --------- --------- ---------
Allowance for loan losses, end of year $ 11,694 $ 10,617 $ 10,585 $ 9,945 $ 9,131
======== ========= ========= ========= =========
Net loans charged-off to average interest-earning loans 0.01% 0.12% 0.07% 0.05% 0.08%
Allowance for loan losses to total loans 1.16 1.12 1.30 1.23 1.23
Allowance for loan losses to nonperforming loans and 172.68 92.44 694.55 350.79 125.46
troubled debt restructurings
Net loans charged-off to allowance for loan losses 1.05 10.06 5.29 3.88 6.06
Recoveries to charge-offs 71.59 21.47 48.48 59.20 68.62
14
The following table presents the approximate allocation of the
allowance for loan losses by loan categories at the dates indicated and the
percentage of such amounts to the total allowance and to total loans. Management
believes that the allowance can be allocated by category only on an approximate
basis. The allocation of the allowance to each category is not indicative of
future losses and does not restrict the use of any of the allowance to absorb
losses in any category.
At December 31,
-----------------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------------ ---------------------------------- -------------------------------------
Percent of Percent of Percent of
Allowance Percent Allowance Percent Allowance Percent
in Each of Loans in Each of Loans in Each of Loans
Category in Each Category in Each Category in Each
to Total Category to to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans Amount Allowance Total Loans
------------------------------------ ---------------------------------- -------------------------------------
(Dollars in thousands)
Real estate $ 6,221 53% 78% $ 5,198 49% 78% $ 4,995 47% 77%
Commercial 4,470 38 14 4,473 42 14 4,714 45 14
Consumer 1,003 9 8 946 9 8 876 8 9
-------- ----- ---- ------- ----- ------ ------- ------- -----
Total allowance
for loan losses 11,694 100% 100% 10,617 100% 100% 10,585 100% 100%
======= ===== ==== ======= ===== ====== ======= ======= =====
-----------------------------------------------------------------------------
1997 1996
-------------------------------------- -------------------------------------
Percent of Percent of
Allowance Percent Allowance Percent
in Each of Loans in Each of Loans
Category in Each Category in Each
to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
-------------------------------------- -------------------------------------
Real estate $ 4,310 43% 78% $3,531 39% 78%
Commercial 4,913 50 13 4,958 54 13
Consumer 722 7 9 642 7 9
------- ----- ------- ------- ---- ----
Total allowance
for loan losses $ 9,945 100% 100% $9,131 100% 100%
======= ===== ======= ======= ==== ====
15
Investment Activities
General. Under Connecticut law, the Bank has authority to purchase a
wide range of investment securities. As a result of recent changes in federal
banking laws, however, financial institutions such as SBM may not engage as
principals in any activities that are not permissible for a national bank,
unless the Federal Deposit Insurance Corporation has determined that the
investments would pose no significant risk to the Bank Insurance Fund and that
SBM is in compliance with applicable capital standards. In 1993, the Regional
Director of the Federal Deposit Insurance Corporation approved a request by SBM
to invest in certain listed stocks and/or registered stocks subject to certain
conditions.
The Bank's Board of Directors has the overall responsibility for the
Bank's investment portfolio, including approval of the Bank's investment policy,
appointment of the Bank's investment adviser and approval of the Bank's
investment transactions. All investment transactions are reviewed by the Board
on a monthly basis. The Bank's President and/or Chief Financial Officer, or
their designees, are authorized to make investment decisions consistent with the
Bank's investment policy and the recommendations of the Bank's investment
adviser and the Board's Investment Committee. The Investment Committee meets
quarterly with the President and Chief Financial Officer in order to review and
determine investment strategies.
The Bank's investment policy is designed to complement the Bank's
lending activities, provide an alternative source of income through interest,
dividends and capital gains, diversify the Bank's assets and improve liquidity
while minimizing the Bank's tax liability. Investment decisions are made in
accordance with the Bank's investment policy and are based upon the quality of a
particular investment, its inherent risks, the composition of the balance sheet,
market expectations, the Bank's liquidity, income and collateral needs and how
the investment fits within the Bank's interest rate risk strategy. Although the
Bank utilizes the investment advisory services of a Boston-based investment
firm, management is ultimately and completely responsible for all investment
decisions.
The Bank's investment policy divides investments into two categories,
fixed income and equity portfolios. The primary objective of the fixed income
portfolio is to maintain an adequate source of liquidity sufficient to meet
regulatory and operating requirements, and to safeguard against deposit
outflows, reduced loan amortization and increased loan demand. The fixed income
portfolio primarily includes debt issues, including mortgage-backed and
asset-backed securities. Substantially all of the Bank's mortgage-backed
securities are issued or guaranteed by agencies of the U.S. Government.
Accordingly, they carry lower credit risk than mortgage-backed securities of a
private issuer. Asset-backed securities are typically collateralized by the cash
flow from a pool of auto loans, credit card receivables, consumer loans and
other similar obligations.
The Bank's investment policy permits the Bank to be a party to
financial instruments with off-balance sheet risk in the normal course of
business in order to manage interest rate risk. The Bank's derivative position
is reviewed by the Investment Committee on a quarterly basis. The investment
policy authorizes the Bank to be involved in and purchase various types of
derivative transactions and products including interest rate swap, cap and floor
agreements. At December 31, 1999, the Bank was a party to one interest rate cap
agreement with a notional principal amount of $25 million. Under the terms of
the cap agreement, the Bank paid a premium totalling $123,000. The cap was sold
during first quarter of 2000 resulting in a net gain of $72,000. At December 31,
2000, the Bank was not party to any interest rate swap, cap, or other derivative
agreement.
The marketable equity securities portfolio has the objective of
producing capital appreciation through long-term investment. Safety of principal
and prudent risk taking are of paramount importance. The total market value of
the marketable equity securities portfolio, excluding Federal Home Loan Bank
stock, is limited by the investment policy to 50% of the SBM's Tier 1 capital.
At December 31, 2000, the market value of the marketable equity securities
portfolio was $49.14 million or 28.43% of the SBM's Tier 1 capital. At December
31, 2000, the net unrealized gains associated with the marketable equity
securities portfolio were $13.92 million. In future periods and subject to
market conditions and other factors, the Bank intends to increase its marketable
equity securities portfolio through periodic purchases of high quality equity
investments. Emphasis will be placed on companies with established records of
growth and financial strength.
16
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" requires that investments be categorized as "held to maturity,"
"trading securities" or "available for sale," based on management's intent as to
the ultimate disposition of each security. SFAS No. 115 allows debt securities
to be classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity." Debt and equity securities held for current resale are classified
as "trading securities." These securities are reported at fair value, and
unrealized gains and losses on the securities would be included in earnings. The
Bank does not currently use or maintain a trading account or have any
investments classified as held to maturity. Debt and equity securities not
classified as either "held to maturity" or "trading securities" are classified
as "available for sale." These securities are reported at fair value, and
unrealized gains and losses on the securities are excluded from earnings and
reported, net of deferred taxes, as a separate component of capital. As
permitted by SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," the Bank adopted the provisions of SFAS No. 133 on January 1, 2000,
earlier than required, and reclassified all held to maturity investments to
available for sale.
All of the Bank's debt securities and mortgage-backed and asset-backed
securities carry market risk insofar as increases in market rates of interest
may cause a decrease in their market value. They also carry prepayment risk
insofar as they may be called or repaid before maturity in times of low market
interest rates, so that the Bank may have to invest the funds at a lower
interest rate. The marketable equity securities portfolio also carries equity
price risk in that, if equity prices decline due to unfavorable market
conditions or other factors, SBM's capital would decrease.
17
The following table presents the amortized cost and fair value of the
Bank's securities, by type of security, at the dates indicated.
At December 31,
----------------------------------------------------------------------
2000 1999 1998
----------------------- ---------------------- ---------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---------- --------- ---------- --------- --------- ---------
(In thousands)
Debt securities held to maturity:
Asset-backed securities $ - $ - $ 17,481 $ 17,418 $ 23,204 $ 23,386
U.S. Government and agency obligations - - - - 3,506 3,524
Corporate securities - - 3,105 2,950 3,145 3,246
--------- -------- ---------- --------- ---------- --------
Total - - 20,586 20,368 29,855 30,156
--------- -------- ---------- --------- ---------- --------
Debt securities available for sale:
Asset-backed securities 32,717 33,816 - - - -
U.S. Government and agency obligations 82,068 85,254 82,486 81,328 70,563 71,703
Corporate securities 58,313 59,212 33,870 33,345 40,128 40,420
--------- -------- ---------- --------- ---------- --------
Total 173,098 178,282 116,356 114,673 110,691 112,123
--------- -------- ---------- --------- ---------- --------
Equity securities available for sale:
Marketable equity securities 35,221 49,144 32,273 50,545 29,427 42,773
Other equity securities 432 432 432 432 396 396
--------- -------- ---------- --------- ---------- --------
Total 35,363 49,576 32,705 50,977 29,823 43,169
--------- -------- ---------- --------- ---------- --------
Total debt and equity securities 208,751 227,858 169,647 186,018 170,369 185,448
--------- -------- ---------- --------- ---------- --------
Mortgage-backed securities:
Mortgage-backed securities available
for sale 79,079 80,223 16,741 16,204 12,832 12,859
Mortgage-backed securities held to
maturity - - 25,474 24,630 22,742 22,898
--------- -------- ---------- --------- ---------- --------
Total mortgage-backed securities 79,079 80,223 42,215 40,834 35,574 35,757
--------- -------- ---------- --------- ---------- --------
Total investment securities $ 287,830 $308,081 $ 211,862 $ 226,852 $ 205,943 $221,205
========= ======== ========== ========= ========== ========
18
At December 31, 2000, the Bank did not own any investment or
mortgage-backed securities of a single issuer, other than U.S. Government and
agency securities, which had an aggregate book value in excess of 10% of SBM's
capital at that date.
The following presents the activity in the investment securities and
mortgage-backed securities portfolios for the periods indicated.
For the Year Ended December 31,
---------------------------------
2000 1999 1998
---------------------------------
(In thousands)
Mortgage-backed and asset-backed securities (1):
Mortgage-backed and asset-backed securities, beginning of year $ 59,159 $ 58,805 $ 58,068
Purchases:
Asset-backed securities - held to maturity - - 5,069
Asset-backed securities - available for sale 25,136 - -
Mortgage-backed securities - held to maturity - 6,876 12,235
Mortgage-backed securities - available for sale 57,220 7,278 -
Sales:
Mortgage-backed securities - available for sale (14,256) - -
Asset-backed securities - available for sale (5,418) - -
Repayments and prepayments (10,713) (13,249) (16,510)
Increase in net premium 132 13 25
Change in unrealized net gain on securities available for sale 2,779 (564) (82)
-------- -------- --------
Net increase in mortgage-backed and asset-backed securities 54,880 354 737
-------- -------- --------
Mortgage-backed and asset-backed securities, end of year 114,039 59,159 58,805
-------- -------- --------
Investment securities (1):
Investment securities, beginning of year 168,755 161,943 123,804
Purchases:
Investment securities - available for sale 127,592 49,875 61,694
Sales:
Investment securities - available for sale (72,566) (18,530) (18,132)
Maturities:
Investment securities - held to maturity - (3,535) (3,500)
Investment securities - available for sale (31,774) (21,778) (5,000)
Increase (decrease) in net premium 615 (1,031) 17
Change in unrealized net gain on securities available for sale 1,420 1,811 3,060
-------- -------- --------
Net increase in investment securities 25,287 6,812 38,139
-------- -------- --------
Investment securities, end of year 194,042 168,755 161,943
-------- -------- --------
Total mortgage-backed, asset-backed and investment securities, end
of year $308,081 $227,914 $220,748
======== ======== ========
(1) Available for sale securities are presented at market value and held to
maturity securities are presented at amortized cost.
19
The following table presents certain information regarding the carrying
194,042 value, weighted average yields and maturities or periods to repricing of
the Bank's debt securities at December 31, 2000.
At December 31, 2000
-----------------------------------------------------------------------
More than One Year More than Five Years
One Year or Less to Five Years to Ten Years
----------------------- ---------------------- -----------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-----------------------------------------------------------------------
(Dollars in thousands)
Available for sale securities:
U.S. Government and agency obligations $ 10,408 6.18% $ 51,358 6.57% $ 23,488 6.18%
Corporate securities 5,477 7.07 42,593 6.44 8,193 7.87
Asset-backed securities - - 16,981 7.04 12,232 6.81
Mortgage-backed securities - - - - 1,324 7.00
---------- --------- --------- -------- -------- --------
Total debt securities at fair value $ 15,885 6.49% $ 110,932 6.59% $ 45,237 6.68%
========== ========= ========
---------------------------------------------
More than Ten Years Total
---------------------- ---------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
-----------------------------------------------
Available for sale securities:
U.S. Government and agency obligations $ - -% $ 85,254 6.41%
Corporate securities 2,949 5.85 59,212 6.67
Asset-backed securities 4,603 6.83 33,816 6.93
Mortgage-backed securities 78,899 7.46 80,223 7.45
-------- -------- ---------- --------
Total debt securities at fair value $ 86,451 7.37% $ 258,505 6.86%
======== =========
20
Deposit Activities and Other Sources of Funds
General. Deposits are the major external source of funds for the Bank's
lending and other investment activities. In addition, the Bank also generates
funds internally from loan principal repayments and prepayments and maturing
investment securities. Scheduled loan repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and money market conditions. SBM may use
borrowings from the Federal Home Loan Bank of Boston to compensate for
reductions in the availability of funds from other sources.
Deposit Accounts. Substantially all of the Bank's depositors reside in
Connecticut. The Bank offers a wide variety of deposit accounts with a range of
interest rates and terms. The Bank's deposit accounts consist of interest-
bearing checking, noninterest-bearing checking, regular savings, money market
savings and certificates of deposit. The maturities of the Bank's certificate of
deposit accounts range from seven days to five years. In addition, the Bank
offers retirement accounts, including IRAs and Keogh accounts and simplified
employee pension plan accounts. The Bank also offers commercial business
products to small businesses operating within its primary market area. Deposit
account terms vary with the principal differences being the minimum balance
deposit, early withdrawal penalties, limits on the number of transactions and
the interest rate. The Bank reviews its deposit mix and pricing on a weekly
basis.
The Bank believes it offers competitive interest rates on its deposit
products. The Bank determines the rates paid based on a number of factors,
including rates paid by competitors, the Bank's need for funds and cost of
funds, borrowing costs and movements of market interest rates. While certificate
accounts in excess of $100,000 are accepted by the Bank, and may receive
preferential rates, the Bank does not actively seek such deposits as they are
more difficult to retain than core deposits. The Bank does not utilize brokers
to obtain deposits and at December 31, 2000, had no brokered deposits.
In the unlikely event SBM is liquidated, eligible depositors as of a
specific record date will be entitled to full payment of their deposit accounts
before any payment is made to the Company as the sole stockholder of the SBM.
The following table presents the deposit activity of the Bank for the
periods indicated.
For the Year Ended December 31,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
(In thousands)
Beginning balance $ 906,591 $ 855,117 $ 827,667
Increase (decrease) before interest credited (6,329) 20,565 (4,969)
Interest credited 33,108 30,909 32,419
----------- ----------- -----------
Net increase 26,779 51,474 27,450
----------- ----------- -----------
Ending balance $ 933,370 $ 906,591 $ 855,117
=========== =========== ===========
At December 31, 2000, the Bank had $57.76 million in certificate of deposit
accounts in amounts of $100,000 or more maturing as follows:
Weighted
Average
Maturity Period Amount Rate
--------------- --------- ---------
(Dollars in thousands)
Three months or less $ 6,005 4.93%
Over 3 months through 6 months 18,567 5.77
Over 6 months through 12 months 19,209 6.38
Over 12 months 13,981 6.17
---------
Total $ 57,762
=========
21
The following table presents information concerning average balances and
weighted average interest rates for the periods indicated.
For the Year Ended December 31,
---------------------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------------ ------------------------------------ ---------------------------------
Percent Percent Percent
of Total Weighted of Total Weighted of Total Weighted
Average Average Average Average Average Average Average Average Average
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
------------------------------------ ------------------------------------ ---------------------------------
(Dollars in thousands)
Savings accounts $ 223,700 24.8% 2.28% $ 226,477 26.0% 2.26% $ 215,769 25.8% 2.36%
Money market
accounts 73,576 8.1 4.24 51,088 5.8 3.52 33,146 4.0 2.87
NOW accounts 115,819 12.8 1.19 105,916 12.1 1.42 94,394 11.2 1.38
Certificates of
deposit 432,624 47.9 5.47 444,550 51.0 5.06 463,226 55.3 5.45
Demand deposits 57,871 6.4 - 44,358 5.1 - 30,985 3.7 -
---------- --------- ---------- -------- ---------- --------
Total $ 903,590 100.0% 3.68% $ 872,389 100.0% 3.54% $ 837,520 100.0% 3.90%
========== ========= ========== ======== ========== ========
Certificates of Deposit by Rates and Maturities. The following table
presents by various rate categories, the amount of certificate accounts
outstanding at the dates indicated and the periods to maturity of the
certificate accounts outstanding at December 31, 2000.
Period to Maturity from December 31, 2000 Total at December 31,
------------------------------------------------------ ---------------------------------
Two to
Less than One to Two Three Over Three
One Year Years Years Years 2000 1999 1998
------------------------------------------------------------------------------------------
(In thousands)
0.00 - 2.00% $ 42 $ - $ - $ - $ 42 $ 18 $ 21
2.01 - 4.00% 1,375 - - - 1,375 2,329 2,598
4.01 - 5.00% 80,460 1,313 1,094 5,718 88,585 207,163 222,709
5.01 - 6.00% 50,276 24,265 18,249 6,735 99,525 195,403 178,662
6.01 - 7.00% 199,699 13,921 3,546 33,146 250,312 39,129 32,907
7.01 - 8.00% - - - - - 6,305 9,227
8.01 - 9.00% - - - - - - 15
-------- --------- --------- -------- --------- -------- ---------
Total $331,852 $ 39,499 $ 22,889 $ 45,599 $ 439,839 $450,347 $ 446,139
======== ========= ========= ======== ========= ======== =========
Borrowings. SBM may use advances from the Federal Home Loan Bank of Boston
to supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The Federal Home Loan Bank of Boston functions as a central
reserve bank providing credit for savings banks and certain other member
financial institutions. As a member of the Federal Home Loan Bank of Boston, SBM
is required to own capital stock in the Federal Home Loan Bank of Boston and is
authorized to apply for advances on the security of the capital stock and
certain of its mortgage loans and other assets, principally securities that are
obligations of, or guaranteed by, the U.S. Government or its agencies, provided
certain creditworthiness standards have been met. Advances are made under
several different credit programs. Each credit program has its own interest rate
and range of maturities. Depending on the program, limitations on the amount of
advances are based on the financial condition of the member institution and the
adequacy of collateral pledged to secure the credit. At December 31, 2000, SBM
had the ability to borrow a total of approximately $447.29 million from the
Federal Home Loan Bank of Boston. Of the total maximum borrowing capacity SBM
had $100.00 million outstanding at December 31, 2000.
22
Federal banking laws and regulations prohibit a bank from paying interest
on commercial checking accounts. However, SBM offers to its commercial customers
a transactional repurchase agreement, a form of non-deposit borrowing by SBM,
that is designed as a mechanism to offer business customers the functional
equivalent of a commercial checking account that pays interest. This account,
overseen by an outside agent, is not a FDIC-insured deposit account, but is
backed by a security interest in U.S. Government and agency securities at a
ratio of approximately 1.10 to 1.00. At December 31, 2000, SBM had such accounts
with balances aggregating $105.73 million, which are included in short-term
borrowed funds, backed by a security interest of $133.43 million or a ratio of
1.26 to 1.00.
The following table presents certain information regarding SBM's Federal
Home Loan Bank advances and short-term borrowed funds at the dates or for the
periods indicated.
At or For the Year Ended December 31,
-------------------------------------
2000 1999 1998
-------------------------------------
(Dollars in thousands)
Average balance outstanding:
Federal Home Loan Bank advances $105,692 $ 58,761 $36,534
Short-term borrowed funds 110,520 89,133 76,523
Maximum amount outstanding at any month-end during the
period:
Federal Home Loan Bank advances 124,000 95,962 45,000
Short-term borrowed funds 119,821 104,575 87,790
Balance outstanding at end of period:
Federal Home Loan Bank advances 100,000 84,000 45,000
Short-term borrowed funds 106,493 95,814 79,545
Weighted average interest rate during the period:
Federal Home Loan Bank advances 6.39% 6.09% 6.31%
Short-term borrowed funds 3.31 3.06 3.00
Weighted average interest rate at end of period:
Federal Home Loan Bank advances 6.15 6.03 6.21
Short-term borrowed funds 3.20 3.12 2.84
Subsidiary Activities
The following are descriptions of SBM's wholly owned subsidiaries, which
are indirectly owned by the Company.
SBM, Ltd. SBM, Ltd. was organized in February 1983 for the purpose of
acquiring and holding real estate acquired by the Bank. In 1990, the purpose
changed to acquire, hold and dispose of real estate acquired through
foreclosure. At December 31, 2000, SBM, Ltd. held no properties and had no
assets.
923 Main, Inc. 923 Main was incorporated in December 1994 for the purpose
of maintaining an ownership interest in a third party registered broker-dealer,
Infinex Financial Group. Infinex maintains an office at the Bank and offers to
customers a complete range of nondeposit investment products, including mutual
funds, debt, equity and government securities, retirement accounts, insurance
products and fixed and variable annuities. The Bank receives a portion of the
commissions generated by Infinex from sales to customers. For the years ended
December 31, 2000 and 1999, the Bank received fees of $1.38 million and $1.16
million, respectively, through its relationship with Infinex.
23
Savings Bank of Manchester Mortgage Company, Inc. SBM Mortgage was
established in January 1999 to service and hold loans secured by real property.
SBM Mortgage was established and is managed to qualify as a passive investment
company for Connecticut income tax purposes. Income earned by a qualifying
passive investment company is exempt from Connecticut income tax. Accordingly,
no state income taxes were provided in 1999 or 2000.
Savings Bank of Manchester Foundation, Inc.
In 1998, SBM established a private charitable foundation, Savings Bank
of Manchester Foundation, Inc. This foundation, which is not a subsidiary of the
Company or SBM, provides grants to individuals and not-for-profit organizations
within the communities that the Bank serves. In 1998, SBM contributed marketable
equity securities with a cost basis and fair market value of $700,000 and $3.00
million, respectively, at the date of contribution and transfer. At December 31,
2000, the foundation had assets of approximately $3.19 million. The foundation's
four member Board of Trustees consists of current directors, officers and
employees of the Bank. The Bank intends to maintain the foundation, but does not
expect to make any further contributions to the foundation in the future.
SBM Charitable Foundation, Inc.
During 2000, the Bank established a second private charitable
foundation, SBM Charitable Foundation, Inc. This foundation, which is not a
subsidiary of the Company or SBM, provides grants to individuals and
not-for-profit organizations within the communities that the Bank serves. In
2000, in connection with the Company's conversion to stock form, the Company
contributed 832,000 shares of company stock with a cost basis and fair market
value of $8.32 million, at the date of contribution and transfer. At December
31, 2000, the foundation had assets of approximately $15.18 million, consisting
primarily of the company stock. The foundation's thirteen member Board of
Directors consists of current directors, officers and employees of the Bank. The
Bank intends to maintain the foundation, but does not expect to make any further
contributions to the foundation in the future.
REGULATION AND SUPERVISION
General
As a savings bank chartered by the State of Connecticut, SBM is
extensively regulated under state law by the Connecticut Banking Commissioner
("Commissioner") with respect to many aspects of its banking activities. In
addition, as a bank whose deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") through the Bank Insurance Fund ("BIF"), SBM must pay
deposit insurance assessments and is examined and supervised by the FDIC. These
laws and regulations have been established primarily for the protection of
depositors, customers and borrowers of SBM, not its stockholders.
The Bank is also required to file reports with, and otherwise comply
with the rules and regulations of, the Office of Thrift Supervision ("OTS"), the
Commissioner, and the Securities and Exchange Commission ("SEC") under the
federal securities laws. The following discussion of the laws and regulations
material to the operations of the Company and SBM is a summary and is qualified
in its entirety by reference to such laws and regulations.
SBM and the Company, as a savings and loan holding company, are
extensively regulated and supervised. Regulations, which affect the Bank on a
daily basis, may be changed at any time, and the interpretation of the relevant
law and regulations may also change because of new interpretations by the
authorities who interpret those laws and regulations. Any change in the
regulatory structure or the applicable statutes or regulations, whether by the
Commissioner, the State of Connecticut, the OTS, the FDIC or the U.S. Congress,
could have a material impact on the Company and SBM.
24
Connecticut Banking Laws and Supervision
The Commissioner regulates SBM's internal organization as well as its
deposit, lending and investment activities. The approval of the Commissioner is
required for, among other things, the establishment of branch offices and
business combination transactions. The Commissioner conducts periodic
examinations of SBM. The FDIC also regulates many of the areas regulated by the
Commissioner and federal law may limit some of the authority provided to SBM by
Connecticut law.
Lending Activities. Connecticut banking laws grant banks broad lending
authority. With certain limited exceptions, however, total secured and unsecured
loans made to any one obligor under this statutory authority may not exceed 10%
and 15%, respectively, of the bank's equity capital and reserves for loan and
lease losses.
A savings bank may pay cash dividends out of its net profits. For
purposes of this restriction, "net profits " means the remainder of all earnings
from current operations. Further, the total amount of all dividends declared by
a savings bank in any calendar year may not exceed the sum of the bank's net
profits for the year in question combined with its retained net profits from the
preceding two calendar years. Additionally, earnings appropriated to reserves
for loan losses and deducted for federal income tax purposes are not available
for cash dividends without the payment of taxes at then current income tax rates
on the amount used. Federal law also prevents an institution from paying
dividends or making other capital distributions if doing so would cause it to
become "undercapitalized." The FDIC may limit a savings bank's ability to pay
dividends. No dividends may be paid to the Bank's stockholders if such dividends
would reduce stockholders' equity below the amount of the liquidation account
required by the Connecticut conversion regulations.
Branching Activities. Any Connecticut-chartered bank meeting certain
statutory requirements may, with the Commissioner's approval, establish and
operate branches in any town or towns within the state and establish mobile
branches.
Investment Activities. Connecticut law requires the board of directors
of each Connecticut bank to adopt annually an investment policy to govern the
types of investments the bank makes, and to periodically review the bank's
adherence to its investment policy. The investment policy must establish
standards for the making of prudent investments and procedures for divesting
investments no longer deemed consistent with the bank's investment policy. In
recent years, Connecticut law has expanded bank investment activities.
Connecticut banks may invest in debt securities and debt mutual funds
without regard to any other liability to the Connecticut bank of the maker or
issuer of the debt securities and debt mutual funds, if the debt securities and
debt mutual funds are rated in the three highest rating categories or otherwise
deemed to be a prudent investment, and so long as the total amount of debt
securities and debt mutual funds of any one issuer will not exceed 25% of the
bank's total equity capital and reserves for loan and lease losses and the total
amount of all its investments in debt securities and debt mutual funds will not
exceed 25% of its assets. In addition, a Connecticut bank may invest in certain
government and agency obligations according to the same standards as debt
securities and debt mutual funds except without any percentage limitation.
Similarly, Connecticut banks may invest in equity securities and equity
mutual funds without regard to any other liability to the Connecticut bank of
the issuer of equity securities and equity mutual funds, so long as the to