--------------------------------------------------------------------------------
---------------------
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FELLOW SHAREHOLDERS:
WE ARE EXTREMELY PLEASED TO REPORT THAT, FOR THE YEAR ENDED DECEMBER 31,
1994, THE COMPANY'S NET INCOME TOTALED $5.8 MILLION OR $1.95 PER SHARE.
NET INCOME FOR 1993 TOTALED $6.5 MILLION OR $2.25 PER SHARE, WHICH
INCLUDED $1.5 MILLION OR $.54 PER SHARE ATTRIBUTABLE TO THE CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING FOR INCOME TAXES EFFECTIVE JANUARY 1, 1993.
EXCLUDING THE EFFECT OF THIS ACCOUNTING CHANGE, NET INCOME FOR 1994 REPRESENTS A
$784,000 OR 15.9% INCREASE ABOVE 1993 INCOME BEFORE THE CUMULATIVE EFFECT OF THE
CHANGE IN ACCOUNTING PRINCIPLE.
A MAJOR CONTRIBUTOR TO THE COMPANY'S IMPROVEMENT IN EARNINGS IN 1994 WAS A
SIGNIFICANT INCREASE IN NET INTEREST INCOME. NET INTEREST INCOME TOTALED $34.5
MILLION IN 1994 COMPARED TO $30.5 MILLION IN THE PRIOR YEAR. FURTHER
CONTRIBUTING TO THE COMPANY'S EARNINGS PERFORMANCE DURING 1994 WAS A $1.5
MILLION REDUCTION IN OPERATING EXPENSES. THE COMPANY'S OVERALL EXPENSE RATIO OF
2.09% OF AVERAGE ASSETS CONTINUES TO RANK AMONG THE LOWEST IN THE STATE.
DURING 1994, THE COMPANY MADE SIGNIFICANT PROGRESS IN REDUCING THE LEVEL OF
NON-PERFORMING ASSETS. ADDITIONALLY, THE VOLUME OF LOANS PAST DUE SIXTY DAYS
TRENDED DOWNWARD. INCREASING ASSET QUALITY, THROUGH THE CONTINUED REDUCTION OF
NON-PERFORMING ASSETS, REMAINS A PRIMARY OBJECTIVE OF THE COMPANY'S PRINCIPAL
SUBSIDIARY, DERBY SAVINGS BANK. DURING 1994, NON-PERFORMING ASSETS DECLINED TO
$20.8 MILLION, REPRESENTING 1.7% OF THE COMPANY'S ASSETS AT YEAR-END 1994, FROM
$28.2 MILLION OR 2.4% OF TOTAL ASSETS AT YEAR-END 1993.
DURING 1994, THERE WAS A MARKED DECLINE IN REAL ESTATE SALES AND REFINANCING
ACTIVITY WHICH WE EXPECT WILL CONTINUE THROUGH 1995. WE VIEW THIS AS AN
OPPORTUNITY TO DIRECT THE RESOURCES OF THE COMPANY TOWARD MEETING THE GROWING
NEEDS OF THE CONSUMER LOAN MARKET. IN THIS REGARD, DURING THE LATTER HALF OF
1994, THE COMPANY INTRODUCED A NUMBER OF ENHANCEMENTS TO ITS CONSUMER LOAN
PRODUCT LINE. AMONG THESE ARE NEWLY DESIGNED SECURED AND UNSECURED LINES OF
CREDIT, AS WELL AS LOAN PRODUCTS TO FINANCE OTHER CONSUMER EXPENDITURES. IN
ADDITION, THE COMPANY WILL CONTINUE TO PROVIDE COMMERCIAL FINANCING. IN FACT, WE
INTRODUCED A NEW ACCOUNTS RECEIVABLE FINANCING PRODUCT DURING THE FIRST QUARTER
OF 1995.
THE COMPANY ANTICIPATES REACHING A REGULATORY CAPITAL LEVEL OF 5.75% BY MID-1995
IN SATISFACTION OF REGULATORY REQUIREMENTS, AND THEN RESUMING A POSTURE OF
BALANCED GROWTH THROUGH PRODUCT DEVELOPMENT AND MARKETING. ADDITIONALLY, WE
INTEND TO CONTINUE TO EXPAND OUR MARKET PENETRATION AND COVERAGE BY LOOKING AT
ACQUISITION OPPORTUNITIES. THE COMPANY HAS CONTINUED TO INVEST IN BOTH HUMAN
RESOURCES AND TECHNOLOGY WHICH WE BELIEVE WILL SERVE AS THE FOUNDATION FOR
FUTURE GROWTH.
A STATE-CHARTERED ORGANIZATION THAT HAS WITHSTOOD THE TEST OF TIME, DERBY WILL
BE CELEBRATING ITS 150TH ANNIVERSARY IN 1996. WE ARE PROUD OF OUR HISTORY AND WE
FEEL THAT THROUGH THE YEARS THE COMPANY HAS GROWN AND EVOLVED INTO AN INTEGRAL
PART OF THE CONNECTICUT ECONOMY. IN THIS REGARD, THE COMPANY HAS TAKEN MANY
STEPS WHICH UNDERSCORE OUR COMMITMENT AND INVESTMENT IN THE COMMUNITY. WE
CONTINUE TO SPONSOR PROGRAMS TO ASSIST FIRST-TIME HOMEBUYERS AND LOW AND
MODERATE INCOME RENTERS IN PURCHASING THEIR FIRST HOMES AND TO PARTICIPATE WITH
AGENCIES WORKING TO MEET INNER-CITY HOUSING NEEDS.
IN 1995, THE COMPANY REMAINS FOCUSED ON ITS STRATEGIC PLAN FOR EARNINGS AND
GROWTH, WHICH WE BELIEVE WILL MAXIMIZE SHAREHOLDER VALUE OVER THE LONG-TERM, AND
IS POISED TO ACCEPT THE CHALLENGES OF THE NEXT DECADE. WE THANK YOU FOR THE
CONFIDENCE YOU'VE SHOWN IN THE PAST AND LOOK FORWARD TO YOUR CONTINUED SUPPORT.
ON BEHALF OF THE BOARD OF DIRECTORS,
MICHAEL F. DADDONA JR. HARRY P. DIADAMO JR.
CHAIRMAN PRESIDENT & CEO
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[COLLAGE OF NEWSPAPER CLIPPINGS, IMPO 2.]
--------------------------------------------------------------------------------
SELECTED FINANCIAL AND OTHER DATA
--------------------------------------------------------------------------------
DS BANCOR, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
AT AND FOR THE YEARS ENDED DECEMBER 31,
1994 1993 1992 1991 1990
-------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
Interest income $ 77,282 $ 74,335 $ 54,144 $ 57,796 $ 59,669
Interest expense 42,818 43,816 31,885 39,469 42,935
--------- --------- --------- --------- ---------
Net interest income 34,464 30,519 22,259 18,327 16,734
Provision for credit losses 2,325 2,475 1,375 4,400 3,430
--------- --------- --------- --------- ---------
Net interest income after provision for credit
losses 32,139 28,044 20,884 13,927 13,304
Non-interest income 3,101 7,343 3,071 1,695 2,758
Non-interest expense 25,610 27,113 15,897 13,166 10,206
--------- --------- --------- --------- ---------
Income before income taxes and cumulative effect
of a change in accounting principle 9,630 8,274 8,058 2,456 5,856
Provision for income taxes 3,920 3,348 3,217 1,645 2,798
--------- --------- --------- --------- ---------
Income before cumulative effect of a change in
accounting principle 5,710 4,926 4,841 811 3,058
Cumulative effect of a change in method of
accounting for income taxes -- 1,548 -- -- --
--------- --------- --------- --------- ---------
NET INCOME $ 5,710 $ 6,474 $ 4,841 $ 811 $ 3,058
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
-------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE--PRIMARY (A):
Income before cumulative effect of a change in
accounting principle $1.95 $1.74 $1.74 $0.29 $1.06
Cumulative effect of a change in method of
accounting for income taxes -- $0.55 -- -- --
Net Income $1.95 $2.28 $1.74 $0.29 $1.06
-------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE--FULLY DILUTED (A):
Income before cumulative effect of a change in
accounting principle $1.95 $1.71 $1.74 $0.29 $1.06
Cumulative effect of a change in method of
accounting for income taxes -- $0.54 -- -- --
Net Income $1.95 $2.25 $1.74 $0.29 $1.06
-------------------------------------------------------------------------------------------------------
PER SHARE (A):
Book value $23.30 $23.83 $21.01 $19.06 $18.50
Dividend -- -- -- $0.20 $0.89
-------------------------------------------------------------------------------------------------------
MARKET PRICES OF COMMON STOCK:
High $33.75 $22.75 $18.50 $14.00 $20.25
Low $21.00 $14.25 $ 8.00 $ 6.00 $ 7.00
At December 31, $22.25 $22.50 $18.25 $ 8.50 $12.50
-------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION AND OTHER DATA:
Total assets $1,222,690 $1,194,121 $1,190,707 $669,545 $638,859
Loan portfolio, net 834,871 779,287 708,022 508,660 550,250
Securities 322,146 322,599 271,515 101,212 40,456
Deposits 1,027,746 1,006,221 994,931 522,180 471,654
Federal Home Loan Bank of Boston advances 111,145 104,991 120,771 83,136 104,326
Other borrowings -- 1,450 2,091 2,936 3,315
Stockholders' equity 67,137 66,440 58,585 53,104 51,512
Leverage ratio 5.63% 5.11% 4.51% 7.93% 8.06%
Tier 1 capital to risk-weighted assets 10.38% 8.87% 7.87% 10.66% 11.08%
Total capital to risk-weighted assets 11.41% 9.89% 9.12% 11.40% 11.58%
Non-performing loans 10,486 12,068 14,253 15,688 16,662
Foreclosed & in-substance foreclosed assets 10,312 16,143 23,142 24,160 17,629
--------- --------- --------- --------- ---------
TOTAL NON-PERFORMING ASSETS 20,798 28,211 37,395 39,848 34,291
Allowance for credit losses 6,803(b) 6,979(b) 13,937(b) 3,674 2,313
Allowance as a percentage of non-performing
loans 64.9% 57.8% 97.8% 23.4% 13.9%
Number of banking offices 22 23 22 10 10
-------------------------------------------------------------------------------------------------------
STATISTICAL DATA:
Net interest rate spread 2.76% 2.55% 3.04% 2.68% 2.28%
Net yield on average interest-earning assets 2.94 2.68 3.24 3.02 2.85
Return on average assets 0.47 0.54 0.66 0.13 0.50
Return on average stockholders' equity 8.34 10.30 8.44 1.47 5.46
Average stockholders' equity to average assets 5.58 5.26 7.80 8.54 9.17
Dividend payout ratio (a) -- -- -- 68.97 83.96
<FN>
(A) ADJUSTED RETROACTIVELY TO REFLECT STOCK DIVIDENDS DECLARED.
(B) INCLUDES $1.8 MILLION, $2.3 MILLION AND $10.4 MILLION, ALLOCATED TO LOANS
ACQUIRED AS PART OF THE BURRITT TRANSACTION, FOR DECEMBER 31, 1994, 1993
AND 1992, RESPECTIVELY.
--------------------------------------------------------------------------------
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3
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MANAGEMENT'S
DISCUSSION AND ANALYSIS
---------------------
--------------------------------------------------------------------------------
GENERAL
DS Bancor, Inc. (the "Company" or "DS Bancor") is the holding company for
Derby Savings Bank ("Derby Savings" or the "Bank"). The Company's principal
asset consists of all of the outstanding shares of Derby Savings Bank.
Deposits at Derby Savings are federally insured by the Bank Insurance Fund
("BIF") administered by the Federal Deposit Insurance Corporation (the "FDIC")
and the Bank is subject to comprehensive regulation, examination and supervision
by the FDIC and the Banking Commissioner of the State of Connecticut. The
Company, as a bank holding company, is subject to regulation by the Board of
Governors of the Federal Reserve System.
BUSINESS. Derby Savings is primarily engaged in the business of attracting
deposits from the general public and originating loans secured by first liens on
residential real estate. At December 31, 1994, the Bank had deposits of $1.03
billion, funding 84.1% of the Company's $1.22 billion in assets. The Bank offers
a variety of deposit products to meet the various investment objectives of its
depositors, including regular savings, certificates of deposit, money market
accounts, individual retirement accounts and keogh accounts.
In addition to deposits, which serve as the Bank's primary source of funds,
the Bank supplements its lending and investment activities through borrowings
from the Federal Home Loan Bank of Boston (the "FHLBB"), which serves as a
credit facility for its members. At December 31, 1994, the Bank had borrowings
from this source of $111.1 million, funding 9.1% of assets.
The Bank has historically concentrated its lending activities in the
consumer segment of the Bank's market area. During the past several years, this
market positioning has been directed towards providing financing for the
purchase and refinance of residential property. At December 31, 1994, $683.6
million, representing 55.9% of the Company's assets, were invested in loans
secured by first liens on one-to-four family residences. In addition, as
secondary business lines, the Bank has provided financing for other consumer
and, to a lesser extent, business needs. The home equity line of credit (the
"HELOC"), which is secured by residential real estate, has been the single most
significant consumer loan product, apart from residential mortgage loans,
offered by the Bank. This is essentially due to the product's ease of credit
access, cost and tax advantages. At December 31, 1994, the Bank had a portfolio
of HELOC's totaling $70.2 million, representing 5.7% of the Company's total
assets. During 1994, the Bank's market areas experienced a stabilization in the
values of residential real estate. This stabilization has encouraged the Bank to
increase loan-to-value ratios on the basis that equity positions, at the very
least, should remain constant. As such, the Bank has introduced a HELOC of up to
90% of the appraised value of the underlying residential real estate. To
complement the line of credit products secured by real estate, and to address
the credit needs of another segment of the consumer market, the Bank has added
an unsecured line of credit. This product, which was made available in late
1994, is available in amounts ranging from $10,000 to $25,000 and is accessed by
check.
Additionally, although to a lesser extent, the Bank provides financing for
consumer purchases and multi-family housing, as well as financing for commercial
real estate, construction and local businesses. At December 31, 1994, the Bank's
aggregate investment in these loans totaled $87.9 million, representing 7.2% of
the Company's total assets.
In 1994, the Company made further progress in reducing 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. Additionally, the
volume of loans past due sixty days has also trended downward. Increasing asset
quality, through the reduction of non-performing assets, continues to be a
primary objective of the Bank. During 1994, non-performing assets declined to
$20.8 million,
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4
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representing 1.7% of the Company's assets, from $28.2 million or 2.4% of total
assets at year end 1993. The Company provided $2.3 million to the allowance for
credit losses in 1994 compared to $2.5 million in 1993. At December 31, 1994,
the allowance for credit losses totaled $6.8 million, representing 64.9% of
non-performing loans. (For a further discussion of non-performing assets, see
"Financial Condition").
For the year ended December 31, 1994, net income totaled $5,710,000 or $1.95
per share (fully diluted) compared to $6,474,000 or $2.25 per share (fully
diluted) for 1993. Net income for 1993 includes $1,548,000 or $.54 per share
(fully diluted) 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 year ended December 31, 1994 represents a $784,000 or 15.9% increase above
the 1993 income before the cumulative effect of the change in accounting
principle of $4,926,000 or $1.71 per share (fully diluted) (See
"General--Dividends").
Net interest income, the primary component of the Company's earnings,
totaled $34.5 million in 1994 compared to $30.5 million in the prior year. The
growth in net interest income was substantially due to the improvement in the
net yield on interest-earning assets during 1994 compared to 1993. The net yield
on interest-earning assets increased to 2.94% for 1994 from 2.68% for 1993 (see
"Results of Operations").
BRANCH OFFICES. During the past several years, the Bank has pursued a
diversified branching strategy which departs from the design of traditional
banking facilities. The focus of this strategy is to design branch facilities to
meet the demographic needs of the Bank's target market while minimizing the
Bank's cost of operations and maximizing customer service. All of the Bank's
branches offer a full range of deposit and loan products. Seventeen of the
Bank's branches are traditional full-service offices which, among other things,
offer full teller and platform customer service, drive-up window service and
automated teller machines. The design of five of the Bank's branch offices
departs from traditional banking facilities with the absence of conventional
teller stations and drive-up windows. These "Savings Centers" are designed to
emphasize the issuance of certificate of deposit products through the delivery
of superior personalized service in a non-traditional banking environment.
In January 1994, the Bank closed one of its five branch offices located in
New Britain, which was acquired in December 1992, when the Bank acquired certain
assets and assumed the insured deposits and certain other liabilities of Burritt
Interfinancial Bancorporation, New Britain, Connecticut (The "Burritt
transaction" or "Burritt") (see Consolidated Financial Statements--Note 13).
During the second quarter of 1994, the Bank relocated the operations of the
former New Britain main office of Burritt. The new facility, which is in close
proximity to the former office, is significantly smaller and more economical to
operate, while affording the Bank the ability to expand the level of services by
including drive-up and ATM facilities. The Bank currently operates twenty-two
full service banking offices located in western New Haven, eastern Fairfield and
Hartford counties.
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 called 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 December 31, 1994,
the level of assets classified "substandard" represented 31.1% 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
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5
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5% of gross loans by December 31, 1993. At December 31, 1994, delinquent loans
totaled $32.0 million or 3.8% 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 relating to the maintenance of capital ratios. The Memorandum
initially required that the Bank maintain a leverage 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 Savings 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 requested and the FDIC
approved an extension of the December 31, 1994 target date to June 30, 1995. The
Bank's leverage ratio at December 31, 1994 was 5.5%. The Bank expects to achieve
the June 30, 1995 capital target ratio of 5.75% through maintaining asset size
at current levels and earnings retention.
DIVIDENDS. As noted in the foregoing section, the Bank is limited in its
ability to pay cash dividends to the Company. Since the Bank is the sole source
of funds for cash dividend payments by the Company to its shareholders, the
FDIC's restriction has resulted in the Company being unable to pay cash
dividends to shareholders. The Company declared a 5% stock dividend on February
15, 1995. The per share amounts for the current and prior periods have been
retroactively adjusted to give effect to this stock dividend.
DERBY FINANCIAL SERVICES. Complementing the financial services offered to
the communities served by the Company, the Bank, through it's wholly owned
subsidiary, Derby Financial Services ("DFS"), began offering brokerage services
in 1993. The products offered through DFS include various equity securities,
bonds and mutual funds.
FINANCIAL CONDITION
-
-
The Company's assets totaled $1.22 billion at December 31, 1994,
representing a $28.6 million or 2.4% increase from year end 1993. The increase
in total assets during 1994 was primarily attributable to a combination of a
high level of mortgage loan refinancing activity during the early part of the
year, as well as the purchase by the Bank of $22.4 million of single-family
adjustable mortgage loans during 1994. Mortgage loans, including $55.2 million
of loans held-for-sale at
[BAR GRAPH]
TOTAL ASSETS
(AMOUNTS IN MILLIONS)
at December 31,
1990 1991 1992 1993 1994
$638.9 $669.5 $1,190.7 $1,194.1 $1,222.7
December 31, 1994 (see "Asset/Liability Management"), increased by $60.4
million, or 9.1%. The growth in mortgage loans was funded, in large part, by a
$21.5 million or 2.1% increase in deposits, a $6.2 million increase in FHLBB
borrowings, and the redeployment of $26.0 million short-term liquid investments.
The assets of the Company are primarily invested in loans to individuals
and, to a lesser extent, the businesses located in the Bank's market area. At
December 31, 1994, approximately $841.7 million, representing 68.8% 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 focus of the Bank's
lending business has been to provide financing for residential real estate. At
December 31, 1994, $683.6 million or 81.2% of the Bank's loans were for the
financing of one-to-four family residences. As
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6
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residential mortgage loan activity declined in reaction to the steady and
significant increase in interest rates during 1994, increased emphasis was given
to financing the growing needs of the consumer loan market. Major developmental
efforts were undertaken to expand the product offerings in the consumer lending
area during the latter half of 1994 to help mitigate the expected decline in
residential mortgage lending throughout the upcoming year. A newly designed home
equity line of credit and an unsecured line of credit, combined with a
concentrated effort in automobile and boat financing, will constitute the focus
of the Bank's consumer lending efforts in 1995.
The Company continued to make progress throughout 1994 in reducing 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
Consolidated Financial Statements--Note 1). At December 31, 1994, non-performing
assets totaled $20.8 million, representing 1.7% of total assets, reflecting a
$7.4 million or 26.3% decline from the $28.2 million of non-performing assets,
or 2.4% of total assets, at year end 1993. At December 31, 1994, foreclosed and
in-substance foreclosed assets totaled $10.3 million, representing .8% of total
assets, compared to $16.1 million or 1.4% of total assets at year end 1993.
The following table sets forth non-accrual loans and loans past due for 90
days or more, including loans in foreclosure ("non-performing loans"), and the
allowance for credit losses at the dates indicated:
--------------------------------------------------------------------------------
DECEMBER 31,
------------------------------------------------------------------------------------------------------------
1994 1993
---------------------------------------------------- ----------------------------------------------------
ALLOWANCE FOR CREDIT ALLOWANCE FOR CREDIT
NON-PERFORMING LOANS LOSSES NON-PERFORMING LOANS LOSSES
-------------------------- ------------------------ ------------------------- --------------------------
% OF NON- % OF NON-
% OF LOANS PERFORMING % OF LOANS PERFORMING
LOAN TYPE BALANCE OUTSTANDING BALANCE LOANS BALANCE OUTSTANDING BALANCE LOANS
---------------------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
MORTGAGE
1-4 Family $ 6,908 1.0% $ 5,665 0.9%
Commercial 181 0.7 681 2.4
Multi-family 1,772 22.1 2,628 30.8
--------- ---------
TOTAL MORTGAGE 8,861 1.2 $ 4,495 50.7% 8,974 1.3 $ 4,605 51.3%
--------- ---------
CONSUMER
HELOC 635 0.9 945 1.4
All other 463 1.7 750 2.8
--------- ---------
TOTAL CONSUMER 1,098 1.1 1,266 115.3 1,695 1.8 1,193 70.4
--------- ---------
COMMERCIAL
Real estate
development 271 8.3 623 16.3
All other 256 1.3 776 2.9
--------- ---------
TOTAL COMMERCIAL 527 2.3 1,042 197.7 1,399 4.6 1,181 84.4
--------- ----------- --------- -----------
TOTAL $ 10,486 1.2 $ 6,803 64.9 $ 12,068 1.5 $ 6,979 57.8
--------- ----------- --------- -----------
--------- ----------- --------- -----------
--------------------------------------------------------------------------------
The Company's loan portfolio is segregated into three broad categories of
loans: mortgage, consumer and commercial. The Company's investment in mortgage
loans totaled $721.0 million, representing 59.0% of total assets at year end
1994 compared to $660.6 million or 55.3% of total assets at year end 1993. Early
in 1994, the Bank processed a significant volume of mortgage loan closings,
predominantly for the refinance of residential property. The majority of the
refinance activity was for loans previously outstanding with other lenders.
During the second, third and fourth quarters of 1994, requests for mortgage
loans declined as interest rates increased, curtailing mortgage loan
originations to $164.9 million from $188.6 million in 1993.
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As in prior years, the Bank continued to supplement local loan originations
through the purchase of single family adjustable rate mortgage loans. The Bank
purchased $21.9 million of these loans during 1994 and $8.8 million during 1993.
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 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 $683.6
million or 81.2% of the Bank's total loan portfolio at year end 1994 compared to
$621.6 million, representing 79.1% of the total loan portfolio, at year end
1993. The level of non-performing loans totaled $6.9 million or 1.0% of this
portfolio at year end 1994 compared to $5.7 million or .9% of the portfolio at
year end 1993.
Multi-family housing loans totaled $8.0 million or 1.0% of the total loan
portfolio at year end 1994 compared to $8.5 million or 1.1% of the total loan
portfolio at year end 1993. At December 31, 1994, non-performing loans totaled
$1.8 million or 22.1% of this portfolio. At year end 1993 there were $2.6
million or 30.8% of non-performing loans included in this category. Loans to
finance commercial real estate totaled $27.0 million or 3.2% of the total loan
portfolio at December 31, 1994, of which $.2 million or .7% were non-performing.
At year end 1993, this portfolio totaled $27.7 million, representing 3.5% of
total loans, of which $.7 million or 2.4% were non-performing.
The fourth group of loans included in the Bank's mortgage portfolio were
made to finance real estate construction, primarily residential condominiums and
single family residences. During 1994, this portfolio of loans remained
essentially unchanged at $2.4 million or .3% of total loans compared to $2.8
million or .4% of total loans at year end 1993. At year end 1994, as with year
end 1993, there were no non-performing real estate construction loans.
Unadvanced construction commitments approximated $1.8 million at year end 1994
compared to $.5 million at year end 1993.
-
-
The Company's investment in consumer loans totaled $98.0 million,
representing 11.6% of total loans at year end 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 $130.5 million, with $70.2
[BAR GRAPH]
CONSUMER LOAN PORTFOLIO
(AMOUNTS IN MILLIONS)
at December 31,
1990 1991 1992 1993 1994
$16.4 $14.2 $ 34.2 $27.1 $27.8
62.6 60.2 71.4 68.4 70.2
----- ----- ------ ----- -----
$79.0 $74.4 $105.6 $95.5 $98.0
million in use at year end 1994 compared to $124.8 million, with $68.4 million
in use at year end 1993. At year end 1994, non-performing consumer loans totaled
$1.1 million or 1.1% of this portfolio. Home equity lines of credit included in
this amount totaled $.6 million, representing .9% of HELOCs outstanding. In
comparison, at year end 1993, non-performing consumer loans more totaled $1.7
million or 1.8% of the consumer loan portfolio, including $.9 million,
representing 1.4% of HELOCs outstanding.
The Company also provides credit to 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
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8
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business needs. The Bank's investment in commercial loans totaled $22.7 million
at year end 1994, reflecting a $7.4 million or 24.8% decrease from the $30.1
million invested at year end 1993. At December 31, 1994, $3.3 million or 14.5%
of this portfolio was invested in loans for the development of real estate and
$19.4 million or 85.5% was invested in loans for various business needs.
Unadvanced real estate development commitments totaled $1.1 million at year end
1994, compared to $1.3 million at year end 1993. At December 31, 1994,
non-performing commercial loans totaled $.5 million, representing 2.3% 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-performing loans, and foreclosed and in-substance foreclosed assets
("non-performing assets") and restructured loans:
--------------------------------------------------------------------------------
DECEMBER 31,
-----------------------------------------------------
1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
NON-ACCRUAL LOANS:
Mortgage $ 7,675 $ 6,657 $ 9,756 $ 7,029 $ 6,524
Consumer 1,098 1,446 1,197 1,000 1,741
Commercial 527 1,399 293 3,412 3,437
--------- --------- --------- --------- ---------
TOTAL 9,300 9,502 11,246 11,441 11,702
--------- --------- --------- --------- ---------
ACCRUING LOANS PAST DUE 90 DAYS:
Mortgage 1,186 2,317 3,006 4,096 4,730
Consumer -- 249 1 151 230
Commercial -- -- -- -- --
--------- --------- --------- --------- ---------
TOTAL 1,186 2,566 3,007 4,247 4,960
--------- --------- --------- --------- ---------
FORECLOSED ASSETS 6,195 9,379 10,456 7,305 5,893
IN-SUBSTANCE FORECLOSED ASSETS 4,556 7,804 13,124 17,267 11,736
--------- --------- --------- --------- ---------
TOTAL 10,751 17,183 23,580 24,572 17,629
Valuation allowance 439 1,040 438 412 --
--------- --------- --------- --------- ---------
TOTAL, NET 10,312 16,143 23,142 24,160 17,629
--------- --------- --------- --------- ---------
TOTAL NON-PERFORMING ASSETS $ 20,798 $ 28,211 $ 37,395 $ 39,848 $ 34,291
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
RESTRUCTURED LOANS $ 4,213 $ 2,273 $ 8,262 $ 6,985 --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
--------------------------------------------------------------------------------
As detailed in the table above, the level of non-performing loans declined
from $12.1 million at year end 1993 to $10.5 million at year end 1994. During
1994, the Bank made significant progress in reducing the level of foreclosed and
in-substance foreclosed assets. At year end 1994, the Bank had $6.2 million in
foreclosed assets, consisting of 37 properties, compared to $9.4 million,
consisting of 44 properties at year end 1993. During 1994, the Bank reclassified
$3.2 million in loans to in-substance foreclosed assets. At year end 1994, the
Bank had $4.6 million, consisting of 26 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 63 properties, totaling $10.3
million, net of a $.4 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
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maintains an allowance for estimated losses on foreclosed assets through a
provision which is charged to and included in foreclosed asset expense. In 1994,
the Bank provided $2.2 million to this allowance compared to $4.3 million in
1993. During 1994, the Bank charged $2.8 million in specific write-downs against
this allowance compared to $3.6 million during the prior year. At December 31,
1994, the allowance for estimated losses on foreclosed assets totaled $.4
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 by
$7.4 million or 26.2% during 1994. A principal focus in 1995 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 may
be moderate. One of the measures used to identify the trends in non-performing
assets is the level of loans past due 60 days. As noted in the table below, the
amount of loans past due 60 days has declined to $6.1 million at December 31,
1994, representing .7% 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:
--------------------------------------------------------------------------------
DECEMBER 31,
-----------------------------------------------------
1994 1993 1992 1991 1990
-------------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
LOANS PAST DUE 60 DAYS:
Mortgage $ 5,014 $ 7,369 $ 8,829 $ 9,072 $ 5,062
Consumer 1,015 651 815 525 753
Commercial 62 -- 95 353 870
--------- --------- --------- --------- ---------
TOTAL $ 6,091 $ 8,020 $ 9,739 $ 9,950 $ 6,685
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
--------------------------------------------------------------------------------
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 crucial 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
Bank has 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 marketing 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 60 properties for an aggregate consideration of $6.2 million in 1994.
During the prior year, the Bank sold and closed on 63 properties for an
aggregate consideration of $6.8 million.
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 credit losses. The allowance for credit losses is maintained through
provisions charged to
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10
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income. These provisions are determined on a quarterly basis, based upon
management's review of the anticipated uncollectability of loans, current
economic conditions, historical trend analysis, real estate deflation factors,
overall portfolio quality, specific problem loans and an assessment of the
adequacy of the allowance for credit losses. Based on these factors, the Company
provided $2.3 million to the allowance for credit losses during 1994 compared to
$2.5 million during 1993. During the year, the Bank wrote off $2.5 million (net
of recoveries). At December 31, 1994 the allowance for credit losses totaled
$6.8 million which includes $1.8 million allocated to the loans acquired in the
Burritt transaction. In comparison, the allowance for credit losses totaled $7.0
million at year end 1993 which included $2.3 million allocated to the loans
acquired in the Burritt transaction (see Consolidated Financial Statements--Note
13). The allowance for credit losses represented 64.9% of non-performing loans
at year end 1994, compared to 57.8% at year end 1993.
The following table summarizes the transactions in the allowance for credit
losses for the periods indicated:
--------------------------------------------------------------------------------
AT AND FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
MORTGAGE LOANS
Balance at beginning of period $ 4,605 $ 11,166 $ 2,180
Provision for credit losses 1,675 1,925 825
Acquired allowance -- (5,958) 9,026
Loan charge-offs (1,848) (2,857) (941)
Recoveries 63 329 76
--------- --------- ---------
BALANCE AT END OF PERIOD $ 4,495 $ 4,605 $ 11,166
--------- --------- ---------
--------- --------- ---------
CONSUMER LOANS
Balance at beginning of period $ 1,193 $ 1,987 $ 704
Provision for credit losses 600 50 125
Acquired allowance -- (5) 1,328
Loan charge-offs (573) (860) (211)
Recoveries 46 21 41
--------- --------- ---------
BALANCE AT END OF PERIOD $ 1,266 $ 1,193 $ 1,987
--------- --------- ---------
--------- --------- ---------
COMMERCIAL LOANS
Balance at beginning of period $ 1,181 $ 784 $ 790
Provision for credit losses 50 500 425
Loan charge-offs (195) (114) (660)
Recoveries 6 11 229
--------- --------- ---------
BALANCE AT END OF PERIOD $ 1,042 $ 1,181 $ 784
--------- --------- ---------
--------- --------- ---------
TOTAL ALLOWANCE FOR CREDIT LOSSES
Balance at beginning of period $ 6,979 $ 13,937 $ 3,674
Provision for credit losses 2,325 2,475 1,375
Acquired allowance -- (5,963) 10,354
Loan charge-offs (2,616) (3,831) (1,812)
Recoveries 115 361 346
--------- --------- ---------
BALANCE AT END OF PERIOD $ 6,803 $ 6,979 $ 13,937
--------- --------- ---------
--------- --------- ---------
--------------------------------------------------------------------------------
In addition to collection and workout efforts, management also monitors and
works closely with certain borrowers that may experience financial difficulties.
The debtors may be experiencing cash flow problems which inhibit their ability
to service their debt in accordance with its terms. This may result in a
modification of loan terms in order to assist a debtor who has been adversely
affected by the state of the economy. The modification of terms may be in the
form of the waiver of principal payments, a reduction in the interest rate or
the waiver of interest payments for a specified period of time. At December 31,
1994, in addition to non-performing assets, the Bank had $4.2 million in loans
which have been restructured.
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The Bank's securities portfolio was $322.1 million or 26.4% of total assets
at December 31, 1994, virtually unchanged from $322.6 million or 27.0% of total
assets at December 31, 1993. The securities portfolio serves primarily as a
source of liquidity and as a vehicle to help balance the interest rate
sensitivity of the Bank. Notwithstanding the need for liquidity and interest
rate sensitivity, the portfolio is also structured for yield. The Bank adopted
Statement of Financial Accounting Standards No. 115 ("SFAS 115") as of December
31, 1993. Under the provisions of SFAS 115 the Bank's securities are classified
into one of three categories: held-to-maturity, available-for-sale or trading
(see Consolidated Financial Statements--Notes 1 & 2). At December 31, 1994 the
Bank had securities totaling $104.7 million classified as held-to-maturity,
compared to $66.3 million at December 31, 1993. These investments are primarily
comprised of intermediate and long-term fixed rate mortgage-backed securities
and are carried at amortized cost. Securities classified as available-for-sale
at December 31, 1994 totaled $216.7 million, compared to $256.3 million at
December 31, 1993. The available-for-sale category at year-end 1994 was
principally comprised of mortgage-backed securities with adjustable rate
interest features. SFAS 115 also requires that securities classified as
available-for-sale be carried at fair value, with unrealized gains and losses,
net of tax effect, reported as a separate component of stockholders' equity. At
December 31, 1994, as a result of the sustained increases in interest rates that
occurred throughout most of 1994 and their effect on the market values of the
securities classified as available-for-sale, the Bank recorded an unrealized
loss, net of tax effect, of $5.6 million which is included in stockholders'
equity. At December 31, 1993, the Bank had an unrealized gain, net of tax
effect, of $1.3 million. The trading portfolio, which consists of equity
securities, totaled $.8 million at year-end 1994. This portfolio is carried at
fair value with unrealized gains or losses included in earnings. There were no
securities classified as trading in 1993.
Cash and cash equivalents were $18.6 million at December 31, 1994 versus
$43.1 million at December 31, 1993. The $24.5 million decrease in cash and cash
equivalents during 1994, as mentioned previously, resulted from the redeployment
of federal funds sold into other earning assets, predominantly residential
mortgage loans.
-
-
FUNDING SOURCES. The investment activities of the Bank are funded from
several sources. The primary source of funds is provided by local depositors and
is complemented by advances from the FHLBB. In addition, the Bank is provided
with a steady flow of funds from the amortization and prepayment of loans as
well as the amortization and maturity of securities. The Bank also derives
funds, from time to time, through the sale of loans into the secondary market
and allocates the
[BAR GRAPH]
TOTAL DEPOSITS
(AMOUNTS IN MILLIONS)
at December 31,
1990 1991 1992 1993 1994
$471.7 $522.2 $994.9 $1,006.2 $1,027.7
proceeds in accordance with established asset and liability management
objectives.
In 1994, deposits increased by $21.5 million or 2.1%, after interest
credited of $35.9 million, from $1.01 billion, funding 84.3% of total assets at
year end 1993, to $1.03 billion, funding 84.1% of total assets at year end 1994.
In comparison, deposits increased by $11.3 million or 1.1% after interest
credited of $37.6 million in 1993. 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 FHLBB as an alternative source of funds. At year
end 1994, FHLBB
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12
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advances totaled $111.1 million, funding 9.1% 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
FHLBB 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 FHLBB 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 $123.0 million in investable funds in 1994,
compared to $195.0 million in 1993. In keeping with the Bank's asset and
liability management objectives, the Bank periodically may sell loans. The Bank
sold $12.1 million in loans in 1994 compared to $30.0 million in 1993. The Bank
has retained servicing on all loans that have been sold and, at December 31,
1994, was servicing $129.3 million of mortgage loans for others. Additionally,
at December 31, 1994, the Bank had $55.2 million in loans identified as held-for
sale.
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 (See Consolidated Financial Statements-- Note
13), Derby paid the FDIC a premium of $6.2 million. Of the premium paid, $5.0
million was recorded as a core deposit intangible. The amortized balance of $3.5
million at December 31, 1994, in addition to approximately $149,000 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 11.4% and a ratio of tier 1
capital to risk-weighted assets of 10.4% at December 31, 1994.
The Board has supplemented the risk-based capital requirements with a
required minimum leverage ratio of 3% of tier 1 capital to total assets. The
Board 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 December 31, 1994, the Company had a ratio of tier 1 capital to total assets
of 5.6%.
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 December 31, 1994,
Derby Savings' ratio of total capital to risk-weighted assets was 11.2% and its
ratio of tier 1 capital to risk-weighted assets was 10.2%.
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 December 31,
1994 was 5.5%.
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 which pertained to the maintenance of
capital ratios. The Memorandum initially required that the Bank maintain a ratio
of leverage 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 of
Banks. The modification required Derby to have leverage capital in excess of 5%
of total assets by December 31, 1993 and leverage capital at or above 5.75% of
total assets by December 31, 1994. However, management of the Bank has requested
and
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13
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the FDIC has approved an extension of the December 31, 1994 target date to June
30, 1995. At December 31, 1994, the Bank's leverage capital to total assets
ratio was 5.5%. The Bank expects to achieve the June 30, 1995 capital target of
5.75% through maintaining asset size at current levels and earnings retention.
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 total risk-based capital ratio
of 10% or greater, a tier 1 risk-based capital ratio of 6% or greater, and a
leverage ratio 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 total risk-based capital ratio
of 8% or greater, a tier 1 risk-based capital ratio of 4% or greater, and a
leverage ratio 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 total risk-based capital ratio that is less than 8%, a
tier 1 risk-based capital ratio that is less than 4% (3% if the institution is
rated composite 1 in its most recent report of examination); (iv) "significantly
undercapitalized" if the institution has a total risk-based capital ratio that
is less than 6%, a tier 1 risk-based capital ratio that is less than 3%, or a
leverage ratio that is less than 3%; and (v) "critically undercapitalized" if
the institution has a ratio of tangible equity to total assets that is equal to
or 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. At
December 31, 1994, the Bank met the "well capitalized" criteria based on its
capital ratios at that date.
RESULTS OF OPERATIONS
The net income of the Company is principally derived from the banking
operation of its wholly owned subsidiary, Derby Savings Bank. The net income of
Derby Savings is dependent to a substantial extent on the difference between
interest and fee income on its loans plus interest and dividends on its
securities portfolio and its cost of money, consisting principally of the
interest paid on its deposit accounts and, to a lesser extent, interest paid on
its borrowings.
The difference between interest income and interest expense is referred to
as net interest income. The difference between the combined weighted average
yield on loans and securities and the combined weighted average cost of deposits
and borrowings is referred to as the net interest rate spread. Interest income
from interest-earning assets depends primarily on the volume of such assets
outstanding during the period and the interest rates and fees earned thereon.
Derby Savings' interest expense is a function of the average amount of deposits
and borrowed money outstanding during the period and the interest rates paid
thereon.
The following table reflects average yields and costs during the periods
indicated.
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------------------------------
AVERAGE YIELD:
Mortgage loans 6.73% 7.23% 8.47% 9.75% 10.13%
Other loans 8.25 7.61 7.79 9.87 10.98
Securities 5.75 5.17 6.25 7.86 8.29
All interest-earning assets 6.58 6.54 7.87 9.51 10.17
AVERAGE COST:
Deposits 3.61 3.81 4.59 6.71 7.75
Borrowings 5.53 5.48 6.15 7.45 8.62
All interest-bearing liabilities 3.82 3.99 4.83 6.83 7.89
NET INTEREST RATE SPREAD 2.76 2.55 3.04 2.68 2.28
NET YIELD ON AVERAGE INTEREST-EARNING ASSETS (A) 2.94 2.68 3.24 3.02 2.85
<FN>
(A) NET INTEREST INCOME DIVIDED BY AVERAGE INTEREST-EARNING ASSETS.
--------------------------------------------------------------------------------
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14
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COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1993
GENERAL. Net income for the year ended December 31, 1994 totaled $5,710,000
or $1.95 per share (fully diluted) compared to $6,474,000 or $2.25 per share
(fully diluted) for the prior year. Net income for 1993 includes $1,548,000 or
$.54 per share (fully diluted) attributable to 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 1994 represents a $784,000 or 15.9% increase above 1993
income before the cumulative effect of the change in accounting principle of
$4,926,000 or $1.71 per share (fully diluted). As a result of the 5% stock
dividend declared by the Company on February 15, 1995, the per share amounts for
the current and prior periods have been retroactively adjusted. The improvement
in net income was primarily attributable to $4.0 million or 12.9% increase in
net interest income and a $1.5 million or 5.5% decline in non-interest expense.
These improvements were offset, in part, by a $4.2 million or 57.8% decline in
non-interest income.
For 1994, net income represented a return on average assets and a return on
average stockholders' equity of .47% and 8.34%, respectively, compared to .54%
and 10.30%, excluding the effect of the change in accounting principle,
respectively, for 1993.
INTEREST INCOME. Interest and fee income on loans and interest and
dividends on the securities portfolio increased $3.0 million or 4.0% from $74.3
million during 1993 to $77.3 million during 1994. The increase in interest
income was essentially due to the increased volume of interest-earning assets
resulting from a modest growth in the volume of average assets and a decline in
the volume of average non-interest-earning assets.
[BAR GRAPH]
INTEREST INCOME
(AMOUNTS IN MILLIONS)
Years ended December 31,
1990 1991 1992 1993 1994
$59.7 $57.8 $54.1 $74.3 $77.3
Average interest-earning assets increased $36.5 million or 3.2% during 1994
compared to the prior year. The increase in average interest-earning assets was
concentrated within the loan portfolio which increased $85.1 million or 11.6%,
while the average of all other interest-earning assets declined $48.6 million or
12.0%. These changes highlight the Bank's efforts, during 1994, to place
greater emphasis on loans as opposed to securities. The average yield on
interest-earning assets improved by 4 basis points (100 basis points equals 1%)
from 6.54% during 1993 to 6.58% during 1994.
INTEREST EXPENSE. Interest expense decreased $1.0 million or 2.3% from
$43.8 million during 1993 to $42.8 million during 1994. The decline in interest
expense was due to a decline in the average cost of funds during the current
year which was partially offset by the interest expense resulting from an
increase in average interest-bearing liabilities.
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-
-
Average interest-bearing liabilities increased $20.4 million or 1.9% during
1994 compared to the prior year. The growth was essentially evenly divided
between average deposits which increased $10.6 million or 1.1% and average
borrowed funds, consisting of FHLBB advances, which increased $9.8 million or
8.7%. Although the level of interest rates trended upward through most of 1994,
the Bank's average cost of funds lagged behind this trend. In addition to the
lag effect of repricing
[BAR GRAPH]
NET INTEREST INCOME
(AMOUNTS IN MILLIONS)
Year ended December 31,
1990 1991 1992 1993 1994
$16.7 $18.3 $22.3 $30.5 $34.5
certificates of deposit throughout 1994, the interest rates paid by the Bank
were, for the most part, at levels less than the general level of interest
rates. As a result, the Bank's average cost of funds declined 17 basis points
from 3.99% for 1993 to 3.82% for 1994.
NET INTEREST INCOME. Net interest income, the primary component of the
Company's earnings, increased $4.0 million or 12.9% to $34.5 million for 1994
from $30.5 million for 1993. As a result of the 4 basis point improvement
in the average yield on interest-earning assets and the 17 basis point decline
in the average cost of interest-bearing liabilities, the net interest rate
spread increased 21 basis points to 2.76% for 1994 from 2.55% for 1993.
Additionally, the Company's net yield on interest-earning assets averaged 2.94%
for 1994 compared to 2.68% for 1993.
[BAR GRAPH]
NET INTEREST RATE SPREAD
Years ended December 31,
1990 1991 1992 1993 1994
2.28% 2.68% 3.04% 2.55% 2.76%
-
-
The following table summarizes net interest income.
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
INTEREST INCOME:
Loans $ 56,802 $ 53,428 $ 44,568 $ 51,208 $ 56,042
Securities 20,480 20,907 9,576 6,588 3,627
--------- --------- --------- --------- ---------
Total 77,282 74,335 54,144 57,796 59,669
--------- --------- --------- --------- ---------
INTEREST EXPENSE:
Deposits 36,008 37,599 25,493 32,585 35,182
Borrowings 6,810 6,217 6,392 6,884 7,753
--------- --------- --------- --------- ---------
Total 42,818 43,816 31,885 39,469 42,935
--------- --------- --------- --------- ---------
NET INTEREST INCOME $ 34,464 $ 30,519 $ 22,259 $ 18,327 $ 16,734
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
--------------------------------------------------------------------------------
PROVISION FOR CREDIT LOSSES. During 1994, the Bank provided $2.3 million
for credit losses compared to $2.5 million during 1993. In addition to the
provision for credit losses, the Bank also provided $2.2 million for estimated
losses on foreclosed assets during 1994 compared to $4.3 million during 1993.
These provisions are included in foreclosed asset expense (see "Non-interest
expense").
NON-INTEREST INCOME. Non-interest income is derived from fees which the
Bank charges for various loan and deposit account services, fees generated from
other ancillary services provided by the Bank, and net securities and loan
gains. During 1994 the income generated from these sources totaled $3.1 million
compared to $7.3 million for the prior year, reflecting a decrease of $4.2
million or 57.8%.
Service charges and other fee income declined $3.6 million or 59.7% and
totaled $2.5 million for 1994 compared to $6.1 million earned in 1993. During
1993, as part of the Burritt transaction, the Bank was servicing loans for the
FDIC on an interim basis (through September 30, 1993), which resulted in $3.7
million in fee income.
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Net securities and loan gains totaled $648,000 in 1994 compared to
$1,256,000 in 1993, reflecting a decline of $608,000 or 48.4%. This decline was
due to a decline in the volume of loans sold at net gains during 1994 compared
to 1993. In keeping with the Bank's asset and liability management objectives
(see "Asset/Liability Management"), the Bank may sell fixed rate mortgage loans
in the secondary markets. In 1994, the Bank sold $12.1 million in fixed rate
mortgage loans, resulting in gains of $102,000 compared to fixed rate mortgage
loan sales of $30.0 million in 1993, resulting in gains of $834,000. The Bank,
during 1994, realized net gains of $546,000 on the sale of various securities
compared to net gains of $422,000 in 1993. The proceeds from these transactions
have been allocated to fund the Bank's loan demand and other securities
purchases.
NON-INTEREST EXPENSE. Non-interest expense totaled $25.6 million or 2.09%
of average assets during 1994 compared to $27.1 million or 2.27% of average
assets in 1993. The $1.5 million or 5.5% decrease in the Company's cost of
operations was due to a decline in foreclosed asset expense which more than
offset increases in several other categories of expense during 1994 compared to
1993.
Salaries and employee benefits, the largest component of the Company's cost
of operations, increased $.5 million or 5.2% from $9.6 million during 1993 to
$10.1 million during 1994. Salaries increased $74,000 or 1.0% during 1994
compared to the prior year. This increase resulted from the exercise of stock
appreciation rights which resulted in compensation expense of $118,000. Employee
benefits increased $.4 million or 21.1% during the year from $1.9 million for
1993 to $2.3 million in 1994. The increased cost of employee benefits was
primarily in pension and postretirement benefit costs, reflecting the increased
number of eligible participants resulting from the Burritt transaction.
During 1994, the Bank continued to incur expenses with the foreclosure
process and the management of foreclosed and in-substance foreclosed assets.
These expenses include all of the direct costs associated with acquiring,
holding, managing, marketing and disposing of these assets. In 1994, the Bank
incurred foreclosed asset expenses of $.8 million compared to $.9 million in
1993 (see Consolidated Financial Statements--Note 4). Subsequent to an initial
estimate of value of the underlying real estate securing loans in the
foreclosure process, the Bank updates appraisals at least on an annual basis. In
order to provide for unidentified and possible future declines in the value of
foreclosed assets the Bank maintains an allowance for estimated losses on
foreclosed assets. For the year ended December 31, 1994, the Bank provided $2.2
million to this allowance compared to $4.3 million for the prior year. The
Company expects that until the level of foreclosed assets declines
substantially, foreclosed asset expense will continue to be significant.
The FDIC insurance premium paid by the Bank in 1994 totaled $2.8 million
compared to $2.4 million in 1993. The increased volume of insured deposits
assumed in connection with the Burritt transaction and the lag in computing the
FDIC insurance premium, in large part, accounted for the increase in the premium
paid in 1994 compared to 1993. In February 1995, the FDIC proposed to reduce the
current deposit insurance assessment rate range of .23% to .31% of insured
deposits to a range of .04% to .31% once the reserve ratio for BIF reaches 1.25%
of total insured deposits. Under the proposal, "well-capitalized" banks, such as
the Bank, would pay insurance premiums within a range of .04% to .21% of insured
deposits, compared to the current assessment rate range for such institutions of
.23% to .29%. The proposal would permit the FDIC to adjust the assessment rate
schedule by up to .05% for all risk classifications.
Data processing expense totaled $1.3 million in 1994, reflecting a decrease
of $.7 million or 35.0% compared to the $2.0 million incurred in 1993. The
decline is largely attributable to the elimination, in the third quarter of
1993, of the former data processing center operated by Burritt. The Bank
continued to operate the center through August 1993 in order to service loans
for the FDIC. (See Consolidated Financial Statements--Note 13).
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17
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Marketing expense increased $.5 million or 62.5% from $.8 million for 1993
to $1.3 million for 1994. The increase reflects the increased promotion of the
Bank's products and services to the markets it serves.
As required by the Statement of Financial Accounting Standards No. 91 ("SFAS
91"), "Accounting for Non-refundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases," the Bank defers certain
direct costs resulting from the origination of loans, which will be amortized as
an adjustment of yield over the contractual term of the related loans. These
deferred costs, which are principally comprised of salaries, employee benefits
and other loan expenses, totaled approximately $1.5 million during 1994 compared
to $1.8 million during 1993.
[BAR GRAPH]
NON-INTEREST EXPENSE
(AMOUNTS IN THOUSANDS)
Years ended December 31,
1990 1991 1992 1993 1994
Foreclosed Asset $ 175 $ 2,547 $ 3,747 $ 4,801 $ 2,904
FDIC Insurance 552 1,016 1,196 2,435 2,770
All Other 9,479 9,603 10,954 19,877 19,936
------- ------- ------- ------- -------
$10,206 $13,166 $15,897 $27,113 $25,610
NET NON-INTEREST MARGIN. The net non-interest margin, the difference
between non-interest income and non-interest expense, as a percentage of average
assets, declined by 18 basis points during 1994 compared to 1993. Non-interest
income decreased 36 basis points from .61% during 1993 to .25% during 1994.
Non-interest expense decreased 18 basis points from 2.27% during 1993 to 2.09%
during 1994.
--------------------------------------------------------------------------------
NET NON-INTEREST INCOME/EXPENSE ANALYSIS
(AS A PERCENT OF AVERAGE ASSETS)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1994 1993 1992 1991 1990
------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME .25 .61 .42 .26 .46
--------- --------- --------- --------- ---------
NON-INTEREST EXPENSE
Foreclosed asset .24 .40 .51 .39 .04
FDIC insurance .23 .20 .16 .16 .09
Other 1.62 1.67 1.49 1.49 1.55
--------- --------- --------- --------- ---------
TOTAL NON-INTEREST EXPENSE 2.09 2.27 2.16 2.04 1.68
--------- --------- --------- --------- ---------
NET NON-INTEREST MARGIN (1.84) (1.66) (1.74) (1.77) (1.22)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
--------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES. The provision for income taxes for 1994 totaled
$3.9 million, reflecting a 40.7% effective income tax rate compared to $3.3
million, representing an effective income tax rate of 40.5% for 1993 (see
Consolidated Financial Statements--Note 9).
COMPARISON OF YEARS ENDED DECEMBER 31, 1993 AND 1992
GENERAL. For the year ended December 31, 1993, net income totaled
$6,474,000 or $2.25 per share (fully diluted) compared to $4,841,000 or $1.74
per share (fully diluted) for the prior year. Net income for 1993 includes
$1,548,000 or $.54 per share (fully diluted) 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 year ended December 31, 1993 before the
cumulative effect of the change in accounting principle totaled $4,926,000 or
$1.71 per share (fully diluted).
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18
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--------------------------------------------------------------------------------
Although net income before the cumulative effect of the change in accounting
principle for 1993 approximated net income for the prior year, there were a
number of changes in the components of net income. Net interest income totaled
$30.5 million for 1993, an increase of $8.3 million or 37.1% over the prior
year. Additionally, for 1993 compared to the prior year, non-interest income
increased $4.3 million or 139.1%. However, these increases were substantially
offset by a $1.1 million or 80.0% increase in the provision for credit losses
and a $11.2 million or 70.6% increase in non-interest expense during 1993
compared to 1992.
For 1993, net income represented a return on average assets and a return on
average stockholders' equity of .54% and 10.30%, respectively, compared to .66%
and 8.44%, respectively, for 1992.
INTEREST INCOME. Interest and fee income on loans and interest and
dividends on the securities portfolio increased $20.2 million or 37.3% from
$54.1 million during 1992 to $74.3 million during 1993. The increase in interest
income was essentially due to the increased volume of interest-earning assets
resulting from the Burritt transaction (see Consolidated Financial
Statements--Note 13), the effect of which was partially offset by a decline in
the average effective yield on interest-earning assets.
Average interest-earning assets increased $449.5 million or 65.4% during
1993 compared to the prior year. Reflecting the composition of the assets
acquired in connection with the Burritt transaction, which was completed in
December 1992, average loans outstanding increased $198.0 million or 37.0%, and
the average of all other interest-earning assets increased $251.5 million or
164.1%. In partial settlement of the Burritt transaction, the FDIC advanced
approximately $225 million to the Bank which was primarily invested in
mortgage-backed securities and federal funds sold. The effective rates of return
on these investments were at levels less than the weighted average yield on
previously outstanding assets. This, in addition to the continuing decline in
the level of interest rates during 1993, given the interest rate sensitivity of
the Bank's assets, reduced the Company's effective yield on interest-earning
assets. The average yield on interest-earning assets declined 133 basis points
from 7.87% during 1992 to 6.54% during 1993.
For the year ended December 31, 1993, interest on loans included the
amortization of previously deferred loan origination fees, net of costs,
totaling $570,000, which increased the yield on average interest-earning assets
by 5 basis points. For 1992, interest on loans included the amortization of
previously deferred fees, net of costs, which totaled $636,000 and increased the
yield on average interest-earning assets by 9 basis points.
INTEREST EXPENSE. Interest expense increased $11.9 million or 37.4% from
$31.9 million during 1992 to $43.8 million during 1993. This increase was due to
a $439.5 million or 66.6% increase in average interest-bearing liabilities
outstanding, the effect of which was partially offset by the decline in the
average cost of funds during 1993.
The increase in average interest-bearing liabilities was primarily in
deposits which increased $430.0 million or 77.4% and reflected the deposits
assumed in connection with the Burritt transaction. Average borrowed funds,
primarily FHLBB advances, which serve as the Bank's secondary funding source,
totaled $113.4 million during 1993, reflecting an increase in average
outstanding balances of $9.5 million or 9.1% over 1992. Throughout 1993,
interest rates gradually trended downward, and given the short-term and
interest-rate sensitive structure of the Bank's interest-bearing liabilities,
the average cost of funds declined 84 basis points from 4.83% for 1992 to 3.99%
for 1993. This decline in the average cost of funds partially offset the
interest expense resulting from the increase in the volume of average interest-
bearing liabilities outstanding during 1993 compared to 1992.
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19
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--------------------------------------------------------------------------------
NET INTEREST INCOME. Net interest income, the primary component of the
Company's earnings, increased $8.3 million or 37.1% from $22.3 million for 1992
to $30.5 million for 1993 as a result of the increased volume of
interest-earning assets resulting from the Burritt transaction. As a result of
the 133 basis point decline in the average yield on interest-earning assets and
the 84 basis point decline in the average cost of interest-bearing liabilities,
the net interest rate spread declined 49 basis points from 3.04% for 1992 to
2.55% for 1993. Additionally, the Company's net yield on interest-earning assets
averaged 2.68% for 1993 compared to 3.24% for 1992.
PROVISION FOR CREDIT LOSSES. During 1993, the Bank provided $2.5 million
for credit losses compared to $1.4 million during 1992. During the third quarter
of 1993, the FDIC performed its annual examination of the Bank. The provision
for credit losses made during 1993 reflects the additional provision for credit
losses recommended by the FDIC examiners. In addition to the provision for
credit losses, the Bank also provided $4.3 million for estimated losses on
foreclosed assets during 1993 compared to $3.2 million during 1992. These
provisions are included in foreclosed asset expense (see "Non-interest
expense").
NON-INTEREST INCOME. Non-interest income is derived from fees which the
Bank charges for various loan and deposit account services, fees generated from
other ancillary services provided by the Bank and net securities and loan gains.
During 1993 the income generated from these sources totaled $7.3 million
compared to $3.1 million for the prior year, reflecting an increase of $4.2
million or 139.1%.
Service charges and other fee income totaled $6.1 million for 1993,
reflecting a $4.3 million or 238.9% increase over the $1.8 million earned in
1992. As part of the Burritt transaction, the Bank was servicing loans for the
FDIC on an interim basis through September 30, 1993. The fees earned by the Bank
for providing this service amounted to $3.7 million, which accounted for 86.0%
of the increase in service charges and other fee income in 1993. In addition to
the interim servicing arrangement, the Bank, in connection with the Burritt
transaction, also acquired the right to service approximately $107.1 million in
loans for others, at an estimated value of approximately $1.1 million. Given the
significant volume of residential real estate mortgage loan refinance activity
that occurred in 1993 this portfolio of loans declined accordingly. As a result,
the Bank reduced the value of mortgage servicing rights by $.5 million as a
reduction to service loan fee income. The residual increase in service charges
and other income is essentially due to the increased volume upon which loan and
deposit related charges are assessed.
Net securities and loan gains, which totaled $1.3 million in both 1992 and
1993 were essentially unchanged. From time to time, in keeping with the Bank's
asset and liability management objectives (see "Asset/Liability Management"),
the Bank may sell fixed rate mortgage loans in the secondary markets. In 1993,
the Bank sold $30.0 million in fixed rate mortgage loans, resulting in gains of
$834,000 compared to fixed rate mortgage loan sales of $24.9 million in 1992,
resulting in gains of $785,000.
Additionally, in 1993, the Bank realized net gains of approximately $422,000
on the sale of various investment securities compared to net gains of $486,000
in 1992. The proceeds from these transactions have been allocated to fund the
Bank's loan demand and other investment purchases.
NON-INTEREST EXPENSE. Non-interest expense totaled $27.1 million or 2.27%
of average assets during 1993 compared to $15.9 million or 2.16% of average
assets in 1992. This $11.2 million or 70.6% increase in the Company's cost of
operations was attributable, in large part, to the costs associated with
managing the operations of the former Burritt. In particular, the most
significant of these increased costs were in salaries and employee benefits,
FDIC insurance
------
20
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--------------------------------------------------------------------------------
premiums, data processing and occupancy, as well as the costs associated with
foreclosed assets.
Salaries and employee benefits, the largest component of the Company's cost
of operations, increased $3.9 million or 67.9% from $5.7 million during 1992 to
$9.6 million during 1993. The increase in this component of the Company's cost
of operations, in addition to normal salary and employee benefit adjustments
during the year, was substantially due to the increase in staff resulting from
the Burritt transaction.
Effective January 1, 1993, the FDIC adopted a premium schedule for insurance
of deposit accounts for banks and savings institutions, including the Bank,
which is based upon the institution's capital level and supervisory rating. The
deposit insurance assessment rate is subject to adjustment on a semi-annual
basis. The FDIC insurance premium paid by the Bank in 1993 totaled $2.4 million
compared to $1.2 million in 1992. The $1.2 million or 100.0% increase in the
premium was substantially due to the increase in the volume of insured deposits
assumed in the Burritt transaction.
Data processing expense totaled $2.0 million in 1993, reflecting an increase
of $1.2 million or 150.0% over the $.8 million incurred in 1992. The increased
cost is largely attributable to the former data processing center operated by
Burritt. Although the data processing consolidation was completed during the
second quarter of 1993, the Bank continued to operate the center through August
1993 in order to service loans for the FDIC. (See Consolidated Financial
Statements--Note 13).
Reflecting the increase in the number of branches which were acquired in the
Burritt transaction, occupancy expense increased $1.1 million or 110.0% from
$1.0 million in 1992 to $2.1 million in 1993.
The foreclosure process and the management of in-substance foreclosed and
foreclosed assets continued to be a significant expense for the Bank in 1993.
These expenses include all of the direct costs associated with acquiring,
holding, managing, marketing and disposing of these assets. Foreclosed asset
expense for 1993 totaled $900,000 compared to $842,000 in 1992. Subsequent to an
initial estimate of value of the underlying real estate securing loans in the
foreclosure process, the Bank updates appraisals at least on an annual basis.
The Bank maintains an allowance for estimated losses on foreclosed assets in
order to provide for unidentified and possible future declines in the value of
foreclosed assets. For the year ended December 31, 1993, the Bank provided $4.3
million to this allowance compared to $3.2 million for the prior year. The
Company expects that until the level of foreclosed assets declines
substantially, foreclosed asset expense will continue to be significant.
In connection with the Burritt transaction, the Bank recorded $5.0 million
as a core deposit intangible included in other assets, which is being amortized
on a straight line basis over a period of seven years. The amortization expense
in 1993 totaled $.7 million.
As required by SFAS 91, the Bank defers certain direct costs resulting from
the origination of loans, which will be amortized as an adjustment of yield over
the contractual term of the related loans. These deferred costs, which are
principally comprised of salaries, employee benefits and other loan expenses,
totaled approximately $1.8 million during 1993 compared to $1.8 million during
1992.
NET NON-INTEREST MARGIN. The net non-interest margin improved by 8 basis
points during 1993 compared to 1992. Non-interest income, primarily due to the
fees earned by the Bank for servicing loans for the FDIC on an interim basis,
increased 19 basis points from .42% during 1992 to .61% during 1993.
Non-interest expense, primarily due to the increased cost of operations
resulting from the acquisition of Burritt, increased 11 basis points from 2.16%
during 1992 to 2.27% during 1993.
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21
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--------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES. The provision for income taxes for 1993 totaled
$3.3 million, reflecting a 40.5% effective income tax rate compared to $3.2
million, representing an effective income tax rate of 39.9% for 1992 (see
Consolidated Financial Statements--Note 9).
The following table summarizes the Company's net interest income (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.
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1994 1993
--------------------------------- ---------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans $ 817,699 $ 56,802 6.95% $ 732,635 $ 53,428 7.29%
Taxable securities 344,778 19,716 5.72 366,216 19,418 5.30
Federal funds 2,700 90 3.33 25,080 734 2.93
FHLBB stock 8,636 674 7.80 7,682 584 7.60
Other interest-earning assets -- -- -- 5,747 171 2.98
---------- --------- ---------- ---------
TOTAL INTEREST-EARNING ASSETS 1,173,813 77,282 6.58 1,137,360 74,335 6.54
---------- --------- ---- ---------- --------- ----
NON-INTEREST-EARNING ASSETS:
Cash and due from banks 14,382 16,156
Premises and equipment, net 7,028 5,960
Accrued income receivable 6,424 6,700
Other assets 30,979 41,422
Less allowance for credit losses (6,814) (12,701)
---------- ----------
TOTAL NON-INTEREST-EARNING ASSETS 51,999 57,537
---------- ----------
TOTAL ASSETS $1,225,812 $1,194,897
---------- ----------
---------- ----------
INTEREST-BEARING LIABILITIES:
Deposits $ 996,450 36,008 3.61 $ 985,875 37,599 3.81
Borrowed funds 123,190 6,810 5.53 113,376 6,217 5.48
---------- --------- ---------- ---------
TOTAL INTEREST-BEARING LIABILITIES 1,119,640 42,818 3.82 1,099,251 43,816 3.99
---------- --------- ---- ---------- --------- ----
NON-INTEREST-BEARING LIABILITIES:
Demand deposits 30,179 26,409
Other 7,568 6,390
---------- ----------
TOTAL NON-INTEREST-BEARING LIABILITIES 37,747 32,799
---------- ----------
STOCKHOLDERS' EQUITY 68,425 62,847
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,225,812 $1,194,897
---------- ----------
---------- ----------
NET INTEREST INCOME $ 34,464 $ 30,519
--------- ---------
--------- ---------
NET INTEREST RATE SPREAD 2.76% 2.55%
---- ----
---- ----
NET YIELD ON AVERAGE INTEREST-EARNING
ASSETS 2.94% 2.68%
---- ----
---- ----
--------------------------------------------------------------------------------
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22
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--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
1992 1991 1990
-------------------------------- -------------------------------- --------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
----------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
$ 534,606 $ 44,568 8.34% $ 523,720 $ 51,208 9.78% $ 542,862 $ 56,042 10.32%
123,562 8,301 6.72 69,183 5,580 8.07 31,965 2,589 8.10
18,235 555 3.04 8,171 469 5.74 6,789 559 8.23
5,601 439 7.84 5,104 458 8.97 4,801 461 9.60
5,865 281 4.79 1,353 81 5.99 200 18 9.00
--------- --------- --------- --------- --------- ---------
687,869 54,144 7.87 607,531 57,796 9.51 586,617 59,669 10.17
--------- ---- --------- --------- ---- --------- --------- -----
6,504 5,227 4,597
5,513 5,911 6,447
5,296 5,682 5,087
34,837 24,099 10,454
(4,491) (3,075) (1,862)
--------- --------- ---------
47,659 37,844 24,723
--------- --------- ---------
$ 735,528 $ 645,375 $ 611,340
--------- --------- ---------
--------- --------- ---------
$ 555,878 25,493 4.59 $ 485,853 32,585 6.71 $ 454,048 35,182 7.75
103,886 6,392 6.15 92,430 6,884 7.45 89,908 7,753 8.62
--------- --------- --------- --------- --------- ---------
659,764 31,885 4.83 578,283 39,469 6.83 543,956 42,935 7.89
--------- ---- --------- --------- ---- --------- --------- -----
12,495 9,667 8,409
5,917 2,303 2,925
--------- --------- ---------
18,412 11,970 11,334
--------- --------- ---------
57,352 55,122 56,050
--------- --------- ---------
$ 735,528 $ 645,375 $ 611,340
--------- --------- ---------
--------- --------- ---------
$ 22,259 $ 18,327 $ 16,734
--------- --------- ---------
--------- --------- ---------
3.04% 2.68% 2.28%
---- ---- -----
---- ---- -----
3.24% 3.02% 2.85%
---- ---- -----
---- ---- -----
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23
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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.
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1994 COMPARED TO 1993 1993 COMPARED TO 1992
--------------------------------- -------------------------------
VOLUME RATE NET VOLUME RATE NET
-------------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
INTEREST EARNED ON:
Loans $ 5,994 $ (2,620) $ 3,374 $ 14,964 $ (6,104) $ 8,860
Taxable securities (1,175) 1,473 298 13,199 (2,082) 11,117
Federal funds (734) 90 (644) 201 (22) 179
FHLBB stock 74 16 90 159 (14) 145
Other interest-earning assets (86) (85) (171) (6) (104) (110)
----------- --------- --------- --------- --------- ---------
INTEREST INCOME 4,073 (1,126) 2,947 28,517 (8,326) 20,191
----------- --------- --------- --------- --------- ---------
INTEREST PAID ON:
Deposits 400 (1,991) (1,591) 16,993 (4,887) 12,106
Borrowed funds 542 51 593 555 (730) (175)
----------- --------- --------- --------- --------- ---------
INTEREST EXPENSE 942 (1,940) (998) 17,548 (5,617) 11,931
----------- --------- --------- --------- --------- ---------
NET INTEREST INCOME $ 3,131 $ 814 $ 3,945 $ 10,969 $ (2,709) $ 8,260
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
--------------------------------------------------------------------------------
ASSET/LIABILITY MANAGEMENT
The primary function of the Company's asset and liability management program
is to identify and manage interest rate risk and allocate the resources of the
Bank to stabilize and increase the level of net interest income through all
phases of the business cycle and resulting interest rate levels. This objective
is administered through the fundamental matching of the interest rate
sensitivity of the Bank's sources and uses of funds. The Bank monitors the
overall interest rate sensitivity of its financial structure through simulation
modeling under various levels of interest rates and attendant volumes.
As noted, the dominant tenet of the Company's asset and liability management
program is to enhance the level of net interest income. Recognizing the adverse
effect that non-performing loans have placed upon net interest income, the
Company continues to focus on returning these assets to performing status. In
1994, the Bank made considerable progress in this area. However, the loss of
interest income on non-performing assets continues to adversely impact earnings
levels (see "Financial Condition").
At December 31, 1994, the Company had approximately $55.2 million in loans
which were identified as held-for-sale. Of this amount, $7.6 million are fixed
rate loans and $47.6 million have adjustable interest rate features. These loans
were acquired in connection with the Burritt transaction. It is expected that
these loans may be sold during the first quarter of 1995.
Although the Company is currently striving to maintain it's current level of
assets, management continues to promote the origination of short term interest
rate sensitive consumer loans (see "Financial Condition"). In 1994, the Bank
originated $40.9 million in consumer loans, including $31.3 million in lines of
credit, compared to $27.9 million, including $22.7 million in lines of credit in
1993. Additionally, in 1994 the Bank originated $164.9 million in mortgage loans
compared to $188.6 million during 1993. Of this amount, $127.2 million or 77% of
the Company's mortgage loan
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24
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originations had adjustable interest rate features compared to $95.9 million or
51% for 1993. Additionally, the Bank has continued to supplement local
adjustable rate mortgage loan originations through the purchase of single family
adjustable rate mortgage loans. These purchases totaled $21.9 million during
1994 and $8.8 million during 1993.
As an integral part of the management of interest rate risk, the Bank
closely monitors the volume of fixed rate mortgage loans in the loan portfolio.
From time to time, in order to achieve the desired balance between
interest-sensitive assets and liabilities and to be able to continue to meet the
credit needs of the local community, the Bank sells fixed rate mortgage loans in
the secondary market. The Company sold $12.1 million in fixed rate mortgage
loans in 1994 and $30.0 million in 1993. The effect of these transactions
enabled the Company to continue to originate fixed rate mortgage loans without
significantly affecting the Bank's interest rate risk. After giving effect to
these transactions, the Bank's relative mix of fixed and adjustable interest
rate mortgage loans, and therefore, interest rate sensitivity, has improved. At
year end 1994, approximately 73% of the mortgage portfolio was invested in
adjustable rate loans compared to approximately 70% at year end 1993. At
December 31, 1994, loans maturing or repricing during the next twelve months
totaled $603.2 million or 74.7% of total interest-sensitive assets maturing or
repricing during the same time period. In comparison, at December 31, 1993,
loans maturing or repricing during 1994 totaled $528.0 million or 66.6% of total
interest-sensitive assets maturing or repricing during the same time period.
As a result of the noted changes, interest-rate sensitive assets that mature
or reprice during the subsequent twelve months totaled $807.1 million at
December 31, 1994 compared to $793.3 million at year end 1993, reflecting an
increase of $13.8 million or 1.7%.
-
-
At December 31, 1994, interest-sensitive liabilities subject to interest
rate adjustments in the next twelve months, primarily comprised of deposits and,
to a lesser extent, advances from the FHLBB, totaled $886.0 million. In
comparison, at year end 1993 this amount totaled $866.0 million. Although the
volume of interest rate sensitive liabilities, as measured over a twelve month
period, remained essentially unchanged, the Bank experienced a modest change in
the mix of deposits in 1994. Term certificate of deposit accounts increased
$26.7 million or 5.3% during 1994
[BAR GRAPH]
MORTGAGE LOAN PORTFOLIO
(AMOUNTS IN MILLIONS)
at December 31,
1990 1991 1992 1993 1994
Fixed Rate $121.0 $107.3 $174.7 $198.3 $192.8
Adjustable Rate 311.8 298.7 418.7 462.3 528.2
-------- ------- ------- ------- -------
$432.8 $406.0 $593.4 $660.6 $721.0
and represented 51.5% of total deposits at year end 1994 compared to 49.9% of
total deposits at year end 1993. Regular savings accounts declined from $223.3
million or 22.2% of total deposits at year end 1993 to $213.6 million or 20.8%
of total deposits at year end 1994.
The Bank recognizes that a static gap, which quantifies the relative volume
of interest rate sensitive assets and liabilities that mature or reprice during
various time frames in the future, fails to accurately reflect the impact of
volumes and timing of interest rate sensitivity. However, the Bank
continues to monitor the ratio of interest-sensitive assets to
interest-sensitive liabilities over various time frames. In general, the Bank
will strive to maintain a ratio of rate sensitive assets to rate sensitive
liabilities, as measured on a static basis over a time horizon of one year,
within a range of 90% to 110%. The ratio of interest-sensitive assets to
interest-sensitive liabilities, as measured over a twelve month time horizon,
remained essentially unchanged at 91.1% at December 31, 1994 compared to 91.6%
at year end 1993.
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25
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The following table summarizes the Company's interest-sensitive assets and
interest-sensitive liabilities at December 31, 1994 that mature or reprice
during the various time periods noted. Loans are net of deferred loan fees and
net of non-accruing loans.
--------------------------------------------------------------------------------
MORE THAN MORE THAN
MORE THAN MORE THAN THREE YEARS FIVE YEARS MORE THAN
SIX MONTHS SIX MONTHS ONE YEAR TO TO FIVE TO TEN 10 YEARS TO MORE THAN
OR LESS TO ONE YEAR THREE YEARS YEARS YEARS 20 YEARS 20 YEARS TOTAL
----------------------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
ASSETS:
Investments:
Securities $ 111,388 $ 88,024 $ 61,904 $ 28,199 $ 20,367 $ 9,020 $ 988 $ 319,890
Federal funds sold 4,500 -- -- -- -- -- -- 4,500
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
TOTAL INVESTMENTS 115,888 88,024 61,904 28,199 20,367 9,020 988 324,390
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
LOANS:
Fixed-rate mortgages 5,000 5,279 22,930 24,706 58,395 51,938 23,349 191,597
Adjustable-rate mortgages 265,033 220,571 29,423 5,234 1,437 -- -- 521,698
Consumer loans 77,525 7,851 4,365 3,150 2,774 1,280 -- 96,945
Commercial loans 20,458 1,446 144 33 29 24 -- 22,134
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
TOTAL LOANS 368,016 235,147 56,862 33,123 62,635 53,242 23,349 832,374
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
TOTAL INTEREST-SENSITIVE
ASSETS $ 483,904 $ 323,171 $ 118,766 $ 61,322 $ 83,002 $ 62,262 $ 24,337 $1,156,764
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
LIABILITIES:
Regular & club savings $ 213,574 $ -- $ -- $ -- $ -- $ -- $ -- $ 213,574
Certificates of deposit 223,708 134,205 112,634 58,371 -- -- -- 528,918
Money market accounts 205,239 -- -- -- -- -- -- 205,239
NOW accounts 49,097 -- -- -- -- -- -- 49,097
FHLBB advances 39,634 20,551 46,240 3,800 920 -- -- 111,145
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
TOTAL INTEREST-SENSITIVE
LIABILITIES $ 731,252 $ 154,756 $ 158,874 $ 62,171 $ 920 $ -- $ -- $1,107,973
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
GAP (REPRICING DIFFERENCE) $(247,348) $ 168,415 $ (40,108) $ (849) $ 82,082 $ 62,262 $ 24,337
CUMULATIVE GAP $(247,348) $ (78,933) $(119,041) $(119,890) $ (37,808) $ 24,454 $ 48,791
CUMULATIVE GAP/TOTAL ASSETS -20.2% -6.5% -9.7% -9.8% -3.1% 2.0% 4.0%
RATIO OF INTEREST-SENSITIVE
ASSETS TO
INTEREST-SENSITIVE
LIABILITIES 66.2% 208.8% 74.8% 98.6% N.M. -- -- 104.4%
CUMULATIVE RATIO OF
INTEREST-SENSITIVE ASSETS
TO INTEREST-SENSITIVE
LIABILITIES 91.1% 88.6% 89.2% 96.6% 102.2% 104.4%
--------------------------------------------------------------------------------
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26
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
IMPACT OF INFLATION AND CHANGING PRICES
The impact of inflation is reflected in the increased cost of the Company's
operations. Since the primary assets and liabilities of the Bank are monetary in
nature, to the extent that inflation affects interest rates, it will in turn
affect the net income of the Company.
NEWLY ADOPTED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In May 1993, the FASB issued Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). SFAS 114,
which the Bank must adopt for the year ending December 31, 1995, requires
creditors to evaluate the collectibility of both contractual interest and
contractual principal of all loans when assessing the need for a loss accrual.
When a loan is impaired, a creditor shall measure impairment based on the
present value of the expected future cash flows discounted at the loan's
effective interest rate, or the fair value of the collateral, less estimated
selling costs, if the loan is collateral-dependent and foreclosure is probable.
The creditor shall recognize an impairment by creating a valuation allowance.
The Bank has not yet made a determination as to the impact, if any, the
adoption of SFAS 114 will have on its financial condition, but it is expected
that the financial statement presentation of certain non-performing loans as
in-substance foreclosed assets, will be essentially eliminated.
MARKET FOR COMMON STOCK
The Company's common stock trades on The Nasdaq Stock Market National Market
System under the symbol "DSBC".
The following table sets forth, for the periods indicated, market price
information regarding the Company's common stock as reported by NASDAQ.
--------------------------------------------------------------------------------
STOCK PRICE
--------------------
HIGH LOW
--------------------------------------------------------------------------------------------------------------
1993
First Quarter $ 22.25 $ 16.50
Second Quarter 19.00 14.25
Third Quarter 20.75 14.50
Fourth Quarter 22.75 16.75
1994
First Quarter 27.50 21.25
Second Quarter 33.75 25.00
Third Quarter 30.50 25.75
Fourth Quarter 28.50 21.00
1995
First Quarter (through March 12) 27.50 21.75
--------------------------------------------------------------------------------
As of December 31, 1994, the Company had approximately 921 stockholders of
record for the 2,745,071 outstanding shares of its common stock. This does not
reflect the number of persons or entities who hold their stock in nominee or
"street" name through various brokerage firms.
-------
27
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DIVIDENDS
Payment of dividends by the Company on its stock is subject to various
restrictions. Under Delaware law, the Company may pay dividends out of surplus
or, in the event there is no surplus, out of net profits for the fiscal year in
which the dividend is declared and/or the preceding fiscal year. Dividends may
not be paid out of net profits, however, if the capital of the Company has been
diminished to an amount less than the aggregate amount of capital represented by
all classes of preferred stock. Pursuant to Connecticut law, cash dividends may
be paid by the Bank to the Company out of net profits, defined as the remainder
of earnings from current operations plus actual recoveries on loans and
investments and other assets, after deducting all current operating expenses,
actual losses, accrued dividends on preferred stock and all federal and state
taxes. The total dividends declared by the Bank in any calendar year may not
exceed the total of its net profits for that year combined with its net profits
for the preceding two years. Additionally, the Bank may not pay cash dividends
on its stock if its net worth would thereby be reduced below the amount required
for the liquidation account (see Consolidated Financial Statements--Note 12) or
as may in the future be required by the Connecticut Commissioner of Banks or the
FDIC.
In accordance with the Memorandum of Understanding which the Bank entered
into with the FDIC and the Connecticut Commissioner of Banks in April 1992, the
Bank has been limited in its ability to pay cash dividends (see "General").
Since the Bank is the sole source of funds for cash dividend payments by the
Company to its stockholders, the FDIC's restriction has resulted in the Company
being unable to pay cash dividends to stockholders.
The Board of Directors declared 5% stock dividends for each of the four
quarters of 1992 and declared a 5% stock dividend on February 15, 1995.
-------
28
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF POSITION
--------------------------------------------------------------------------------
DS BANCOR, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
DECEMBER 31,
1994 1993
---------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN
THOUSANDS)
ASSETS
Cash and due from banks (Note 1) $ 14,128 $ 12,618
Federal funds sold (Note 1) 4,500 30,500
Securities (Notes 1 & 2)
Trading 770 --
Available-for-sale 216,674 256,346
Held-to-maturity (fair value: $96,928 at December 31, 1994 and $66,846 at December 31,
1993) 104,702 66,253
Loans held-for-sale (Notes 1 & 3) 55,190 --
Loans receivable (net of allowances for credit losses of $6,803 at December 31, 1994
and $6,979 at December 31, 1993) (Notes 1, 3 & 16) 779,681 779,287
Federal Home Loan Bank of Boston stock, at cost (Note 7) 8,899 8,022
Accrued income receivable (Note 1) 7,227 6,541
Bank premises and equipment, net (Notes 1 & 5) 6,975 7,062
Prepaid and deferred income taxes (Notes 1 & 9) 7,247 2,501
Foreclosed & in-substance foreclosed assets (net of allowances of $439 at December 31,
1994 and $1,040 at December 31, 1993) (Notes 1 & 4) 10,312 16,143
Other assets (Note 13) 6,385 8,848
---------- ----------
TOTAL ASSETS $1,222,690 $1,194,121
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 6)
Non-interest bearing $ 30,918 $ 28,185
Interest bearing 996,828 978,036
---------- ----------
Total 1,027,746 1,006,221
Mortgagors' escrow 11,885 10,476
Advances from Federal Home Loan Bank of Boston (Note 7) 111,145 104,991
Other borrowings (Notes 7 & 18) -- 1,450
Other liabilities (Note 8) 4,777 4,543
---------- ----------
TOTAL LIABILITIES 1,155,553 1,127,681
---------- ----------
COMMITMENTS & CONTINGENT LIABILITIES (NOTES 5 & 10)
STOCKHOLDERS' EQUITY (NOTES 1, 11, 12 & 19)
Preferred stock, no par value; authorized 2,000,000 shares; none issued -- --
Common stock, par value $1.00; authorized 6,000,000 shares; issued--December 31,
1994-3,084,571 shares, December 31, 1993-2,991,116 shares; outstanding--December
31, 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 36,362 30,652
Net unrealized gains (losses) on available-for-sale securities, net of tax effect of
$3,970 at December 31, 1994 and ($928) at December 31, 1993 (5,577) 1,303
Less: Treasury stock, at cost (339,500 shares) (4,513) (4,513)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 67,137 66,440
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,222,690 $1,194,121
---------- ----------
---------- ----------
--------------------------------------------------------------------------------
See notes to consolidated financial statements.
------
29
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
--------------------------------------------------------------------------------
DS BANCOR, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER
31,
1994 1993 1992
---------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
INTEREST INCOME (NOTE 1)
Interest and fees on loans $56,802 $53,428 $44,568
Taxable interest on securities 19,528 20,020 8,833
Dividends on securities 952 887 743
--------- --------- ---------
TOTAL INTEREST INCOME 77,282 74,335 54,144
--------- --------- ---------
INTEREST EXPENSE
Deposits (Note 6) 36,102 37,679 25,553
Borrowed funds (Note 7) 6,810 6,217 6,392
Less: Penalties on premature time deposit withdrawals (94) (80) (60)
--------- --------- ---------
NET INTEREST EXPENSE 42,818 43,816 31,885
--------- --------- ---------
NET INTEREST INCOME 34,464 30,519 22,259
Provision for credit losses (Notes 1 & 3) 2,325 2,475 1,375
--------- --------- ---------
Net interest income after provision for credit losses 32,139 28,044 20,884
--------- --------- ---------
NON-INTEREST INCOME
Service charges and other income (Note 14) 2,453 6,087 1,800
Net realized securities gains (Note 2) 546 422 482
Net gain on sale of loans 102 834 789
--------- --------- ---------
TOTAL NON-INTEREST INCOME, NET 3,101 7,343 3,071
--------- --------- ---------
NON-INTEREST EXPENSE
Salaries and wages 7,820 7,746 4,430
Employee benefits (Note 8) 2,312 1,868 1,296
Occupancy (Note 5) 2,094 2,148 987
Furniture and equipment (Note 5) 1,039 907 694
Foreclosed asset expense, net (Notes 1 & 4) 2,904 4,801 3,747
Other (Note 14) 9,441 9,643 4,743
--------- --------- ---------
TOTAL NON-INTEREST EXPENSE 25,610 27,113 15,897
--------- --------- ---------
Income before income taxes and cumulative effect of a change in accounting principle 9,630 8,274 8,058
Provision for income taxes (Note 9) 3,920 3,348 3,217
--------- --------- ---------
Income before cumulative effect of a change in accounting principle 5,710 4,926 4,841
Cumulative effect of a change in method of accounting for income taxes (Notes 1 & 9) -- 1,548 --
--------- --------- ---------
NET INCOME $ 5,710 $ 6,474 $ 4,841
--------- --------- ---------
--------- --------- ---------
---------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (NOTES 1 & 12)
Primary 2,926,825 2,834,337 2,786,199
Fully Diluted 2,929,005 2,875,790 2,786,199
---------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE--PRIMARY (NOTES 1 & 12)
Income before cumulative effect of a change in accounting principle $1.95 $1.74 $1.74
Cumulative effect of a change in method of accounting for income taxes -- $0.55 --
Net Income $1.95 $2.28 $1.74
EARNINGS PER SHARE--FULLY DILUTED (NOTES 1 & 12)
Income before cumulative effect of a change in accounting principle $1.95 $1.71 $1.74
Cumulative effect of a change in method of accounting for income taxes -- $0.54 --
Net Income $1.95 $2.25 $1.74
--------------------------------------------------------------------------------
See notes to consolidated financial statements.
------
30
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
DS BANCOR, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
RETAINED EARNINGS
ADDITIONAL -------------------------- TOTAL
COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS UNREALIZED STOCK EQUITY
GAINS &
LOSSES
(NOTE 1)
------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
BALANCE--JANUARY 1, 1992 $ 2,417 $ 28,034 $ 27,884 $ (718) $ (4,513) $ 53,104
Net income 4,841 4,841
Stock dividend declared on
common stock
(5%--January 31, 1992, 5%--
April 30, 1992,
5%--August 6, 1992 and 5%--
November 6, 1992)(Note 12) 446 5,911 (6,357) --
Shares issued for fractional
interest 2 26 28
Cash in lieu of fractional
shares (28) (28)
Adjustment of unrealized
losses 640 640
----------- ------------- ----------- ------------- ----------- ---------------
BALANCE--DECEMBER 31, 1992 2,865 33,971 26,340 (78) (4,513) 58,585
Net income 6,474 6,474
Stock dividend declared on
common stock
(5%--February 26, 1993)
(Note 12) 126 2,029 (2,155) --
Shares issued for fractional
interest 7 7
Cash in lieu of fractional
shares (7) (7)
Adjustment of unrealized
gains, net 1,381 1,381
----------- ------------- ----------- ------------- ----------- ---------------
BALANCE--DECEMBER 31, 1993 2,991 36,007 30,652 1,303 (4,513) 66,440
Net income 5,710 5,710
Stock options exercised
(93,455 shares) (Notes 11 &
12) 94 1,773 1,867
Adjustment of unrealized
losses, net (6,880) (6,880)
----------- ------------- ----------- ------------- ----------- ---------------
BALANCE--DECEMBER 31, 1994 $ 3,085 $ 37,780 $ 36,362 $ (5,577) $ (4,513) $ 67,137
----------- ------------- ----------- ------------- ----------- -------
----------- ------------- ----------- ------------- ----------- -------
--------------------------------------------------------------------------------
See notes to consolidated financial statements.
------
31
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
DS BANCOR, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER
31,
1994 1993 1992
--------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,710 $ 6,474 $ 4,841
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Provision for credit losses 2,325 2,475 1,375
Provision for estimated losses on foreclosed assets 2,235 4,250 3,150
Depreciation and amortization 807 692 584
Amortization of intangible assets 956 1,255 --
Net amortization of premiums/discounts on securities 1,208 2,077 645
Net accretion of deferred loan fees (506) 170 (29)
Decrease (increase) in prepaid and deferred income taxes 492 112 (279)
Net securities gains (546) (422) (482)
Net gain on sale of loans (102) (834) (789)
Gains on sales of foreclosed assets (93) (349) (245)
Proceeds from sale of trading securities 772 -- --
Purchases of trading securities (1,621) -- --
Increase in accrued income receivable (686) (2,280) (1,202)
Cumulative effect of change in accounting principle -- (1,548) --
Benefit for deferred income taxes (340) (879) --
Net (increase) decrease in other assets 1,507 19,234 (22,407)
Increase (decrease) in other liabilities 234 (1,307) (366)
Other, net 74 -- --
--------- --------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 12,426 29,120 (15,204)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of securities -- 62,175 25,843
Proceeds from matured available-for-sale securities 43,553 -- --
Proceeds from sale of available-for-sale securities 39,020 -- --
Proceeds from matured held-to-maturity securities 34,895 145,708 44,827
Purchase of available-for-sale securities (54,779) -- --
Purchase of held-to-maturity securities (73,827) (261,069) (234,849)
Purchase of FHLBB stock (877) (1,405) (1,535)
Proceeds from loans sold to others 12,245 30,820 25,689
Purchases of loans from others (21,938) (8,813) (172,046)
Net increase in loans to customers (47,291) (96,127) (62,274)
Premises and equipment additions (794) (2,259) (461)
Proceeds from sale of foreclosed assets 3,328 3,590 7,450
Net decrease (increase) in foreclosed assets 44 552 (629)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (66,421) (126,828) (367,985)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits from customers 21,525 11,290 13,201
Assumption of deposits and liabilities -- -- 465,046
Net increase in mortgagors' escrow 1,409 1,997 1,010
Net decrease in repurchase agreements & other borrowings (1,450) (641) (845)
Net increase in short term FHLBB advances 11,754 12,745 3,535
Proceeds from long term FHLBB advances 35,000 13,000 70,200
Repayment of long term FHLBB advances (40,600) (41,525) (36,100)
Proceeds from issuance of common stock 1,867 7 28
Dividends paid to stockholders -- (7) (28)
--------- --------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 29,505 (3,134) 516,047
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (24,490) (100,842) 132,858
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 43,118 143,960 11,102
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 18,628 $ 43,118 $ 143,960
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest $ 42,912 $ 43,838 $ 31,910
Income taxes 3,089 4,208 3,496
Loans transferred to foreclosed assets 3,208 12,081 13,069
Foreclosed assets transferred to loans 1,173 3,499 --
Loans transferred to loans held-for-sale 55,190 -- --
Bank-financed foreclosed asset sales 2,352 2,427 4,361
--------------------------------------------------------------------------------
See notes to consolidated financial statements.
------
32
--------------------------------------------------------------------------------
---------------------
--------------------------------------------------------------------------------
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 either the Bank's or the consolidated financial statements.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and the Bank. All significant 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 and general practice within the banking industry. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and income and expenses as of the date of the consolidated
statements of financial position and the consolidated statements of earnings 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 credit losses
and the valuation of real estate acquired in settlement of loans. In connection
with the determination of the allowances for credit 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 markets in Connecticut, which have experienced significant value declines in
recent years. In addition, essentially all of the Bank's foreclosed assets are
located in those same 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 losses, future additions to the
allowances 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 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. For the purposes of the Consolidated Statements of Cash
Flows, cash equivalents include demand deposits at other financial institutions
and federal funds sold. Generally, federal funds are sold for one-day periods.
SECURITIES. Effective December 31, 1993, the Bank implemented the
provisions of Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standard ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). Under SFAS 115,
securities are classified upon acquisition as Held-to-maturity,
Available-for-sale or Trading. Securities that are purchased in anticipation of
short-term market gains or for resale are classified as Trading securities and
carried at fair value with unrealized gains and losses included in earnings.
Securities that the Bank has both the positive intent and ability to hold to
maturity are classified as Held-to-maturity and carried at cost adjusted for
premiums and discounts amortized to interest income using the interest method
over the period to the earlier of the maturity or call date, if any. Securities
not designated as either Trading or Held to maturity are classified as
Available-for-sale and carried at fair value, with unrealized gains and losses,
net of related
------
33
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
income taxes, reported as a separate component of Stockholders' Equity until
realized. Declines in the fair value of individual Held-to-maturity and
Available-for-sale securities below their cost that are other than temporary are
recognized as write-downs of the individual securities to their fair value, with
the write-downs included in earnings as realized losses.
Prior to the implementation of SFAS 115, investment securities which were
intended to be held until maturity or as long-term investments were stated at
cost adjusted, where applicable, for amortization of premiums and accretion of
discounts generally computed using the interest method. Marketable equity
securities which were included in investment securities were carried at the
lower of aggregate cost or market value, and a valuation allowance was recorded
as a component of retained earnings, when the aggregate cost of marketable
equity securities temporarily exceeded market value. A loss was recognized in
earnings when the Bank's carrying value in an investment exceeded, other than
temporarily, its market value.
Gain or loss on securities sold is computed by the specific identification
method.
LOANS HELD FOR SALE generally consist of certain first mortgage loans that
management has identified will most likely be sold for reasons of managing rate
risk, liquidity, and/or asset growth, and are reflected at the lower of
aggregate cost or estimated market value. Net unrealized losses resulting from
market value less than cost are recognized through a valuation allowance by
charges against income.
LOANS RECEIVABLE that the Bank has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reflected at amortized cost
(unpaid principal balances reduced by any partial charge-offs or specific
valuation accounts) net of any net deferred fees or costs on originated loans or
any unamortized premiums or discounts on purchased loans, and less an Allowance
for credit losses.
Interest on loans is included in income as earned based on rates applied to
principal amounts outstanding. The accrual of interest income is generally
discontinued when a loan becomes past due 90 days or more as to contractual
payments of principal or interest. Income on purchased loans is adjusted for the
accretion of discounts and the amortization of premiums using the interest
method over the contractual lives of the loans, adjusted for estimated
prepayments.
Loan origination fees, net of certain direct related costs, are deferred and
amortized as an adjustment of loan yield over the life of the related loan.
Allowances for credit losses have been established by provisions charged to
income and decreased by loans charged off (net of recoveries). These Allowances
represent amounts which, in management's judgment, are adequate to absorb
possible losses on loans that may become uncollectible based on such factors as
the Bank's past loan loss experience, changes in the nature and volume of the
loan portfolio, current and prospective economic conditions that may affect the
borrowers' ability to pay, overall portfolio quality, 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
------
34
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
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 appropriate depreciation provisions of the Internal
Revenue Code.
FORECLOSED AND IN-SUBSTANCE FORECLOSED ASSETS ("Foreclosed Assets") are
comprised of real estate acquired through foreclosure proceedings or deeds
accepted in lieu of foreclosure, and properties that have been in-substance
repossessed. These properties are initially recorded at the lower of the
carrying value of the related loans or the estimated fair value of the real
estate acquired or in-substance repossessed, with any excess of the loan balance
over the estimated fair value of the property charged to the Allowance for
credit losses. Subsequent changes in the net realizable value of the property
are reflected by charges or credits to the Allowance for estimated losses on
foreclosed assets. Costs relating to the subsequent development or improvement
of a property are capitalized when value is increased. All other holding costs
and expenses, net of rental income, if any, are expensed as incurred.
CORE DEPOSIT INTANGIBLE. In connection with the Burritt transaction (Note
13), the core deposit intangible is being amortized on a straight line basis
over seven years.
INCOME TAXES. Effective January 1, 1993, the Company adopted SFAS No. 109,
"Accounting for Income Taxes". SFAS 109 required a change from the deferred
method of accounting for income taxes of the Accounting Principles Board Opinion
11 ("APB 11") to the asset and liability method of accounting for income taxes.
Under the asset and liability method of SFAS 109, deferred income tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Pursuant to the deferred method under APB 11, which was applied in 1992 and
prior years, deferred income taxes were recognized for income and expense items
that were reported in different years for financial reporting purposes and
income tax purposes using the tax rate applicable for the year of the
calculation. Under the deferred method, deferred taxes were not adjusted for
subsequent changes in tax rates.
Provisions for income taxes are computed based on all taxable revenue and
deductible expense items included in the accompanying Consolidated Statement of
Earnings regardless of the period in which such items are recognized for income
tax filing purposes. The Company and its subsidiary file consolidated Federal
and combined Connecticut income tax returns.
The Company recorded a cumulative one-time benefit in the accompanying
Consolidated Statements of Earnings for the year ended December 31, 1993 for the
change in method of accounting for income taxes upon the adoption of SFAS 109.
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
------
35
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
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 year
ended December 31, 1992 and is, therefore, not reflected in the computation of
per share amounts for that year.
EMPLOYEE RETIREMENT BENEFITS and related deferred assets and liabilities
are accounted for in accordance with SFAS 87, "Employers Accounting for
Pensions" and SFAS 106, "Employers' Accounting for Postretirement Benefits Other
than Pensions". Pension expense and postretirement health care expense are based
on actuarial computations of current and future benefits for employees and
retirees.
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.
NOTE 2 -- SECURITIES
A summary of the Bank's investment securities is as follows:
--------------------------------------------------------------------------------
DECEMBER 31, 1994
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
TRADING COST GAINS LOSSES VALUE
-----------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Marketable Equities $ 918 $ -- $ 148 $ 770
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DECEMBER 31, 1994
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
-----------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
U.S. Government and agency bonds $ 21,095 $ 1 $ 677 $ 20,419
Mortgage-backed securities 174,667 7 7,832 166,842
Other bonds and notes 28,903 2 978 27,927
----------- ----------- ----------- ---------
Total debt securities 224,665 10 9,487 215,188
Marketable equities 1,556 37 107 1,486
----------- ----------- ----------- ---------
Total $ 226,221 $ 47 $ 9,594 $ 216,674
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
--------------------------------------------------------------------------------
------
36
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 2 -- SECURITIES (CONTINUED)
--------------------------------------------------------------------------------
DECEMBER 31, 1994
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
HELD-TO-MATURITY COST GAINS LOSSES VALUE
-----------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
U.S. Government and agency bonds $ 2,000 $ -- $ 60 $ 1,940
Mortgage-backed securities 102,702 -- 7,714 94,988
----------- ----------- ----------- ---------
Total $ 104,702 $ -- $ 7,774 $ 96,928
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DECEMBER 31, 1993
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
-----------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Mortgage-backed securities $ 187,746 $ 1,303 $ 454 $ 188,595
Other bonds and notes 65,095 1,302 45 66,352
----------- ----------- ----------- ---------
Total debt securities 252,841 2,605 499 254,947
Marketable equities 1,274 194 69 1,399
----------- ----------- ----------- ---------
Total $ 254,115 $ 2,799 $ 568 $ 256,346
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DECEMBER 31, 1993
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
HELD-TO-MATURITY COST GAINS LOSSES VALUE
-----------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
U.S. Government and agency bonds $ 2,000 $ 21 $ -- $ 2,021
Mortgage-backed securities 55,253 661 89 55,825
----------- ----------- ----------- ---------
Total debt securities 57,253 682 89 57,846
Money market preferred stock 9,000 -- -- 9,000
----------- ----------- ----------- ---------
Total $ 66,253 $ 682 $ 89 $ 66,846
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
--------------------------------------------------------------------------------
------
37
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 2 -- SECURITIES (CONTINUED)
The amortized cost and market value of debt securities by contractual
maturity is as follows:
--------------------------------------------------------------------------------
DECEMBER 31, 1994
------------------------------------------------
AVAILABLE-FOR-SALE HELD-TO-MATURITY
------------------------ ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-----------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Due in one year or less $ 12,605 $ 12,391 $ -- $ --
Due after one year through five years 16,298 15,536 2,000 1,940
Due after five years through ten years 16,095 15,600 -- --
Due after ten years 5,000 4,819 -- --
----------- ----------- ----------- ---------
49,998 48,346 2,000 1,940
Mortgage-backed securities 174,667 166,842 102,702 94,988
----------- ----------- ----------- ---------
Total $ 224,665 $ 215,188 $ 104,702 $ 96,928
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
--------------------------------------------------------------------------------
During 1994, proceeds and realized gains (losses) from sales of
Available-for-sale and Trading securities and unrealized gains (losses) on
securities classified as Trading were as follows:
--------------------------------------------------------------------------------
GROSS GROSS
PROCEEDS REALIZED REALIZED NET GAIN
FROM SALES GAINS LOSSES (LOSS)
------------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE (AMOUNTS IN THOUSANDS)
U.S. Government and agency bonds $ 4,020 $ 20 $ -- $ 20
Other bonds and notes 33,929 455 3 452
----------- ----- --- -----------
Total debt securities 37,949 475 3 472
Marketable equities 1,071 208 55 153
----------- ----- --- -----------
Total available-for-sale 39,020 683 58 625
TRADING
Realized gains 772 69 -- 69
----------- ----- --- -----------
Total realized $ 39,792 $ 752 $ 58 694
----------- ----- ---
----------- ----- ---
Net unrealized losses--trading (148)
-----------
Total $ 546
-----------
-----------
--------------------------------------------------------------------------------
Proceeds from the sales of debt securities during 1993 were $59,189,000.
Gross gains of $497,000 and gross losses of $365,000 were realized on those
sales. Proceeds from the sales of investments in debt securities during 1992
were $16,464,000. Gross gains of $494,000 and gross losses of $177,000 were
realized on those sales.
At December 31, 1994, the aggregate amortized cost and fair value of
securities pledged as collateral against public funds and treasury tax and loan
deposits were approximately $7.0 million and $6.8 million, respectively.
The effect of adopting SFAS 115 as of December 31, 1993 in the accompanying
Consolidated Financial Statements was to increase the carrying value of
Available-for-sale securities by approximately $2,231,000, offset by an increase
in Retained earnings of approximately $1,303,000, net of deferred income taxes
of approximately $928,000.
------
38
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 3 -- LOANS RECEIVABLE AND LOANS HELD-FOR-SALE
The components of loans in the accompanying Consolidated Statements of
Position were as follows:
--------------------------------------------------------------------------------
DECEMBER 31,
--------------------
1994 1993
----------------------------------------------------------------------------------------------------------
(AMOUNTS IN
THOUSANDS)
MORTGAGE
Residential real estate $ 686,395 $ 628,208
Commercial real estate 27,268 28,174
Multi-family real estate 8,007 8,544
Residential construction 2,363 2,753
--------- ---------
724,033 667,679
--------- ---------
CONSUMER
Home equity lines of credit 70,177 68,265
Home equity installment 19,267 18,863
Collateral 3,014 3,020
All other 4,783 4,748
--------- ---------
97,241 94,896
--------- ---------
COMMERCIAL
Commercial 19,666 26,694
Real estate development 3,258 3,833
--------- ---------
22,924 30,527
--------- ---------
844,198 793,102
Net deferred loan fees, premiums & discounts (2,524) (6,836)
Allowances for credit losses (6,803) (6,979)
--------- ---------
834,871 779,287
Residential real estate loans held-for-sale (55,190) --
--------- ---------
Loans receivable, net $ 779,681 $ 779,287
--------- ---------
--------- ---------
--------------------------------------------------------------------------------
Loans are summarized between fixed and adjustable rates as follows:
--------------------------------------------------------------------------------
DECEMBER 31,
--------------------
1994 1993
----------------------------------------------------------------------------------------------------------
(AMOUNTS IN
THOUSANDS)
Fixed rate $ 212,820 $ 221,708
Adjustable rate 631,378 571,394
--------- ---------
Total $ 844,198 $ 793,102
--------- ---------
--------- ---------
--------------------------------------------------------------------------------
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 $129,300,000 and $149,900,000 at December 31, 1994 and 1993,
respectively.
Loans outstanding at December 31, 1994 and 1993 included approximately
$10,486,000 and $12,068,000, respectively, of non-performing loans, which were
comprised of $8,861,000 in mortgage loans, $1,098,000 in consumer loans and
$527,000 in commercial loans at December 31, 1994 and $8,974,000 in mortgage
loans, $1,695,000 in consumer loans and $1,399,000 in commercial loans at
December 31, 1993. At December 31, 1994 and 1993, interest
------
39
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 3 -- LOANS RECEIVABLE AND LOANS HELD-FOR-SALE (CONTINUED)
income not recognized on these loans, in accordance with Bank policy, aggregated
approximately $640,000 and $810,000, respectively.
Activity in the Allowances for credit losses for each of the three years in
the period ended December 31, 1994 was as follows:
--------------------------------------------------------------------------------
MORTGAGE CONSUMER COMMERCIAL TOTAL
--------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Balance--January 1, 1992 $ 2,180 $ 704 $ 790 $ 3,674
Provision for credit losses 825 125 425 1,375
Acquired allowance 9,026 1,328 -- 10,354
Loans charged off (941) (211) (660) (1,812)
Recoveries of loans previously charged off 76 41 229 346
----------- ----------- ------------- ---------
Balance--December 31, 1992 11,166 1,987 784 13,937
Provision for credit losses 1,925 50 500 2,475
Acquired allowance adjustment (5,958) (5) -- (5,963)
Loans charged off (2,857) (860) (114) (3,831)
Recoveries of loans previously charged off 329 21 11 361
----------- ----------- ------------- ---------
Balance--December 31, 1993 4,605 1,193 1,181 6,979
Provision for credit losses 1,675 600 50 2,325
Loans charged off (1,848) (573) (195) (2,616)
Recoveries of loans previously charged off 63 46 6 115
----------- ----------- ------------- ---------
Balance--December 31, 1994 $ 4,495 $ 1,266 $ 1,042 $ 6,803
----------- ----------- ------------- ---------
----------- ----------- ------------- ---------
--------------------------------------------------------------------------------
In connection with the Burritt transaction (Note 13), the Bank purchased two
loan pools at discounts of approximately $9.0 million and $1.3 million, which
were added to the Bank's Allowance for mortgage and consumer credit losses,
respectively, in 1992. During 1993, the Bank completed a valuation analysis of
these loans and allocated approximately $6.0 million from these amounts to a
purchased loan discount, which will be accreted to interest income over the
remaining terms of the acquired loans. At December 31, 1994, the Allowances for
credit losses, which totaled approximately $6.8 million, included approximately
$1.8 million allocated to the loans acquired in the Burritt transaction.
------
40
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 4 -- FORECLOSED AND IN-SUBSTANCE FORECLOSED ASSETS
Foreclosed assets consisted of the following:
--------------------------------------------------------------------------------
DECEMBER 31,
--------------------
1994 1993
-----------------------------------------------------------------------------------------------------------
(AMOUNTS IN
THOUSANDS)
FORECLOSED ASSETS:
One-to-four family residential $ 1,599 $ 2,159
Multi-family 510 546
Commercial real estate 907 1,589
Land 3,179 5,085
--------- ---------
6,195 9,379
--------- ---------
IN-SUBSTANCE FORECLOSED ASSETS:
One-to-four family residential 1,226 2,964
Multi-family 143 371
Commercial real estate 2,295 3,262
Land 892 1,207
--------- ---------
4,556 7,804
--------- ---------
Total 10,751 17,183
Allowance for estimated losses (439) (1,040)
--------- ---------
Foreclosed assets, net $ 10,312 $ 16,143
--------- ---------
--------- ---------
--------------------------------------------------------------------------------
Activity in the Allowance for estimated losses on foreclosed assets for each
of the three years in the period ended December 31, 1994 was as follows:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1993 1992
--------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Balance at January 1 $ 1,040 $ 438 $ 412
Provision charged to expense 2,235 4,250 3,150
Net losses charged to the allowance (2,836) (3,648) (3,124)
--------- --------- ---------
Balance at December 31 $ 439 $ 1,040 $ 438
--------- --------- ---------
--------- --------- ---------
--------------------------------------------------------------------------------
Losses and expenses related to foreclosed assets are summarized as follows:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1993 1992
--------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Provision charged to expense $ 2,235 $ 4,250 $ 3,150
Gain on sales (93) (349) (245)
Holding costs and expenses 1,005 1,057 906
Rental income (243) (157) (64)
--------- --------- ---------
Foreclosed asset expense, net $ 2,904 $ 4,801 $ 3,747
--------- --------- ---------
--------- --------- ---------
--------------------------------------------------------------------------------
------
41
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 5 -- BANK PREMISES AND EQUIPMENT
Bank premises and equipment were comprised of the following:
--------------------------------------------------------------------------------
1994 1993
----------------------------------------------------------------------------------------------------------
(AMOUNTS IN
THOUSANDS)
Buildings and land $ 7,266 $ 7,188
Leasehold improvements 836 887
Furniture and equipment 5,656 6,154
--------- ---------
13,758 14,229
Accumulated depreciation and amortization 6,783 7,167
--------- ---------
Bank premises and equipment, net $ 6,975 $ 7,062
--------- ---------
--------- ---------
--------------------------------------------------------------------------------
Depreciation and amortization included in Non-interest expense aggregated
approximately $806,900, $692,100 and $566,400 for the years ended December 31,
1994, 1993 and 1992, respectively.
LEASES. Rent expense for banking premises of $847,100, $792,500 and
$220,300 is included in Occupancy expense for the years ended December 31, 1994,
1993 and 1992, 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 December 31, 1994 (amounts in thousands):
--------------------------------------------------------------------------------
1995 $ 566
1996 532
1997 436
1998 263
1999 116
Thereafter 145
---------
Total future minimum lease payments $ 2,058
---------
---------
--------------------------------------------------------------------------------
These leases include options to renew for periods ranging from 3 to 22
years.
NOTE 6 -- DEPOSITS
Deposits were comprised of the following:
--------------------------------------------------------------------------------
DECEMBER 31,
--------------------------------------------------------
1994 1993
--------------------------- ---------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
STATED RATE AMOUNT STATED RATE AMOUNT
----------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
Demand $ 30,918 $ 28,185
NOW 1.75-2.00%(a) 49,097 1.75-2.00%(a) 47,330
Regular and club savings 2.00 213,574 2.00 223,255
Money market deposit accounts 5.10 205,239 2.80 205,261
Time accounts 4.72 528,918 4.39 502,190
---------- ----------
Total deposits $1,027,746 $1,006,221
---------- ----------
---------- ----------
<FN>
(A) RANGES INDICATE TIERS
--------------------------------------------------------------------------------
------
42
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 6 -- DEPOSITS (CONTINUED)
Time accounts at December 31, 1994 mature as follows:
--------------------------------------------------------------------------------
WEIGHTED AVERAGE
YEAR OF MATURITY STATED RATE AMOUNT
--------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN
THOUSANDS)
1995 4.34% $ 357,915
1996 5.36% 68,632
1997 5.72% 43,755
Beyond 5.49% 58,616
---------
Total 4.72% $ 528,918
---------
---------
--------------------------------------------------------------------------------
Time deposit accounts of $100,000 or more approximated $32,169,000 at
December 31, 1994. Of that amount, approximately $11,501,000 mature in six
months or less, $6,923,000 mature after six months to one year, and $13,745,000
mature after one year.
Interest expense on deposits is summarized as follows:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
NOW $ 931 $ 1,108 $ 415
Regular and club savings 4,488 5,928 4,548
Money market deposits 7,979 5,970 4,558
Time accounts 22,530 24,453 15,862
Escrow 174 220 170
--------- --------- ---------
Total interest expense on deposits $ 36,102 $ 37,679 $ 25,553
--------- --------- ---------
--------- --------- ---------
--------------------------------------------------------------------------------
NOTE 7 -- BORROWED FUNDS
Terms of the advances from the Federal Home Loan Bank of Boston ("FHLBB")
were as follows:
--------------------------------------------------------------------------------
DECEMBER 31,
------------------------------------------------------
1994 1993
-------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
MATURITY/REPRICE DATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
1994 $ -- --% $ 14,802 --%
1994 -- -- 39,178 5.13
1995 1,482 -- -- --
1995 58,703 6.02 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 FHLBB $ 111,145 $ 104,991
--------- ---------
--------- ---------
--------------------------------------------------------------------------------
------
43
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 7 -- BORROWED FUNDS (CONTINUED)
The Bank has a cash management line of credit from the FHLBB in the amount
of $10,672,000 at December 31, 1994. At December 31, 1994 and 1993, the Bank had
book overdrafts of $1,482,000 and $14,802,000, respectively, which are included
in advances from the FHLBB.
The Company had a $3.0 million line of credit (Note 18), of which
approximately $1.4 million was outstanding at December 31, 1993, and was
subsequently paid off in June 1994.
Interest expense on borrowed funds is summarized as follows:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1993 1992
--------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
FHLBB $ 6,767 $ 6,098 $ 6,229
Line of credit 43 112 152
Repurchase agreements -- 7 11
--------- --------- ---------
Total interest expense on borrowed funds $ 6,810 $ 6,217 $ 6,392
--------- --------- ---------
--------- --------- ---------
--------------------------------------------------------------------------------
Stock of the FHLBB, mortgage loans and mortgage-backed securities with fair
values, as determined in accordance with FHLBB's collateral pledge agreement, at
least equal to the outstanding advances and any unused lines of credit were
pledged against outstanding advances from the FHLBB at December 31, 1994 and
1993.
NOTE 8 -- BENEFIT PLANS
A. RETIREMENT PLAN The Bank sponsors 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:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1993 1992
------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Service cost-benefits earned during the period $ 400 $ 264 $ 249
Interest cost on projected benefit obligation 305 272 240
Actual return on plan assets 67 (400) (133)
Net amortization and deferral (466) 75 (164)
--------- --------- ---------
Net pension expense $ 306 $ 211 $ 192
--------- --------- ---------
--------- --------- ---------
--------------------------------------------------------------------------------
------
44
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 8 -- BENEFIT PLANS (CONTINUED)
Assumptions used in the accounting were:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
------------------------------------------------------------------------------------------------------------------------
Discount/settlement rates 7.00% 7.00% 7.00%
Rates of increase in compensation levels 5.00% 5.50% 5.50%
Long-term rate of return on assets 9.50% 9.50% 9.50%
--------------------------------------------------------------------------------
The following table sets forth the Plan's funded status and amounts
recognized in the Consolidated Statements of Position:
--------------------------------------------------------------------------------
DECEMBER 31,
--------------------
1994 1993
-------------------------------------------------------------------------------------------------------------
(AMOUNTS IN
THOUSANDS)
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS:
Accumulated benefit obligation -- vested $ (3,306) $ (2,950)
Accumulated benefit obligation -- nonvested (72) (340)
--------- ---------
Total accumulated benefit obligation (3,378) (3,290)
Effect of projected future compensation levels (1,174) (1,000)
--------- ---------
Projected benefit obligation ("PBO") for service rendered to date (4,552) (4,290)
Plan assets, at fair value * 4,095 3,885
--------- ---------
PBO in excess of plan assets (457) (405)
Unrecognized net asset existing at January 1, 1987 being recognized over approximately
18 years (93) (102)
Unrecognized prior service cost (72) (77)
Unrecognized net loss from past experience different from that assumed and effects of
changes in assumptions 556 378
--------- ---------
Accrued pension cost included in Other liabilities $ (66) $ (206)
--------- ---------
--------- ---------
* 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 years ended
December 31, 1994, 1993 and 1992 was $96,100, $92,600 and $86,400, respectively.
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
years ended December 31, 1994, 1993 and 1992, the Bank had no insurance premium
expenses inasmuch 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
------
45
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 8 -- BENEFIT PLANS (CONTINUED)
to the Thrift Plan for each $1.00 contributed by participants up to three
percent of each participant's compensation. The Bank's expense during the years
ended December 31, 1994, 1993 and 1992 was $85,800, $71,600 and $59,200,
respectively.
D. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 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 premiums paid by the Bank are based on the retiree's length of service with
the Bank. The Company adopted SFAS No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions" 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 cost
included in the Company's Consolidated Statements of Position:
--------------------------------------------------------------------------------
DECEMBER 31,
--------------------
1994 1993
----------------------------------------------------------------------------------------------------------
(AMOUNTS IN
THOUSANDS)
Accumulated Postretirement Benefit Obligation
Retirees $ (488) $ (613)
Fully eligible active plan participants (180) (551)
Other active plan participants (1,561) (1,566)
--------- ---------
Total APBO (2,229) (2,730)
Unrecognized transition obligation 1,917 2,022
Unrecognized net gains from past experience different from that assumed and effects
of changes in assumptions (920) (4)
--------- ---------
Accrued postretirement benefit cost included in Other liabilities $ (1,232) $ (712)
--------- ---------
--------- ---------
--------------------------------------------------------------------------------
The APBO includes approximately $1,759,000 attributable to the Company's
postretirement health care plan.
Net periodic postretirement benefit cost reflected in Employee benefits
expense included the following components:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1994 1993 1992
---------------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Service cost-benefits attributable to service during the period $ 280 $ 168 $ 74
Interest cost on APBO 168 176 165
Amortization 102 105 105
----- ----- -----
Net periodic postretirement benefit cost $ 550 $ 449 $ 344
----- ----- -----
----- ----- -----
--------------------------------------------------------------------------------
For measurement purposes, a 14.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed in 1994. The rate was assumed
to decrease gradually to 4.0% in year 15 and remain at that level thereafter.
The health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the
------
46
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 8 -- BENEFIT PLANS (CONTINUED)
assumed health care cost trend rates by 1% in each year would increase the APBO
as of December 31, 1994 by $461,000 and the aggregate of the service and
interest cost components of net periodic postretirement benefit expense for the
year then ended by $86,000.
The weighted-average discount rates used in determining the APBO were 8.5%,
7.0% and 7.5% in 1994, 1993 and 1992, respectively.
NOTE 9 -- INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS 109. As a result, the
Company recorded a cumulative one-time benefit of this change in accounting
principle of approximately $1,548,000 or $.54 per share (fully diluted) in the
accompanying Consolidated Statements of Earnings for the year ended December 31,
1993.
The allocation of federal and state income taxes between current and
deferred portions, calculated using the liability method in 1994 and 1993 and
the deferred method in 1992 is as follows:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1993 1992
---------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
CURRENT INCOME TAX PROVISION
Federal $ 3,102 $ 3,070 $ 2,246
State 1,158 1,157 988
--------- --------- ---------
Total current 4,260 4,227 3,234
--------- --------- ---------
DEFERRED INCOME TAX BENEFIT
Federal (246) (636) (16)
State (94) (243) (1)
--------- --------- ---------
Total deferred (340) (879) (17)
--------- --------- ---------
Total provision for income taxes $ 3,920 $ 3,348 $ 3,217
--------- --------- ---------
--------- --------- ---------
--------------------------------------------------------------------------------
The Company's effective income tax rate differed from the Federal statutory
tax rate as follows:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1994 1993 1992
---------------------- ---------------------- ----------------------
AMOUNT % AMOUNT % AMOUNT %
------------------------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
Tax at statutory Federal rate $ 3,274 34.0 $ 2,814 34.0 $ 2,740 34.0
State tax* 703 7.3 603 7.3 631 7.8
Bad debt deduction -- -- -- -- (81) (1.0)
Dividend income exclusion (67) (0.7) (72) (0.9) (72) (0.9)
Other 10 0.1 3 0.1 (1) --
----------- --------- ----------- --------- ----------- ---------
Effective rate on operations $ 3,920 40.7 $ 3,348 40.5 $ 3,217 39.9
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
* NET OF FEDERAL TAX BENEFIT
--------------------------------------------------------------------------------
------
47
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 9 -- INCOME TAXES
(CONTINUED)
The components of the net deferred income tax asset are as follows:
--------------------------------------------------------------------------------
DECEMBER 31,
--------------------
1994 1993
----------------------------------------------------------------------------------------------------------
(AMOUNTS IN
THOUSANDS)
DEFERRED INCOME TAX LIABILITY:
Federal $ 273 $ 967
State 104 370
--------- ---------
377 1,337
--------- ---------
DEFERRED INCOME TAX ASSET:
Federal 5,549 2,454
State 2,121 938
--------- ---------
7,670 3,392
--------- ---------
Net deferred income tax asset $ 7,293 $ 2,055
--------- ---------
--------- ---------
--------------------------------------------------------------------------------
The tax effects of each item of income and expense and net unrealized gains
(losses) on securities available-for-sale that give rise to deferred income
taxes are as follows:
--------------------------------------------------------------------------------
DECEMBER 31,
--------------------
1994 1993
----------------------------------------------------------------------------------------------------------
(AMOUNTS IN
THOUSANDS)
Allowances for losses $ 2,023 $ 2,132
Depreciation (62) (171)
Deferred loan fees (59) 43
Deferred compensation 215 191
Loan expense 291 249
Employee benefits 539 382
Trading loss 62 --
Intangible asset 314 157
--------- ---------
3,323 2,983
Unrealized losses (gains) 3,970 (928)
--------- ---------
Net deferred income tax asset $ 7,293 $ 2,055
--------- ---------
--------- ---------
--------------------------------------------------------------------------------
A summary of the change in the net deferred income tax asset is as follows:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1994 1993
----------------------------------------------------------------------------------------------------------
(AMOUNTS IN
THOUSANDS)
Net deferred income tax asset--beginning $ 2,055 $ 556
Cumulative effect of a change in accounting principle -- 1,548
Deferred tax provision:
Income and expense 340 879
Unrealized losses (gains) 4,898 (928)
--------- ---------
Net deferred income tax asset--ending $ 7,293 $ 2,055
--------- ---------
--------- ---------
--------------------------------------------------------------------------------
------
48
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 9 -- INCOME TAXES
(CONTINUED)
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. Retained earnings includes a tax reserve for qualifying loans. 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 income taxes have been
provided for this temporary difference.
NOTE 10 -- COMMITMENTS AND CONTINGENT LIABILITIES
The accompanying Consolidated Financial Statements do not reflect various
commitments and contingent liabilities which arise in the normal course of
business and which involve elements of credit risk, interest-rate risk and
liquidity risk. These commitments and contingent liabilities are described in
Note 15.
The Company is party to litigation and claims arising from the normal course
of business. After consultation with legal counsel, management is of the opinion
that the liabilities, if any, arising from such litigation and claims will not
be material to the consolidated financial position.
NOTE 11 -- STOCK OPTIONS
Under the Company's stock option plans 563,797 shares, adjusted to reflect
stock dividends, if any, 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 shares 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 ("SARS") 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 SARS holders are most likely to elect based upon the facts
available each period. Accordingly, no expense accruals have been made for the
years ended December 31, 1994, 1993 and 1992 inasmuch as management does not
anticipate exercise of SARS at this time.
The following table and the data below summarizes the shares subject to
option under the Plans, which have been adjusted to reflect stock dividends
declared:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1994 1993
---------------------------------------------------------------------------------------------------------------
Outstanding at beginning of period 275,653 233,180
Granted 43,107 45,234
Exercised (a) (101,884) --
Cancelled -- (2,761)
--------- ---------
Outstanding at end of period 216,876 275,653
--------- ---------
--------- ---------
(A) INCLUDES SARS
--------------------------------------------------------------------------------
------
49
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 11 -- STOCK OPTIONS (CONTINUED)
As of December 31, 1994, 216,876 options were exercisable at prices ranging
from $9.98 to $29.00.
At December 31, 1994, there were 216,876 options in the Plans that remained
outstanding. Through December 31, 1994, 127,918 options have been exercised and
45,590 options, adjusted to reflect subsequent stock dividends, have been
cancelled. 219,003 options are available for grant.
During 1994, 8,429 SARS were exercised which resulted in payments to
employees aggregating $118,000. These amounts are included in Salary and wage
expense for 1994. During 1993 and 1992, there were no SARS exercised.
NOTE 12 -- STOCKHOLDERS' EQUITY
A. LIQUIDATION ACCOUNT. When the Bank converted to stock form, it was
required to establish a liquidation account of approximately $21,600,000 which
was equal to the Bank's net worth as of September 30, 1985. The liquidation
account is established for a period of 10 years subsequent to conversion for the
benefit of eligible depositors who continue to maintain their deposit accounts
in the Bank after conversion, subject to downward adjustment. Eligible
depositors would be entitled, in the unlikely event of complete liquidation of
the Bank, to receive liquidating distributions of any assets remaining after
payment of all creditors' claims (including the claims of all depositors at the
time of liquidation) equal to the withdrawal value of their deposit accounts,
but before any distributions are made to the Bank's stockholders, equal to their
proportionate interest at that time in the liquidation account. Except for the
repurchase of stock and payment of dividends by the Bank, the existence of the
liquidation account will not restrict the use or application of such net worth.
B. DIVIDENDS. Pursuant to Connecticut law, cash dividends may be paid by
the Bank to the Company out of net profits, defined as the remainder of earnings
from current operations plus actual recoveries on loans and investments and
other assets, after deducting all current operating expenses, actual losses,
accrued dividends on preferred stock and all federal and state taxes. The total
dividends declared by the Bank in any calendar year shall not exceed the total
of its net profits for that year combined with its net profits for the preceding
two years. Additionally, the Bank may not pay cash dividends on its stock if its
net worth would thereby be reduced below the amount required for the liquidation
account or as may in the future be required by the Connecticut Commissioner of
Banking or the Federal Deposit Insurance Corporation (the "FDIC").
During the second quarter of 1991, the Bank was informed by the regional
office of the FDIC that it will be permitted to pay dividends to the Company in
an amount limited to the holding company's non-salary expenses and debt service
payments. This restriction was made part of a Memorandum of Understanding which
the Bank entered into with the FDIC and the Connecticut Commissioner of Banks
(Note 19). Since the Bank is the sole source of funds for cash dividend payments
by the Company to its stockholders, the FDIC's restriction has resulted in the
Company being unable to pay cash dividends to stockholders.
The Board of Directors declared 5% stock dividends for each of the four
quarters of 1992 and declared a 5% stock dividend on February 15, 1995.
Fractional shares were not issued to stockholders in connection with these stock
dividends. However, the Company arranged for the sale of the aggregate
fractional interests and distributed the cash proceeds to the stockholders. In
accordance with generally accepted accounting principles, weighted average
shares outstanding, and thus earnings per share, for each of the periods have
been retroactively adjusted.
------
50
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 12 -- STOCKHOLDERS' EQUITY (CONTINUED)
C. STOCK OPTIONS EXERCISED. During 1994, 93,455 stock options were
exercised, resulting in an increase to Additional paid-in capital of
approximately $1.8 million, which includes tax benefits of approximately
$678,000.
NOTE 13 -- 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 par 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
allowances for credit losses. Specific allocations of the acquired allowance for
credit 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 a 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 credit losses as a purchased loan discount
(Note 3). This amount will be accreted to interest income over the remaining
terms of the acquired loans.
Of a $6.2 million premium paid by the Bank to the FDIC for the assumption of
deposits and other customer service liabilities, the Bank recorded approximately
$5.0 million as a core deposit intangible which is included in Other assets, net
of amortization approximating $956,000 through December 31, 1994 (Note 1).
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 totaled $258.9 million at December
31,1992. The fees earned by the Bank for providing this service amounted to
approximately $3.7 million in 1993 and $313,000 in 1992. 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 thirteen banking offices and related equipment. The Bank
exercised its option with respect to eleven of such banking offices. Derby did
not exercise its option with respect to two Burritt banking offices which were
closed by the FDIC and not opened by Derby. Three of Burritt's offices were
owned and in 1993, the Bank purchased two of these offices and entered into a
short-term rental agreement with the FDIC for the third. In June 1994, the Bank
relocated the operations of the former main office of Burritt, which the Bank
had been renting from the FDIC. Of the remaining eight banking offices which had
been leased by Burritt, one had been assumed by the Bank. Through December 31,
1994, the Bank entered into leases on five of the seven locations formerly
leased by Burritt and is renegotiating the terms of one of the remaining
locations. The Bank closed one of the acquired former branch offices of Burritt
in January 1994.
------
51
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 14 -- NON-INTEREST INCOME AND NON-INTEREST EXPENSE
Included in Service charges and other income were the following:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1993 1992
--------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Fees on loans $ 552 $ 551 $ 608
Fees on loans serviced for the FDIC (a) -- 3,681 313
Deposit service charges 814 867 472
All other, none greater than 1% of income 1,087 988 407
--------- --------- ---------
Total $ 2,453 $ 6,087 $ 1,800
--------- --------- ---------
--------- --------- ---------
(a) In connection with the Burritt transaction (Note 13), the Bank serviced
loans for the FDIC on an interim basis through September 1993.
--------------------------------------------------------------------------------
Included in Other Non-interest expense were the following:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1993 1992
--------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Data processing $ 1,266 $ 2,035 $ 839
FDIC insurance premium 2,770 2,435 1,196
Marketing 1,291 821 508
Amortization of intangible assets (Note 13) 711 712 --
All other, none greater than 1% of income 3,403 3,640 2,200
--------- --------- ---------
Total $ 9,441 $ 9,643 $ 4,743
--------- --------- ---------
--------- --------- ---------
--------------------------------------------------------------------------------
NOTE 15 -- FINANCIAL INSTRUMENTS
A. 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.
------
52
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 15 -- FINANCIAL INSTRUMENTS (CONTINUED)
The Bank's exposure to credit risk is represented by the contractual amount
of those instruments and is summarized below:
--------------------------------------------------------------------------------
DECEMBER 31,
--------------------
1994 1993
-------------------------------------------------------------------------------------------------------
(AMOUNTS IN
THOUSANDS)
LOAN COMMITMENTS
Commitments to extend credit $ 10,783 $ 43,832
Commitments to purchase loans 24,000 --
Unadvanced commercial lines of credit 8,232 6,115
Unadvanced portion of construction loans 2,904 1,881
Unused portion of Home Equity Lines of Credit 59,977 56,331
Other consumer lines of credit 994 635
--------- ---------
Total $ 106,890 $ 108,794
--------- ---------
--------- ---------
Letters of credit $ 1,463 $ 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.
At December 31, 1994, the Bank had approximately $57.9 million in
commitments to sell mortgage loans. There were no outstanding commitments to
purchase or sell securities at December 31, 1994.
B. FAIR VALUE The estimated fair values of the Bank's financial instruments
are as follows:
--------------------------------------------------------------------------------
DECEMBER 31,
----------------------------------------------
1994 1993
---------------------- ----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
FINANCIAL ASSETS:
Cash and short term investments $ 18,628 $ 18,628 $ 43,118 $ 43,118
Securities 322,146 314,372 322,599 323,192
Loans held-for-sale 55,190 57,951 -- --
Loans receivable, net 779,681 765,395 779,287 781,756
FHLBB stock 8,899 8,899 8,022 8,022
---------- ---------- ---------- ----------
Total financial assets $1,184,544 $1,165,245 $1,153,026 $1,156,088
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
FINANCIAL LIABILITIES:
Deposits $1,027,746 $1,025,671 $1,016,697 $1,022,707
Advances from FHLBB 111,145 111,322 104,991 107,421
Other borrowings -- -- 1,450 1,450
---------- ---------- ---------- ----------
Total financial liabilities $1,138,891 $1,136,993 $1,123,138 $1,131,578
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
--------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments.
CASH AND SHORT-TERM INVESTMENTS. For those short-term instruments, the
carrying amount is a reasonable estimate of fair value.
------
53
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 15 -- FINANCIAL INSTRUMENTS (CONTINUED)
SECURITIES. Fair values for investment securities are based on quoted
market prices.
LOANS HELD-FOR-SALE AND LOANS RECEIVABLE. The fair values for loans are
estimated using discounted cash flow analyses. Discount rates used are comprised
of the risk-free rate associated with the remaining term to maturity, adjusted
for risk and the expenses associated with servicing the loans. Fair values of
purchased mortgages are estimated using the quoted market prices for securities
collateralized by similar loans.
FHLBB STOCK. The carrying amount approximates fair value.
DEPOSITS. The fair values disclosed for interest and non-interest checking,
passbook savings, money market deposit accounts and mortgagors' escrow are equal
to the amount payable on demand at the reporting date. The fair values of
certificates of deposit are estimated using rates currently offered for deposits
of similar remaining maturities.
ADVANCES FROM THE FHLBB. The fair values of advances from the FHLBB are
estimated using rates which approximate the rates currently being offered by the
FHLBB for similar remaining maturities.
OTHER BORROWINGS. The carrying amounts of short-term borrowings approximate
their fair values.
OFF-BALANCE SHEET INSTRUMENTS. In the course of originating loans and
extending credit and standby letters of credit, the Bank will charge fees in
exchange for its lending commitment. While these commitment fees have value, the
Company has not estimated their value due to the short term nature of the
underlying commitments.
NOTE 16 -- CONCENTRATION OF CREDIT RISK
The Bank is primarily engaged in the business of providing credit secured by
residential real estate to the consumer segment of the Bank's market area within
the state of Connecticut. The concentration of the Bank's loan portfolio by type
of loan at December 31, 1994 and 1993, is set forth in Note 3. These loans are
comprised of one-to-four family mortgages, construction loans and home equity
loans aggregating approximately $781.1 million and $721.9 million at December
31, 1994 and 1993, respectively, or approximately 92.5% and 91.0% of total
loans, respectively. Approximately 95.8% and 97.0% of these loans are secured by
residential real estate located within the state of Connecticut at December 31,
1994 and 1993, respectively.
The Bank also has loan commitments, including unused lines of credit and
amounts not yet advanced on construction loans, secured by Connecticut real
estate. In addition, at December 31, 1994 a substantial portion of the Bank's
foreclosed assets (Note 4) is located in those same 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 real estate market conditions
in Connecticut.
The Bank is required to periodically conduct reviews of the financial
condition of correspondent banks with which it does business in order to
minimize the risks associated with such activities.
NOTE 17 -- RELATED PARTY TRANSACTIONS
At December 31, 1994 and 1993 loans to directors aggregated approximately
$1,191,000 and $1,160,000, respectively. During the year ended December 31,
1994, new loans totaling approximately $135,000 were granted to directors and
repayments totaled approximately $324,000.
------
54
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 17 -- RELATED PARTY TRANSACTIONS (CONTINUED)
During the years ended December 31, 1994, 1993 and 1992, payments
aggregating approximately $364,000, $509,000 and $556,000, respectively, were
made for legal, insurance, maintenance, construction and appraisal services to
companies in which certain directors have an interest.
These loans and payments were made in the ordinary course of business. The
loans were granted on substantially the same terms, including interest rates and
collateral on loans, as those prevailing at the same time for comparable
transactions with others.
NOTE 18 -- CONDENSED FINANCIAL INFORMATION OF DS BANCOR, INC.
(PARENT COMPANY ONLY)
The condensed statements of position for DS Bancor, Inc. were as follows:
--------------------------------------------------------------------------------
DECEMBER 31,
--------------------
1994 1993
---------------------------------------------------------------------------------------------------------
(AMOUNTS IN
THOUSANDS)
ASSETS
Cash in subsidiary bank $ 860 $ 85
Investment in bank subsidiary, at equity 65,985 67,562
Other assets 303 274
--------- ---------
TOTAL ASSETS $ 67,148 $ 67,921
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes payable--bank (Note A) $ -- $ 1,450
Other liabilities 11 31
--------- ---------
Total Liabilities 11 1,481
--------- ---------
Stockholders' Equity
Common stock 3,085 2,991
Additional paid-in capital 37,780 36,007
Retained earnings 30,785 31,955
Less: Treasury stock, at cost (339,500 shares) (4,513) (4,513)
--------- ---------
Total Stockholders' Equity 67,137 66,440
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 67,148 $ 67,921
--------- ---------
--------- ---------
--------------------------------------------------------------------------------
------
55
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 18 -- CONDENSED FINANCIAL INFORMATION OF DS BANCOR, INC.
(PARENT COMPANY ONLY) (CONTINUED)
The condensed statements of earnings were as follows:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1994 1993 1992
---------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Income:
Dividends from subsidiary $ 567 $ 873 $ 742
Other 39 -- --
----------- ----------- -----------
Total income 606 873 742
----------- ----------- -----------
Expense:
Interest expense 43 113 152
Other 265 181 209
----------- ----------- -----------
Total expense 308 294 361
----------- ----------- -----------
Income before income taxes and change in equity of subsidiary 298 579 381
Income tax benefit 109 119 150
----------- ----------- -----------
Income before change in equity of subsidiary 407 698 531
Change in equity of subsidiary 5,303 4,228 4,310
----------- ----------- -----------
Income before cumulative effect of a change in accounting principle 5,710 4,926 4,841
Cumulative effect of change in accounting principle (Note 9) -- 1,548 --
----------- ----------- -----------
Net income $ 5,710 $ 6,474 $ 4,841
----------- ----------- -----------
----------- ----------- -----------
Weighted average shares outstanding (Notes 1 & 12)
Primary 2,926,825 2,834,337 2,786,199
Fully Diluted 2,929,005 2,875,790 2,786,199
Earnings per share--Primary (Notes 1 & 12)
Income before cumulative effect of a change in accounting principle $1.95 $1.74 $1.74
Cumulative effect of a change in accounting principle -- .55 --
Net income $1.95 $2.28 $1.74
Earnings per share--Fully Diluted (Notes 1 & 12)
Income before cumulative effect of a change in accounting principle $1.95 $1.71 $1.74
Cumulative effect of a change in accounting principle -- .54 --
Net income $1.95 $2.25 $1.74
--------------------------------------------------------------------------------
------
56
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 18 -- CONDENSED FINANCIAL INFORMATION OF DS BANCOR, INC.
(PARENT COMPANY ONLY) (CONTINUED)
The condensed changes in the components of Stockholders' Equity for the
years ended December 31, 1994, 1993 and 1992 were as follows:
--------------------------------------------------------------------------------
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK
----------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
Balance--January 1, 1992 $ 2,417 $ 28,034 $ 27,166 $ (4,513)
Net income 4,841
Stock dividend declared on common stock (Note 12) 446 5,911 (6,357)
Shares issued for fractional interest 2 26
Cash in lieu of fractional shares (28)
Adjustment for unrealized losses on marketable equity securities
of subsidiary (Note 2) 640
----------- ----------- ----------- -----------
Balance--December 31, 1992 2,865 33,971 26,262 (4,513)
Net income 6,474
Stock dividend declared on common stock (Note 12) 126 2,029 (2,155)
Shares issued for fractional interest 7
Cash in lieu of fractional shares (7)
Adjustment for unrealized security gains of subsidiary (Note 2) 1,381
----------- ----------- ----------- -----------
Balance--December 31, 1993 2,991 36,007 31,955 (4,513)
Net income 5,710
Stock options exercised (93,455 shares) (Note 11) 94 1,773
Adjustment for unrealized security losses of subsidiary (Note 2) (6,880)
----------- ----------- ----------- -----------
Balance--December 31, 1994 $ 3,085 $ 37,780 $ 30,785 $ (4,513)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
--------------------------------------------------------------------------------
The condensed statements of cash flows were as follows:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1993 1992
---------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Cash flows from operating activities:
Dividends received from subsidiary $ 567 $ 873 $ 742
Non-interest income 39 -- --
Tax benefit received from subsidiary 80 -- --
Interest paid (68) (123) (171)
Cash paid to suppliers (260) (205) (185)
--------- --------- ---------
Net cash provided by operating activities 358 545 386
--------- --------- ---------
Cash flows from financing activities:
Payments on notes payable--bank (1,450) (483) (484)
Dividends paid to stockholders -- (7) (29)
Issuance of common stock 1,867 7 29
--------- --------- ---------
Net cash used by financing activities 417 (483) (484)
--------- --------- ---------
Net increase (decrease) in cash 775 62 (98)
Cash at beginning of year 85 23 121
--------- --------- ---------
Cash at end of year $ 860 $ 85 $ 23
--------- --------- ---------
--------- --------- ---------
--------------------------------------------------------------------------------
------
57
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 18 -- CONDENSED FINANCIAL INFORMATION OF DS BANCOR, INC.
(PARENT COMPANY ONLY) (CONTINUED)
A reconciliation of net income to cash provided by operating activities was
as follows:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1993 1992
------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Net income $ 5,710 $ 6,474 $ 4,841
Items not resulting in cash flow:
Equity in undistributed earnings of subsidiary (5,303) (5,776) (4,310)
Increase in income tax benefits receivable (29) (119) (150)
Amortization of organization cost -- -- 18
Decrease in accrued expenses (20) (34) (13)
--------- --------- ---------
Net cash flow from operating activities $ 358 $ 545 $ 386
--------- --------- ---------
--------- --------- ---------
------------------------------------------------------------------------------------------------------------------
<FN>
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, WHICH HAD AN
INTEREST RATE OF PRIME PLUS ONE PERCENT, WAS PAID IN FULL IN JUNE,
1994. (NOTES 7, 12 & 19).
--------------------------------------------------------------------------------
NOTE 19 -- REGULATORY MATTERS
DS Bancor and its wholly owned subsidiary Derby Savings Bank, pursuant to
the regulations of the Federal Reserve Board (the "Board") and the FDIC,
respectively, are subject to risk-based capital standards. These risk-based
standards require a minimum ratio of total capital to risk-weighted assets of
8.0%. Of the required capital, 4.0% must be tier 1 capital (primarily
stockholders' equity).
The Board has supplemented these standards with a minimum leverage ratio of
3.0% of tier 1 capital to total assets. The Board has indicated that all but the
most highly rated bank holding companies should maintain a leverage ratio of 4%
to 5% of tier 1 capital to total assets. The FDIC has adopted a similar leverage
requirement.
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 December 31, 1994, the level of assets classified
"substandard" represented 31.1% 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 December 31, 1994, delinquent loans totaled $32.0 million
or 3.8% 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 leverage 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 required Derby to have a leverage ratio in excess of 5% of total
assets by
------
58
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 19 -- REGULATORY MATTERS (CONTINUED)
December 31, 1993 and a leverage ratio 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.
At December 31, 1994, the Bank's leverage ratio of tier 1 capital to total
assets ratio was 5.5%. The Bank expects to achieve the 5.75% June 30, 1995
capital target through maintaining asset size at current levels and earnings
retention.
The following table summarizes the capital ratios of DS Bancor and Derby
Savings Bank at December 31, 1994:
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RISK-BASED
--------------------
LEVERAGE RATIO TIER 1 TOTAL
--------------------------------------------------------------------------------------------------------------------
DS Bancor 5.6% 10.38% 11.41%
Derby Savings Bank 5.5% 10.21% 11.24%
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NOTE 20 -- RECENT ACCOUNTING PRONOUNCEMENTS
In May 1993, the FASB issued Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). SFAS 114,
which the Bank must adopt for the year ending December 31, 1995, requires
creditors to evaluate the collectibility of both contractual interest and
contractual principal of all loans when assessing the need for a loss accrual.
When a loan is impaired, a creditor shall measure impairment based on the
present value of the expected future cash flows discounted at the loan's
effective interest rate, or the fair value of the collateral, less estimated
selling costs, if the loan is collateral-dependent and foreclosure is probable.
The creditor shall recognize an impairment by creating a valuation allowance.
The Bank has not yet made a determination as to the impact, if any, the adoption
of SFAS 114 will have on its financial condition, but it is expected that the
financial statement presentation of certain non-performing loans as In-substance
foreclosed assets will be essentially discontinued.
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NOTE 21 -- QUARTERLY RESULTS OF EARNINGS (UNAUDITED)
The following is a summary of the quarterly results of earnings for the
years ended December 31, 1994 and 1993:
--------------------------------------------------------------------------------
QUARTERS ENDED
------------------------------------------
12/31/94 9/30/94 6/30/94 3/31/94
--------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Interest income $ 20,414 $ 19,794 $ 18,781 $ 18,293
Interest expense 11,427 10,985 10,444 9,962
--------- --------- --------- ---------
Net interest income 8,987 8,809 8,337 8,331
Provision for credit losses 700 625 400 600
--------- --------- --------- ---------
Net interest income after provision for credit losses 8,287 8,184 7,937 7,731
Non-interest income, net 545 683 1,010 863
Non-interest expense 6,507 6,480 6,532 6,091
--------- --------- --------- ---------
Income before income taxes 2,325 2,387 2,415 2,503
Income tax 977 966 966 1,011
--------- --------- --------- ---------
Net income $ 1,348 $ 1,421 $ 1,449 $ 1,492
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per share--Primary (a) $ 0.46 $ 0.48 $ 0.49 $ 0.52
Earnings per share--Fully Diluted (a) $ 0.46 $ 0.48 $ 0.49 $ 0.51
--------------------------------------------------------------------------------------------------------------
12/31/93 9/30/93 6/30/93 3/31/93
--------------------------------------------------------------------------------------------------------------
Interest income $ 18,083 $ 18,137 $ 19,128 $ 18,987
Interest expense 10,095 10,736 11,334 11,651
--------- --------- --------- ---------
Net interest income 7,988 7,401 7,794 7,336
Provision for credit losses 425 1,325 275 450
--------- --------- --------- ---------
Net interest income after provision for credit losses 7,563 6,076 7,519 6,886
Non-interest income, net 932 1,862 2,755 1,794
Non-interest expense 6,203 6,736 7,772 6,402
--------- --------- --------- ---------
Income before income taxes and cumulative effect of a change in
accounting principle 2,292 1,202 2,502 2,278
Income tax 957 323 1,080 988
--------- --------- --------- ---------
Income before cumulative effect of a change in accounting
principle 1,335 879 1,422 1,290
Cumulative effect of a change in accounting principle -- -- -- 1,548
--------- --------- --------- ---------
Net income $ 1,335 $ 879 $ 1,422 $ 2,838
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per share--Primary (a)
Income before cumulative effect of a change in accounting
principle $ 0.47 $ 0.32 $ 0.51 $ 0.46
Cumulative effect of a change in accounting principle -- -- -- $ 0.56
Net income $ 0.47 $ 0.32 $ 0.51 $ 1.02
Earnings per share--Fully Diluted (a)
Income before cumulative effect of a change in accounting
principle $ 0.46 $ 0.32 $ 0.51 $ 0.46
Cumulative effect of a change in accounting principle -- -- -- $ 0.56
Net income $ 0.46 $ 0.32 $ 0.51 $ 1.02
(a) Adjusted retroactively to reflect stock dividend declared (Note 12).
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INDEPENDENT AUDITOR'S REPORT
---------------------
--------------------------------------------------------------------------------
The Board of Directors and Stockholders
DS Bancor, Inc.
Derby, Connecticut
WE HAVE AUDITED THE ACCOMPANYING CONSOLIDATED STATEMENTS OF POSITION OF
DS BANCOR, INC. AND SUBSIDIARY AS OF DECEMBER 31, 1994 AND 1993, AND THE
RELATED CONSOLIDATED STATEMENTS OF EARNINGS, STOCKHOLDERS' EQUITY AND
CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31,
1994. THESE CONSOLIDATED FINANCIAL STATEMENTS ARE THE RESPONSIBILITY OF THE
COMPANY'S MANAGEMENT. OUR RESPONSIBILITY IS TO EXPRESS AN OPINION ON THESE
CONSOLIDATED FINANCIAL STATEMENTS BASED ON OUR AUDITS.
WE CONDUCTED OUR AUDITS IN ACCORDANCE WITH GENERALLY ACCEPTED AUDITING
STANDARDS. THOSE STANDARDS REQUIRE THAT WE PLAN AND PERFORM THE AUDITS TO OBTAIN
REASONABLE ASSURANCE ABOUT WHETHER THE CONSOLIDATED FINANCIAL STATEMENTS ARE
FREE OF MATERIAL MISSTATEMENT. AN AUDIT INCLUDES EXAMINING, ON A TEST BASIS,
EVIDENCE SUPPORTING THE AMOUNTS AND DISCLOSURES IN THE CONSOLIDATED FINANCIAL
STATEMENTS. AN AUDIT ALSO INCLUDES ASSESSING THE ACCOUNTING PRINCIPLES USED AND
SIGNIFICANT ESTIMATES MADE BY MANAGEMENT, AS WELL AS EVALUATING THE OVERALL
CONSOLIDATED FINANCIAL STATEMENT PRESENTATION. WE BELIEVE THAT OUR AUDITS
PROVIDE A REASONABLE BASIS FOR OUR OPINION.
IN OUR OPINION, THE CONSOLIDATED FINANCIAL STATEMENTS REFERRED TO ABOVE PRESENT
FAIRLY, IN ALL MATERIAL RESPECTS, THE CONSOLIDATED FINANCIAL POSITION OF DS
BANCOR, INC. AND SUBSIDIARY AS OF DECEMBER 31, 1994 AND 1993, AND THE RESULTS OF
THEIR OPERATIONS, CHANGES IN THEIR STOCKHOLDERS' EQUITY, AND THEIR CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1994, IN CONFORMITY
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
BRIDGEPORT, CONNECTICUT
FEBRUARY 10, 1995
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61
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---------------------
--------------------------------------------------------------------------------
DIRECTORS
DS BANCOR, INC. & DERBY SAVINGS BANK
MICHAEL F. DADDONA JR.
Chairman of the Board;
Owner/General Manager
Automated Services
ACHILLE A. APICELLA, CPA
President.
Apicella, Testa & Co.
WALTER R. ARCHER JR.
President
Burtville Associates & Archer Landfill Service Co.
JOHN J. BRENNAN
President
J.J. Brennan Construction Company
JOHN F. COSTIGAN
Executive Vice President & Secretary
Derby Savings Bank
HARRY P. DIADAMO JR.
President, Treasurer & CEO
Derby Savings Bank
ANGELO E. DIRIENZO
Retired Superintendent of Schools
Sherman Board of Education
LAURA J. DONAHUE, ESQ.
Attorney
Donahue & Donahue
CHRISTOPHER H.B. MILLS (1)
Chief Executive
North Atlantic Small Companies Trust PLC
JOHN M. RAK
Owner
John M. Rak Real Estate
JOHN P. SPONHEIMER, ESQ.
Partner
Hoyle & Sponheimer
BRONISLAW WINNICK, ESQ. (HONORARY)
Partner
Winnick, Vine, Welch, Donnelly & Teodosio
(1) Director, DS Bancor, Inc., only
--------------------------------------------------------------------------------
ADVISORY BOARD--NEW BRITAIN/HARTFORD REGION
MARYANN E. CICHOWSKI
SAL N. GIONFRIDDO
NANCY B. HEISER
WILLIAM R. HOFFMAN
DANIEL J. O'CONNELL
ANNELISA SANTORO
--------------------------------------------------------------------------------
BANK COUNSEL
Winnick, Vine, Welch, Donnelly & Teodosio
SPECIAL COUNSEL
Hogan & Hartson L.L.P.
INDEPENDENT PUBLIC ACCOUNTANTS
Friedberg, Smith & Co., P.C.
REGISTRAR AND TRANSFER AGENT
American Stock Transfer & Trust Co.
40 Wall Street, 46th Floor
New York, NY 10005
1-800-937-5449
INVESTOR RELATIONS
Katherine Costigan Partesano
Assistant Vice President
Telephone (203) 736-1000 X605
COMMON STOCK INFORMATION
Listing: NASDAQ
NMS Symbol: DSBC
ANNUAL MEETING OF STOCKHOLDERS
April 26, 1995, 10:00 a.m.
Trumbull Marriott
180 Hawley Lane
Trumbull, CT 06611
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------------------------------------------------------------------------------
DS BANCOR, INC.
OFFICERS:
HARRY P. DIADAMO JR.
President & CEO
JOHN F. COSTIGAN
Executive Vice President & Secretary
ALFRED T. SANTORO
Vice President,
Treasurer & CFO
--------------------------------------------------------------------------------
DERBY SAVINGS BANK
OFFICERS:
HARRY P. DIADAMO JR.
President,
Treasurer & CEO
JOHN F. COSTIGAN
Executive Vice President,
Secretary & COO
ALFRED T. SANTORO
Executive Vice President
Finance & CFO
THOMAS H. WELLS
Senior Vice President &
Chief Lending Officer
LYNN A. MILLER
Senior Vice President
Branch Administration
NINA M. ALLEN
Vice President
Retail Loan Servicing
WILLIAM W. COTE
Vice President
Legal Services
JOHN DADA
Vice President
Marketing
DAVID A. DEDMAN
Vice President
Commercial Real Estate Lending
KENNETH J. DOUGHTY
Vice President
Retail Lending
THOMAS J. LASKOWSKI
Vice President
Deposit Servicing
ROBERT V. OUELLETTE
Vice President
Commercial Lending
JANICE A. SHEEHY
Vice President
Commercial Lending
BONITA L. SMITH
Vice President
Human Resources
FREDERICK I. WILSON
Vice President
Real Estate Management
DONALD E. KEAGAN
Controller
RITA L. FINNEGAN
Auditor
CALVIN K. PRICE
Director of Community Affairs
--------------------------------------------------------------------------------
SUBSIDIARY:
DERBY FINANCIAL SERVICES
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OFFICES
CORPORATE HEADQUARTERS
33 Elizabeth Street
Derby, CT 06418
AVON
Tri-Town Plaza
320 West Main Street
Avon, CT 06001
DERBY
One Elizabeth Street
Derby, CT 06418
Orange-Derby Shopping Center
Derby, CT 06418
EAST HARTFORD
471 Main Street
East Hartford, CT 06118
FAIRFIELD
1919 Black Rock Turnpike
Fairfield, CT 06430
GLASTONBURY
119 Hebron Avenue
Glastonbury, CT 06033
NEW BRITAIN
185 Main Street
New Britain, CT 06050
435 South Main Street
New Britain, CT 06051
275 Newington Avenue
New Britain, CT 06053
681 West Main Street
New Britain, CT 06050
NEWINGTON
260 Hartford Avenue
Newington, CT 06111
ORANGE
35 Old Tavern Road
Orange, CT 06477
PLAINVILLE
54 East Street
Plainville, CT 06062
ROCKY HILL
2049 Silas Dean Highway
Rocky Hill, CT 06067
SEYMOUR
15 New Haven Road
Seymour, CT 06483
SHELTON
502 Howe Avenue
Shelton, CT 06484
506 Shelton Avenue
Shelton, CT 06484
SOUTHBURY
325 Main Street South
Southbury, CT 06488
STRATFORD
2505 Main Street
Stratford, CT 06497
TRUMBULL
952 White Plains Road
Trumbull, CT 06611
WEST HARTFORD
1253 New Britain Avenue
West Hartford, CT 06110
970 Farmington Avenue
West Hartford, CT 06107
Member FDIC
Equal Housing Lender
Equal Opportunity Employer
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