ITEM 1 - BUSINESS.
The main office of the Company and of the Bank is located at 121 Main Street, Southington, Connecticut 06489. The telephone number is 860-628-0351.
The Company was incorporated under the laws of the State of Delaware on March 31, 1994, to operate principally as the bank holding company of the Bank. The Company acquired all of the Bank's outstanding common stock on November 17, 1994, in a one-for-one exchange with the Bank's existing shareholders. The Bank is the sole subsidiary of the Company and its principal asset.
General
The Bank is a Connecticut chartered capital stock commercial bank. The Bank was organized in 1860, and in 1986 it converted from a mutual to a capital stock savings bank. In July 2001, the Bank effected the change of its charter from a savings bank to a commercial bank, as approved by the Connecticut Banking Commissioner on May 9, 2001. This change was made in order to more closely reflect how the Bank presently conducts its banking operations. The Bank is subject to supervision, examination and regulation by the Connecticut Banking Commissioner. The Bank's deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC"), which also has supervisory and regulatory authority over the Bank. The Bank is a member of the Federal Home Loan Bank (the "FHLB") of Boston. The Company is subject to regulation by the Federal Reserve Board as the registered bank holding company of the Bank.
The Bank's primary market area is the greater central Connecticut region. The Bank operates four branch offices in Southington and three additional branch facilities in Cheshire, Kensington and Wallingford. Southington, which is contiguous to the towns of Berlin, Bristol, Cheshire, Meriden, New Britain, Plainville, and Wolcott, is located approximately 18 miles from Hartford, 25 miles from New Haven and 9 miles from Waterbury. Kensington is a section of the town of Berlin. The Cheshire and Kensington branch offices are approximately 5 and 6.5 miles, respectively, from the Bank's main office. Wallingford is contiguous to the City of Meriden.
In January 2001, the Bank filed applications with the Connecticut Department of Banking for new branch offices in Kensington and Cheshire. Both office locations were approved by the Connecticut Department of Banking in February, 2001 and were opened in April 2001. The Kensington office provides a business platform for the Newington, New Britain, and Berlin marketplace and the Cheshire office helps the Bank better service the substantial presence it already has in the Cheshire area.
The Bank's principal business consists of attracting and accepting deposits from the general public and investing those deposits, together with funds generated by fees and other income, in various types of loans and investments, including commercial loans, residential loans, consumer loans and securities.
The Bank's business strategy is to operate primarily as an innovative full-service community financial institution, offering a wide range of commercial and consumer services. These services include checking accounts, NOW accounts, regular savings accounts, money market accounts, individual retirement accounts, savings certificates, commercial demand deposit accounts, residential real estate loans, home equity loans and lines of credit, consumer loans, secured and unsecured commercial loans and lines of credit, letters of credit, credit card and debit card services, Internet banking (including bill-paying services), and cash management services. The Bank makes available Savings Bank Life Insurance ("SBLI"). The Bank provides investment brokerage and insurance services through Infinex Financial Group, Inc. and its affiliates. Investment products such as mutual funds, tax exempt securities and individual stocks and bonds are provided through Infinex Investment Group, a broker-dealer. Insurance products such as annuities are provided through Infinex Insurance Group, a licensed insurance agency. Near the end of the second quarter of 2000, the Bank launched a new wholly-owned subsidiary known as SSB Insurance Services, Inc. which earns commissions on auto, homeowner and business insurance product referrals to existing and prospective clients through a joint marketing agreement with an insurance agency.
The main focus of the Bank's lending activities is the origination of commercial and industrial loans, consumer loans and residential mortgage loans. The Bank also makes auto loans and commercial real estate loans. In recent years, the Bank has concentrated its efforts on increasing the percentage of commercial and consumer loans within its loan portfolio. Commercial loans consist primarily of lines of credit with interest rates tied to the prime rate and fixed rate term loans. Commercial real estate loans are primarily first mortgage loans with adjustable rates. Consumer loan originations have been primarily fixed rate home equity loans with maximum terms of 15 years or less. The Bank also offers home equity lines of credit that have interest rates tied to the prime lending rate and are available for a term of 10 years. The Bank offers a wide variety of fixed and variable rate residential mortgage loan products. In the future, the Bank expects to continue to place a greater emphasis on the growth of its commercial loan portfolio.
The Bank's primary focus with respect to residential mortgage loans continues to be origination for sale into the secondary mortgage market on a servicing released basis, or loan referrals to third parties for fee income. The sale of fixed rate mortgages allows the Bank to generate both a higher volume of fixed rate mortgages without impairing its asset/liability management and provide additional fee income. The Bank continues to supplement its own loan originations by purchasing automobile loans from BCI Financial Corporation ("BCIF"), a majority-owned subsidiary of the Bank that was formed in 1998 to originate indirect automobile loans for sale to the Bank and other financial institutions. In addition, the Bank continues to purchase the guaranteed portion of Small Business Administration and USDA business loans.
The principal sources of funds for the Bank's activities are deposit accounts, amortization and prepayment of loans, borrowings from the FHLB of Boston, reverse repurchase agreements and funds provided from operations. The Bank's principal sources of income are interest on loans and interest and dividends on investment securities. The Bank also has realized income from the sale of loans and investment securities. To a lesser extent, the Bank realizes other noninterest income, including income from service charges on deposit accounts, income from call options premiums written on marketable equity security holdings, brokerage and insurance services, SBLI sales, origination compensation from referrals of residential mortgage loans, and fee income from the sale and servicing of loans generated by BCIF.
The Bank conducts its banking operations through six full service offices, one limited purpose branch, and one drive-in center. All of the foregoing offices and branches are located in Southington, except for three branch facilities that are located in the towns of Cheshire, Kensington and Wallingford. As discussed previously, the branch offices in Kensington and Cheshire were opened in April 2001. As of February 28, 2002, the Bank had 108 full-time employees and 40 part-time employees. The Company has no paid employees.
The Bank has not obtained a material portion of its deposits from a single person or small group of persons. No material portion of the Bank's loans is concentrated within a single industry or group of industries.
The Bank primarily makes commercial, residential and consumer loans to customers located within its primary market area in the State of Connecticut. The majority of the Bank's loan portfolio is collateralized by real estate.
During the past two years, the Bank's officers and employees continually have engaged in marketing activities, including evaluation and development of new services. During 2001, the Bank was selected as the first prepaid card issuer for the MasterCard Bonus Card, a reward option of the MasterCard Business Bonuses™ program for small businesses. This program allows small business customers to take points earned with MasterCard credit card purchases and redeem them for a prepaid card. In addition to the Bonus Card, the Bank also became the prepaid card issuer for a MasterCard employee pilot program designed for teenagers. The Bank's participation in MasterCard's programs is another way for it to diversify its noninterest revenues. During 2000, a comprehensive Internet-based cash management system for business customers was introduced by the Bank which was favorably received by its existing customers. As of December 31, 2001, the Bank had nearly 100 business clients using its Internet cash management facility. In the second quarter of 2000, the Bank introduced SSB Insurance Services, Inc., a wholly-owned subsidiary of the Bank, which offers a variety of insurance products to Connecticut residents. The Bank's initial investment in SSB Insurance Services, Inc. was $10,000.
The Bank's business is not seasonal. Based upon the Bank's present business activities, compliance with Federal, state and local provisions regulating the discharge of materials into the environment will not materially affect the Bank's or the Company's capital expenditures, earnings or competitive position.
Competition
The banking business in the greater central Connecticut region which the Bank serves, and in Connecticut generally, is highly competitive. Intense market demands, economic pressures, fluctuating interest rates and increased customer awareness of product and service differences among financial institutions have forced such institutions to continue to diversify their services, increase returns on deposits and become more cost effective.
The Bank experiences substantial competition in attracting and retaining deposits and in making loans of all types. The Bank competes for deposit accounts with other commercial banks, savings banks, savings and loan associations, credit unions, insurance companies, securities brokerage houses and money market mutual funds. Competition for deposits includes competition not only from other deposit accounts, but also competition with various other investment vehicles, such as corporate and governmental securities and mutual funds, which may offer higher rates of return. Interest rates, convenience of office locations, service and marketing are all significant factors in the Bank's competition for deposits. From time to time, competing financial institutions set rates higher than market rates to attract or retain deposits, a fact which may cause upward pressure on the Bank's rate structure or a loss of deposits.
Competition for loans comes from other commercial banks, savings banks, savings and loan associations, insurance companies, consumer finance companies, mortgage companies, credit unions and other lending institutions located throughout the United States. Banking combinations completed during the past several years in New England have increased the resources of several major banks and other financial institutions that operate many offices over a wide geographic area, including the Bank's primary market area. Because of their greater capitalization, these other institutions have substantially higher lending limits than the Bank. The Bank competes for loan originations through the interest rates and loan fees it charges and the efficiency and quality of services it provides. Competition is affected by the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors that are not readily predictable.
The Bank's market area is served by a significant number of financial institutions. Thirty-seven offices (not including the Bank's seven offices) of twelve banking institutions are located in Southington, Cheshire, Kensington, and Wallingford alone. At December 31, 2001, there were approximately fifty mortgage lenders operating in the Bank's primary market area.
In addition, Federal and Connecticut legislation likely will continue to further increase competition for deposits and loans in the Bank's primary market area. Since 1995, Connecticut has affirmatively "opted-in" to Federal law to permit interstate mergers and acquisitions, the establishment of Connecticut chartered banks by foreign bank holding companies and interstate de novo branching, subject to certain reciprocity requirements.
Federal legislation enacted in 1999 also allows broad new affiliations among banks, securities companies and insurance firms. See "Regulation and Supervision - Gramm-Leach-Bliley Act" below.
Regulation and Supervision
General
As a Connecticut-chartered capital stock commercial bank, the deposits of which are insured by the FDIC, the Bank is subject to extensive regulation and supervision by both the Connecticut Banking Commissioner and the FDIC. The Company also is subject to certain regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). This governmental regulation is intended primarily to protect depositors and the FDIC's Bank Insurance Fund, not the Company's shareholders.
Connecticut Regulation
The Connecticut Banking Commissioner regulates the Bank's internal organization as well as its deposit, lending and investment activities. The approval of the Connecticut Banking Commissioner is required, among other things, for the establishment of branch offices and business combination transactions. The Connecticut Banking Commissioner conducts periodic examinations of the Bank. The FDIC also regulates many of the areas regulated by the Connecticut Banking Commissioner.
Connecticut banking laws grant banks broad lending authority. Subject to certain limited exceptions, however, total secured and unsecured loans made to any one obligor pursuant to this statutory authority may not exceed 25% of the Bank's equity capital and reserves for loan and lease losses.
Connecticut banking law prohibits the Bank from paying dividends in certain situations. For a further description of this limitation, see Item 5 below.
Under Connecticut banking law, no person may acquire beneficial ownership of more than 10% of any class of voting securities of a Connecticut-chartered bank, or any bank holding company of such a bank, without prior notification of, and lack of disapproval by, the Connecticut Banking Commissioner. Similar restrictions apply to any person who holds in excess of 10% of any such class and desires to increase its holdings to 25% or more of such class.
Any Connecticut-chartered bank meeting certain statutory requirements may, with the Connecticut Banking Commissioner's approval, establish and operate branches in any town or towns within the state. Banks may also establish mobile branches with the Banking Commissioner's approval.
Connecticut law presently permits Connecticut banks to engage in stock acquisitions of, and mergers with, depository institutions in other states with reciprocal legislation. Many other states have enacted reciprocal legislation. Several interstate mergers and acquisitions have been completed which involve Connecticut bank holding companies or banks with offices in the Bank's primary market area and bank holding companies or banks headquartered in other states.
As noted above, in 1995, Connecticut affirmatively "opted-in" to permit interstate mergers and acquisitions, the establishment of Connecticut chartered banks by foreign bank holding companies and interstate de novo branching, subject to certain reciprocity requirements. Connecticut law also places a minimum permissible age of 5 years on the target bank and a 30% limit on concentration of deposits in both interstate and intrastate acquisitions. An out-of-state bank may also merge or consolidate with or acquire a branch of another out-of-state bank which has a branch in Connecticut.
Connecticut law presently requires the board of directors of each Connecticut bank to adopt annually and to periodically review an investment policy governing investments by such bank, which policy must establish standards for the making of prudent investments. In addition, Connecticut law permits Connecticut banks to sell fixed and variable rate annuities if licensed to do so by the Connecticut Insurance Commissioner.
Connecticut banks can invest in debt securities without regard to any other liability to the Connecticut bank of the maker or issuer of the debt securities, if the securities are rated in the three highest rating categories or otherwise deemed to be a prudent investment, and so long as the total amount of such debt securities does not exceed 25% of the bank's total equity capital and reserves for loan and lease losses and 25% of its assets.
Connecticut banks may invest in equity securities without regard to any other liability to the Connecticut bank of the issuer of such securities, so long as the total amount of equity securities of any one issuer does not exceed 25% of the bank's total equity capital and reserves for loan and lease losses and 25% of its assets.
Legislation recently enacted in Connecticut (i) permits, subject to certain limitations, Connecticut banks to sell insurance, directly or indirectly; and (ii) permits a Connecticut bank to convert to an uninsured bank.
In 2001, Connecticut legislation incorporated the privacy provisions of the Gramm-Leach-Bliley Financial Modernization Act of 1999 with respect to financial institutions under the jurisdiction of the Connecticut Banking Commissioner. The federal privacy provisions prohibit "financial institutions," as defined, from disclosing nonpublic personal information to nonaffiliated third parties unless the customer or consumer is given the opportunity to opt-out of having the information disclosed and does not opt-out. Connecticut privacy laws protect a much narrower range of information than is protected under the federal act. However, the state law is stricter than the federal law in that it is an opt-in provision requiring the customer's consent for disclosure, and it limits disclosure to any person and not just nonaffiliated third parties. The legislation, by incorporating into state law those opt-out privacy provisions of the federal act that are applicable to specified entities subject to the jurisdiction of the Connecticut Banking Commissioner, gives the Commissioner enforcement authority with respect to such federal provisions.
Connecticut legislation proposed in 2002 would provide state-chartered banks with the authority to engage in any activity that a federal bank or an out-of-state bank may be authorized to engage in under any state law, provided advance notice is provided to the Banking Commissioner, and the Banking Commissioner does not disapprove such activity.
FDIC Regulation
The Bank's deposit accounts are insured by the FDIC, generally, to a maximum of $100,000 for each insured depositor. As with all state-chartered, FDIC insured banks, the Bank is subject to extensive supervision and examination by the FDIC. FDIC insured banks also are subject to FDIC regulations governing many aspects of their business and operations, including types of deposit instruments offered and permissible methods of acquisition of funds.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the FDIC has implemented a system of risk-related deposit insurance assessments. Under this system, for the first six months and the second six months of 2001, insurance premiums for all banks varied between 0.0% and .27% of total deposits, depending upon the capital level and supervisory rating of the institution. The FDIC has stated that it will reevaluate the adequacy of its assessment schedule every six months, and the FDIC may increase or decrease premium levels by up to 5 basis points each six months. The Bank Insurance Fund FDIC insurance premium for the Bank was 0.0% for 2001 and 0.0% for the first six months of 2002.
The Deposit Insurance Funds Act of 1996 also authorizes the Financing Corporation ("FICO") to levy assessments on Bank Insurance Fund ("BIF") -assessable deposits (the Bank's deposits). The FICO rate for the Bank is not tied to FDIC risk classification. The FICO BIF annual rate expressed in basis points for each quarter in 2001 commencing with the first quarter was 1.960, 1.900, 1.880 and 1.840, respectively, or an average rate of 1.895 basis points for the year 2001. The FICO BIF annual rate for the first quarter of 2002 is 1.820 basis points and for the second quarter of 2002 is 1.760 basis points.
Under the FDIC's risk-based capital requirements, each FDIC-insured bank is required to maintain minimum levels of "capital" based on the institution's total "risk-weighted assets." For purposes of these requirements, "capital" is comprised of Tier 1 capital and Tier 2 capital. Tier 1 capital consists primarily of common stock and limited amounts of perpetual preferred stock. Tier 2 capital consists primarily of the allowance for loan and lease losses (subject to certain limitations), unrealized gains on certain equity securities (subject to certain limitations), and certain preferred stock, subordinated debt and convertible securities. In determining total capital, the amount of Tier 2 capital may not exceed the amount of Tier 1 capital. A bank's total "risk-weighted assets" are determined by assigning the bank's assets and off-balance sheet items (e.g., letters of credit) to one of four risk categories based upon their relative credit risk. Under the FDIC regulations, the greater the risk associated with an asset, the greater the amount of such assets that will be subject to the capital requirements. Those banks whose trading activities equal 10% or more of total assets or $1 billion or more must incorporate capital charges for certain market risks into the risk-based capital ratio. All FDIC-insured banks are required to maintain their capital at or above certain minimum ratios. At December 31, 2001, the Bank's capital exceeded these minimums. See "Management's Discussion and Analysis-Liquidity and Capital Resources" in the 2001 Annual Report for a more detailed description of these requirements and the Bank's capital position at December 31, 2001.
In addition, FDICIA categorizes banks based on five separate capital levels and triggers certain mandatory and discretionary federal banking agency responses for institutions that fall below certain capital levels. These categories range from "well capitalized" for the most highly capitalized institutions to "critically undercapitalized" for the least capitalized institutions. Under regulatory definitions, an institution is considered "well capitalized" (the highest rating) if its leverage capital ratio is 5% or higher, its Tier 1 risk-based capital ratio is 6% or higher, its total risk-based capital ratio is 10% or higher and it is not subject to certain regulatory orders. On December 31, 2001, the Bank had a leverage capital ratio of 9.35%, a Tier 1 risk-based capital ratio of 13.22% and a total risk-based capital ratio of 14.47%. At December 31, 2001, the Bank was not subject to any regulatory order.
Effective April 1, 2002 the FDIC adopted a final rule governing the regulatory capital treatment for equity investments in non-financial companies. Under the final rule, covered equity investments are subject to a Tier 1 capital charge (for both risk-based and leverage capital purposes) that increases in steps as the banking organization's level of concentration in equity investments increases.
FDICIA also limits the ability of FDIC-insured banks, such as the Bank, to acquire and retain equity investments. Generally, state banks may hold equity securities only to the extent permitted for national banks. However, FDICIA also permits certain state banks to acquire or retain equity investments in an amount up to 100% of Tier 1 capital in either (1) common or preferred stock listed on a national securities exchange, or (2) shares of a registered investment company. The Bank applied for and was granted this exception.
Additionally, FDICIA generally prohibits a FDIC-insured bank from making investments of more than 15% of its total capital in money market preferred stocks and adjustable rate preferred stocks. On December 29, 1995, the FDIC granted the Bank permission to make such investments in amounts up to 100% of its Tier 1 leverage capital.
The FDIC regulations that implement FDICIA generally require an insured state bank to obtain the FDIC's prior consent before directly, or indirectly through a majority-owned subsidiary, engaging "as principal" in any activity that is not permissible for a national bank unless one of the exceptions contained in the regulation applies. The Company does not believe that this regulation has had or will have a material impact on the business of the Bank.
Effective January 5, 2001, the FDIC adopted a final rule to implement certain provisions of the Gramm-Leach-Bliley Act governing activities and investments of insured state banks. The final rule provides the framework for subsidiaries of state nonmember banks to engage in financial activities - including securities underwriting - that the new law permits national banks to conduct through a financial subsidiary. As in the past, all contemplated activities must be permitted by the institution's chartering authority. Under the final rule, state nonmember banks must self-certify that they meet the requirements to carry out these activities, which will allow them to conduct the new activities immediately. When the bank submits the notice, the bank and all of its depository institution affiliates must have a Community Reinvestment Act compliance rating of no less than satisfactory.
The FDIC also adopted a final rule on the privacy of consumers' financial information, as required by the Gramm-Leach-Bliley Act. The rule took effect November 13, 2000, but financial institutions had until July 1, 2001, to be in mandatory compliance with the regulation.
The rule (i) requires a financial institution to provide notice to customers about its privacy policies and practices; (ii) describes under what conditions a financial institution may disclose nonpublic personal information about customers to nonaffiliated third parties; and (iii) provides an "opt-out" method for consumers to prevent the financial institution from disclosing that information to nonaffiliated third parties.
Also, in February 2001, the FDIC published final guidelines establishing standards for safeguarding customer information that implement certain provisions of the Gramm-Leach-Bliley Act. The Guidelines were effective July 1, 2001.
Pursuant to FDICIA, the federal bank regulatory agencies have issued rules establishing standards for safety and soundness at FDIC-insured institutions and their holding companies. These standards formalize in regulation the fundamental standards used by the federal bank regulatory agencies to assess the operational and managerial qualities of an institution. The rules establish operational, managerial, asset quality and earnings standards for FDIC-insured banks and their holding companies and standards that prohibit as an unsafe and unsound practice the payment of compensation that is excessive or could lead to material financial loss to such institutions. These standards are designed to identify potential safety and soundness concerns and ensure that action is taken to address those concerns before they pose a risk to the deposit insurance funds.
The FDIC may terminate FDIC insurance of the Bank's deposits after notice and a hearing upon a finding by the FDIC that the Bank has engaged in unsafe or unsound practices or is in an unsafe and unsound condition to continue operations or has violated any applicable law, regulation, rule or order of, or conditions imposed by, the FDIC. The Bank is not aware of any practice, condition or violation that might lead to termination of its deposit insurance.
Federal Reserve System Regulation
Under the regulations of the Federal Reserve System, depository institutions such as the Bank are required to maintain reserves against their transaction accounts. During 2001 through November 18, 2001, these regulations generally required the maintenance of reserves of 3.0% against net transaction accounts between $5.5 million and $42.8 million and 10.0% of the amount of such accounts in excess of such amount. Effective November 19, 2001, these regulations generally required the maintenance of reserves of 3% against net transaction accounts between $5.7 million and $41.3 million and 10% of the amount of such accounts in excess of such amount. These amounts and percentages are subject to further adjustment by the Federal Reserve Board.
The Company is subject to regulation by the Federal Reserve Board as a registered bank holding company. The Federal Bank Holding Company Act of 1956, as amended (the "BHCA"), under which the Company registered, limits the types of companies which the Company may acquire or organize and the activities in which they may engage. In general, prior to the enactment of the Gramm-Leach-Bliley Act in November 1999, a bank holding company and its subsidiaries were prohibited from engaging in or acquiring direct control of any company engaged in non-banking activities unless such activities are so closely related to banking or managing or controlling banks as to be a proper incident thereto. With the enactment of the Gramm-Leach-Bliley Act, a financial holding company may engage in any activity, and may acquire and retain the shares of any company engaged in any activity, that the Federal Reserve Board has determined (i) to be financial in nature or incidental to such financial activity or (ii) is complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. A bank holding company may not engage in such activities unless all of its depository institution subsidiaries are well-capitalized and well-managed, and the bank holding company has filed an election to engage in such activities with the Federal Reserve Board. As of December 31, 2001, the Company has not filed for such an election. A "financial holding company" is defined to be a bank holding company that meets the requirements set forth in the preceding sentence.
The Federal Reserve Board has established capital adequacy guidelines for bank holding companies that are similar to the FDIC's capital requirements described above. As of December 31, 2001, the Company was in full compliance with all applicable capital requirements, and management believes that the Company will maintain such compliance.
The BHCA requires, with certain exceptions, a bank holding company to obtain the Federal Reserve Board's approval prior to acquiring more than 5% of the outstanding voting stock of any bank or bank holding company, acquiring all or substantially all of the assets of a bank or merging or consolidating with another bank holding company.
Under the BHCA, the Company, the Bank and any other subsidiaries generally are prohibited from engaging in certain reciprocal arrangements in connection with any extension of credit or provision of any property or services. The Bank is also subject to certain restrictions imposed by the Federal Reserve Act on making certain investments in the stock or other securities of the Company or in certain of the Company's subsidiaries, and the taking of such stock or securities as collateral for loans to any borrower.
The Bank also is subject to certain restrictions imposed by the Federal Reserve Act on the amount of loans it can make to the Company or certain other affiliates. Such loans must be collateralized as provided by the Federal Reserve Act. The amount of such loans may not exceed (when aggregated with certain other transactions between the Bank and the Company) 10% of the capital stock and surplus of the Bank. Since formation of the Company, there have been no loans made by the Bank to the Company.
The BHCA requires the Company to file reports of operations annually with the Federal Reserve Board. The Company, the Bank and any other subsidiaries of the Company also are subject to examination by the Federal Reserve Board. In addition, the Company is registered as a bank holding company with the Connecticut Banking Commissioner under the Connecticut Bank Holding Company and Bank Acquisition Act.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Financial Modernization Act of 1999 (the "Act") contains some of the most significant reform of financial services regulation in over 60 years. The Act is divided into seven titles, the most significant features of which are summarized below.
Title I permits affiliations among banks, securities firms and insurance companies. Financial institutions are able to structure these new affiliations through a holding company structure, or through a financial subsidiary. A bank holding company can now qualify as a financial holding company and expand into a wide variety of financial services, provided that its subsidiary depository institutions are well-managed, well-capitalized and have received a "satisfactory" rating on their last Community Reinvestment Act examination. The new powers granted to a financial holding company include the authority to engage in merchant banking and insurance activities. The financial subsidiary is a subsidiary company that can be used by a national bank to engage in many of the activities permitted for a financial holding company.
Insured state banks also are given the authority to engage in financial activities through subsidiaries, by virtue of an amendment to the Federal Deposit Insurance Act. Under appropriate circumstances, an insured state bank may hold an interest in a subsidiary that is essentially equivalent to a national bank's financial subsidiary.
The state bank and all of its insured depository institution affiliates must be well capitalized. The bank must also comply with the same capital deduction and financial statement requirements and financial and operational safeguards that apply to national banks. In the bank's transactions with its subsidiary, the bank must comply with the limits on transactions with affiliates.
State banks are not required to divest any interests in subsidiaries that they lawfully held when the Act was enacted, and such subsidiaries are not required to change their activities.
State bank subsidiaries are subject to FDIC examination to the same extent as any other state bank subsidiary. They also remain subject to the same securities-related rules that govern national banks, as long as such rules do not affect the state bank's interest in its equivalent of a financial subsidiary.
Under the Act, individual states remain responsible for regulating the business of insurance. State insurance laws, however, are preempted if they prevent or significantly interfere with certain insurance activities of depository institutions, namely sales and affiliation activities. State laws governing other financial activities, except securities and insurance activities, are not preempted provided they do not discriminate against depository institutions.
Title II makes changes related to the securities industry. Among these changes, the Act replaces the broad exemption banks had enjoyed from Securities and Exchange Commission regulation with more limited exemptions and directs the SEC and the Federal Reserve Board to work together to establish rules for future hybrid financial products. In addition, the Act now requires banks that advise mutual funds to register with the SEC as investment advisers, and requires banks selling mutual funds to clearly disclose that these funds are not federally insured.
Title III confirms that states are the regulators for the insurance activities of all persons, including acting as the functional regulator for the insurance activities of federally-chartered banks. However, states may not prevent depository institutions and their affiliates from engaging in insurance activities. In addition, the Act encourages the states to develop uniform or reciprocal requirements for the licensing of insurance agents.
Title IV closes a loophole for unitary thrift holding companies by outlawing the future acquisition or creation of new unitary thrifts by commercial enterprises.
Title V provides consumers with new protections against the transfer and use of their private personal information by financial institutions. These provisions enable customers of financial institutions to "opt-out" of having their personal financial information shared with unaffiliated third parties, subject to certain exceptions. It also is made a federal crime to obtain or attempt to obtain private customer financial information through fraudulent or deceptive means.
Title VI reforms the Federal Home Loan Bank system to provide small banks with greater access to funds for making loans to small businesses, and establishes an improved capital structure for the system.
Title VII requires automated teller machine operators who impose a fee for use of an ATM by a noncustomer to disclose the surcharge more prominently. Title VII also requires agreements between an insured depository institution or affiliate and a nongovernmental entity in connection with the Community Reinvestment Act to be disclosed both to the public and to the federal banking agencies. For smaller institutions, the new law provides possible regulatory relief in the form of a longer period between examinations.
The Company expects the Act to continue to increase competition, especially because many financial institutions (especially those larger than the Company and the Bank) may likely take advantage of the Act to offer a range of banking and insurance products and services to their customers.
Effect of Governmental Policy
Banking is a business that depends on interest rate differentials. One of the most significant factors affecting the Company's and the Bank's earnings is the difference between (1) the interest rates paid by the Bank on its deposits and its other borrowings and (2) the interest rates received by the Bank on loans extended to its customers and securities held in the Bank's investment portfolio. The value and yields of the Bank's assets and the rates paid on its liabilities are sensitive to changes in prevailing market rates of interest. Thus, the earnings and growth of the Bank will be influenced by general economic conditions, the monetary and fiscal policies of the Federal government and the policies of regulatory agencies, particularly the Federal Reserve Board, that implement national monetary policy. The nature and impact of any future changes in monetary policies cannot be predicted.
Effective January 1, 1995, Connecticut's banking laws were recodified. The recodification generally combined and made uniform numerous provisions concerning the organization, administration and powers of the various types of Connecticut-chartered banks. In so doing, it permitted, for the first time, interstate mergers and asset acquisitions between state-chartered commercial banks. It also liberalized the ability of out-of-state banks to make loans in Connecticut. The recodification has increased competition.
The present bank regulatory climate is undergoing significant change, both as it affects the banking industry itself and as it affects competition between banks and non-banking financial institutions. There has been significant regulatory change in the regulation and operations of savings associations, in the bank merger and acquisition area, in the products and services banks can offer, and in the non-banking activities in which bank holding companies can engage. Partly as a result of these changes, banks are competing actively with other types of depository institutions and with non-bank financial institutions, such as money market funds, brokerage firms, insurance companies and other financial service enterprises. The impact of these changes in the regulatory climate ultimately has resulted in downward pressure on the Bank's net interest margin and spread, the magnitude of which is not possible to assess. The Company's net interest margin, on a tax equivalent basis, was 3.68% for 2001 compared to 3.72% for 2000. The reduction of 4 basis points in the net interest margin between the two years was mainly attributable to reduced equity investment income available for the dividends received deduction. The dividends received reduction was lower as a result of a lower volume and reduced yields due to a lower interest rate environment. The interest rate spread, on a tax equivalent basis, was 3.05% in 2001 compared to 3.03% for 2000. Average yields on interest-earning assets declined 49 basis points while the overall interest rate on interest-bearing liabilities decreased 51 basis points between the two twelve-month periods. A rapidly declining interest rate environment during 2001 affected interest sensitive sources of funds slightly more than interest sensitive assets.
Moreover, certain legislative and regulatory proposals that could affect the Bank and/or the Company and/or the banking business in general are pending, or may be introduced, before the United States Congress, the Connecticut General Assembly and various governmental agencies. These proposals include measures that may alter further the structure, regulation and competitive relationship of financial institutions and proposals that may subject the Bank and/or the Company to increased regulation, disclosure and reporting requirements. In addition, the various banking regulatory agencies frequently propose rules and regulations to implement and enforce existing legislation. It cannot be predicted whether or in what form any legislation or regulations will be enacted or the extent to which the business of the Bank and/or the Company will be affected thereby.
Regional Economy
In 2001, the economy of the State of Connecticut slumped into a recession very much similar to that of the U.S. economy. A decreasing interest rate environment and increased competition for both commercial and consumer loans placed downward pressure on net interest margins, which partially offset the increase in lower cost core deposits and fee income. Currently, the heightened competition is expected to continue to place downward pressure on net interest margins. In addition, banking institutions must deal with continued business consolidation in the Connecticut market and continued strict bank regulation.
ITEM 2
ITEM 2 - PROPERTIES.
The following table sets forth the location of the Bank's branch offices and other related information:
Office
Location
Status
Main Office
121 Main St., Southington, CT
Owned
Queen Corner Office
900 Queen St., Southington, CT
Owned
South End Office
921 Meriden-Waterbury Tpke., Southington, CT
Owned
Drive-In Center
30 Berlin Ave., Southington, CT
Owned
Cheshire Office
1289 Highland Avenue, Cheshire, CT
Leased(1)
Kensington Office
67 Chamberlain Highway, Kensington, CT
Leased(2)
Wallingford Office
950 North Colony Road, Wallingford, CT
Leased(3)
(1) The Bank leases approximately 1,000 square feet at 1289 Highland Avenue, Cheshire, Connecticut to house its Cheshire branch office, which opened in April 2001. The lease has an expiration date of February 28, 2011, with options to extend the lease for two successive five-year terms.
(2) The Bank leases approximately 2,011 square feet at 67 Chamberlain Highway, Kensington, Connecticut to house its Kensington branch office, which opened in April 2001. The lease has an expiration date of April 30, 2003, with no options to renew.
(3) The Bank leases approximately 1,580 square feet at 950 North Colony Road, Wallingford, Connecticut to house its Wallingford branch office. The lease has an expiration date of March 31, 2008, with an option to extend the lease for five years.
Since January 1995, the Bank has operated a limited purpose branch banking facility at Southington High School, which is located at 720 Pleasant Street, Southington, Connecticut. The High School Branch processes only deposits and withdrawals and is open only during school hours. This branch is operated on a cooperative basis: the Bank supplies management and equipment, the town of Southington provides the required space, and students staff the branch.
The Bank leases sufficient space at 55 Meriden Avenue in Southington (Bradley Memorial Hospital) to support a free standing automatic teller machine. The lease had an expiration date of July 31, 2000, with no option to extend the lease. The Bank is currently renting the space on a month-to-month basis.
The Bank owns a building located at 98 Main Street in Southington. The building contains approximately 22,500 square feet and houses the administrative offices of its human resources, marketing, finance, managed assets, consumer banking, deposit services, residential mortgage origination and information systems departments.
The Bank owns an approximately 35,000 square foot lot located at 918 Meriden-Waterbury Turnpike, which is adjacent to the Bank's South End office. The lot is primarily undeveloped and is partially utilized as additional parking space for the Bank's South End Office.
The Bank also owns and is holding for future expansion a property located adjacent to its Main Office parking facilities. The property consists of an approximately 14,800 square foot undeveloped lot located at 31 Vermont Avenue.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS.
Neither the Company nor the Bank is presently a party to any legal proceedings the adverse outcome of which would likely have, in management's belief, a material effect on the Company's or the Bank's financial condition, results of operations or cash flows.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of 2001, no matter was submitted to a vote of shareholders of the Company.
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been issued and outstanding since November 17, 1994, when the Company acquired all of the Bank's outstanding common stock in a one-for-one exchange with the Bank's existing shareholders. As of March 1, 2002, 5,170,780 shares of Common Stock were issued and outstanding and were held by approximately 1,749 shareholders of record.
The Company's Common Stock is traded in the over-the-counter market and is quoted on the National Market tier of The National Association of Securities Dealers Automated Quotation ("Nasdaq") Stock Market under the symbol "BKCT." Quarterly high and low bid prices for 2000 and 2001 are included in the 2001 Annual Report under the heading "Market Price and Dividends" and are incorporated herein by reference. Such bid prices reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions.
For the foreseeable future, the only substantial source of funds available to the Company for the declaration of dividends will be dividends declared and paid by the Bank on Bank common stock. As the holder of Bank common stock, the Company is entitled to receive dividends when, as and if declared by the Bank board of directors out of funds legally available therefor. The Bank may pay cash dividends out of the Bank's net profits. For purposes of this restriction, "net profits" means the remainder of all earnings from operations. Further, the total of all dividends declared by the Bank in any calendar year may not exceed the sum of the Bank's net profits for the year in question combined with its retained net profits from the preceding two calendar years. Additionally, earnings appropriated to reserves for loan losses and deducted for federal income tax purposes are not available for cash dividends without the payment of taxes at the then current income tax rates on the amount used. The Connecticut Banking Commissioner and/or the FDIC may limit the Bank's ability to pay dividends.
The Company paid its first quarterly dividend during the quarter ended March 31, 1995 and, since that time, has paid consecutive quarterly dividends. No assurances can be given that further dividends will be paid or approved. Dividend history for the Company from January 1, 2000 through December 31, 2001 is included in the 2001 Annual Report under the heading "Market Price and Dividends" and is incorporated herein by reference. In addition to its regular quarterly dividends, on December 19, 2001, a special year-end cash dividend of $0.20 per share was declared and paid on January 15, 2002. The special dividend represented the return of a portion of the Company's accumulated retained earnings in light of its strong capital position.
In April 2000, the Company's Board of Directors authorized a share-buyback program of up to 5% (262,000) of its then outstanding shares of common stock over the next twelve months. In April 2001, this share-buyback program was terminated. Pursuant to that program, the Company purchased 101,000 shares of its outstanding shares of common stock at an average price of $15.24 per share, or 1.9% of its outstanding shares as of April 2000 and April 2001.
In April 2001, the Company's Board of Directors voted to authorize a new share-buyback program of up to 10% (515,000) of its then outstanding shares of common stock over the next twelve months. As of December 31, 2001, the Company had purchased 164,970 shares at an average price of $18.67 per share, or 3.2% of its outstanding shares as of April 2001 and December 2001.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA.
The required information is included in the 2001 Annual Report under the heading "Selected Consolidated Financial Data," and is incorporated herein by reference.
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
The required information is included in the 2001 Annual Report under the heading "Management's Discussion and Analysis" and is incorporated herein by reference.
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The required information is included in the 2001 Annual Report under the heading "Management's Discussion and Analysis - Asset/Liability Management and Market Risk" and is incorporated herein by reference.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The report of the Company's independent accountants and the Company's Consolidated Statements of Condition at December 31, 2001 and 2000, and the related Consolidated Statements of Income, Shareholders' Equity and Cash Flows for each of the three years in the period ended December 31, 2001, and the Notes to Consolidated Financial Statements appear in the 2001 Annual Report and are incorporated herein by reference.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The required information is included in the 2002 Proxy Statement under the heading "Election of Directors" and is incorporated herein by reference.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION.
The required information is included in the 2002 Proxy Statement under the heading "Election of Directors - Executive Compensation" and is incorporated herein by reference.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of March 1, 2002, there were no persons or groups (as that term is used in Section 13(d)(3) of the Exchange Act) known to the Company who may be deemed to own beneficially more than 5% of the Common Stock.
Certain other required information under this item is included in the 2002 Proxy Statement under the heading "Election of Directors - Stock Ownership of Directors and Officers" and is incorporated herein by reference.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The required information is included in the 2002 Proxy Statement under the headings "Election of Directors - Transactions With Management", "Certain Business Relationships", "Indebtedness of Management and Others" and "Compensation Committee Interlocks and Insider Participation" and is incorporated herein by reference.
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
________________________
* Management contract or compensatory plan or arrangement.
THE COMPANY WILL PROVIDE A COPY OF ANY EXHIBIT LISTED ABOVE TO ANY SHAREHOLDER UPON THE WRITTEN REQUEST OF SUCH SHAREHOLDER AND UPON THE PAYMENT OF A REASONABLE FEE LIMITED TO THE COMPANY'S EXPENSES INCURRED IN FURNISHING SUCH EXHIBIT. REQUESTS SHOULD BE ADDRESSED TO THOMAS A. SEBASTIAN, BANCORP CONNECTICUT, INC., 121 MAIN STREET, SOUTHINGTON, CONNECTICUT 06489.
(b)
The Company did not file any Report on Form 8-K during the last quarter of 2001.
(c)
The exhibits required by Item 601 of Regulation S-K are filed as a separate part of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Bancorp Connecticut, Inc.
(Registrant)
Date: March 22, 2002
By: /s/ Robert D. Morton
Robert D. Morton
Its Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
/s/ Robert D. Morton
Chairman, President,
March 22, 2002
Robert D. Morton
Chief Executive
Officer and Director
(Principal Executive Officer)
/s/ Phillip J. Mucha
Chief Financial Officer and
March 22, 2002
Phillip J. Mucha
Treasurer/Secretary (Principal
Financial Officer and
Principal Accounting Officer)
Norbert H. Beauchemin*
Director
March 22, 2002
Norbert H. Beauchemin
Michael J. Karabin*
Director
March 22, 2002
Michael J. Karabin
David P. Kelley*
Director
March 22, 2002
David P. Kelley
Frederick E. Kuhr*
Director
March 22, 2002
Frederick E. Kuhr
Joseph J. LaPorte*
Director
March 22, 2002
Joseph J. LaPorte
Ralph G. Mann*
Director
March 22, 2002
Ralph G. Mann
Andrew J. Meade*
Director
March 22, 2002
Andrew J. Meade
Frank R. Miller*
Director
March 22, 2002
Frank R. Miller
Anthony S. Pizzitola*
Director
March 22, 2002
Anthony S. Pizzitola
Dennis J. Stanek*
Director
March 22, 2002
Dennis J. Stanek
*By: /s/ Robert D. Morton
Robert D. Morton
Attorney-in-fact
EXHIBIT INDEX
Exhibit No.
Description
Page
3.1
Certificate of Incorporation of Registrant (Incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-77696) (the "Registration Statement"))
3.2
Bylaws of Registrant (Incorporated by reference to Exhibit 3.2 to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001)
3.3
Certificate of Amendment of Certificate of Incorporation dated May 20, 1996 (Incorporated by reference to Exhibit 3.3 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996)
4.1
Instruments defining the rights of security holders (Included in Exhibits 3.1 and 3.2)
4.2
Form of Stock Certificate (Incorporated by reference to Exhibit 4.5 to the Registrant's Registration Statement on Form S-8 (Registration No. 33-333-2638))
10.1*
Employment and Non-Competition Agreement dated as of February 1, 2000, as amended, by and between the Company, the Bank and Robert D. Morton
10.2*
Southington Savings Bank 1986 Stock Option Plan (Incorporated by reference to Exhibit 10.2 to the Registration Statement)
10.3*
Southington Savings Bank 1993 Stock Option Plan (Incorporated by reference to Exhibit 10.3 to the Registration Statement)
10.4*
Pension Plan of Southington Savings Bank, as amended
10.5*
Southington Savings Bank Supplemental Retirement Plan (Incorporated by reference to Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30,1996)
10.6*
Bancorp Connecticut, Inc. 1997 Stock Option Plan (Incorporated by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-8 (Registration No. 33-30146))
10.7*
Southington Savings Bank Supplemental Executive Retirement Plan, as amended
10.8*
Employment and Non-Competition Agreement dated as of February 1, 2000, by and between the Company, the Bank and Phillip J. Mucha (Incorporated by reference to Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000)
10.9*
Split-Dollar Agreement dated as of August 5, 1996 by and between Trust Company of Connecticut, as trustee, and Robert D. Morton
13.1
Annual Report to Security Holders
Subsidiaries of Registrant
Consent of PricewaterhouseCoopers LLP
Power of Attorney
________________________________________________________
* Management contract or compensatory plan or arrangement.