Form 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 1995
Commission File Number 0-17495
Shelton Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation or organization)
06-1209317
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(I.R.S. Employer Identification No.)
375 Bridgeport Avenue, Shelton, Connecticut 06484
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(Address of principal executive offices)
(203) 944-2200
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(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days Yes...X No...
On September 30, 1995 there were 1,397,249 shares outstanding of the
Registrant's $1.00 par value common stock.
Part I - Financial Statements
Item 1. Unaudited Financial Statements
Consolidated Statements of Condition
September 30, June 30,
($ In thousands) 1995 1994 1995
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Assets
Loans:
Real estate $218,353 $202,170 $219,426
Consumer installment 5,549 5,917 5,859
Held for sale (fair value $158-September, 1995; $98-June, 1995) 154 - 97
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Total loans 224,056 208,087 225,382
Less allowance for loan losses 1,525 1,329 1,466
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Net loans 222,531 206,758 223,916
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Securities:
Held to maturity (fair value $37,995-September, 1995;
$38,640-September, 1994; $38,588-June, 1995) 38,086 40,109 38,704
Available for sale, at fair value 14,497 19,787 15,924
Money market investments 4,423 6,506 2
Trading account, at fair value - 128 -
- - - ----------------------------------------------------------------------------------------------------------
Total securities 57,006 66,530 54,630
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Total interest-bearing assets 279,537 273,288 278,546
Cash and due from banks 8,489 7,511 10,132
Premises and equipment 5,683 5,573 5,719
Accrued interest receivable 1,929 1,882 1,802
Investments in real estate 849 1,290 1,101
Other real estate owned 657 431 440
Other assets 1,193 1,883 1,219
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Total assets $298,337 $291,858 $298,959
==========================================================================================================
Liabilities and stockholders' equity
Liabilities:
Deposits:
Time certificates $143,299 $134,110 $142,605
Savings and NOW 74,738 82,345 77,277
Money market 36,874 33,332 30,592
Demand 18,368 15,819 18,285
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Total deposits 273,279 265,606 268,759
Borrowings 3,700 7,200 9,505
Accrued taxes and other liabilities 514 489 659
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Total liabilities 277,493 273,295 278,923
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Stockholders' equity:
Preferred stock, $1.00 par value; authorized-1,000,000 shares;
none issued - - -
Common stock, $1.00 par value; authorized-5,000,000 shares;
issued 1,500,707 shares September, 1995; 1,404,056 shares
September, 1994; 1,446,799 shares June, 1995 1,501 1,404 1,447
Additional paid-in capital 8,411 7,731 8,000
Retained earnings 11,651 10,266 11,313
Net unrealized gain (loss) on securities available for sale 31 (145) 26
Treasury stock at cost-103,458 shares September, 1995;
99,800 shares September, 1994; 103,458 shares June, 1995 (750) (693) (750)
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Total stockholders' equity 20,844 18,563 20,036
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Total liabilities and stockholders' equity $298,337 $291,858 $298,959
==========================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
. Consolidated Statements of Income
Three months ended
(In thousands, except per share data) September 30, 1995 1994
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Interest income
Loans $ 4,307 $ 3,555
Securities 796 885
Money market and other 27 39
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Total interest income 5,130 4,479
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Interest expense
Deposits 2,761 2,186
Borrowings 88 124
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Total interest expense 2,849 2,310
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Net interest income 2,281 2,169
Provision for loan losses 105 75
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Net interest income after provision for loan losses 2,176 2,094
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Non-interest income
Banking service charges 275 241
Income from real estate investments 67 3
Loan servicing fees 42 44
Trust fees 33 24
Gain on sale of loans 2 2
Trading account gains - 24
Other 40 27
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Total non-interest income 459 365
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Non-interest expense
Salaries and benefits 834 760
Premises and equipment 345 257
Professional services 213 161
Other real estate owned 36 16
Insurance premiums 18 176
Other 222 182
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Total non-interest expense 1,668 1,552
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Earnings
Income before income taxes 967 907
Provision for income taxes 412 360
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Net income $ 555 $ 547
===========================================================================================
Net income per share
Primary $ 0.41 $ 0.40
Fully diluted 0.41 0.40
===========================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
. Consolidated Statements of
Changes in Stockholders' Equity
Common Additional Retained Net Unrealized Gain Treasury Total
Stock Paid-in Earnings (Loss) on Securities Stock Stockholders'
(In thousands) Capital Available for sale at Cost Equity
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Balance at June 30, 1994 $1,404 $7,730 $9,914 ($93) ($693) $18,262
Net income - - 547 - - 547
Options exercised - 1 - - - 1
Cash dividends ($0.15 per share) (195) (195)
Increase in net unrealized loss
on securities available for sale - - - (52) - (52)
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Balance at September 30, 1994 $1,404 $7,731 $10,266 ($145) ($693) $18,563
=========================================================================================================================
(In thousands)
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Balance at June 30, 1995 $1,447 $8,000 $11,313 $26 ($750) $20,036
Net income - - 555 - - 555
Cash dividends ($0.16 per share) (217) (217)
Options exercised 54 411 - - - 465
Increase in net unrealized gain
on securities available for sale - - - 5 - 5
- - - -------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1995 $1,501 $8,411 $11,651 $31 ($750) $20,844
=========================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
. Consolidated Statements of Cash Flows
(In thousands) Year ended September 30, 1995 1994
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Cash flows from operating activities
Net income $ 555 $ 547
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
(Gain) loss on sale of:
Loans held for sale 2 (2)
Real estate investments (86) (3)
Trading account - (24)
Depreciation and amortization 114 108
Loss provisions 113 148
Amortization of premium on other securities 40 28
Deferred income taxes expense (benefit) 29 (62)
Amortization of premium on mortgage-backed securities 24 34
Amortization of deferred loan origination fees (69) (61)
Changes in operating assets and liabilities:
Accrued interest receivable (127) (221)
Accrued taxes and other liabilities (145) (6)
Other assets (688) (131)
Trading account assets - 3
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Net cash provided by (used in) operating activities (238) 358
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Cash flows from investing activities
Loans for portfolio
Net (increase) decrease 1,406 (11,347)
Purchases - (5,500)
Loans held for sale
Proceeds from sales 230 324
Net increase (289) (322)
Mortgage-backed securities held to maturity
Repayments 480 690
Securities held to maturity
Proceeds from maturities 100 100
Purchases (24) -
Securities available for sale
Proceeds from maturities 1,500 910
Purchases (84) (47)
Proceeds from sale of real estate investments 610 391
Proceeds from sale of other real estate owned 154 118
Additions to investments in real estate 48 (228)
Purchase of premises and equipment (78) (47)
Net increase in money market investments (4,421) (1,714)
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Net cash used in investing activities (368) (16,672)
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Cash flows from financing activities
Borrowings
Proceeds from short-term borrowings 13,414 4,000
Repayment of short-term borrowings (19,219) (2,000)
Net increase in other deposit accounts 3,826 28
Net increase in time certificates of deposit 694 13,532
Options exercised 465 1
Dividends paid (217) (195)
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Net cash provided by (used in) financing activities (1,037) 15,366
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Net decrease in cash and due from banks (1,643) (948)
Cash and due from banks at beginning of period 10,132 8,459
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Cash and due from banks at end of period $ 8,489 $ 7,511
================================================================================
Supplemental information
Cash paid during the period for:
Interest $ 2,827 $ 2,298
Income taxes 462 401
Noncash investing activities:
Loans transferred to other real estate owned 302 -
Net unrealized (gain) loss on securities available
for sale (5) 52
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
Notes to Unaudited Consolidated Financial Statements
Note 1 - Basis of presentation
The accompanying consolidated financial statements include the accounts of
Shelton Bancorp, Inc. ("Bancorp" or the "Registrant" and its subsidiary Shelton
Savings Bank (the "Bank"), collectively referred to as the "Company". In the
opinion of management, the consolidated financial statements have been prepared
in conformity with generally accepted accounting principles and include all
material adjustments, consisting solely of normal recurring adjustments,
necessary for a fair presentation of the Company's financial condition and
results of operations for the periods presented. All significant intercompany
accounts and transactions have been eliminated from the consolidated financial
statements.
The consolidated financial statements necessarily include some amounts that are
based on estimates, the most significant of which relate to the adequacy of the
allowance for loan losses, and the valuation of other real estate owned ("OREO")
and investments in real estate. As these estimates are highly susceptible to
changes in the state of the general economic environment, actual results could
differ significantly from such estimates.
The Company specializes in residential real estate lending and also engages in
the development and sale of residential real estate. Loans collateralized by
real estate located in Connecticut and direct investments in local real estate
development projects comprise most of the Company's total assets. This
concentration is the result of the Company targeting its lending activities to
the geographic area where management is familiar with housing and economic
trends, combined with the Company's long standing commitment to meeting the
credit needs of the communities from which it obtains deposit funds. As
essentially all of the Company's business is conducted in Connecticut, the
overall profitability of the Company is heavily dependent on the state of the
general economic environment within Connecticut.
The accompanying consolidated financial statements should be read in conjunction
with the Notes to the Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations, which
are included in the Company's annual report for the year ended June 30, 1995, as
filed with the Securities and Exchange Commission on Form 10-K.
Reclassifications have been made to the prior year's consolidated financial
statements to conform to the current reporting format. The results of operations
for the three months ended September 30, 1995, are not necessarily indicative of
the results of operations that may be expected for the year ending June 30,
1996.
Note 2 - Net income per share
Net income per share has been calculated by dividing net income by the weighted
average number of common shares outstanding during the period, plus common share
equivalents when dilutive. The latter consists of shares issuable upon the
exercise of stock options. The dilutive effect of stock options on primary
income per share is computed utilizing the average market price of the Company's
stock during the period. When calculating fully diluted income per share, the
dilutive effect of stock options is computed utilizing the greater of the
closing market price or the average market price during the period.
The number of shares used in the calculation of income per share were as
follows:
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Three Months Ended
September 30, 1995 1994
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Primary net income per share 1,364,958 1,380,261
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Fully net diluted income per share 1,364,958 1,380,261
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Note 3 - Contingencies, commitments and financial instruments with
off-balance sheet credit risk
The Company is a party to various legal proceedings incident to its business. In
the opinion of management, the resolution of these proceedings will not have a
material effect on the Company.
In the normal course of business, the Company enters into agreements to extend
credit which are not reflected in the accompanying consolidated financial
statements.
Commitments to extend credit consisted of the following:
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(In thousands) September 30, 1995 June 30, 1995
Fixed Variable or Fixed Variable or
Interest Adjustable Interest Adjustable
Rate Interest Rate Total Rate Interest Rate Total
- - - --------------------------------------------------------------------------------------------------------------------------
Home equity credit lines $ - $ 9,244 $ 9,244 $ - $ 9,162 $ 9,162
Mortgage loans - 5,018 5,018 195 6,151 6,346
Letters of credit - 2,774 2,774 - 2,463 2,463
Personal credit lines 772 - 772 822 - 822
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Total $ 772 $ 17,036 $ 17,808 $ 1,017 $ 17,776 $ 18,793
==========================================================================================================================
Since the Company can terminate a loan commitment if the buyer does not comply
with the terms of the contract, and some of the agreements may expire without
being drawn upon, they do not necessarily represent a future cash requirement of
the Company. Prior to entering into any agreement to extend credit, the Company
evaluates the customer's credit-worthiness in accordance with the Company's loan
underwriting standards. In most cases the agreements are collateralized with
real estate and the customer is required to pay a non-refundable fee. The
Company's maximum exposure to credit loss is the total contract amount of the
agreements. In addition, the possibility of future increases in market interest
rates may result in a decline in the market value of fixed-rate loans.
Management does not, however, anticipate any material losses as a result of
these agreements and does not consider them to represent an undue level of
credit, interest or liquidity risk for the Company.
To reduce the risk of a potential decline in the market value of fixed rate
loans being originated for sale, the Company enters into contracts to sell such
loans at a pre-agreed upon price and date. The primary risk from these contracts
is the potential inability of the Company to deliver such loans in accordance
with the terms of the contract, in which case the Company would be
obligated to compensate the buyer for any decline in the market value of the
contractual amount of loans that were not delivered.
Note 4 - Merger agreement
On June 20, 1995, the Company entered into a definitive merger agreement
pursuant to which Webster Financial Corporation ("Webster") has agreed to
acquire the Company. Under the terms of the agreement, stockholders of the
Company will receive .92 of a share of Webster common stock, in a tax free
exchange, for each of their shares of the Company's common stock. The exchange
ratio is not subject to market price adjustment. Subject to shareholder and
regulatory approvals, the acquisition of the Company by Webster is expected to
close during the quarter ended December 31, 1995.
Note 5 - Change in method of accounting
As discussed under Item 2 of this report, on July 1, 1995 the Company adopted
Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for
Impairment of a Loan" ("SFAS 114"). The adoption of FAS 114 did not have a
material impact on the Company's financial position or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Highlights
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($ In thousands, except per share data) Three Months Ended
September 30, 1995 1994
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For the Period
Interest income $ 5,130 $ 4,479
Interest expense 2,849 2,310
Net interest income 2,281 2,169
Net income 555 547
Per share data
Book value $ 14.92 $ 14.23
Primary net income per share 0.41 0.40
Fully diluted net income per share 0.41 0.40
Cash dividends declared 0.16 0.15
Selected Financial Ratios
Yield on interest-bearing assets 7.31 % 6.73 %
Cost of funds 4.38 3.68
Interest rate spread 2.93 3.05
Net interest margin 3.27 3.28
Return on average assets 0.75 0.77
Return on average equity 10.83 11.77
Average equity to average assets 6.89 6.52
Dividend payout ratio 39.10 35.65
At end of period:
Tier 1 leverage ratio of bank subsidiary 6.32 5.96
Tier 1 risk-based ratio of bank subsidiary 11.87 11.54
Total risk-based ratio of bank subsidiary 12.84 12.37
Non-performing assets to total loans and OREO 1.25 1.30
Non-performing loans to total loans 0.96 1.10
Allowance for loan losses to total loans 0.68 0.64
Allowance for loan losses to non-performing loans 71.13 58.21
At End of Period September 30 June 30,
1995 1995
- - - ----------------------------------------------------------------------------------------------------
Net loans $ 222,531 $ 223,916
Securities 57,006 54,630
Total assets 298,337 298,959
Deposits 273,279 268,759
Borrowings 3,700 9,505
Stockholders' equity 20,844 20,036
Outstanding shares 1,397,249 1,304,256
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Overview
The major components of the change in total assets, liabilities and equity were
as follows:
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($ In thousands) September 30, June 30, Change Annualized
1995 1995 Growth
Rate
- - - ----------------------------------------------------------------------------------------------------
Assets:
Net loans $ 222,531 $ 223,916 $ (1,385) (2)%
Securities held to maturity 38,086 38,704 (618) (6)
Other securities 18,920 15,926 2,994 75
- - - ----------------------------------------------------------------------------------------------------
Total interest-bearing assets 279,537 278,546 991 1
Investments in real estate 849 1,101 (252) (92)
Other real estate owned 657 440 217 197
Other assets 17,294 18,872 (1,578) (33)
- - - ----------------------------------------------------------------------------------------------------
Total assets $ 298,337 $ 298,959 $ (622) (1)%
====================================================================================================
Liabilities and stockholders' equity:
Time certificates of deposit $ 143,299 $ 142,605 $ 694 2 %
Savings and NOW accounts 74,738 77,277 (2,539) (13)
Money market deposits 36,874 30,592 6,282 82
Borrowings 3,700 9,505 (5,805) (244)
- - - ----------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 258,611 259,979 (1,368) (2)
Demand deposits 18,368 18,285 83 2
Other liabilities 514 659 (145) (88)
Stockholders' equity 20,844 20,036 808 16
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Total liabilities and stockholders' equity $ 298,337 $ 298,959 $ (622) (1)%
====================================================================================================
The major components of the change in year-to-date net income were as follows:
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($ In thousands) Three Months End Change
September 30, 1995 1994 Amount Percent
- - - ----------------------------------------------------------------------------------------------------
Net interest income $ 2,281 $ 2,169 $ 112 5 %
Provision for loan losses 105 75 30 40
Core non-interest income 390 336 54 16
Core non-interest expense 1,632 1,536 96 6
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Core pre-tax earnings 934 894 40 4
Gains from asset sales 69 29 40 138
Other real estate owned expense 36 16 20 125
- - - ----------------------------------------------------------------------------------------------------
Income before income taxes 967 907 60 7
Provision for income taxes 412 360 52 14
- - - ----------------------------------------------------------------------------------------------------
Net income $ 555 $ 547 $ 8 1 %
====================================================================================================
Loans
Loans consisted of the following
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($ In thousands) September 30, June 30, Change Annualized
1995 1995 Growth
Rate
- - - ----------------------------------------------------------------------------------------------------
Real estate loans:
First mortgages $ 178,827 $ 180,298 $ (1,471) (3)%
Home equity credit lines 18,702 18,668 34 1
Commercial 14,496 13,136 1,360 41
Residential construction 5,166 5,266 (100) (8)
Commercial construction 989 1,194 (205) (69)
Second mortgage 959 1,024 (65) (25)
Held for sale 154 97 57 235
Deferred loan origination fees (786) (775) (11) 6
- - - ----------------------------------------------------------------------------------------------------
Total real estate loans 218,507 218,908 (401) (1)
Consumer installment 5,549 5,859 (310) (21)
- - - ----------------------------------------------------------------------------------------------------
Total loans $ 224,056 $ 224,767 $ (711) (1)%
====================================================================================================
As part of its interest rate risk management program, the Company's lending for
portfolio centers on adjustable rate mortgage loans ("ARMs") collateralized by
1-4 family residential properties. The interest rate that the Company charges on
ARMs generally adjusts annually based on the National Monthly Median Cost of
Funds Index, an index that approximates the Company's own cost of funds. The
Company has also placed strong emphasis on the origination of floating rate home
equity credit lines. The rate on these credit lines is subject to monthly
adjustment, based on changes in the prime interest rate. The Company currently
sells the majority of its fixed rate mortgage loan originations in the secondary
market.
Since ARMs are the Company's primary lending product for portfolio, demand ARMs
generally drives the Company's overall growth and is one of the primary
determinants of core profitability. Demand for ARMs generally increases when
their opening first year rate is significantly lower than the rate available on
a comparable fixed rate mortgage. As this was not the case during the three
months September 30, 1995, total loans declined by $1.3 million during the
period.
Non-performing assets
Non-performing assets consisted of the following:
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($ In thousands) September 30, June 30, Change Annualized
1995 1995 Growth
Rate
- - - ----------------------------------------------------------------------------------------------------
Loans past due 90 days or more:
Nonaccrual $ 2,028 $ 2,490 $ (462) (74)%
Accrual 116 116 0 0
- - - ----------------------------------------------------------------------------------------------------
Total loans past due 90 days or more 2,144 2,606 (462) (71)
- - - ----------------------------------------------------------------------------------------------------
OREO 657 442 215 195
Allowance for OREO losses - (2) 2 (400)
- - - ----------------------------------------------------------------------------------------------------
Non-performing assets $ 2,801 $ 3,046 $ (245) (32)%
====================================================================================================
Restructured loans $ 99 $ 100 $ (1) (4)%
====================================================================================================
Non-performing assets to total loans and OREO 1.25 % 1.35 % (0.10)% (30)%
Allowance for loan losses to total loans past due
90 days or more 71.13 56.25 14.88 106
As a percentage of total loans:
Loans past due 90 days or more 0.96 1.16 (0.20) (69)
Allowance for loan losses 0.68 0.65 0.03 18
====================================================================================================
Loans past due 90 days or more consisted of the following:
- - - ----------------------------------------------------------------------------------------------------
($ In thousands) September 30, June 30, Change Annualized
1995 1995 Growth
Rate
- - - ----------------------------------------------------------------------------------------------------
1-4 family residential properties $ 2,138 $ 2,604 $ (466) (72)%
Consumer installment 6 2 4 800
- - - ----------------------------------------------------------------------------------------------------
Total loans past due 90 days or more $ 2,144 $ 2,606 $ (462) (71)%
====================================================================================================
Not included in the tables above are loans that, in management's opinion,
warrant monitoring due to varying degrees of documentation deficiencies
supporting the borrowers' current financial position. These deficiencies have
created some uncertainty, but not serious doubts, as to the borrowers' ability
to comply with the loan repayment terms in the future. Such loans totaled
$505,000 at September 30, 1995.
The accrual of interest income is generally discontinued when a loan becomes
past due 90 days or more, or earlier if reasonable doubt exists as to its
ultimate collectibility. When the accrual of interest income is discontinued,
all previously accrued and uncollected interest income is generally reversed
against the current period's interest income. The accrual of interest on loans
past due 90 days or more may be continued when the net realizable value of the
property collateralizing the loan is sufficient to discharge all principal and
accrued interest income due on the loan. A nonaccrual loan is restored to an
accrual status when it is no longer delinquent and the collectibility of
interest and principal is no longer in doubt.
The amount of interest income recognized on nonaccrual and restructured loans,
versus the amount that would have been recognized under the original contract
terms was:
- - - --------------------------------------------------------------------------------
(In thousands) Three Months Ended
September 30, 1995 1994
- - - --------------------------------------------------------------------------------
Interest income recorded:
Nonaccrual loans $ 3 $ 3
Restructured loans 2 2
Interest income under original contract terms:
Nonaccrual loans 49 32
Restructured loans 2 3
================================================================================
Loss allowances
The changes in the loss allowances were as follows:
- - - --------------------------------------------------------------------------------
(In thousands) Loans OREO
Three months ended September 30, 1995 1994 1995 1994
- - - --------------------------------------------------------------------------------
Beginning balance $ 1,466 $ 1,273 $ 2 $ 54
Provision charged to expense 105 75 8 6
Net charge-offs (46) (19) (10) (30)
- - - --------------------------------------------------------------------------------
Ending balance $ 1,525 $ 1,329 $ - $ 30
================================================================================
On July 1, 1995 the Company adopted SFAS 114. Under the new standard, a loan is
considered impaired based on current information and events, if it is probable
that the Company will be unable to collect the scheduled payments of principal
and interest when due according to the contractual terms of the loan agreement.
The measurement of impaired loans and the related allowance for loan losses is
generally based on the present value of expected future cash flows, discounted
at the loan's effective interest rate.
As permitted by the statement, smaller balance homogeneous loans, such as
personal loans and loans collateralized by residential properties, may be
excluded from the provisions of FAS 114. As all of the Company's impaired loans
are currently comprised of such smaller balance homogeneous loans, the adoption
of FAS 114 did not have an impact on the Company's financial position or results
of operations.
The allowance for loan losses is established through charges against income and
is maintained at a level that management considers adequate to absorb potential
losses in the loan portfolio. Management's estimate of the adequacy of the
allowance for loan losses is based on evaluations of individual loans, estimates
of current collateral values and the results of regulatory examinations.
Management also evaluates the general risk characteristics inherent in the loan
portfolio, concentrations of credit risk, prevailing and anticipated economic
conditions, and historical loan loss experience. Loans are charged against the
allowance for loan losses when management believes that collection is unlikely.
Any subsequent recoveries are credited to the allowance for loan losses when
received.
Loans are originally transferred to OREO at the lower of the loan balance or the
fair value of the property. If, on the date of transfer, the loan balance
exceeds the fair value of the property, the excess is charged-off against the
allowance for loan losses. An allowance for OREO losses is established whenever
the carrying value of an individual property exceeds its current fair value, net
of estimated selling costs.
Securities
The cost, fair value and gross unrealized gains and losses on securities held to
maturity were as follows:
- - - --------------------------------------------------------------------------------
(In thousands) September 30, 1995 Cost Gross Gross Fair
Unrealized Unrealized
Gains Losses Value
- - - --------------------------------------------------------------------------------
U.S. Treasury $ 19,530 $ 283 $ 62 $ 19,751
U.S. agencies and corporations:
Mortgage-backed 13,401 - 301 13,100
Other 1,999 1 16 1,984
Corporate bonds, notes and debentures 3,156 14 10 3,160
- - - --------------------------------------------------------------------------------
Securities held to maturity 38,086 298 $ 389 $ 37,995
================================================================================
- - - --------------------------------------------------------------------------------
(In thousands) June 30, 1995 Cost Gross Gross Fair
Unrealized Unrealized
Gains Losses Value
- - - --------------------------------------------------------------------------------
U.S. Treasury $ 19,543 $ 306 $ 67 $ 19,782
U.S. agencies and corporations:
Mortgage-backed 13,905 - 332 13,573
Other 1,999 1 26 1,974
Corporate bonds, notes and debentures 3,257 19 17 3,259
- - - --------------------------------------------------------------------------------
Securities held to maturity 38,704 326 $ 442 $ 38,588
================================================================================
The cost, fair value and gross unrealized gains and losses on securities
available for sale were as follows:
- - - --------------------------------------------------------------------------------
(In thousands) September 30, 1995 Cost Gross Gross Fair
Unrealized Unrealized
Gains Losses Value
- - - --------------------------------------------------------------------------------
U.S. Treasury $ 6,919 $ 16 $ 8 $ 6,927
U.S. agencies and corporations 200 - - 200
Equities 7,325 90 45 7,370
- - - --------------------------------------------------------------------------------
Securities available for sale $ 14,444 $ 106 $ 53 $ 14,497
================================================================================
- - - --------------------------------------------------------------------------------
(In thousands) June 30, 1995 Cost Gross Gross Fair
Unrealized Unrealized
Gains Losses Value
- - - --------------------------------------------------------------------------------
U.S. Treasury $ 8,317 $ 29 $ 26 $ 8,320
U.S. agencies and corporations: 300 - - 300
Equities 7,262 80 38 7,304
- - - --------------------------------------------------------------------------------
Securities available for sale $ 15,879 $ 109 $ 64 $ 15,924
================================================================================
Debt securities that the Company has the intent and ability to hold until
maturity are classified as held to maturity and carried at amortized cost.
Securities purchased for resale, in anticipation of short-term gains, are
classified as trading accounts and carried at fair value. All other debt and
equity securities are classified as available for sale. Securities in this
classification may be sold in response to changes in a number of factors,
including the Company's liquidity needs and market interest rate movements.
Available for sale securities are carried at fair value and unrealized holding
gains and losses, net of income taxes, are reported as a separate component of
stockholders' equity. The cost basis of a security that has experienced other
than a temporary decline in fair value is written down to fair value by a charge
to security gains and losses.
Investments in real estate
Investments in real estate consisted of the following:
- - - --------------------------------------------------------------------------------------------
(In thousands) September 30, June 30, Change Annualized
1995 1995 Growth
Rate
- - - --------------------------------------------------------------------------------------------
Direct:
Stonebridge (30 lot residential subdivision) $ 749 $ 1,035 $ (286) (111)%
Allowance for losses (50) (50) - -
Joint venture:
Walnut Estates (19 lot residential subdivision) 150 116 34 117
- - - --------------------------------------------------------------------------------------------
Investments in real estate $ 849 $ 1,101 $ (252) (92)%
============================================================================================
Income (loss) from investments in real estate consisted of the following:
- - - --------------------------------------------------------------------------------------------
(In thousands) Three months ended
September 30, 1995 1994
- - - --------------------------------------------------------------------------------------------
Joint ventures $ 35 $ 73
Direct 32 (3)
Provision for losses - (67)
- - - --------------------------------------------------------------------------------------------
Income from real estate investments $ 67 $ 3
============================================================================================
Investments in real estate are carried at the lower of cost or estimated fair
value. An allowance for losses on real estate investments is established
whenever the cost basis of an individual property exceeds the net present value
of its estimated future cash flows.
The development phase of the Stonebridge project, located in Oxford,
Connecticut, is expected to be completed during the quarter ending December 31,
1995. A total of 17 lots have been sold since the project entered the sales
phase in December, 1994. Based on current projections, the Company expects to
sell the remaining 13 lots within the next 8 to 13 months.
As an equity partner in joint ventures with local developers, the Company
typically receives 50% of the venture's net profits. Both the Company and its
partner are generally required to make capital contributions, in equal amounts,
to the venture. The Walnut Estates joint venture project, located in Shelton,
Connecticut, entered its sales phase during the latter part of fiscal 1993.
Current projections indicate that the 1 remaining lot will be sold during the
quarter ending December 31, 1995.
A change in federal regulations has made it necessary for the Company to divest
itself of all real estate investments by December 19, 1996. Given the length of
time remaining to complete such divestiture, the Company has not found it
necessary to make significant changes in the timing of expenditures, sales
prices or any other material aspects of its real estate investments.
Deposits
Deposits consisted of the following:
- - - --------------------------------------------------------------------------------
($ In thousands) September 30, June 30, Change Annualized
1995 1995 Growth
Rate
- - - --------------------------------------------------------------------------------
Time certificates $ 143,299 $ 142,605 $ 694 2 %
Savings 57,906 61,459 (3,553) (23)
NOW 16,832 15,818 1,014 26
Money market 36,874 30,592 6,282 82
Demand deposits 18,368 18,285 83 2
- - - --------------------------------------------------------------------------------
Total deposits $ 273,279 $ 268,759 $ 4,520 7 %
================================================================================
During the past three months the Company's marketing efforts centered on
attracting relatively low cost money market accounts. As a result, growth in
money market accounts was primarily responsible for the 7% annualized growth
rate in total deposits during the three months ended September 30, 1995.
Borrowings
Borrowings consisted of the following:
- - - --------------------------------------------------------------------------------
($ In thousands) September 30, June 30, Change Annualized
1995 1995 Growth
Rate
- - - --------------------------------------------------------------------------------
Long-term borrowings $ 3,700 $ 3,700 $ - - %
Short-term borrowings - 5,805 (5,805) (400)
- - - --------------------------------------------------------------------------------
Total borrowings $ 3,700 $ 9,505 $ (5,805) (244)%
================================================================================
Borrowings are utilized to fund any shortfall between loan growth, and the cash
flow provided by deposit growth and the sale or maturity of securities. A
decline in the loan portfolio, combined with the cash flow generated by deposit
growth, provided the Company with the funds necessary to pay-off $5.8 million in
short-term borrowings during the quarter ended September 30, 1995.
Asset/Liability management
The following table presents the expected maturities, or period to repricing, of
the Company's assets and liabilities at September 30, 1995:
- - - -------------------------------------------------------------------------------------------------
(In thousands) Rate Sensitive or Due in:
Three Over Over Six Total Over Total
Months or Three to Months to Within One Year
less Six Months One Year One Year
- - - -------------------------------------------------------------------------------------------------
Assets:
Interest-bearing assets:
Loans $ 59,500 $ 38,286 $ 77,790 $ 175,576 $ 48,480 $ 224,056
Securities 8,979 1,301 2,046 12,326 40,257 52,583
Money market and
other securities 4,423 - - 4,423 - 4,423
- - - -------------------------------------------------------------------------------------------------
Total interest-bearing
assets 72,902 39,587 79,826 192,325 88,737 281,062
Other assets, net - - - - 17,275 17,275
- - - -------------------------------------------------------------------------------------------------
Total assets 72,902 39,587 79,836 192,325 106,012 298,337
- - - -------------------------------------------------------------------------------------------------
Liabilities and
stockholders' equity:
Interest-bearing liabilities:
Time certificates 28,408 19,316 - 85,240 58,059 143,299
Regular savings 57,906 - - 57,906 - 57,906
NOW accounts 16,832 - - 16,832 - 16,832
Money market accounts 36,874 - - 36,874 - 36,874
Borrowings - - 1,000 1,000 2,700 3,700
- - - -------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 140,020 19,316 38,516 197,852 60,759 258,611
Demand deposits - - - - 18,368 18,368
Other liabilities - - - - 514 514
Stockholders' equity - - - - 20,844 20,844
- - - -------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity:
- - - -------------------------------------------------------------------------------------------------
Rate sensitivity GAP $ (67,118) $ 20,271 $ 41,320 $ (5,527) $ 5,527 $ -
=================================================================================================
The preceding table presents the Company's rate sensitivity GAP at September 30,
1995. GAP analysis is a basic interest rate risk measurement tool that provides
management with an indication of the effect that future interest rate movements
could have on the Company. When liabilities reprice or mature at a faster pace
than assets, a negative GAP position exists. A negative rate sensitivity GAP
indicates that net interest income would tend to decrease as interest rates
rise, and increase as rates fall. Conversely, if a positive GAP position exists,
net interest income would tend to rise with increases in interest rates, and
fall as rates drop.
The Company's asset/liability management program focuses on minimizing interest
rate risk by maintaining what management considers an appropriate balance
between the volume of assets and liabilities maturing or subject to repricing
within the same time interval. In an effort to maximize the net interest margin
at all levels of the interest rate cycle, lending centers on adjustable rate
loans, the average rates on which float at a positive spread over the average
cost of the liabilities funding the loans.
This focus on adjustable rate lending has served to minimize fluctuations in the
net interest margin in the past, evidenced by the Company's ability to maintain
the net interest margin at over 3.20% during each of the past five fiscal years.
By comparison, the cost of funds varied between a high of 7.26% and a low of
3.60% during the same time period.
As GAP analysis is only a static view of potential interest rate risk,
management also utilizes multiple simulation analysis techniques to estimate how
the repricing and maturity mix of assets
and liabilities could change in response to future interest rate changes, and
the effect of such changes on the Company's net interest income and liquidity
position. If these analyses indicate a high degree of significant adverse change
in net interest income or liquidity, current funding strategies and asset mix
would be changed to minimize the Company's potential risk exposure.
Liquidity
The Company regularly monitors its ability to profitably fund both short and
long-term growth in its lending and other investment activities. The Company
also monitors its capacity to fund any rapid unforeseen large cash outflows in
an orderly and cost effective manner.
As lending is the Company's single largest investment activity, the Company's
cash requirements are primarily determined by the level of loan demand. Loan
demand varies in response to changes in market interest rates, the state of the
economy and competition. The Company's second largest investment activity is the
holding of securities. The majority of the Company's securities can either be
sold or used as collateral for short-term borrowings, providing a source of cash
to fund unforeseen rapid outflows of funds.
Deposits, specifically time certificates of deposit, are the Company's primary
financing source. As the Company does not accept brokered deposits or offer
premium rates to attract large denomination certificates of deposit, essentially
all of its deposit base is comprised of local retail deposit accounts. A local
retail deposit base tends to be somewhat insensitive to moderate interest rate
fluctuations, and provides a reasonably stable and cost effective source of
funds.
The Company also has the ability to borrow from the Federal Home Loan Bank ("the
FHLB") on both a short and long-term basis, and does so whenever the cash
requirements of its investing activities exceed deposit growth. The Company's
borrowings from the FHLB are limited to the amount of qualified collateral that
the Company holds. Based on available collateral, at September 30, 1995 the
Company had potential access to over $100 million in additional financing, an
amount well in excess of the Company's normal annual financing requirements.
Federal regulations require that the Company maintain reserves, in the form of
cash on hand or deposit balances at the Federal Reserve Bank, against certain
deposit liabilities. At September 30, 1995 the Company's reserve requirement was
$1.7 million.
Management is not aware of any known trends, events, uncertainties, or proposed
regulatory changes that are reasonably likely to have a material effect on the
Company's liquidity, capital resources or operations.
Capital resources
The Bank must maintain certain minimum regulatory capital ratios. Depending on
the FDIC's overall quality rating of an institution, all but the highest rated
banks must maintain a minimum Tier 1 leverage ratio of between 4.00% to 5.00%.
The FDIC also requires banks to meet supplemental capital adequacy standards
which measure qualifying capital against risk-weighted assets plus off-balance
sheet items such as outstanding loan commitments and letters of credit.
The FDIC's minimum risk-based capital ratio requirement is 8.00%. Under current
FDIC standards the Bank is "well capitalized". A "well capitalized" institution,
as defined by the FDIC, is one which maintains a total risk-based capital ratio
equal to, or greater than 10%, a tier 1 risk-based capital ratio equal to, or
greater than 6%, and a tier 1 leverage ratio equal to, or greater than 5%.
The Bank's regulatory capital ratios were as follows:
- - - --------------------------------------------------------------------------------
($ In thousands) September 30, June 30,
1995 1995
- - - --------------------------------------------------------------------------------
Bank's capital components:
Tier 1 capital (Stockholders' equity) $ 18,850 $ 18,509
Tier 2 capital (Allowance for loan losses) 1,525 1,466
- - - --------------------------------------------------------------------------------
Bank's total risk-based capital $ 20,375 $ 19,975
================================================================================
Bank's capital ratios:
Total risk-based 12.84 % 12.55 %
Tier 1 risk-based 11.87 11.63
Tier 1 leverage 6.32 6.20
================================================================================
The Bank is Bancorp's sole source of funds for dividend payments to its
stockholders. Connecticut Banking Laws limit the amount of annual cash dividends
that the Bank may pay to Bancorp to an amount which approximates the Bank's net
income for the then current year, plus its retained net income for the prior two
years. The Bank is also prohibited from paying a cash dividend that would reduce
its capital to asset ratios below minimum regulatory requirements.
Bancorp reviews its dividend policy based on current and projected earnings, and
by assessing the need to retain earnings to support long-term growth.
Average balances, interest, yields and rates
The following tables present condensed daily average statements of condition,
the components of net interest income and selected statistical data: (1)
- - - -------------------------------------------------------------------------------------------------------
Three months ended September 30, 1995 1994
Average Interest Annualized Average Interest Annualized
($ In thousands) Balance Rate Balance Rate
- - - -------------------------------------------------------------------------------------------------------
Assets:
Total loans $ 225,031 $ 4,307 7.65% $ 200,900 $ 3,555 7.07%
- - - -------------------------------------------------------------------------------------------------------
Securities:
Debt and equity 39,890 615 6.13 45,323 685 6.00
Money market and other 1,886 27 5.70 3,659 39 4.03
Mortgage-backed 13,669 181 5.27 15,620 200 5.08
- - - -------------------------------------------------------------------------------------------------------
Total securities 55,445 823 5.91 54,302 924 5.66
- - - -------------------------------------------------------------------------------------------------------
Total interest-bearing assets 250,476 5,130 7.31 265,702 4,479 6.73
Cash and due from banks 6,983 7,446
Other assets 8,369 9,779
- - - -------------------------------------------------------------------------------------------------------
Total assets $ 295,828 $ 282,927
=======================================================================================================
Liabilities and stockholders' equity
Interest bearing deposits:
Time certificates $ 142,188 $ 1,924 5.38% $ 123,748 $ 1,432 4.59%
Savings and NOW 74,994 385 2.04 84,700 403 1.89
Money market 36,628 452 4.91 33,226 351 4.19
- - - -------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 253,810 2,761 4.35 241,674 2,186 3.62
Borrowings 4,781 88 7.32 7,640 124 6.44
- - - -------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 258,591 2,849 4.38 249,314 2,310 3.68
Demand deposits 16,717 14,927
Accrued taxes and other liabilities 127 241
Stockholders' equity 20,393 18,445
- - - -------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 295,828 $ 282,927
=======================================================================================================
Net interest income/rate spread $ 2,281 2.92% $ 2,169 3.05%
=======================================================================================================
Net interest margin 3.27% 3.28%
=======================================================================================================
(1) Nonaccrual loans are included in the average balances outstanding.
Interest on nonaccrual loans has been included only to the extent reflected
in the consolidated statements of income.
Analysis of changes in interest income and expense
The following table presents the changes in interest income and expense for each
major category of interest-bearing assets and liabilities, and the amount of the
change attributable to changes in average outstanding balances ("volume") and
rates. Changes attributable to both volume and rate changes have been allocated
in proportion to the relationship of the absolute dollar amount of the changes
in volume and rate.
- - - --------------------------------------------------------------------------------
(In thousands) Change from the quarter ended
September 30, 1994, to quarter
ended September 30, 1995,
Attributable to:
Rate Volume Total
- - - --------------------------------------------------------------------------------
Interest income:
Loans $ 305 $ 447 $ 752
Securities 46 (147) (101)
- - - --------------------------------------------------------------------------------
Total interest income 351 300 651
- - - --------------------------------------------------------------------------------
Interest expense:
Deposits 355 220 575
Borrowings 15 (51) (36)
- - - --------------------------------------------------------------------------------
Total interest expense 370 169 539
- - - --------------------------------------------------------------------------------
Net interest income $ (19) $ 131 $ 112
================================================================================
Net interest income
During the quarter ended September 30, 1995 net interest income totaled $2.3
million, up 5% from $2.2 million during the same period last year.
As shown in the preceding tables, the single largest contributor to the growth
in net interest income was an increase in average loans outstanding. Average
loans outstanding rose by 12%, from $200.9 million during the quarter ended
September 30, 1994, to $225.0 million during the quarter ended September 30,
1995.
Compared to the same period last year, in 1995 all major categories of
interest-bearing assets posted higher yields. The yield on total
interest-bearing assets grew from 7.07% during the quarter ended September 30,
1994 to 7.65% during the quarter ended September 30, 1995.
All of the favorable effect of higher yields was offset by an increase in the
cost of funds. Driven by higher deposit costs, the cost of funds rose from 3.68%
during the quarter ended September 30, 1994 to 4.38% during the quarter ended
September 30, 1995.
Non-interest income
Non-interest income consisted of the following:
- - - --------------------------------------------------------------------------------
($ In thousands) Three Months Ended
September 30, 1995 1994 % Change
- - - --------------------------------------------------------------------------------
Banking service charges $ 275 $ 241 14 %
Loan servicing fees 42 44 (5)
Trust fees 33 24 38
Other 40 27 48
- - - --------------------------------------------------------------------------------
Core non-interest income 390 336 16
Income from real estate investments 67 3 2,135
Gain (loss) on sale of loans 2 2 -
Trading account gains (losses) - 24 (100)
- - - --------------------------------------------------------------------------------
Total non-interest income $ 459 $ 365 26 %
================================================================================
The increase in banking service charges was primarily attributable to an
increase in the number of outstanding checking accounts, and a correspondingly
higher utilization of fee-based services by customers.
A decrease in the loan servicing portfolio was responsible for the decline in
loan servicing fees.
The increase in trust fees resulted from growth in assets under management.
The growth in other non-interest income is primarily attributable to an increase
in fees from the sale of insurance products.
The increase in income from real estate investments is the result of a $67,000
drop in the provision for losses on real estate investments.
The Company's ability to realize gains from the sale of securities varies with
existing conditions in the financial markets.
Non-interest expense
Non-interest expense consisted of the following:
- - - ------------------------------------------------------------------------------------------------
($ In thousands) Three Months Ended
September 30, 1995 1994 % Change
- - - ------------------------------------------------------------------------------------------------
Salaries and benefits $ 834 $ 760 10 %
Premises and equipment 345 257 34
Professional services 213 161 32
Insurance premiums 18 176 (90)
Other 222 182 22
- - - ------------------------------------------------------------------------------------------------
Core non-interest expense 1,632 1,536 6
Other real estate owned 36 16 125
- - - ------------------------------------------------------------------------------------------------
Total non-interest expense $ 1,668 $ 1,552 7 %
================================================================================================
Most of the increase in salaries and benefits resulted from higher merit
increases in base salaries and bonuses, combined with an increase in medical
insurance premiums.
The Company leases out unused space at its office locations. The increase in
premises and equipment expense is primarily attributable to lower rental income,
which resulted from the loss of a major tenant.
The decrease in insurance premiums was attributable to a refund of FDIC
insurance premiums.
The Company's utilization of outside consultants, for technical advice related
to the Company's trust department, caused the increase in professional services
expense during 1995.
The increase in other expenses was primarily attributable to an increase in
charitable contributions.
Part II - Other Information
Item 1. Legal proceedings.
Not applicable.
Item 2. Changes in securities.
Not applicable.
Item 3. Defaults upon senior securities.
Not applicable.
Item 4. Submission of matters to a vote of security holders.
Not applicable.
Item 5. Other information.
Not applicable.
Item 6. Exhibits and reports on Form 8-K.
Not applicable.
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.
SHELTON BANCORP, INC.
-----------------------------------------
Registrant
By: /s/ KENNETH E. SCHAIBLE
-----------------------------------------
Date: October 27, 1995 Kenneth E. Schaible
President & Treasurer
(Principal Executive Officer)
By: /s/ RALPH J. RODRIGUEZ
-----------------------------------------
Date: October 27, 1995 Ralph J. Rodriguez
Senior Vice President, Controller &
Assistant Secretary
(Chief Financial Officer)