Among the largest of Connecticut community banks, the Savings Bank of Manchester is reporting a significant earnings increase for the first quarter, doing nothing to squelch rumors of potential mergers and acquisitions involving the institution.

Connecticut Bancshares Inc, the holding company for The Savings Bank of Manchester, reported net income of $7.34 million for the first quarter of 2003, compared to net income of $5.57 million for the first quarter of 2002, representing a 31.78 percent increase.

Earnings per diluted share for the quarter ended March 31, 2003, stood at 68 cents based on 10.86 million weighted-average shares outstanding, compared to earnings per diluted share for the quarter ended March 31, 2002 of 52 cents based on 10.74 million weighted-average shares outstanding.

Additionally, the company declared a quarterly cash dividend of 18 cents per share on the outstanding shares of its common stock.

Company President and CEO Richard P. Meduski said, “We are reporting another strong quarter of earnings. Our earnings have increased significantly from last year and our loan growth has been strong. Our nonperforming assets continue to decline. The bank continues its strategic focus on customer service and leading-edge technology.”

It has long been rumored that the Savings Bank of Manchester has been gearing up for a takeover. John Carusone, president of the Bank Analysis Center, said, “I don’t report to know whether or not those rumors are true, but they are certainly financial cocktail discourse around the Greater Hartford area.”

Carusone said that the interest in the bank as an acquisition target is the result of a combination of factors.

“The bank is a comparatively well-performing institution from a standpoint of earnings, credit quality and expense control,” he said. “There is a scarcity factor as well. The Savings Bank of Manchester has arguably the best footprint for a community bank east of the Connecticut River.”

Carusone added that the bank is the object of desire for a lot of predatory institutions seeking to round out their Connecticut franchise, causing some competitive rivalry among potential acquiring institutions.

He noted that the bank’s performance is good but not outstanding. On a relative basis he places the bank in the upper quartile of its peer group. However, he did say the “scarcity factor” works in the bank’s favor, making it more desirable. The Savings Bank of Manchester is the “last and best” bulk franchise in Central Connecticut that still remains independent, he said.

“I think they’ve done a pretty good job of positioning themselves as a community bank,” he said. “Typically, true community banks tend to be somewhat smaller, so this bank is on the upper end of the community bank scale but on the lower end of the statewide mid-sized banks. But I think they’ve done an effective job of positioning themselves as a community institution through their adroit marketing and advertising efforts.”

Increased ‘Chatter’

The bank’s strong performance in the first quarter of 2003 is another strong marketing tool. Net interest income for the first quarter of 2003 was $20.87 million, a $1.95 million, or 10.31 percent, increase from $18.92 million for the first quarter of 2002. Average interest-earning assets were $2.39 billion for the quarter ended March 31, 2003, compared to $2.32 billion for the same period in the prior year. The company’s net interest margin was 3.51 percent for the quarter ended March 31, 2003, compared to 3.28 percent for the quarter ended March 31, 2002.

The increase in net interest income was primarily due to a lower cost of funds on interest-bearing liabilities and a higher volume of loans partially offset by lower yields on loans and investments. The cost of funds decreased from 3.14 percent for the quarter ended March 31, 2002, to 2.44 percent for the quarter ended March 31, 2003.

The reduction was primarily due to a lower interest rate environment. Average gross loans increased $134.95 million, or 9.25 percent, from $1.46 billion for the quarter ended March 31, 2002. Average gross loans totaled $1.59 billion for the quarter ended March 31, 2003. The increase in average gross loans was primarily in residential and commercial real estate loans. The yield on interest-earning assets declined from 6.1 percent for the quarter ended March 31, 2002, to 5.68 percent for the quarter ended March 31, 2003. Loan yields declined from 6.85 percent for the quarter ended March 31, 2002 to 6.23 percent for the quarter ended March 31, 2003. Investment yields declined from 4.82 percent for the first quarter of 2002 to 4.58 percent for the same quarter in 2003. The reductions in yield were primarily due to a lower interest rate environment.

Noninterest income for the first quarter of 2003 was $5.01 million, a $289,000, or 6.12 percent, increase from $4.72 million in noninterest income for the first quarter of 2002. The increase in noninterest income was primarily due to an increase in service charges and fees and an increase in gains on sales of securities, partially offset by a charge for other than temporary impairment of investment securities.

Service charges and fees increased $592,000 between the first quarter of 2002 and the same period in 2003 primarily due to increases in checking account and merchant services fees. Gains on sales of securities increased $161,000 as certain debt and equity securities were sold during the most recent quarter. During the first quarter of 2003, a charge for other than temporary impairment totaling $359,000 for two investments was recorded.

Noninterest expense for the first quarter of 2003 was $14.54 million, a $486,000, or 3.23 percent, decrease from $15.03 million for the first quarter of 2002. The decrease in noninterest expense from the prior year period was primarily due to decreases in amortization of other intangible assets, fees and services, furniture and equipment and other operating expenses. These decreases were partially offset by an increase in employee benefits.

Established in 1905, The Savings Bank of Manchester is one of Connecticut’s oldest and largest independent banks. The bank is headquartered in Manchester with 28 branch offices serving 22 communities throughout Central and Eastern Connecticut.

At roughly $2.5 billion in assets, the Savings Bank of a Manchester is a good size for either an acquisition by a larger firm or merger with a similarly sized bank, according to industry watchers. The bank’s 2001 acquisition of First Federal Savings and Loan Association of East Hartford has helped boost the institution to a size that is attractive to acquiring banks.

“Clearly the potential acquirers are many times larger than they [Savings Bank of Manchester] are. To some interested parties, $2.5 billion [is just] a rounding error. To others it represents a bigger package. [Savings Bank of Manchester] clearly [is] capable of being of interest to $10 billion organizations to many times that size, or even a potential merger partner with similar-sized institution.”

The banking landscape in Connecticut is currently showing signs of potential mergers and acquisitions, said Carusone.

“There’s increased chatter in the pipeline regarding a variety of institutions at various stages of development. I’d think that it’s not unreasonable to say that there’ll be a couple of announcements during the course of this year,” he said.