UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------- --------------------
Commission file number 0-16193
DS BANCOR, INC.
---------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1162884
-------- ----------
(State or other jurisdiction of I .R.S. Employer
Incorporation or organization) Identification No.)
33 ELIZABETH STREET, DERBY, CONNECTICUT
---------------------------------------
(Address of principal executive offices)
06418
-----
(Zip Code)
(203) 736-1000
--------------
(Registrant's telephone number, including area code)
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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class: Common Stock, par value $1.00 per share
Outstanding at November 10, 1994: 2,745,071 shares
I N D E X
Page(s)
-------
Part 1 -- Consolidated Financial Statements
A. Consolidated Statements of Position 1
B. Consolidated Statements of Earnings 2
C. Consolidated Statements of Stockholders' Equity 3
D. Consolidated Statements of Cash Flows 4
E. Notes to Consolidated Financial Statements 5 - 25
F. Selected Consolidated Financial and Other Data 26
G. Management's Discussion and Analysis 27 - 41
Part 2 -- Other Information 42
Signatures 43
DS BANCOR, INC.
CONSOLIDATED STATEMENTS OF POSITION
(Dollar amounts in thousands)
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- ------------
(unaudited)
ASSETS
Cash and due from banks (Note 1) $15,187 $12,618
Federal funds sold (Note 1) 4,125 30,500
Investment securities (Notes 1, 2 & 3)
Trading account securities, at market 865 --
Available-for-sale, at market 227,157 256,346
Held-to-maturity (market value: $101,841 at September 30, 1994
and $66,846 at December 31, 1993) 108,260 66,253
Federal Home Loan Bank of Boston stock, at cost (Note 3) 8,899 8,022
---------- ----------
Loans (Notes 1, 3, 4 & 5)
Mortgage 717,551 660,605
Consumer 95,605 95,520
Commerical 23,251 30,141
---------- ----------
836,407 786,266
Less: Allowance for loan losses (6,515) (6,979)
---------- ----------
Loans, net 829,892 779,287
---------- ----------
Income receivable (Note 1) 6,865 6,541
Bank premises and equipment, net (Notes 1 & 6) 7,012 7,062
Prepaid and deferred income taxes (Notes 1 & 9) 5,484 2,501
Foreclosed & in-substance foreclosed assets (Notes 1 & 7) 11,686 16,143
Other assets 7,498 8,848
---------- ----------
TOTAL ASSETS $1,232,930 $1,194,121
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 8)
Non-interest bearing $28,406 $28,185
Interest bearing 986,626 978,036
---------- ----------
1,015,032 1,006,221
Mortgagors' escrow 6,173 10,476
Advances from Federal Home Loan Bank of Boston (Notes 3 & 8) 138,867 104,991
Repurchase agreements & other borrowings (Notes 3, 8 & 13) -- 1,450
Other liabilities (Note 10) 4,424 4,543
---------- ----------
Total Liabilities 1,164,496 1,127,681
---------- ----------
Commitments and contingent Liabilities (Notes 5 & 6)
STOCKHOLDERS' EQUITY (NOTES 12, 13 & 15)
Preferred stock, no par value; authorized 2,000,000 shares; none issued -- --
Common stock, par value $1.00; authorized 6,000,000 shares;
issued--September 30, 1994--3,084,571 shares, December 31, 1993--
2,991,116 shares; outstanding--September 30, 1994--2,745,071 shares,
December 31, 1993--2,651,616 shares 3,085 2,991
Additional paid-in capital 37,780 36,007
Retained earnings 35,014 30,652
Net unrealized gains (losses) on available-for-sale portfolio (2,932) 1,303
Less: Treasury stock, at cost (339,500 shares) (4,513) (4,513)
---------- ----------
Total Stockholders' Equity 68,434 66,440
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,232,930 $1,194,121
---------- ----------
---------- ----------
See notes to consolidated financial statements.
-1-
DS BANCOR, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar amounts in thousands, except per share data)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1994 1993 1994 1993
------- ------- ------- -------
(unaudited) (unaudited)
INTEREST REVENUE (NOTE 1)
Interest and fees on loans $14,426 $12,936 $41,770 $40,257
Taxable interest on investments 5,126 4,972 14,356 15,304
Dividends on investments 242 229 742 691
------- ------- ------- -------
Total interest revenue 19,794 18,137 56,868 56,252
------- ------- ------- -------
INTEREST EXPENSE (NOTE 8)
Deposits 9,218 9,146 26,259 29,004
Borrowed funds 1,793 1,609 5,194 4,775
Less: Penalties on premature time deposit withdrawals (26) (19) (62) (58)
------- ------- ------- -------
Net interest expense 10,985 10,736 31,391 33,721
------- ------- ------- -------
NET INTEREST REVENUE 8,809 7,401 25,477 22,531
Provision for loan losses (Notes 1 & 4) 625 1,325 1,625 2,050
------- ------- ------- -------
Net interest revenue after provision for loan losses 8,184 6,076 23,852 20,481
------- ------- ------- -------
OTHER REVENUE
Service charges and other revenue 647 1,615 1,816 5,585
Net securities and other gains 36 247 740 826
------- ------- ------- -------
Total other revenue 683 1,862 2,556 6,411
------- ------- ------- -------
OTHER EXPENSES
Salaries and wages 1,945 2,083 5,917 5,879
Employee benefits (Note 10) 587 495 1,739 1,419
Occupancy (Note 6) 540 532 1,665 1,554
Furniture and equipment (Note 6) 282 193 755 551
Foreclosed asset expense (Note 7) 664 894 2,119 4,448
Other 2,462 2,539 6,908 7,059
------- ------- ------- -------
Total other expenses 6,480 6,736 19,103 20,910
------- ------- ------- -------
Income before income taxes and cumulative
effect of a change in accounting principle 2,387 1,202 7,305 5,982
Provision for income taxes (Note 9) 966 323 2,943 2,391
------- ------- ------- -------
Income before cumulative effect of a change in accounting principle 1,421 879 4,362 3,591
Cumulative effect of a change in method of accounting for income taxes -- -- -- 1,548
------- ------- ------- -------
NET INCOME $1,421 $879 $4,362 $5,139
------- ------- ------- -------
------- ------- ------- -------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (NOTE 11)
Primary 2,812,315 2,651,616 2,786,216 2,651,509
Fully diluted 2,813,557 2,651,616 2,789,151 2,651,509
EARNINGS PER SHARE--PRIMARY (NOTE 11)
Income before cumulative effect of a change in accounting principle $0.51 $0.33 $1.57 $1.35
Cumulative effect of a change in method of accounting for income taxes -- -- -- $0.58
Net income $0.51 $0.33 $1.57 $1.94
EARNINGS PER SHARE--FULLY DILUTED (NOTE 11)
Income before cumulative effect of a change in accounting principle $0.50 $0.33 $1.56 $1.35
Cumulative effect of a change in method of accounting for income taxes -- -- -- $0.58
Net income $0.50 $0.33 $1.56 $1.94
See notes to consolidated financial statements.
-2-
DS BANCOR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)
(unaudited)
Retained Earnings
-----------------
Net
Additional Unrealized Total
Common Paid-in Retained Gains Treasury Stockholder
Stock Capital Earnings (Losses) Stock Equity
----- ---------- -------- ---------- -------- -----------
(Note 1) (Note 2) (Note 13)
Balance--December 31, 1992 $2,865 $33,971 $26,340 ($78) ($4,513) $58,585
Net income 5,139 5,139
Stock dividend declared on common
stock (5%--February 26, 1992) 126 2,029 (2,155) 0
Shares issued for fractional interest 7 7
Cash in lieu of fractional shares (7) (7)
Adjustment of unrealized losses 78 78
------ ------- ------- ------ ------- -------
Balance--September 30, 1993 $2,991 $36,007 $29,317 $0 ($4,513) $63,802
------ ------- ------- ------ ------- -------
------ ------- ------- ------ ------- -------
Balance--December 31, 1993 $2,991 $36,007 $30,652 $1,303 ($4,513) $66,440
Net income 4,362 4,362
Stock options exercised
(93,455 shares) (Note 12) 94 1,773 1,867
Adjustment for net unrealized
gains (losses) (4,235) (4,235)
------ ------- ------- ------ ------- -------
BALANCE--SEPTEMBER 30, 1994 $3,085 $37,780 $35,014 ($2,932) ($4,513) $68,434
------ ------- ------- ------ ------- -------
------ ------- ------- ------ ------- -------
See notes to consolidated financial statements.
-3-
DS BANCOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
For The Nine Months Ended September 30,
---------------------------------------
1994 1993
------ ------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,362 $5,139
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 1,625 2,050
Provision for foreclosed assets 1,585 3,925
Depreciation and amortization 589 448
Amortization of intangible assets 727 803
Net amortization of premiums on securities 1,007 1,362
Deferral (amortization) of loan fees, net (937) 418
Decrease in prepaid income taxes 269 283
Net securities and other gains (793) (836)
Increase in interest receivable (324) (2,648)
Cumulative effect of change in accounting principle --- (1,548)
Benefit for deferred income taxes (237) (945)
Net decrease in other assets 1,780 17,340
Decrease in other liabilities (119) (2,020)
-------- --------
Net cash provided by operating activities 9,534 23,771
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from matured securities 67,342 112,093
Proceeds from sale of securities 40,210 5,713
Purchase of investment securities (129,949) (247,124)
Purchase of FHLB of Boston stock (877) (1,405)
Proceeds from loans sold to others 12,124 26,333
Purchases of loans from others (11,958) (8,796)
Net increase in loans to customers (53,386) (51,292)
Premises and equipment additions (539) (1,839)
Proceeds from sale of foreclosed assets 5,021 5,207
Net increase (decrease) in property taken by foreclosure (129) 121
-------- --------
Net cash used in investing activities (72,141) (160,989)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits from customers 8,811 16,757
Net increase (decrease) in mortgagors' escrow (4,303) (2,474)
Net decrease in repurchase agreements & other borrowings (1,450) (342)
Net increase (decrease) in short term FHLB of Boston advances 14,426 771
Proceeds from long term FHLB of Boston advances 50,000 12,000
Repayment of long term FHLB of Boston advances (30,550) (14,125)
Proceeds from issuance of common stock 1,867 7
Dividends paid to stockholders --- (7)
-------- --------
Net cash provided by financing activities 38,801 12,587
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (23,806) (124,631)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 43,118 143,960
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $19,312 $19,329
-------- --------
-------- --------
See notes to consolidated financial statements.
-4-
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by DS
Bancor, Inc. (the "Company"), its wholly owned subsidiary Derby Savings Bank
(the "Bank") and Derby Financial Services Corp., the Bank's wholly owned
subsidiary, and reflected in the accompanying consolidated financial statements.
The financial statements of Derby Financial Services Corp. are not significant
to the Bank's or the consolidated financial statements.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of the Company and the Bank and all material intercompany accounts and
transactions have been eliminated.
BASIS OF CONSOLIDATED FINANCIAL STATEMENT PRESENTATION. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and revenue and expenses as of the
date of the consolidated statements of financial position and the consolidated
statements of operations for the period. Actual results may differ from those
estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures and in
satisfaction of loans. In connection with the determination of the allowances
for loan losses and foreclosed assets, management utilizes the services of
professional appraisers for significant properties.
A substantial portion of the Bank's loans are collateralized by real estate in
depressed markets in Connecticut. In addition, all of the foreclosed assets are
located in those same depressed markets. Accordingly, the ultimate
collectibility of a substantial portion of the Bank's loan portfolio and the
recovery of a substantial portion of the carrying amount of foreclosed assets
are particularly susceptible to changes in market conditions in Connecticut.
While management uses available information to recognize possible loan losses,
future additions to the allowance may be necessary based on changes in economic
conditions, particularly in the Bank's service area, Connecticut. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowances for loan and foreclosed asset losses.
Such agencies may require the Bank to recognize additions to the allowances
based on their judgements of information available to them at the time of their
examination.
CASH EQUIVALENTS. Cash equivalents include demand deposits at other financial
institutions and federal funds sold. Generally, federal funds are sold for
one-day periods.
INVESTMENT SECURITIES, effective December 31 ,1993, at the time of acquisition,
are classified into one of three categories: held-to-maturity, available-for-
sale or trading. The classification is based upon management's intended holding
period and, in the case of the held-to-maturity classification, the ability to
hold the securities to maturity. Investments classified as held-to-maturity are
carried at amortized cost. Investments classified as available-for-sale are
carried at fair value with unrealized gains and losses, net of tax, reported in
a separate component of stockholders' equity. Trading securities are carried at
fair value with unrealized gains and losses included in earnings. Prior to
December 31, 1993, investment securities were stated at cost, adjusted for
amortization of bond premiums and accretion of bond discounts using the interest
method. Marketable equity securities were stated at the lower of aggregate cost
or market value. The specific cost method is used to determine gains or losses
on the sales of securities.
LOANS are stated net of deferred fees.
INTEREST ON LOANS is credited to operations as earned based primarily upon the
principal amount outstanding. In determining income recognition on mortgage,
consumer and commercial loans, it is the general policy that no additional
interest revenue shall be credited to operations with respect to loans on which
a default of interest has existed for a period in excess of 90 days, at which
time previously accrued interest is reversed. On loans secured by real estate,
management may continue to accrue interest if the estimated realizable value
-5-
of the underlying collateral for such loans is sufficient to cover both
principal and accrued interest. All loan origination fees and direct loan
origination costs transacted are being deferred and amortized over the
contractual life of the related loans as an adjustment of yield.
THE ALLOWANCE FOR LOAN LOSSES has been established through provisions for loan
losses and is a valuation allowance which is reflected as a deduction from
loans. The allowance represents amounts which, in management's judgment, will
be adequate to absorb possible losses on loans that may become uncollectible,
based on such factors as changes in the nature and volume of the loan portfolio,
current economic conditions that may affect the borrowers' ability to pay,
overall portfolio quality, the average of the Bank's loan losses less recoveries
for the current and preceding five years, and review of specific problem loans.
BANK PREMISES AND EQUIPMENT are stated at cost, less accumulated depreciation
and amortization. The Bank uses primarily accelerated methods of calculating
depreciation.
Leasehold improvements are amortized over the shorter of the estimated service
lives or the terms of the leases. Bank premises are depreciated over a period
of between 30 and 40 years; furniture and equipment are depreciated over a
period of between 1 and 20 years. For income tax purposes, the Bank uses the
depreciation provisions of the Internal Revenue Code.
FORECLOSED ASSETS acquired through foreclosure action or deed in lieu of
foreclosure are reflected at acquisition cost (loan balance and accrued
interest) plus improvements. The carrying value cannot exceed the estimated net
realizable value and any excess is charged off against the allowance for
foreclosed assets. Operating costs, net of rental income, if any, are charged
to expense in the period incurred.
IN-SUBSTANCE FORECLOSED ASSETS. Collateral generally is considered repossessed
in substance and accounted for at its fair value when the debtor has little or
no equity in the collateral, considering the current net realizable value of the
collateral; proceeds for repayment of the loan can be expected to come only from
the operation or sale of the collateral; and the debtor has either formally or
effectively abandoned control of the collateral to the creditor or retained
control of the collateral but, because of the current financial condition of the
debtor, or the economic prospects for the debtor and/or the collateral in the
foreseeable future, it is doubtful that the debtor will be able to rebuild
equity in the collateral or otherwise repay the loan in the foreseeable future.
To the extent the loan balance exceeds the net realizable value of the
collateral, the excess is charged off against the allowance for loan losses.
Subsequent declines, if any, in the net realizable value of the collateral are
charged off against the allowance for foreclosed assets.
INCOME TAXES. Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109. This Statement requires the use of the
liability method in determining the tax effect of temporary differences in the
recognition of items of income and expense reported in the consolidated
financial statements and those reported for income tax purposes. In prior years
the Company used the deferred method in computing such tax effects. In adopting
this statement, the Company provided for the effect of the change in 1993.
The Company and its subsidiaries file consolidated income tax returns. The
subsidiaries pay to or receive from the Company, as appropriate, an allocated
portion of the consolidated income taxes or benefits based upon the effective
income tax rate of the consolidated group.
CONTINGENCY RESERVE FOR QUALIFYING LOAN LOSSES. Deductions from taxable income
in prior years have been claimed as loan loss provisions for qualifying (real
estate) loans in accordance with the Internal Revenue Code. A segregation equal
to the deductions has been made from unappropriated retained earnings to
establish the reserve. If the reserve is used for any purpose other than to
absorb losses on loans, an income tax liability could be incurred. Management
does not anticipate that this reserve will be made available for any other
purposes. In accordance with generally accepted accounting principles, no
deferred taxes have been provided for this temporary difference (Note 9).
CLASSIFICATION OF CERTAIN AMOUNTS. For comparative purposes, certain amounts in
prior period consolidated financial statements have been reclassified to conform
with the current period classifications.
-6-
NOTE 2 - INVESTMENT SECURITIES
The Bank adopted Financial Accounting Standards Board Statement No. 115 as of
December 31, 1993. This statement requires that investment securities, at the
time of acquisition, be classified into one of three categories: held-to-
maturity, available-for-sale or trading.
Debt securities that are purchased with the positive intent and ability to hold
to maturity are classified as held-to-maturity and reported at amortized cost.
Debt and equity securities that are purchased and held for the purpose of sale
in the near term are classified as trading securities and reported at fair
value, with unrealized gains and losses included in earnings.
Debt and equity securities not classified as either held-to-maturity or trading
securities are classified as available-for-sale securities and reported at fair
value, with unrealized gains and losses, net of tax (Note 9), reported in a
separate component of stockholders' equity.
At the time of adoption of this statement, the Bank classified investments in
debt and equity securities based upon the Bank's current intent.
A summary of the Bank's investment securities is as follows:
Available-For-Sale
------------------------------------------
September 30, 1994
------------------------------------------
(Amounts in thousands)
Gross Gross
Amortized unrealized unrealized Market
Cost gains losses value
-------- ---------- ---------- ------
Mortgage-backed securities $180,734 $ 62 $ 3,873 $176,923
Other bonds and notes 49,927 4 1,200 48,731
-------- -------- -------- --------
Total bonds 230,661 66 5,073 225,654
Marketable equities 1,515 51 63 1,503
-------- -------- -------- --------
Total investment securities $232,176 $ 117 $ 5,136 $227,157
-------- -------- -------- --------
-------- -------- -------- --------
Held-to-Maturity
---------------------------------------------
September 30, 1994
---------------------------------------------
(Amounts in thousands)
Gross Gross
Amortized unrealized unrealized Market
Cost gains losses value
--------- ---------- ---------- --------
U.S. Government and agency bonds $ 2,000 $ --- $ 44 $ 1,956
Mortgage-backed securities 106,260 7 6,382 99,885
-------- -------- -------- --------
Total investment securities $108,260 $ 7 $ 6,426 $101,841
-------- -------- -------- --------
-------- -------- -------- --------
-7-
Trading Account
--------------------------------------------------
September 30, 1994
--------------------------------------------------
(Amounts in thousands)
Gross Gross
Amortized unrealized unrealized Market
Cost gains losses value
--------- ---------- ---------- --------
Marketable equities $ 918 7 60 865
-------- -------- -------- --------
Total investment securities $ 918 $ 7 $ 60 $ 865
-------- -------- -------- --------
-------- -------- -------- --------
Available-For-Sale
------------------------------------------------
December 31, 1993
-------------------------------------------------
(Amounts in thousands)
Gross Gross
Amortized unrealized unrealized Market
Cost gains losses value
--------- ---------- ---------- --------
Mortgage-backed securities $187,746 $ 1,303 $ 454 $188,595
Other bonds and notes 65,095 1,302 45 66,352
-------- -------- -------- --------
Total bonds 252,841 2,605 499 254,947
Marketable equities 1,274 194 69 1,399
-------- -------- -------- --------
Total investment securities $254,115 $ 2,799 $ 568 $256,346
-------- -------- -------- --------
-------- -------- -------- --------
Held-to-Maturity
--------------------------------------------------
December 31, 1993
--------------------------------------------------
(Amounts in thousands)
Gross Gross
Amortized unrealized unrealized Market
Cost gains losses value
--------- ---------- ---------- ---------
U.S. Government and agency bonds $ 2,000 $ 21 $ --- $ 2,021
Mortgage-backed securities 55,253 661 89 55,825
-------- -------- -------- --------
Total bonds 57,253 682 89 57,846
Money market preferred stock 9,000 --- --- 9,000
-------- -------- -------- --------
Total investment securities $ 66,253 $ 682 $ 89 $ 66,846
-------- -------- -------- --------
-------- -------- -------- --------
Prior to December 31, 1993, the aggregate carrying value of the marketable
equity securities portfolio was adjusted to aggregate market, if lower than
cost, by a valuation allowance which was adjusted through corresponding charges
and credits to Retained earnings.
-8-
The amortized cost and market value of debt securities by contractual maturity
is as follows:
September 30, 1994
-----------------------------------------
(Amounts in thousands)
Available-for-Sale Held-to-Maturity
------------------- -------------------
Amortized Market Amortized Market
Cost value Cost value
--------- -------- --------- -------
Due in one year or less $ 6,587 $ 6,526 $ --- $ ---
Due after one year through five years 22,340 21,710 2,000 1,956
Due after fives years through ten years 16,000 15,645 --- ---
Due after ten years 5,000 4,850 --- ---
-------- -------- -------- --------
49,927 48,731 2,000 1,956
Mortgage-backed securities 180,734 176,923 106,260 99,885
-------- -------- -------- --------
Total $230,661 $225,654 $108,260 $101,841
-------- -------- -------- --------
-------- -------- -------- --------
Total Portfolio
---------------------
(Amounts in thousands)
Amortized Market
Cost value
--------- --------
Due in one year or less $ 6,587 $ 6,526
Due after one year through five years 24,340 23,666
Due after fives years through ten years 16,000 15,645
Due after ten years 5,000 4,850
-------- --------
51,927 50,687
Mortgage-backed securities 286,994 276,808
-------- --------
Total $338,921 $327,495
-------- --------
-------- --------
Proceeds from the sales of debt securities during the three and nine months
ended September 30, 1994 were $0 and $37,756,000, respectively. Gross gains of
$0 and $475,000, respectively, and gross losses of $0 and $4,000, respectively,
were realized on those sales. Proceeds from the sales of debt securities during
the three and nine months ended September 30, 1993 were $0 and $4,104,000,
respectively. Gross gains of $0 and $54,000, respectively, were realized on
those sales.
NOTE 3 - PLEDGED ASSETS
The aggregate book value and market value of investment securities pledged as
collateral against public funds, treasury tax and loan deposits and repurchase
agreements (Note 8) were approximately as follows:
September 30, 1994 December 31, 1993
------------------ -----------------
(Amounts in thousands)
Book value $7,000 $2,000
------ ------
------ ------
Market value $6,806 $2,020
------ ------
------ ------
Stock of the Federal Home Loan Bank (the "FHLB") of Boston and mortgage loans
and mortgage-backed securities with market values, as determined in accordance
with FHLB of Boston's collateral pledge agreement, at least equal to the
outstanding advances and any unused lines of credit (Note 8) were pledged
against outstanding advances from the FHLB of Boston at September 30, 1994 and
December 31, 1993.
-9-
NOTE 4 - LOANS
Loans are summarized between fixed and adjustable rates as follows:
September 30, 1994 December 31, 1993
------------------ -----------------
(Amounts in thousands)
Mortgage
Fixed rate $199,142 $200,406
Adjustable rate 524,806 467,273
-------- --------
723,948 667,679
-------- --------
Consumer
Fixed rate 11,967 12,101
Adjustable rate 82,838 82,795
-------- --------
94,805 94,896
-------- --------
Commercial
Fixed rate 4,998 9,201
Adjustable rate 18,555 21,326
-------- --------
23,553 30,527
-------- --------
Total loans 842,306 793,102
-------- --------
Less: Allowance for loan losses 6,515 6,979
Deferred loan fees and discount 5,899 6,836
-------- --------
12,414 13,815
-------- --------
Loans, net $829,892 $779,287
-------- --------
-------- --------
Included in loans outstanding at September 30, 1994 and December 31, 1993 were
$8,363,000 and $9,502,000, respectively, in loans on non-accrual status.
Included in these amounts were $6,610,000 in mortgage loans, $1,087,000 in
consumer loans and $666,000 in commercial loans at September 30, 1994 and
$6,657,000 in mortgage loans, $1,446,000 in consumer loans and $1,399,000 in
commercial loans at December 31, 1993. At September 30, 1994 and December 31,
1993, non-accrual interest on these loans totaled approximately $615,100 and
$810,400, respectively.
The Bank has sold certain mortgage loans and retained the related servicing
rights. The principal balances of loans serviced for others, which are not
included in the accompanying Consolidated Statements of Position, were
approximately $132,700,000 and $149,900,000 at September 30, 1994 and December
31, 1993, respectively.
In connection with the Burritt transaction (Note 14), the Bank purchased two
loan pools at discounts of $9.0 million and $1.3 million, which had been added
to the Bank's allowance for mortgage and consumer loan losses, respectively, in
1992. During 1993, the Company completed the valuation analysis of the loans
acquired in connection with the Burritt transaction. As a result of this
analysis, the Company allocated $6.0 million of the Burritt acquired allowance
for loan losses as a purchased loan discount. This amount will be accreted to
interest revenue over the remaining terms of the acquired loans. At September
30, 1994, the allowance for loan losses, which totaled $6.5 million, included
$1.8 million allocated to the loans acquired in the Burritt transaction.
-10-
Activity in the allowances for loan losses for the periods indicated were as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
-------- -------- -------- --------
(Amounts in thousands)
MORTGAGE LOANS
Balance at beginning of period $ 4,032 $10,122 $ 4,605 $11,166
Provision for possible loan losses 625 1,125 975 1,800
Acquired allowance --- --- --- 42
Loan charge-offs (467) (461) (1,391) (2,460)
Recoveries 2 78 3 316
------- ------- ------- -------
Balance at end of period $ 4,192 $10,864 $ 4,192 $10,864
------- ------- ------- -------
------- ------- ------- -------
CONSUMER LOANS
Balance at beginning of period $ 1,378 $ 1,351 $ 1,193 $ 1,987
Provision for possible loan losses --- --- 600 50
Acquired allowance --- --- --- (5)
Loan charge-offs (121) (89) (555) (781)
Recoveries 25 6 44 17
------- ------- ------- -------
Balance at end of period $ 1,282 $ 1,268 $ 1,282 $ 1,268
------- ------- ------- -------
------- ------- ------- -------
COMMERCIAL LOANS
Balance at beginning of period $ 1,059 $ 715 $ 1,181 $ 784
Provision for possible loan losses --- 200 50 200
Loan charge-offs (19) --- (195) (72)
Recoveries 1 7 5 10
------- ------- ------- -------
Balance at end of period $ 1,041 $ 922 $ 1,041 $ 922
------- ------- ------- -------
------- ------- ------- -------
TOTAL ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ 6,469 $12,188 $ 6,979 $13,937
Provision for possible loan losses 625 1,325 1,625 2,050
Acquired allowance --- --- --- 37
Loan charge-offs (607) (550) (2,141) (3,313)
Recoveries 28 91 52 343
------- ------- ------- -------
Balance at end of period $ 6,515 $13,054 $ 6,515 $13,054
------- ------- ------- -------
------- ------- ------- -------
NOTE 5 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK
A. PURCHASE AND SALES COMMITMENTS.
In the normal course of business, there are various commitments and contingent
liabilities outstanding pertaining to the purchase and sale of securities which
are not reflected in the accompanying consolidated financial statements. The
Bank does not anticipate any material losses as a result of these transactions.
There no outstanding commitments to purchase or sell securities at September 30,
1994.
-11-
B. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
instruments expose the Bank to credit risk which is not included in the
accompanying Consolidated Statements of Position.
The Bank's exposure to credit risk is represented by the contractual amount of
the loan commitments and letters of credit summarized below:
September 30, 1994 December 31, 1993
------------------ -----------------
(Amounts in thousands)
Loan Commitments
Commitments to extend credit $ 9,699 $ 43,832
Unadvanced commercial lines of credit 8,268 6,115
Unadvanced portion of construction loans 3,118 1,881
Unused portion of Home Equity
Lines of Credit 58,978 56,331
Other consumer lines of credit 473 635
------- --------
Total $80,536 $108,794
------- --------
------- --------
Letters of credit $ 1,052 $ 1,643
------- --------
------- --------
Loan commitments are agreements to lend and are subject to the same credit
policies as loans and generally have fixed expiration dates or other termination
clauses. The Bank also issues traditional letters of credit which commit the
Bank to make payments on behalf of its customers based upon specific future
events. Since many of the letters of credit are expected to expire without
being drawn upon, the total letters of credit do not necessarily represent
future cash requirements. Collateral is obtained based upon management's credit
assessment of the customer.
NOTE 6 - BANK PREMISES AND EQUIPMENT
Bank premises and equipment were comprised of the following:
September 30, 1994 December 31, 1993
------------------ -----------------
(Amounts in thousands)
Buildings and land $ 7,257 $ 7,188
Leasehold improvements 848 887
Furniture and equipment 5,880 6,154
------- -------
13,985 14,229
Accumulated depreciation and amortization 6,973 7,167
------- -------
Bank premises and equipment, net $ 7,012 $ 7,062
------- -------
------- -------
Depreciation and amortization included in Other expenses aggregated
approximately $211,900 and $589,400 for the three and nine months ended
September 30, 1994, respectively, and $161,800 and $448,400 for the three and
nine months ended September 30, 1993, respectively.
-12-
LEASES.
Rent expense for banking premises of $209,500 and $670,100 is included in
Occupancy expense for the three and nine months ended September 30, 1994,
respectively, and $209,100 and $531,500 for the three and nine months ended
September 30, 1993, respectively.
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with initial or remaining terms of one year or more consist of
the following at September 30, 1994 (amounts in thousands):
1994 $ 130
1995 517
1996 482
1997 384
1998 209
Thereafter 237
------
Total future minimum lease payments $1,959
------
------
These leases include options to renew for periods ranging from 3 to 22 years.
In connection with the Burritt transaction, the Bank acquired an option to lease
ten branches, formerly leased by Burritt. The FDIC disaffirmed all of the
leases, except for one which the Bank has assumed. Two of the offices were
closed by the FDIC and not reopened by the Bank. Through September 30, 1994,
the Bank entered into leases on four of the seven locations formerly leased by
Burritt and is renegotiating the terms of two of the remaining locations. The
Bank closed one of the acquired former branch offices of Burritt in January
1994. (Note 14)
NOTE 7 - FORECLOSED AND IN-SUBSTANCE FORECLOSED ASSETS
Foreclosed and in-substance foreclosed assets consisted of the following:
September 30, 1994 December 31, 1993
------------------ -----------------
(Amounts in thousands)
Foreclosed assets $ 7,239 $ 9,379
In-substance foreclosed assets 5,180 7,804
------- -------
Subtotal 12,419 17,183
Valuation allowance (733) (1,040)
------- -------
Net carrying amount $11,686 $16,143
------- -------
------- -------
At September 30, 1994 and December 31, 1993, there were 40 and 44 properties,
respectively, included in foreclosed assets and 35 and 50 properties,
respectively, in in-substance foreclosed assets. During the nine months ended
September 30, 1994, the Bank transferred loans aggregating $2.6 million to
in-substance foreclosed assets.
Activity in the allowance for foreclosed assets is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
------- ------- ------- -------
(Amounts in thousands)
Balance at beginning of period $1,089 $ 942 $1,040 $ 438
Provision 485 750 1,585 3,925
Write-downs (841) (508) (1,892) (3,179)
------ ------ ------ ------
Balance at end of period $ 733 $1,184 $ 733 $1,184
------ ------ ------ ------
------ ------ ------ ------
-13-
Expenses related to foreclosed assets are summarized as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
------- ------- ------- -------
(Amounts in thousands)
Provision $ 485 $ 750 $1,585 $3,925
Gain on sale of real estate (38) (93) (62) (252)
Other expenses, net 217 237 596 775
------ ------ ------ ------
Net foreclosed asset expense $ 664 $ 894 $2,119 $4,448
------ ------ ------ ------
------ ------ ------ ------
NOTE 8 - TERM LIABILITIES
Interest-bearing deposits were comprised of the following:
September 30, 1994 December 31, 1993
------------------ -----------------
(Amounts in thousands)
NOW accounts $ 46,761 $ 47,330
Money market deposit accounts 205,687 205,261
Regular and club savings 221,713 223,255
-------- --------
Time savings
30 - 360 days ($100,000 and over) 3,030 1,881
90 and 91 days 19,941 20,261
6 - 8 months 91,031 102,862
9 - 17 months 148,500 122,955
18 - 35 months 91,496 110,341
36 months or more 158,467 143,890
-------- --------
Total time savings 512,465 502,190
-------- --------
Total interest bearing deposits $986,626 $978,036
-------- --------
-------- --------
Time savings deposits of $100,000 or more approximated $32,326,000 at September
30, 1994 and $30,628,000 at December 31, 1993. There were no brokered deposits
at September 30, 1994 or December 31, 1993.
Interest expense on deposits is summarized as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
---- ---- ---- ----
(Amounts in thousands)
NOW $ 235 $ 242 $ 693 $ 882
Money market deposits 2,180 1,685 5,544 4,420
Regular and club savings 1,139 1,299 3,390 4,789
Time savings 5,635 5,878 16,512 18,749
Escrow 29 42 120 164
------- ------- ------- -------
Total interest expense on deposits $ 9,218 $ 9,146 $26,259 $29,004
------- ------- ------- -------
------- ------- ------- -------
-14-
Terms of the advances from the FHLB of Boston were as follows:
September 30, 1994 December 31, 1993
---------------------- ----------------------
(Dollar amounts in thousands)
Weighted Average Weighted Average
Maturity/Reprice Date Balance Interest Rate Balance Interest Rate
- - --------------------- -------- ------------- -------- -------------
1994 $ 688 ---% $ 14,802 ---%
1994 55,167 5.17 39,178 5.13
1995 32,052 5.49 27,051 5.78
1996 27,050 4.95 10,050 7.08
1997 19,190 5.55 9,190 6.35
1998 1,600 5.48 1,600 5.48
1999 2,200 8.60 2,200 8.60
2000 920 9.16 920 9.16
-------- --------
Total advances from the FHLB of Boston $138,867 $104,991
-------- --------
-------- --------
The Bank has a cash management line of credit from the FHLB of Boston of
$10,672,000. At September 30, 1994 and December 31, 1993, the Bank had book
overdrafts of $688,000 and $14,802,000, respectively, which are included in
advances from the FHLB of Boston.
At September 30, 1994 and December 31, 1993, the Bank had no retail "sweep"
repurchase agreements.
During 1990, the Company established a $3.0 million line of credit (Note 13), of
which $1.4 million were outstanding at December 31, 1993, and was subsequently
paid off in June 1994.
Interest expense on borrowed funds is summarized as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
---- ---- ---- ----
(Amounts in thousands)
FHLB of Boston advances $1,793 $1,580 $5,151 $4,681
Line of credit --- 27 43 87
Repurchase agreements & other borrowings --- 2 --- 7
------ ------ ------ ------
Total expense on borrowed funds $1,793 $1,609 $5,194 $4,775
------ ------ ------ ------
------ ------ ------ ------
NOTE 9 - INCOME TAXES
In February 1992, the FASB issued Statement of Financial Accounting Standards
No. 109 ("SFAS 109") "Accounting For Income Taxes", which superseded SFAS 96, as
amended, which established financial accounting and reporting standards for the
effects of income taxes. The statement requires the use of the liability method
in determining the tax effect of temporary differences in the recognition of
items of income and expense reported in the consolidated financial statements
and those reported for income tax purposes. Effective January 1, 1993, the
Company adopted SFAS 109. As a result of the adoption of SFAS 109, the Company
recorded the cumulative effect of this change in accounting principle which
amounted to $1,548,000 or $.58 per share.
-15-
The allocation of federal and state income taxes between current and deferred
portions is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1994 1993 1994 1993
---- ---- ---- ----
(Amounts in thousands)
Current income tax provision
Federal $ 751 $ 452 $2,331 $2,439
State 271 160 849 897
------ ------ ------ ------
Total current 1,022 612 3,180 3,336
------ ------ ------ ------
Deferred income tax provision
Federal (41) (209) (172) (684)
State (15) (80) (65) (261)
------ ------ ------ ------
Total deferred (56) (289) (237) (945)
------ ------ ------ ------
Total provision for income taxes $ 966 $ 323 $2,943 $2,391
------ ------ ------ ------
------ ------ ------ ------
The Company's effective income tax rate differed from the Federal statutory tax
rate as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
1994 1993 1994 1993
--------------- --------------- -------------- ---------------
(Dollar amounts in thousands)
Amount % Amount % Amount % Amount %
------ ---- ------ ---- ------ ---- ------ ----
Tax at statutory Federal rate $ 812 34.0% $ 409 34.0% $2,483 34.0% $2,035 34.0%
State tax* 169 7.1 53 4.4 518 7.1 419 7.0
Dividend income exclusion (15) (0.6) (18) (1.5) (61) (0.8) (64) (1.0)
Non-deductible intangibles -- -- (121) (10.0) -- -- -- --
Other -- -- -- -- 3 -- 1 --
------ ---- ------ ---- ------ ---- ------ ----
Effective rate on operations $ 966 40.5% $ 323 26.9% $2,943 40.3% $2,391 40.0%
------ ---- ------ ---- ------ ---- ------ ----
------ ---- ------ ---- ------ ---- ------ ----
<FN>
* Net of Federal tax benefit
The components of the net deferred tax asset are as follows:
September 30, 1994 December 31, 1993
------------------ -----------------
(Amounts in thousands)
Deferred tax liability:
Federal $ 234 $ 967
State 89 370
------ ------
323 1,337
------ ------
Deferred tax asset:
Federal 4,074 2,454
State 1,556 938
------ ------
5,630 3,392
------ ------
Net deferred tax asset $5,307 $2,055
------ ------
------ ------
-16-
The tax effects of each item of income and expense that give rise to deferred
taxes are:
September 30, 1994 December 31, 1993
------------------ -----------------
(Amounts in thousands)
Allowances for losses $1,988 $2,132
Depreciation (62) (171)
Deferred loan fees 19 43
Deferred compensation 210 191
Loan expense 300 249
Employee benefits 490 382
Intangible asset 275 157
------ ------
3,220 2,983
Unrealized (gains) losses 2,087 (928)
------ ------
Net deferred tax asset $5,307 $2,055
------ ------
------ ------
A summary of the change in the net deferred tax asset for the nine months ended
September 30, 1994 and 1993 is as follows (Amounts in thousands):
Deferred tax asset at December 31, 1993 $2,055
Cumulative effect of a change in accounting principle ---
Deferred tax provision:
Income and expense 237
Unrealized gains 3,015
------
Net deferred tax asset at September 30, 1994 $5,307
------
------
Deferred tax asset at December 31, 1992 $ 556
Cumulative effect of a change in accounting principle 1,548
Deferred tax provision 945
------
Net deferred tax asset at September 30, 1993 $3,049
------
------
NOTE 10 - BENEFIT PLANS
A. RETIREMENT PLAN
The Bank has a defined benefit pension plan which is noncontributory and covers
all full-time employees who meet certain age and length of service requirements.
Benefits are based on years of service and the employee's highest compensation
during any consecutive five year period during the last ten years before normal
retirement. The Bank's funding policy is to contribute annually amounts at
least equal to minimum required contributions under the Employee Retirement
Income Security Act of 1974 (ERISA). Contributions are intended to provide not
only for benefits attributed to service to date, but also for those expected to
be earned in the future.
The components of the net pension expense reflected in Employee benefits expense
were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
---- ---- ---- ----
(Amounts in thousands)
Service cost-benefits earned during the period $100 $ 66 $300 $198
Interest cost on projected benefit obligation 76 68 228 204
Expected return on plan assets (97) (81) (292) (242)
Net amortization and deferral (2) (1) (7) (3)
---- ---- ---- ----
Net pension expense $ 77 $ 52 $229 $157
---- ---- ---- ----
---- ---- ---- ----
-17-
Assumptions used in the accounting were:
For the Nine Months Ended September 30,
---------------------------------------
1994 1993
---- -----
Discount/settlement rates 7.00% 7.00%
Rates of increase in compensation levels 5.00% 5.50%
Expected long-term rate of return on assets 9.50% 9.50%
The following table sets forth the plan's funded status and amounts recognized
in the Consolidated Statements of Position at December 31, 1993 (Amounts in
thousands):
Actuarial present value of benefit obligations:
Accumulated benefit obligation - vested $2,950
Accumulated benefit obligation - nonvested 340
------
Total accumulated benefit obligation 3,290
Effect of projected future compensation levels 1,000
------
Projected benefit obligation (PBO) for service
rendered to date 4,290
Plan assets, at fair value * 3,885
------
"PBO" in excess of plan assets (405)
Unrecognized net asset existing at January 1, 1987
being recognized over approximately 18 years (102)
Unrecognized net loss from past experience different
from that assumed and effects of changes in assumptions 300
------
Accrued pension cost included in Other liabilities $ (207)
------
------
<FN>
* The plan's assets are allocated among equity securities and various short
and intermediate term bond funds.
B. DEFERRED COMPENSATION PLAN.
The Bank has adopted deferred compensation agreements for its directors whereby
directors can defer earned fees to future years with benefits commencing at
retirement or pre-retirement benefits at death prior to retirement. The
deferred compensation expense for the three and nine months ended September 30,
1994 was approximately $24,000 and $72,100, respectively, and $23,200 and
$69,500, respectively, for the three and nine months ended September 30, 1993.
The Bank has purchased life insurance policies which it intends to use to fund
the retirement benefits. For income tax purposes, no deduction is allowed for
the insurance premium expense or deferred compensation expense, but a deduction
will be allowed at the time compensation is paid to the participant. For the
three and nine months ended September 30, 1994 and 1993, the Company had no
insurance premium expenses as policy loans were utilized to fund premiums due.
C. THRIFT PLAN.
The Bank has established a defined contribution thrift plan (the "Thrift Plan")
covering eligible employees. Full-time employees are eligible to participate in
the Thrift Plan upon completion of six months of service. Eligible employees
participating in the Thrift Plan may contribute between one percent and ten
percent of their pre-tax annual compensation. If an employee contributes the
maximum ten percent of annual compensation, the employee may also contribute an
additional ten percent of post tax annual compensation. The Bank contributes
$.50 out of net income to the Thrift Plan for each $1.00 contributed by
participants up to three percent of each participant's compensation. The Bank's
expense for the three and nine months ended September 30, 1994 was $21,000 and
$63,300, respectively, and $20,600 and $48,800, respectively, for the three and
nine months ended September 30, 1993.
-18-
D. POSTRETIREMENT BENEFITS OTHER THAN PENSION
The Bank provides certain health care and life insurance benefits for retired
employees. Substantially all of the Bank's employees become eligible if they
reach normal retirement age while still working for the Bank. These benefits
are provided through an insurance company whose premiums are based on the
benefits paid during the year. The premium is paid by the Bank is based on the
retiree's length of service with the Bank. The Company adopted the Statement of
Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement
Benefits Other Than Pensions" ("SFAS No. 106") in 1992. The statement requires
that the projected future costs of providing postretirement benefits be
recognized as an expense as employees render service, instead of when the
benefits are paid. Prior to the adoption of this statement in 1992, the Company
recognized postretirement benefit expense as paid.
The following table sets forth the accumulated postretirement benefit obligation
(APBO) reconciled to the accrued postretirement benefit expense included in the
Company's Consolidated Statements of Position at the year ended December 31,
1993.
December 31, 1993
-------------------
(Amounts in thousands)
Accumulated Postretirement Benefit Obligation
Retirees $ (613)
Fully eligible active plan participants (551)
Other active plan participants (1,566)
------
Total APBO (2,730)
Unrecognized transition obligation 2,022
Unrecognized net gain from past experience different
from that assumed and effects of changes in assumptions (4)
------
Accrued postretirement benefit cost $ (712)
------
------
The APBO includes approximately $2,163,000 attributable to the Company's
postretirement health care plan.
Net periodic postretirement benefit cost reflected in Employee benefits included
the following components.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1994 1993 1994 1993
---- ---- ---- ----
(Amounts in thousands)
Service cost-benefits attributable to
service during the period $ 70 $ 44 $210 $123
Interest cost on APBO 42 47 126 129
Amortization of transition obligation 25 28 76 77
---- ---- ---- ----
Net periodic postretirement benefit cost $137 $119 $412 $329
---- ---- ---- ----
---- ---- ---- ----
For measurement purposes, a 15.0% annual rate of increase in the per capita cost
of covered health care benefits was assumed in 1993. The rate was assumed to
decrease gradually to 4.5% in year 16 and remain at that level thereafter. The
health care cost trend rate assumption has a significant effect on the amounts
reported.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5%.
-19-
NOTE 11 - EARNINGS PER SHARE
Primary and fully diluted earnings per share are based on the weighted average
number of common shares outstanding during the period and additional common
shares assumed to be outstanding to reflect the dilutive effect of common stock
equivalents. Stock options and their equivalents are included in earnings per
share computations using the treasury stock method, which assumes that the
options are exercised at the beginning of the period. Proceeds from such
exercise are assumed to be used to repurchase common stock. The difference
between the number of common shares assumed to have been issued from the
exercise of options and the number of common shares assumed to have been
purchased are added to the weighted average number of common shares outstanding.
Potential dilution due to exercisable stock options was not material for the
three and nine month periods ended September 30, 1993 and is, therefore, not
reflected in the computation of per share amounts for that period (Note 12).
NOTE 12 - STOCK OPTIONS
Under the Company's stock option plans, 563,797 shares (adjusted to reflect
stock dividends) of common stock are reserved. At the time options are granted,
no accounting entry is made. The proceeds from the exercise of options are
credited to common stock for the par value of the shares purchased and the
excess of the option price over the par value of the share issued is credited to
additional paid-in capital. The exercise price of options granted approximated
the fair market value of the shares on the dates granted. Additionally, stock
appreciation rights have been granted in tandem with stock options under the
Company's 1985 Stock Option Plan.
In accordance with generally accepted accounting principles, compensation
accruals are required for SARs when the market value exceeds the option exercise
price. However, compensation expense should be measured according to the terms
the Company's SAR holders are most likely to elect based upon the facts
available each period. Accordingly, no expense accruals have been made through
September 30, 1994 in as much as management does not anticipate exercise of SAR
at this time.
The following table and the data below summarizes the shares subject to option
granted under the plans which have been adjusted to reflect stock dividends
declared:
For The Nine Months Ended September 30, 1994
--------------------------------------------
Outstanding at beginning of period 275,653
Granted 43,107
Exercised (101,233)
--------
Outstanding at end of period 217,527
--------
--------
As of September 30, 1994, 217,527 options were exercisable at prices ranging
from $9.98 to $29.00.
At September 30, 1994, there were 217,537 options in the plan that remained
outstanding. Through September 30, 1994, 127,267 options have been exercised
and 45,590 options, adjusted to reflect subsequent stock dividends, have been
cancelled. 219,003 options are available for grant.
-20-
NOTE 13 - CONDENSED FINANCIAL INFORMATION OF DS BANCOR, INC.
(PARENT COMPANY ONLY)
The condensed statements of position for DS Bancor, Inc. were as follows:
September 30, December 31,
1994 1993
------------- ------------
(Dollar amounts in thousands)
ASSETS
Cash in subsidiary bank $ 924 $ 85
Investment in bank subsidiary, at equity 67,241 67,562
Other assets 279 274
-------- -------
TOTAL ASSETS $68,444 $67,921
-------- -------
-------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Notes payable--bank (Note A) $ --- $ 1,450
Other liabilities 10 31
-------- -------
Total Liabilities 10 1,481
-------- -------
STOCKHOLDERS' EQUITY
Common Stock 3,085 2,991
Additional paid-in capital 37,780 36,007
Retained earnings 32,082 31,955
Less: Treasury stock, at cost (339,500 shares) (4,513) (4,513)
-------- -------
Total Stockholders' Equity 68,434 66,440
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $68,444 $67,921
-------- -------
-------- -------
-21-
The condensed Statements of Earnings were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1994 1993 1994 1993
---- ---- ---- ----
(Dollar amounts in thousands, except per share date)
Revenue:
Dividends from subsidiary $ --- $ 60 $ 567 $ 793
Other revenue 28 --- 28 ---
------ ------ ------ ------
Total revenue 28 60 595 793
------ ------ ------ ------
Expenses:
Interest expense --- 27 43 87
Other expenses 42 33 189 125
------ ------ ------ ------
Total expenses 42 60 232 212
------ ------ ------ ------
Income before income tax and change
in equity of subsidiary (14) --- 363 581
Income tax benefit (6) (25) (85) (88)
------ ------ ------ ------
Income before change in
equity of subsidiary (8) 25 448 669
Increase in equity of subsidiary 1,429 854 3,914 2,922
------ ------ ------ ------
Income before cumulative effect of a
change in accounting principle 1,421 879 4,362 3,591
Cumulative effect of a change in
accounting principle --- --- --- 1,548
------ ------ ------ ------
Net income $1,421 $ 879 $4,362 $5,139
------ ------ ------ ------
------ ------ ------ ------
Weighted average shares outstanding
Primary 2,812,351 2,651,616 2,786,216 2,651,509
Fully Diluted 2,813,557 2,651,616 2,789,151 2,651,509
Earnings per share--Primary (Note 11)
Income before cumulative effect of a
change in accounting principle $ 0.51 $ 0.33 $ 1.57 $ 1.35
Cumulative effect of a change in
accounting principle $ -- $ -- $ -- $ .58
Net Income $ 0.51 $ 0.33 $ 1.57 $ 1.94
Earnings per share--Fully Diluted (Note 11)
Income before cumulative effect of a
change in accounting principle $ 0.50 $ 0.33 $ 1.56 $ 1.35
Cumulative effect of a change in
accounting principle $ -- $ -- $ -- $ .58
Net Income $ 0.50 $ 0.33 $ 1.56 $ 1.94
-22-
The condensed changes in the components of Stockholders' Equity for the nine
months ended September 30, 1994 and 1993 were as follows:
Additional
Common Paid-In Retained Treasury
Stock Capital Earnings Stock
------ ---------- -------- --------
(Dollar amounts in thousands)
Balance - December 31, 1992 $2,865 $33,971 $26,262 $(4,513)
Net income 5,139
Stock dividend declared on common stock 126 2,029 (2,155)
Shares issued for fractional interest 7
Cash in lieu of fractional shares (7)
Adjustment for unrealized losses
on marketable equity securities
of subsidiary 78
------ ------- ------- -------
Balance - September 30, 1993 $2,991 $36,007 $29,317 $(4,513)
------ ------- ------- -------
------ ------- ------- -------
Balance - December 31, 1993 $2,991 $36,007 $31,955 $(4,513)
Net income 4,362
Stock options exercised
(93,455 shares)(Note 12) 94 1,773
Adjustment for unrealized security
gains (losses) of subsidiary (Note 2) (4,235)
------ ------- ------- -------
BALANCE - SEPTEMBER 30, 1994 $3,085 $37,780 $32,082 $(4,513)
------ ------- ------- -------
------ ------- ------- -------
The condensed statement of cash flows was as follows:
For The Nine Months Ended September 30,
----------------------------------------
1994 1993
---- ----
(Amounts in thousands)
Cash flows from operating activities:
Dividends received from subsidiary $ 567 $ 733
Other revenue 80 ---
Tax benefit received from subsidiary 28 ---
Interest paid (68) (122)
Cash paid to suppliers (185) (149)
------ ------
Net cash provided from operating activities 422 462
------ ------
Cash flows from financing activities:
Payments on notes payable--Bank (1,450) (484)
Dividends paid to stockholders --- 7
Issuance of common stock 1,867 (7)
------ ------
Net cash applied to financing activities 417 484
------ ------
Net increase in cash 839 22
Cash at beginning of period 85 23
------ ------
Cash at end of period $ 924 $ 1
------ ------
------ ------
-23-
A reconciliation of net earnings to cash provided by operating activities was as
follows:
For The Nine Months Ended September 30,
----------------------------------------
1994 1993
---- ----
(Amounts in thousands)
Net Income $4,362 $5,139
Items not resulting in cash flow:
Equity in undistributed earnings of subsidiary (3,914) (4,470)
Increase in dividends receivable --- (60)
Decrease (increase) in income tax
benefits receivable (5) (88)
Decrease in accrued expenses (21) (59)
------ ------
Net cash flow from operating activities $ 422 $ 462
------ ------
------ ------
Note A: The Board of Directors authorized and the Company established a $3.0
million line of credit to partially fund the repurchase of the
Company's common stock in 1989 and 1990. This loan had an interest
rate of prime plus one percent was paid in full in September, 1994.
(Notes 8 and 15).
NOTE 14 - ACQUISITION OF BURRITT INTERFINANCIAL BANCORPORATION
On December 4, 1992, Derby Savings entered into an Insured Deposit Purchase and
Assumption Agreement ("P & A") with the FDIC, pursuant to which Derby purchased
certain assets and assumed the insured deposits and certain other liabilities of
Burritt Interfinancial Bancorporation, New Britain, Connecticut in an FDIC-
assisted transaction. In the transaction, the Bank assumed approximately $460
million of insured deposits and approximately $5.5 million of other liabilities
of Burritt.
The assets of Burritt acquired included cash, various investment securities and
certain other assets totaling approximately $54.0 million and two loan pools of
one-to-four family mortgage loans and consumer loans, with book values of
approximately $139.7 million and $29.6 million, respectively. The loan pools,
at December 31, 1992, included non-accrual loans totaling approximately $6.1
million and $221,000, respectively. The loans acquired in this transaction were
purchased at a $10.4 million discount, which had been added to the Bank's
allowance for loan losses. Specific allocations of the acquired allowance for
loan losses, to reflect the fair value of loans acquired, have been made as
management of the Bank identified probable losses. During 1993, the Bank
completed the valuation analysis of the loans acquired in connection with the
Burritt transaction. As a result of this analysis, the Company allocated $6.0
million of the Burritt allowance for loan losses as a purchased loan discount
(Note 4). This amount will be accreted to interest revenue over the remaining
terms of the acquired loans.
The FDIC advanced approximately $225 million in cash to Derby in partial
settlement of the difference between the amount of deposits and liabilities
assumed and the assets acquired by Derby, less the $6.2 million premium paid by
Derby in the transaction. Of the premium paid to the FDIC, the Bank recorded
$5.0 million as a core deposit intangible included in Other assets.
The assets purchased and the liabilities assumed in the Burritt transaction were
subject to adjustment up to the settlement date, December 3, 1993, to reflect
the actual book value of the assets and liabilities acquired. During 1993,
through a series of interim settlements, the FDIC paid Derby approximately $15.4
million, which reflects the net adjustments of the assets and liabilities
acquired and certain other adjustments (including any costs, expenses and fees
associated with certain determinations of value) as provided in the P & A.
-24-
As part of the transaction, the Bank acquired the right to service loans for
others which totaled approximately $107.1 million at December 31, 1992.
Approximately $1.1 million of the premium paid to the FDIC has been allocated to
the tangible value of acquired mortgage servicing rights, included in Other
assets. This amount will be amortized over the expected future life of the
serviced loans as a reduction to serviced loan fee income. Additionally, the
Bank entered into an interim management agreement with the FDIC pursuant to
which the Bank would service loans which at December 31, 1992 totaled $258.9
million. The servicing of these loans for the FDIC ended September 30, 1993.
In connection with the transaction, Derby acquired an option to acquire or lease
Burritt's 13 banking offices and related equipment. The Bank exercised its
option with respect to 11 of such banking offices. The offices acquired are
located in the towns of New Britain (5 offices), Newington, East Hartford,
Plainville, Rocky Hill, West Hartford and Glastonbury, Connecticut. Derby did
not exercise its option with respect to the two Burritt banking offices located
in Vernon and Southington, Connecticut. Such offices were closed and not opened
by Derby. Three of Burritt's offices were owned and, in accordance with the P &
A, were appraised in order to establish their fair value. In 1993, the Bank
purchased two of these offices and entered into a short-term rental agreement
with the FDIC on the third. In June 1994, the Bank relocated the operations of
the former main office of Burritt, which the Bank was renting from the FDIC. Of
the remaining 8 banking offices which had been leased by Burritt, one had been
assumed by the Bank. Through September 30, 1994, the Bank entered into leases
on four of the seven locations formerly leased by Burritt and is renegotiating
the terms of two of the remaining locations. The Bank closed one of the
acquired former branch offices of Burritt in January 1994.
NOTE 15 - MEMORANDUM OF UNDERSTANDING
In the second quarter of 1992, the Board of Directors of Derby Savings entered
into a Memorandum of Understanding (the "Memorandum") with the FDIC and the
Connecticut Commissioner of Banks. The Memorandum calls for the Board of
Directors of the Bank to develop a written plan to reduce the level of assets
classified "substandard" and to establish target levels for the reduction of
adversely classified assets to 75% of total equity capital and reserves by
December 31, 1992 and to 50% of total equity capital and reserves within a
reasonable time thereafter. At September 30, 1994, the level of assets
classified "substandard" represented 30% of the Bank's total equity capital and
reserves. The Memorandum also calls for the level of delinquent loans to be
reduced to no more than 7% of gross loans by December 31, 1992 and to 5% of
gross loans by December 31, 1993. At September 30, 1994, delinquent loans
totaled $32.6 million or 3.9% of total loans. Additionally, the Memorandum
limits the payment of cash dividends by the Bank to DS Bancor to the Company's
debt service and non-salary expenses.
In connection with the Burritt transaction, the FDIC modified the terms of the
Memorandum which pertained to the maintenance of capital ratios. The Memorandum
initially required that the Bank maintain a ratio of tier 1 capital to total
assets of at least 5.5% and if the ratio fell below 7%, the Bank was required to
notify the FDIC and the Connecticut Commissioner. The modification requires
Derby to have tier 1 capital in excess of 5% of total assets by December 31,
1993 and tier 1 capital at or above 5.75% of total assets by December 31, 1994.
However, management of the Bank has requested and the FDIC has approved an
extension of the December 31, 1994 target date to June 30, 1995. The Bank's
tier 1 capital ratio at September 30, 1994 was 5.4%. The Bank expects to
achieve the 5.75% June 30, 1995 capital target through maintaining asset size at
current levels and earnings retention.
-25-
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(Dollar amounts in thousands, except per share data)
FOR THE QUARTER FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1994 1993 1994 1993
------ ------ ------ ------
(unaudited)
OPERATING DATA:
Interest revenue $19,794 $18,137 $56,868 $56,252
Interest expense 10,985 10,736 31,391 33,721
------- ------- ------- -------
Net interest revenue 8,809 7,401 25,477 22,531
Provision for loan losses 625 1,325 1,625 2,050
------- ------- ------- -------
Net interest revenue after provision for loan losses 8,184 6,076 23,852 20,481
Other revenue 683 1,862 2,556 6,411
Other expenses 6,480 6,736 19,103 20,910
------- ------- ------- -------
Income before income taxes and cumulative effect
of a change in accounting principle 2,387 1,202 7,305 5,982
Provision for income taxes 966 323 2,943 2,391
------- ------- ------- -------
Income before cumulative effect of a change in accounting principle 1,421 879 4,362 3,591
Cumulative effect of a change in method of accounting for income taxes -- -- -- 1,548
------- ------- ------- -------
NET INCOME $1,421 $879 $4,362 $5,139
------- ------- ------- -------
------- ------- ------- -------
EARNINGS PER SHARE--PRIMARY
Income before cumulative effect of a change in accounting principle $0.51 $0.33 $1.57 $1.35
Cumulative effect of a change in method of accounting for income taxes -- -- -- $0.58
Net Income $0.51 $0.33 $1.57 $1.94
EARNINGS PER SHARE--FULLY DILUTED
Income before cumulative effect of a change in accounting principle $0.50 $0.33 $1.56 $1.35
Cumulative effect of a change in method of accounting for income taxes -- -- -- $0.58
Net Income $0.50 $0.33 $1.56 $1.94
STATISTICAL DATA:
Net interest rate spread (a) 2.76% 2.46% 2.73% 2.51%
Net yield on average interest-earning assets (a) 2.96% 2.58% 2.90% 2.64%
Return on average assets (a) 0.46% 0.29% 0.48% 0.57%
Return on average stockholders' equity (a) 8.13% 5.48% 8.52% 11.05%
Average stockholders' equity to average assets 5.70% 5.31% 5.58% 5.19%
MARKET PRICES OF COMMON STOCK:
High $30.50 $20.75 $33.75 $22.25
Low $25.75 $14.50 $21.25 $14.25
At June 30 $26.50 $20.25 $26.50 $20.25
FINANCIAL CONDITION AND OTHER DATA AT: September 30, December 31,
1994 1993
------------ ------------
(unaudited)
Total assets $1,232,930 $1,194,121
Loan portfolio, net 829,892 779,287
Investment portfolio 336,282 322,599
Deposits 1,015,032 1,006,221
Federal Home Loan Bank of Boston advances 138,867 104,991
Other borrowings -- 1,450
Stockholders' equity 68,434 66,440
Book value per share 24.93 25.06
Leverage ratio 5.49% 5.11%
Tier I capital to risk-weighted assets 9.92% 8.87%
Total capital to risk-weighted assets 10.88% 9.89%
Non-performing loans 9,094 12,068
Foreclosed & in-substance foreclosed assets 11,686 16,143
------ ------
Total non-performing assets 20,780 28,211
Restructured loans 3,850 2,273
Allowance for loan losses 6,515 (b) 6,979 (b)
Allowance as a percentage of non-performing loans 71.6% 57.8%
- - ---------------
<FN>
(a) Annualized.
(b) Includes $1.8 million and $2.3 million, allocated to loans acquired as part
of the Burritt transaction, for September 30, 1994 and December 31, 1993,
respectively.
- 26 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
COMPARISON OF RESULTS OF OPERATION
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
GENERAL. Net income for the third quarter ended September 30, 1994 totaled
$1,421,000 or $.50 per share (fully diluted) compared to net income of $879,000
or $.33 per share (fully diluted) for the comparable period in 1993. Net income
for the three months ended September 30, 1994 represented an annualized return
on average assets of .46% compared to .29% for comparable 1993 period. Net
interest revenue, the primary component of the Company's earnings, increased
$1.4 million or 19.0% from $7.4 million for the third quarter of 1993 to $8.8
million for the current quarter. For the current quarter compared to the year
earlier period, the provision for loan losses declined $700,000 or 52.8% and
Other expenses declined $256,000 or 3.8%. These declines were partially offset
by an $1,179,000 or 63.3% decrease in Other revenue.
INTEREST REVENUE. Interest and fee revenue from loans and revenue on the
investment portfolio increased $1.7 million or 9.1% during the three months
ended September 30, 1994, compared to the corresponding period in 1993. This
increase in interest revenue was essentially due to an increase in interest-
earning assets and an increase in the annualized yield on interest-earning
assets. The increase in average interest-earning assets was primarily within
the loan portfolio. Average loans outstanding increased $95.0 million or 12.9%
while the average of all other interest-earning assets decreased $54.0 million
or 13.1%. The average yield on interest-earning assets increased 34 basis
points (100 basis points equals 1%) from 6.32% during the third quarter of 1993
to 6.66% during the current period. The increase in the average yield on
interest-earning assets, in large part, reflects the upward repricing of
interest rate sensitive assets included within the loan and investment
portfolios of the Bank.
INTEREST EXPENSE. Interest expense increased $249,000 or 2.3% during the
three months ended September 30, 1994, compared to the corresponding period in
1993. This increase was substantially due to an increase in average interest-
bearing liabilities outstanding and to a lessor extent an increase in the cost
of funds. The increase in average interest-bearing liabilities was due to
increases in both deposits and borrowings between the two periods. The average
cost of funds increased from 3.86% during the quarter ended September 30, 1993
to 3.90% for the current quarter. This increase reflects the general increase
in the level of interest rates between the two periods.
NET INTEREST REVENUE. Net interest revenue, as a result of a $1.7 million
increase in interest revenue, which was partially offset by a $249,000 increase
in interest expense, increased $1.4 million or 19.0% from $7.4 million for the
quarter ended September 30, 1993 to $8.8 million for the current 1994 quarter.
The net interest rate spread increased 30 basis point from 2.46% during the
third quarter of 1993 to 2.76% during the corresponding period in 1994.
-27-
The following table summarizes the Bank's net interest revenue (including
dividends) and net yield on average interest-earning assets. Non-accruing
loans, for the purpose of this analysis, are included in average loans
outstanding during the periods indicated. For the purpose of these
computations, daily average amounts were used to compute average balances.
Three Months Ended September 30,
--------------------------------
1994 1993
---- -----
(Dollar amounts in thousands)
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Interest-earning assets:
Loans $ 831,826 14,426 6.94% $ 736,802 $12,936 7.02%
Taxable investment securities 348,409 5,187 5.96 399,804 5,020 5.02
Federal funds 149 2 5.37 3,581 27 3.02
FHLB of Boston stock 8,899 179 8.05 8,022 154 7.68
---------- ------ ---------- -------
Total interest-earning assets $1,189,283 19,794 6.66 $1,148,209 18,137 6.32
---------- ------ ---- ---------- ------- -----
---------- ----------
Interest-bearing liabilities:
Deposits $ 996,787 9,192 3.69 $ 988,355 9,127 3.69
Borrowed funds 131,169 1,793 5.47 124,103 1,609 5.19
---------- ------ ---------- -------
Total interest-bearing
liabilities $1,127,956 10,985 3.90 $1,112,458 10,736 3.86
---------- ------ ---- ---------- ------- -----
---------- ----------
Net interest revenue $ 8,809 $ 7,401
------- -------
------- -------
Net interest rate spread 2.76% 2.46%
---- ----
---- ----
Net yield on average
interest-earning assets 2.96% 2.58%
---- ----
---- ----
RATE/VOLUME ANALYSIS. The following table sets forth the changes in
interest earned and interest paid resulting from changes in volume and changes
in rates. Changes in interest earned or paid due to both rate and volume have
been allocated in proportion to the relationship of the absolute dollar amounts
of the changes in each. There were no material out of period items or
adjustments included in interest revenue or interest expense during the periods
indicated.
Three Months Ended September 30,
--------------------------------
1994 Compared to 1993
---------------------
Volume Rate Net
------ ---- ---
(Amounts in thousands)
Interest earned on:
Loans $1,650 $ (160) $ 1,490
Taxable investment securities (694) 861 167
Federal funds (37) 12 (25)
FHLB of Boston stock 17 8 25
------ ------- -------
Interest revenue 936 721 1,657
------ ------- -------
Interest paid on:
Deposits 78 (13) 65
Borrowed funds 94 90 184
------ ------- -------
Interest expense 172 77 249
------ ------- -------
Net interest revenue $ 764 $ 644 $ 1,408
------ ------- -------
------ ------- -------
-28-
PROVISION FOR LOAN LOSSES. The Bank provided $625,000 for loan losses for
the current quarter compared to $1,325,000 for the comparable 1993 period. In
addition to the provision for loan losses, the Bank also provided $485,000 for
foreclosed assets during the current quarter compared to $750,000 during the
year earlier period, which is included in foreclosed asset expense (See "Other
Expense"). At the end of the current quarter, the Company's allowance for loan
losses totaled $6.5 million, representing 71.6% of loans past due 90 days or
more and non-accruing loans. (see "Financial Condition")
OTHER REVENUE. Other revenue declined $1.2 million from $1.9 million during
the quarter ended September 30, 1993 to $683,000 during the current period.
Service charges and other revenue, comprised principally of loan service and
deposit related fees, decreased $968,000 from $1.6 million during the quarter
ended September 30, 1993 to $647,000 for the current quarter. As part of the
Burritt transaction, the Bank was servicing loans for the FDIC on an interim
basis (through September, 1993). The fees earned by the Bank for providing this
service amounted to $950,000 for the third quarter of 1993. Net securities and
other gains totaled $36,000 during the current quarter compared to $247,000
during the same period in 1993.
OTHER EXPENSES. Other expenses decreased $256,000 or 3.8% from $6.7 million
during the third quarter of 1993 to $6.5 million during the current period.
Salaries and employee benefits, the largest component of the Company's cost of
operations, decreased $46,000 or 1.8% from $2.6 million during the third quarter
of 1993 to $2.5 million during the current quarter.
All other operating expenses, in the aggregate, decreased by $210,000 or 5.1%
during the current quarter compared to the comparable period in 1993.
Foreclosed asset expense totaled $664,000 during the current quarter compared
to $894,000 during the comparable 1993 period. Included in the current quarter
foreclosed asset expense is a $485,000 provision for foreclosed assets compared
to a $750,000 provision for the same period in 1993. (See Note 7 to
Consolidated Financial Statements). The Company expects that until the level of
foreclosed assets declines substantially, foreclosed asset expense will continue
to be significant.
Data processing expense totaled $325,000 for the current quarter reflecting a
decrease of $175,000 or 34.9% compared to the $500,000 incurred during the
comparable 1993 period. The decline is largely attributable to the elimination
of the former data processing center operated by Burritt in the third quarter of
1993. Although the data processing consolidation of Burritt was completed
during the second quarter of 1993, the Company continued to operate the center
through August of 1993 in order to service loans for the FDIC. (See Note 14 to
Consolidated Financial Statements).
The Federal Deposit Insurance Corporation premium declined from $723,000 for
the third quarter of 1993 to $659,000 for the third quarter of 1994.
Offsetting the declines in several of the components of other operating
expenses was an increase of $286,000 or 198.4% in marketing expense for the
current quarter compared to the year earlier period. The increase reflects
increased promotion of the Bank's products and services to the markets it
serves.
The Bank, as required by the Statement of Financial Accounting Standards No.
91, defers costs resulting from the origination of loans, which are amortized as
an adjustment to yield over the contractual term of the related loans. These
deferred costs, which are primarily comprised of salaries, employee benefits,
and other loan expenses, totaled $272,000 during the current quarter compared to
$503,000 during the year earlier period.
-29-
NET NON-INTEREST MARGIN. The net non-interest margin, the difference between
other revenue (non-interest revenue) and other expenses (non-interest expense),
as a percentage of average assets (annualized) outstanding, decreased by 28
basis points from (1.61%) during the quarter ended September 30, 1993 to (1.89%)
during the current 1994 period. Other revenue as a percentage of average assets
(annualized) decreased from .62% to .22% for the quarters ended September 30,
1993 and 1994, respectively. Other expenses as a percentage of average assets
(annualized) decreased 12 basis points from 2.23% during the quarter ended
September 30, 1993 to 2.11% during the current quarter.
NET NON-INTEREST REVENUE/EXPENSE ANALYSIS
AS A PERCENTAGE OF AVERAGE ASSETS
Three Months Ended September 30,
--------------------------------
1994 1993
---- ----
Non-interest revenue .22 .62
---- ----
Non-interest expense
Foreclosed asset .22 .30
FDIC insurance .21 .24
Other 1.68 1.69
----- ----
Total non-interest expense 2.11 2.23
----- ----
Net non-interest margin (1.89) (1.61)
----- ----
----- ----
PROVISION FOR INCOME TAXES. The provision for income taxes during the
current quarter totaled $966,000, reflecting a 40.5% effective income tax rate
compared to a $323,000 or an effective income tax rate of 26.9% for the
comparable year earlier period. As a result of tax legislation enacted during
the quarter ended September 30, 1993, the Company was allowed to deduct, for
income tax purposes, the amortization of certain intangible assets. This
change, applied retroactively to January 1, 1993, resulted in a $148,000
reduction in the Company's provision for income taxes in the quarter ended
September 30, 1993, attributable to the first six months of the 1993.
-30-
COMPARISON OF RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
GENERAL. Net income for the nine months ended September 30, 1994 totaled
$4,362,000 or $1.56 per share (fully diluted) compared to net income of
$5,139,000 or $1.94 per share (fully diluted) for the same 1993 period. Net
income for the 1993 nine month period includes $1,548,000 or $.58 per share,
resulting from the adoption of Financial Accounting Standards Board Statement
No. 109. This amount represents the cumulative effect of a change in accounting
for income taxes effective January 1, 1993. Net income for the first nine
months of 1993, before the cumulative effect of the change in accounting
principle, totaled $3,591,000 or $1.35 per share.
Net income for the current period reflects an increase of $771,000 or 21.5%
compared to net income before the cumulative effect of the change in accounting
principle for the comparable 1993 period. For the current period compared to
the year earlier period, net interest revenue increased $2.9 million or 13.1%,
the provision for loan losses was decreased by $425,000 or 20.7% and Other
expense declined $1.8 million or 8.6%. These improvements were partially offset
by a $3.9 million or 60.1% decrease in Other revenue.
INTEREST REVENUE. Interest and fee revenue from loans and interest on the
investment portfolio increased $616,000 or 1.1% from $56.3 million for the first
nine months of 1993 to $56.9 million for the first nine months of 1994. This
increase in interest revenue was essentially due to the increase in interest-
earning assets, which was substantially offset by a decline in the average
effective yield on interest-earning assets.
Average interest-earning assets increased $33.8 million or 3.0% during the
current period compared to the year earlier period. The increase in average
interest-earning assets was within the loan portfolio. Average loans
outstanding increased $82.9 million or 11.4% and the average of all other
interest-earning assets declined $49.1 million or 12.0%. The average yield on
interest-earning assets declined 12 basis points from 6.59% for the nine months
ended September 30, 1993 to 6.47% for the nine months ended September 30, 1994.
The decline in the yield on average-earning assets reflects the prepayment of
higher yielding loans that occurred between the two periods and the
origination/refinance of new loans at interest rates lower than the average
yield on previously outstanding loans.
INTEREST EXPENSE. Interest expense declined $2.3 million or 6.9% from
$33.7 million for the first nine months of 1993 to $31.4 million for the
comparable nine month period in 1994. This decrease was essentially due to a
decline in the cost of funds which was partially offset by an increase in
average interest-bearing liabilities outstanding.
The average interest rate paid on interest-bearing liabilities declined
from 4.08% during the first nine months of 1993 to 3.74% during the current 1994
period. The level of interest rates was higher during the current period
compared to the year earlier period. However, the lower cost of funding in the
current period reflects the unchanged interest rate paid on regular savings and
the lag in repricing term deposit accounts.
Average interest-bearing liabilities increased $17.0 million or 1.5%
between the two nine month periods ending September 30, 1993 and 1994,
respectively. The increase reflects increases in retail deposits and borrowings
from the Federal Home Loan Bank of Boston.
NET INTEREST REVENUE. Net interest revenue, as a result of a $616,000
increase in interest revenue, and a $2.3 million decrease in interest expense,
increased $2.9 million or 13.1% from $22.5 million for the nine months ended
September 30, 1993 to $25.4 million for the same period in 1994. The net
interest rate spread improved 22 basis points from 2.51% during the 1993 period
to 2.73% during the corresponding period in 1994.
-31-
The following table summarizes the Bank's net interest revenue (including
dividends) and net yield on average interest-earning assets. Non-accruing
loans, for the purpose of this analysis, are included in average loans
outstanding during the periods indicated. For the purpose of these
computations, daily average amounts were used to compute average balances.
Nine Months Ended September 30,
-------------------------------
1994 1993
---- -----
(Dollar amounts in thousands)
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Interest-earning assets:
Loans $ 810,555 41,770 6.87% $ 727,632 $40,257 7.38%
Taxable investment securities 349,627 14,526 5.54 365,413 14,741 5.38
Federal funds 3,520 86 3.26 30,155 662 2.93
FHLB of Boston stock 8,548 486 7.58 7,569 422 7.43
Other interest-earning assets --- --- --- 7,662 170 2.96
---------- ------ ---------- -------
Total interest-earning assets $1,172,250 56,868 6.47 $1,138,431 56,252 6.59
---------- ------ ---- ---------- ------- ----
---------- ----------
Interest-bearing liabilities:
Deposits $ 993,848 26,197 3.51 $ 983,777 28,946 3.92
Borrowed funds 125,760 5,194 5.51 118,838 4,775 5.36
---------- ------ ---------- -------
Total interest-bearing
liabilities $1,119,608 31,391 3.74 $1,102,615 33,721 4.08
---------- ------ ---- ---------- ------- ----
---------- ----------
Net interest revenue $25,477 $22,531
------- -------
------- -------
Net interest rate spread 2.73% 2.51%
---- ----
---- ----
Net yield on average
interest-earning assets 2.90% 2.64%
---- ----
---- ----
RATE/VOLUME ANALYSIS. The following table sets forth the changes in
interest earned and interest paid resulting from changes in volume and changes
in rates. Changes in interest earned or paid due to both rate and volume have
been allocated in proportion to the relationship of the absolute dollar amounts
of the changes in each. There were no material out of period items or
adjustments included in interest revenue or interest expense during the periods
indicated.
Nine Months Ended September 30,
-------------------------------
1994 Compared to 1993
---------------------
Volume Rate Net
------ ---- ---
(Amounts in thousands)
Interest earned on:
Loans $ 4,391 $(2,878) $ 1,513
Taxable investment securities (648) 433 (215)
Federal funds (643) 67 (576)
FHLB of Boston stock 56 8 64
Other interest earning assets (85) (85) (170)
------- ------- -------
Interest revenue 3,071 (2,455) 616
------- ------- -------
Interest paid on:
Deposits 294 (3,043) (2,749)
Borrowed funds 283 136 419
------- ------- -------
Interest expense 577 (2,907) (2,330)
------- ------- -------
Net interest revenue $ 2,494 $ 452 $ 2,946
------- ------- -------
------- ------- -------
-32-
PROVISION FOR LOAN LOSSES. During the first nine months of 1994, the
Company provided $1.6 million for loan losses compared to $2.1 million during
the comparable 1993 period. In addition to the provision for loan losses, the
Bank also provided $1.6 million for foreclosed assets during the current period
compared to $3.9 million during the year earlier period. These provisions are
included in foreclosed asset expense (see "Other Expense").
OTHER REVENUE. Other revenue decreased $3.8 million or 60.1% from $6.4
million during the first nine months of 1993 to $2.3 million during the
comparable 1994 period. For the current period, service charges and other
revenue totaled $1.8 million compared to $5.6 million for the comparable 1993
period. As part of the Burritt transaction, the Bank was servicing loans for
the FDIC on an interim basis (through September, 1993). The fees earned by the
Bank for providing this service amounted to $3.7 million for the first nine
months of 1993.
Net securities and other gains declined $86,000 from $826,000 for the first
nine months of 1993 to $740,000 for the current 1994 period.
OTHER EXPENSES. Other expenses declined $1.8 million 8.6% from $20.9
million during the first nine months of 1993 to $19.1 million during the current
1994 period. Salaries and employee benefits increased $358,000 or 4.9% from
$7.3 million during the nine months ended September 30, 1993 to $7.7 million
during the current nine month period. Salaries increased $38,000 or .7% between
the two periods. During the current period, 7,778 stock appreciation rights
were exercised which resulted in compensation expense of $118,000. Employee
benefits increased $320,000 or 22.6% during the current period compared to the
year earlier period.
All other operating expenses, in the aggregate, decreased by $2.2 million
or 15.9% during the current nine month period compared to the comparable period
in 1993.
Foreclosed asset expense totaled $2.1 million during the current period
compared to $4.4 million during the comparable 1993 period. Included in the
current period foreclosed asset expense is a $1.6 million provision for
foreclosed assets compared to a $3.9 million provision for the same period in
1993. (See Note 7 to Consolidated Financial Statements). The Company expects
that until the level of foreclosed assets declines substantially, foreclosed
asset expense will continue to be significant.
Data processing expense totaled $953,000 for the current period reflecting
a decrease of $726,000 or 43.2% compared to the $1.7 million incurred during the
comparable 1993 period. The decline is largely attributable to the elimination,
in the third quarter of 1993, of the former data processing center operated by
Burritt. Although the data processing consolidation of Burritt was completed
during the second quarter, the Company continued to operate the center through
August of 1993 in order to service loans for the FDIC. (See Note 14 to
Consolidated Financial Statements).
The Federal Deposit Insurance Corporation premium increased from $1.7
million for the nine months ended September 30, 1993 to $2.1 million for the
comparable 1994 period. The increased volume of insured deposits assumed in
connection with the Burritt transaction, in large part, accounted for the
$400,000 or 18.9% increase in the premium paid in the current period compared to
the year earlier period.
Marketing expense increased $347,000 or 80.7% from $430,000 for the first
nine months of 1993 to $777,000 for the comparable 1994 period. The increase
reflects increased promotion of the Bank's products and services to the markets
it serves.
The Bank, as required by the Statement of Financial Accounting Standards
No. 91, defers certain direct costs resulting from the origination of loans,
which are amortized as an adjustment of yield over the contractual period of the
related loans. These deferred costs, which are principally comprised of
salaries, employee benefits, and other loan expenses, totaled $1.3 million
during the current nine month period compared to $1.4 million during the
comparable 1993 period.
-33-
NET NON INTEREST MARGIN. The net non-interest margin, as a percentage of
average assets (annualized) outstanding, declined by 19 basis points from (1.61)
during the period ended September 30, 1993 to (1.80%) during the current 1994
period. Other revenue, as a percentage of average assets (annualized), declined
from .72% to .28% for the nine month periods ended September 30, 1993 and 1994,
respectively. Other expenses, as a percentage of average assets (annualized),
decreased 25 basis points from 2.33% during the nine month period ended
September 30, 1993 to 2.08% during the current period.
NET NON-INTEREST REVENUE/EXPENSE ANALYSIS
AS A PERCENTAGE OF AVERAGE ASSETS
Nine Months Ended September 30,
-------------------------------
1994 1993
---- ----
Non-interest revenue .28 .72
----- -----
Non-interest expense
Foreclosed asset .23 .50
FDIC insurance .23 .19
Other 1.62 1.64
----- -----
Total non-interest expense 2.08 2.33
----- -----
Net non-interest margin (1.80) (1.61)
----- -----
----- -----
PROVISION FOR INCOME TAXES. The provision for income taxes during the
current period totaled $2.9 million, reflecting a 40.3% effective income tax
rate, compared to $2.4 million or an effective income tax rate of 40.0% for the
comparable 1993 period.
FINANCIAL CONDITION
The Company's assets totaled $1.23 billion at September 30, 1994 compared
to $1.19 billion at December 31, 1993. The assets of the Company are primarily
invested in loans to residents and, to a lesser extent, the businesses located
in the Bank's market area. At September 30, 1994, approximately $836.4 million,
representing 67.8% of the Company's assets, were comprised of loans, compared to
$786.3 million or 65.8% of total assets at December 31, 1993. The predominant
thrust of the Bank's lending business is to provide financing for residential
real estate. Essentially as a result of the relatively low level of interest
rates available for residential mortgage loans during the fourth quarter of
1993, which fostered a rise in the level of loan applications, the Bank's loan
portfolio increased $50.1 million or 6.4% during the first nine months of the
year. As in 1993, a substantial portion of the residential real estate loans
made by the Bank during the current year were for the refinance of previously
outstanding loans. Nonetheless, the Bank achieved a net growth in outstanding
loans. Curtailing the growth in the loan portfolio during the current year was
the sale of approximately $12.0 million in mortgage loans and the
reclassification of $2.6 million of loans to in-substance foreclosed assets.
The Bank has positioned itself in the market area that it serves primarily
as a provider of consumer financing and, to a lesser extent, as a provider of
commercial and business loans. At September 30, 1994, $681.2 million or 81.4%
of the Bank's loans were for the financing of one-to-four family residences and
$95.6 million or 11.4% of the Bank's loans were allocated to consumer loans,
primarily home equity lines of credit. In the aggregate, at September 30, 1994,
these two segments of the Bank's loan portfolio represented 92.8% of the Bank's
total loans.
During the year, the level of non-performing assets, which include loans
past due 90 days or more, non-accrual loans, and foreclosed and in-substance
foreclosed assets (see Note 1 to Consolidated Financial Statements) continued to
trend down. At September 30, 1994, non-performing assets totaled $20.8 million,
representing 1.7% of total assets compared to $28.2 million or 2.4% of total
assets at year end 1993. At September 30, 1994, foreclosed and in-substance
foreclosed assets totaled $11.7 million, representing 1.0% of total assets,
compared to $16.1 million or 1.4% of total assets at year end 1993.
-34-
The following table sets forth non-accrual loans and loans past due for 90
days or more, including loans in foreclosure, and the allowance for loan losses
at the dates indicated:
September 30, 1994 December 31, 1993
--------------------------------------------------- -----------------------------------------------------
(Dollar amounts in thousands)
Allowance for Allowance for
Loans Past Due Loan Losses Loans Past Due Loan Losses
---------------------- ------------------------- ------------------------ -------------------------
% of Loans % of Loans % of Loans % of Loans
Loan Type Balance Outstanding Balance(1) Past due Balance Outstanding Balance(1) Past due
- - --------- ------- ----------- ---------- -------- ------- ----------- ---------- --------
Real Estate
1-4 Family $ 6,762 1.0% $ 5,665 0.9%
Commercial 181 0.7 681 2.5
Construction --- -- --- --
Multi-family 250 3.2 2,628 30.8
------- -------
Total 7,193 1.0 $ 4,192 58.3% 8,974 1.4 $ 4,605 51.3%
------- -------
Consumer
HELOC 632 0.9 945 1.4
All other 603 2.4 750 2.8
------- -------
Total 1,235 1.3 1,282 103.8 1,695 1.8 1,193 70.3
------- -------
Commercial
Real estate
development 336 9.1 623 16.3
All other 330 1.7 776 2.9
------- -------
Total 666 2.9 1,041 156.3 1,399 4.6 1,181 84.4
------- ------- ------- -------
Total Loans $ 9,094 1.1 $ 6,515 71.6 $12,068 1.5 $ 6,979 57.8
------- ------- ------- -------
------- ------- ------- -------
<FN>
(1) The Bank reallocated $6 million of the allowance allocated to the loans
acquired in the Burritt transaction to a purchased loan discount.
The Company's loan portfolio is segregated into three broad categories of
loans: real estate, consumer and commercial. The Company's investment in real
estate loans totaled $717.6 million, representing 58.2% of total assets at
September 30, 1994 compared to $660.6 million or 55.3% of total assets at year
end 1993. The Bank experienced a significant rise in the level of mortgage loan
applications during the fourth quarter of 1993, predominantly for the refinance
of residential property. As previously noted and reflected in the growth in the
Bank's loan portfolio, the majority of the refinance activity were loans
previously outstanding with other lenders. Mortgage loans closed during the
first nine months of 1994 totaled $157.4 million.
The Bank continued to supplement local loan originations through the
purchase of single family adjustable rate mortgage loans. The Bank purchased
$12.0 million of these loans during the first nine months of 1994 compared to
$8.8 million during comparable 1993 period. The origination and purchase of
adjustable rate loans is an integral part of the Bank's management of interest
rate risk. (See "Asset/Liability Management".)
The Bank's investment in real estate mortgages is primarily secured by
residential properties and, to a lesser extent, multi-family housing. This
portfolio also includes financing for commercial real estate and real estate
development and construction. Loans to finance one-to-four family residences
totaled $681.2 million or 81.4% of the Bank's total loan portfolio at September
30, 1994 compared to $621.6 million, representing 79.1% of the total loan
portfolio, at year end 1993. The level of loans past due 90 days or more
totaled $6.8 million or 1.0% of this portfolio at September 30, 1994 compared to
$5.7 million or .9% of the portfolio at year end 1993.
Multi-family housing loans totaled $7.9 million or .9% of the total loan
portfolio at September 30, 1994 compared to $8.5 million or 1.1% of the total
loan portfolio at year end 1993. At September 30, 1994, loans past due 90 days
or more totaled $.3 million or 3.2% of this portfolio compared to $2.6 million
or 30.8% at year end 1993. Loans to finance commercial real estate totaled
$26.1 million or 3.1% of the total loan portfolio at September 30, 1994, of
which $.2 million or .7% were past due 90 days or
-35-
more. At year end 1993, this portfolio totaled $27.7 million, representing 3.5%
of total loans, of which $.7 million or 2.5% were past due 90 days or more.
The fourth group of loans included in the Bank's real estate mortgage
portfolio were made to finance real estate construction, primarily residential
condominiums and single family residences. This portfolio of loans totaled $2.3
million or .3% of total loans at September 30, 1994 compared to $2.8 million or
.4% of total loans at year end 1993. At September 30, 1994 and year end 1993,
there were no loans in this loan category past due 90 days or more. Unadvanced
construction commitments approximated $2.4 million at September 30, 1994 and
$533,000 at year end 1993.
The Company's investment in consumer loans totaled $95.6 million,
representing 11.4% of total loans at September 30, 1994, compared to $95.5
million or 12.1% of total loans at year end 1993. The consumer loan portfolio
is primarily comprised of home equity lines of credit, which complement the
Bank's primary business of providing financing for single family residences.
The home equity line of credit, which is collateralized by the equity in
residential real property, has become the Bank's second largest investment in
loans. Home equity lines of credit totaled $128.9 million, with $70.0 million
in use at September 30, 1994 compared to $124.8 million, with $68.4 million in
use at year end 1993. At September 30, 1994, consumer loans past due 90 days or
more totaled $1.2 million or 1.3% of this portfolio. Home equity lines of
credit included in this amount totaled $632,000, representing .9% of HELOCs
outstanding. In comparison, at year end 1993, consumer loans past due 90 days
or more totaled $1.7 million or 1.8% of the consumer loan portfolio, including
$945,000, representing 1.4% of the home equity lines of credit.
The Company also provides credit to the businesses located within the
Bank's market area. The Bank's commercial lending department invests in loans
for the development of real estate and other business needs. The Bank's
investment in commercial loans totaled $23.3 million at September 30, 1994,
compared to $30.1 million invested at year end 1993. At September 30, 1994,
$3.7 million or 15.8% of this portfolio was invested in loans for the
development of real estate and $19.6 million or 84.2% was invested in loans for
various business needs. Unadvanced real estate development commitments totaled
$.8 million at September 30, 1994, compared to $1.3 million at year end 1993.
At September 30, 1994, loans past due 90 days or more totaled $.7 million,
representing 2.9% of the commercial loan portfolio compared to $1.4 million or
4.6% at year end 1993.
NON-PERFORMING ASSETS. The following table summarizes the Bank's
non-accrual loans, accruing loans past due 90 days or more, and foreclosed and
in-substance foreclosed assets.
At September 30, At December 31,
---------------------- ------------------------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
------ ------ ------ ------ ------ ------ ------
(Amounts in thousands)
Non-accrual loans:
Mortgage............. $ 6,610 $ 3,806 $ 6,657 $ 9,756 $ 7,029 $ 6,524 $ 4,618
Consumer............. 1,087 1,166 1,446 1,197 1,000 1,741 1,008
Commercial........... 666 640 1,399 293 3,412 3,437 1,970
------- ------- ------- ------- ------- ------- -------
Total.................. 8,363 5,612 9,502 11,246 11,441 11,702 7,596
------- ------- ------- ------- ------- ------- -------
Accruing loans past due
90 days or more:
Mortgage............. 583 4,359 2,317 3,006 4,096 4,730 4,056
Consumer............. 148 137 249 1 151 230 106
Commercial........... --- --- --- --- --- --- 2,000
------- ------- ------- ------- ------- ------- -------
Total.................. 731 4,496 2,566 3,007 4,247 4,960 6,162
------- ------- ------- ------- ------- ------- -------
Foreclosed assets...... 7,239 8,998 9,379 10,456 7,305 5,893 3,051
In-substance foreclosed
assets............... 5,180 10,168 7,804 13,124 17,267 11,736 ---
------- ------- ------- ------- ------- ------- -------
Total.................. 12,419 19,166 17,183 23,580 24,572 17,629 3,051
Valuation allowance.... 733 1,184 1,040 438 412 --- ---
------- ------- ------- ------- ------- ------- -------
Total, net............. 11,686 17,982 16,143 23,142 24,160 17,629 3,051
------- ------- ------- ------- ------- ------- -------
Total non-performing
assets............... $20,780 $28,090 $28,211 $37,395 $39,848 $34,291 $16,809
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Restructured loans $ 3,850 $ 4,444 $ 2,273 $ 8,262 $ 6,985 --- ---
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
-36-
As detailed in the table on the previous page, the level of non-accrual
loans and accruing loans past due 90 days or more declined from $12.1 million at
year end 1993 to $9.1 million at September 30, 1994. At September 30, 1994, the
Bank had $7.2 million in foreclosed assets, consisting of 40 properties,
compared to $9.4 million, consisting of 44 properties at year end 1993. During
the first nine months of the year, the Bank reclassified $2.6 million in loans
to in-substance foreclosed assets. At September 30, 1994, the Bank had $5.2
million, consisting of 35 properties, classified as in-substance foreclosed
assets compared to $7.8 million, consisting of 50 properties, at year end 1993.
In the aggregate, the Bank is carrying 75 properties, totaling $11.7 million,
net of a $.7 million valuation allowance, in foreclosed and in-substance
foreclosed assets. This compares to 94 properties, totaling $16.1 million, net
of a $1.0 million valuation allowance, at year end 1993.
During the past several years, as the volume of assets acquired by the Bank
through the foreclosure process increased and the value of the underlying real
estate declined, the Bank adopted a policy of reappraising foreclosed and in-
substance foreclosed assets on at least an annual basis. This policy has
assisted the Bank in quantifying the net realizable value of these assets, and
has provided the basis, as necessary, for subsequent write-downs of the carrying
amount of these assets. Additionally, in order to provide for unidentified and
possible future declines in the value of foreclosed assets, the Bank established
an allowance for foreclosed assets in 1991. This allowance is funded through a
provision for foreclosed assets which is charged to and included in foreclosed
asset expense. In the nine month period ended September 30, 1994, the Bank
provided $1.6 million to this allowance compared to $3.9 million in the
comparable 1993 period. During the current period, the Bank charged $1.9
million in specific write-downs against this allowance compared to $3.2 million
during the year earlier period. At September 30, 1994, the allowance for
foreclosed assets totaled $.7 million compared to $1.0 million at year end 1993.
The reduction of non-performing assets has been one of the primary
objectives of the Bank and, as noted, total non-performing assets declined
modestly during the period. A principal focus going forward will be a
continuation of the Bank's efforts to reduce the level of non-performing assets.
Continued weakness in the local economy suggests that progress in this area will
be moderate. The amount of loans past due 60 days was essentially unchanged at
$8.1 million at September 30, 1994, representing 1.0% of the total loan
portfolio compared to $8.0 million or 1.0% of the total loan portfolio at year
end 1993.
The following table summarizes the Bank's accruing loans past due 60 days:
September 30, At December 31,
--------------------- ------------------------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
------ ------ ------ ------ ------ ------ ------
(Amounts in thousands)
Loans past due 60 days:
Mortgage............. $ 6,792 $ 6,164 $ 7,369 $ 8,829 $ 9,072 $ 5,062 $ 4,534
Consumer............. 716 857 651 815 525 753 561
Commercial........... 617 524 --- 95 353 870 295
------- ------- ------- ------- ------- ------- -------
Total.................. $ 8,125 $ 7,545 $ 8,020 $ 9,739 $ 9,950 $ 6,685 $ 5,390
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
The foundation of the Bank's program to reduce the level of non-performing
assets is the loan collection and workout process. In addition to the personnel
assigned to the collection/workout area, the Bank has two officers responsible
for the management and sale of foreclosed assets. This increasingly important
function of the Bank is supported by a standing committee of the Board of
Directors, comprised of individuals experienced in the areas of real estate
sales and development, which was established to assist and give advice on the
management and disposition of troubled assets.
To the extent that the Bank ultimately takes title to troubled assets, the
Board of Directors and management of the Bank have established several programs
to facilitate the timely disposition of foreclosed assets. The foundation of
these programs is to establish fair and realistic value for foreclosed assets,
taking into consideration the potential opportunity cost associated with lengthy
marketing time. The Bank augments this pricing policy through preferred Bank
financing, including special first-time home-buyer programs. To further expand
sales efforts and reduce market time, the Bank also maintains consistent
marketing programs and premium realtor commissions. The employment of these
programs has enabled the Bank to sell and close on 51 properties for an
aggregate consideration of $5.5 million in the first nine months of 1994.
During the comparable 1993 period, the Bank sold and closed on 50 properties for
an aggregate consideration of $5.2 million.
-37-
In order to maintain the quality of the loan portfolio, as well as to
provide for potential losses that are inherent in the lending process, the Bank
controls its lending activities through adherence to loan policies adopted by
the Board of Directors and stringent underwriting standards. To provide for
possible losses within the loan portfolio, the Company maintains an allowance
for loan losses. The allowance for loan losses is maintained through the
provision for loan losses which is a charge to earnings. This provision is
determined on a quarterly basis, based upon management's review of the
anticipated uncollectability of loans, current economic conditions, overall
portfolio quality, specific problem loans and an assessment of the adequacy of
the allowance for loan losses. Based on these factors, the Company provided
$1.6 million to the allowance for loan losses during the first nine months of
1994 compared to $2.1 million during the comparable 1993 period. During the
current 1994 period the Bank wrote off $2.1 million (net of recoveries).
As part of the Burritt transaction, the Bank purchased approximately
$169.3 million of loans at a $10.4 million discount, which was initially added
to the Bank's allowance for loan losses. This discount was based upon
management's assessment of the potential credit risk inherent in the portfolios
acquired. During 1993, the Bank completed the valuation analysis of the loans
acquired in the Burritt transaction. As a result of this analysis, the Bank
allocated $6.0 million of the Burritt allowance for loan losses as a purchased
loan discount. This amount is being accreted to interest revenue over the
remaining terms of the acquired loans. At September 30, 1994, the allowance for
loan losses totaled $6.5 million, which includes $1.8 million allocated to the
loans acquired in the Burritt transaction. In comparison, the allowance for
loan losses totaled $7.0 million at year end 1993, which included $2.3 million
allocated to the loans acquired in the Burritt transaction. The allowance for
loan losses represented 71.6% of non-performing loans at September 30, 1994,
compared to 57.8% at year end 1993.
During the past several years, the performance of the Company has been
adversely impacted through the loss of interest revenue and increases in the
provisions for loan losses. To moderate this effect upon the Company's
performance, the Bank, prior to the Burritt transaction, had been following a
strategy of increasing the level of interest-earning assets. (See
"Asset/Liability Management"). In addition to assertive marketing programs
directed toward the origination of loans and deposits, the Bank has also
borrowed funds from the FHLB of Boston and allocated these resources to the
investment portfolio. The investments made by the Bank were, for the most part,
in mortgage-backed securities issued by agencies of the U.S. Government.
Additionally, in settlement of the difference between the amount of deposits and
liabilities assumed and the assets purchased in the Burritt transaction, the
FDIC advanced approximately $240 million to the Bank. These funds have been
primarily allocated among various mortgage-backed security investment
alternatives and other investment grade securities. As a result of these
purchases, the investment portfolio totaled $322.6 million, representing 27.0%
of total assets at year end 1993 and $336.3 million or 27.3% of total assets at
September 30, 1994. In addition to mortgage-backed securities, the Company's
investment portfolio is comprised of investment grade corporate bonds,
marketable equity securities and money market preferred stock.
The Bank adopted Financial Accounting Standards Board Statement No. 115 as
of December 31, 1993. This statement requires, in part, that certain investment
securities that are classified as available for sale be recorded at market
value, with unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity. As a result, at September 30, 1994, the Bank
recorded an unrealized loss, net of tax, of $2.9 million which is included as a
reduction in Stockholders' equity. (See "Consolidated Financial Statements").
FUNDING SOURCES. The investment activities of the Bank are funded from
several sources. The primary source of funds is supplied by local depositors
and is complimented by advances from the FHLB of Boston. In addition, the Bank
is supplied with a steady flow of funds from the amortization and prepayment of
loans as well as the amortization and maturity of investment securities. The
Bank also derives funds, from time to time, through the sale of loans into the
secondary market and allocates the proceeds in accordance with established asset
and liability management objectives.
During the nine months of 1994, deposits increased by $8.8 million or .9%,
after interest credited of $26.1 million, from $1.006 billion, funding 84.3% of
total assets at year end 1993, to $1.015 billion, funding 82.3% of total assets
at September 30, 1994.
-38-
Retail deposits are essentially derived from the communities in which the
Bank's offices are located. The Bank offers a wide variety of deposit accounts
which include money market deposit accounts, certificates of deposit and regular
savings.
The Bank also utilizes the FHLB of Boston as an alternative source of
funds. At September 30, 1994, FHLB of Boston advances totaled $138.9 million,
funding 11.3% of total assets, compared to $105.0 million, funding 8.8% of total
assets at year end 1993. The flexibility, pricing and repricing characteristics
of the funding alternatives offered by the FHLB of Boston have allowed the Bank
to match-fund fixed rate commercial mortgage loans, one year adjustable rate
mortgage loans and home equity lines of credit. The Bank has also employed
funds from the FHLB of Boston to fund the purchase of various mortgage-backed
securities.
Amortization, prepayments and the sale of loans into the secondary market
supplied the Bank with an additional $167.6 million in investable funds during
the nine months of the year. In keeping with the Bank's asset and liability
management objectives, the Bank sold $12.0 million in fixed rate mortgage loans
during the first nine months of 1994. The Bank has retained servicing on all
loans that have been sold and, at September 30, 1994, was servicing $132.7
million of mortgage loans for others.
CAPITAL RESOURCES. The Federal Reserve Board (the "FRB") has adopted
risk-based capital standards which require bank holding companies to maintain a
minimum ratio of total capital to risk-weighted assets of 8.0%. Of the required
capital, 4.0% must be tier 1 capital. Tier 1 capital is primarily common
stockholders' equity and certain categories of perpetual preferred stock. As
part of the Burritt transaction, Derby paid the FDIC a premium of $6.2 million.
Of the premium paid, $5.0 million was recorded as a core deposit intangible.
Through September 30, 1994, this amount was reduced to $3.7 million through
amortization expense. This amount, in addition to approximately $154,000 of
other intangible assets resulting from the transaction, are required to be
deducted from the Company's and the Bank's capital prior to determining
regulatory capital requirements. After giving effect to the transaction, the
Company had a ratio of total capital to risk-weighted assets of 10.9% and a
ratio of tier 1 capital to risk-weighted assets of 9.9% at September 30, 1994.
The FRB has supplemented the risk-based capital requirements with a
required minimum leverage ratio of 3% of tier 1 capital to total assets. The
FRB indicated that all but the most highly-rated holding companies, however,
should maintain a leverage ratio of 4% to 5% of tier 1 capital to total assets.
At September 30, 1994, the Company had a ratio of tier 1 capital to total assets
of 5.5%.
Derby Savings Bank is also required by the FDIC to meet risk-based ratios
the same as those adopted by the FRB for the Company. At September 30, 1994,
Derby Savings' ratio of total capital to risk-weighted assets was 10.7% and its
ratio of tier 1 capital to risk-weighted assets was 9.8%.
The FDIC has also adopted a minimum leverage ratio of 3% of tier 1 capital
to total assets. The FDIC has also indicated that all but the most highly rated
banks should maintain a leverage ratio of 4% to 5% of tier 1 capital to total
assets. Derby Savings' ratio of tier 1 capital to total assets at September 30,
1994 was 5.4%.
Derby entered into a Memorandum of Understanding (the "Memorandum") with
the FDIC in April 1992, which required Derby to maintain a minimum tier 1
capital to total asset ratio of 5.5%. In connection with the Burritt
transaction, the FDIC modified the terms of the Memorandum to require that Derby
have tier 1 capital to total assets ratio in excess of 5% by December 31, 1993,
which the Bank has exceeded, and at or above 5.75% by December 31, 1994.
However, management of the Bank has requested and the FDIC has approved an
extension of the December 31, 1994 target date to June 30, 1995. The Bank's
tier 1 capital ratio at September 30, 1994 was 5.4%. The Bank expects to
achieve the 5.75% June 30, 1995 capital target through maintaining asset size at
current levels and earnings retention.
-39-
Under the prompt corrective action regulation recently adopted by the FDIC,
which became effective on December 19, 1992, a savings bank will be considered:
(i) "well capitalized" if the savings bank has a risk based capital ratio of 10%
or greater, a tier one or core capital to risk-weighted assets ratio of 6% or
greater, and a leverage ratio to adjusted total assets of 5% or greater
(provided the savings bank is not subject to an order, written agreement,
capital directive or prompt corrective action to meet and maintain
a specified capital level for any capital measure); (ii)"adequately capitalized"
if the institution has a risk-based capital ratio of 8% or greater, a tier 1 or
core capital to risk weighted assets ratio of 4% or greater, and a leverage
ratio to adjusted total assets of 4% or greater (3% or greater if the
institution is rated composite 1 in its most recent report of examination);
(iii) "undercapitalized" if the institution has a risk based capital ratio that
is less than 8%, a tier 1 or core capital to risk weighted assets ratio that is
less than 4% (3% if the institution is rated composite 1 in its most recent
report of examination) and a leverage ratio to adjusted total assets that is
less that 3%; (iv)"significantly undercapitalized" if the institution has a
risk-based capital ratio that is less than 6%, a tier one or core capital to
risk weighted assets ratio that is less than 3%, and a leverage ratio to
adjusted total assets ratio that is less than 3%; and (v) "critically
undercapitalized" if the institution has a ratio of tangible equity to total
assets that is less than 2%. The regulation also permits the FDIC to determine
that a savings bank should be placed in a lower category based on other
information such as a savings institution's examination report, after written
notice. Based on its capital ratios as of September 30, 1994, the Bank believes
it is "adequately capitalized" for purposes of this regulation.
Regulatory capital ratios for the Company and the Bank at September 30,
1994 do not reflect any Financial Accounting Standards Board Statement No. 115
adjustment for unrealized gains or losses, net of tax, on investment securities
classified as available-for-sale. At September 30, 1994, the Bank had a net
unrealized loss of $2.9 million on investment securities classified as
available-for-sale, which is included as a reduction to Stockholders' equity at
that date in accordance with such Statement. The Federal Reserve Board and the
FDIC have proposed, but not yet acted upon, revisions to their regulatory
capital requirements that would include as a component of regulatory capital a
FASB Statement No. 115 adjustment for unrealized gains or losses, net of tax, on
securities classified as available-for-sale. Giving effect to such adjustment
at September 30, 1994, the Company would have had a ratio of total capital to
risk-weighted assets of 10.5%, a ratio of tier 1 capital to risk-weighted assets
of 9.5% and a ratio of tier 1 capital to total assets of 5.3%. Corresponding
ratios for the Bank would have been 10.3%, 9.3% and 5.2%, respectively.
ASSET/LIABILITY MANAGEMENT. Derby Savings' asset liability management
program is based upon operating the Bank within a framework of fundamentally
matching interest-sensitive assets and interest-sensitive liabilities. The
purpose of pursuing this policy is to position the Bank to produce stable net
interest revenue through all phases of the business cycle and resulting interest
rate levels.
The table on the following page summarizes the Company's interest-sensitive
assets and interest-sensitive liabilities that mature or reprice during the
various time periods noted. Loans are net of deferred loan fees and net of
non-accruing loans.
-40-
SEPTEMBER 30, 1994
More Than More Than More Than More Than More Than
Six Months One Year Three Years Five Years 10 Years
Six Months To One To Three To Five To Ten To 20 More Than
or Less Year Years Years Years Years 20 Years Total
---------- ---------- --------- ----------- ---------- --------- --------- -----
(Dollar amounts in thousands)
ASSETS:
Investments:
Investment
securities $130,500 $75,523 $73,203 $28,336 $20,107 $5,649 $596 $333,914
Federal funds
sold 4,125 -- -- -- -- -- -- 4,125
-------- -------- -------- ------- ------- ------- ------- ----------
Total investments 134,625 75,523 73,203 28,336 20,107 5,649 596 338,039
-------- -------- -------- ------- ------- ------- ------- ----------
Loans:
Fixed-rate
mortgages 5,012 5,290 23,196 24,926 59,627 54,239 23,958 196,248
Adjustable-rate
mortgages 262,292 219,855 27,830 4,622 30 -- -- 514,629
Consumer loans 76,581 8,189 3,774 2,884 2,138 804 -- 94,370
Commercial loans 20,529 144 1,728 128 31 25 -- 22,585
-------- -------- -------- ------- ------- ------- ------- ----------
Total loans 364,414 233,478 56,528 32,560 61,826 55,068 23,958 827,832
-------- -------- -------- ------- ------- ------- ------- ----------
TOTAL INTEREST-
SENSITIVE
ASSETS $499,039 $309,001 $129,731 $60,896 $81,933 $60,717 $24,554 $1,165,871
-------- -------- -------- ------- ------- ------- ------- ----------
-------- -------- -------- ------- ------- ------- ------- ----------
LIABILITIES:
Regular & club
savings $221,713 $ -- $ -- $ -- $ -- $ -- $ -- $221,713
Certificates of
deposit 219,673 116,604 113,314 62,874 -- -- -- 512,465
Money market
accounts 205,687 -- -- -- -- -- -- 205,687
NOW accounts 46,761 -- -- -- -- -- -- 46,761
FHLB of Boston
advances 65,855 12,702 54,690 2,500 3,120 -- -- 138,867
-------- -------- -------- ------- ------- ------- ------- ----------
TOTAL INTEREST-
SENSITIVE
LIABILITIES $759,689 $129,306 $168,004 $65,374 $3,120 $ -- $ -- $1,125,493
-------- -------- -------- ------- ------- ------- ------- ----------
-------- -------- -------- ------- ------- ------- ------- ----------
GAP (repricing
difference) ($260,650) $179,695 ($38,273) ($4,478) $78,813 $60,717 $24,554
Cumulative GAP ($260,650) ($80,955) ($119,228) ($123,706) ($44,893) $15,824 $40,378
Cumulative GAP/
total assets -21.1% -6.6% -9.7% -10.0% -3.6% 1.3% 3.3%
Ratio of
interest-
sensitive
assets
to interest-
sensitive
liabilities 65.7% 239.0% 77.2% 93.2% 2626.1% 103.6%
Cumulative ratio
of interest-
sensitive
assets to
interest-
sensitive
liabilities 90.9% 88.7% 89.0% 96.0% 101.4% 103.6%
-41-
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
-42-
SIGNATURES
Pursuant to the requirements 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.
DS Bancor, Inc.
------------------------------------------
Registrant
Date: November 10, 1994 By: /S/ Harry P. DiAdamo, Jr.
---------------------- ------------------------------------------
Harry P. DiAdamo, Jr.
President & CEO
Date: November 10, 1994 By: /S/ Alfred T. Santoro
---------------------- ------------------------------------------
Alfred T. Santoro
Vice President, Treasurer and CFO
-43-