UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-16193
DS BANCOR, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-1162884
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(State or other jurisdiction of I.R.S. Employer
Incorporation or organization) Identification No.)
33 Elizabeth Street, Derby, Connecticut
----------------------------------------
(Address of principal executive offices)
06418
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(Zip Code)
(203) 736-1000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class: Common Stock, par value $1.00 per share
Outstanding at August 7, 1995: 2,882,352 shares
I N D E X
Page(s)
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Part 1 -- Consolidated Financial Statements
A. Consolidated Statements of Position 1
B. Consolidated Statements of Earnings 2
C. Consolidated Statements of Stockholders' Equity 3
D. Consolidated Statements of Cash Flows 4
E. Notes to Consolidated Financial Statements 5 - 25
F. Selected Consolidated Financial and Other Data 26
G. Management's Discussion and Analysis 27 - 41
Part 2 -- Other Information 32
Signatures 43
DS BANCOR, INC.
CONSOLIDATED STATEMENTS OF POSITION
(DOLLAR AMOUNTS IN THOUSANDS)
JUNE 30, DECEMBER 31,
1995 1994
---------- ------------
(UNAUDITED)
ASSETS
Cash and due from banks (Note 1) $12,774 $14,128
Federal funds sold (Note 1) 14,240 4,500
Securities (Notes 1 & 2)
Trading 1,121 770
Available-for-sale 220,631 216,674
Held-to-maturity (fair value: $101,529 at
June 30, 1995 and $96,928 at December 31, 1994) 103,477 104,702
Loans held-for-sale (Notes 1 & 3) -- 55,190
Loans receivable (net of allowances for credit losses of $6,552
at June 30, 1995 and $6,803 at December 31, 1994)(Notes 1 & 3) 825,840 784,237
Federal Home Loan Bank of Boston stock, at cost (Note 8) 9,793 8,899
Accrued income receivable (Note 1) 7,441 7,227
Bank premises and equipment, net (Notes 1 & 6) 6,617 6,975
Prepaid and deferred income taxes (Notes 1 & 10) 3,580 7,247
Foreclosed assets (net of allowances of $385 at June 30, 1995
and $439 at December 31, 1994)(Notes 1 & 5) 5,146 5,756
Other assets (Note 13) 6,975 6,385
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TOTAL ASSETS $1,217,635 $1,222,690
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---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits (Note 7)
Non-interest bearing $29,383 $30,918
Interest bearing 999,777 996,828
---------- ----------
Total 1,029,160 1,027,746
Mortgagors' escrow 12,616 11,885
Advances from Federal Home Loan Bank of Boston (Note 8) 73,071 111,145
Other borrowings (Note 8) 23,000 --
Other liabilities (Note 9) 4,196 4,777
---------- ----------
Total Liabilities 1,142,043 1,155,553
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STOCKHOLDERS' EQUITY (NOTES 1, 11 & 14)
Preferred stock, no par value; authorized
2,000,000 shares; none issued -- --
Common stock, par value $1.00; authorized 6,000,000 shares;
issued--June 30, 1995--3,221,852 shares, December 31, 1994--
3,084,571 shares; outstanding--June 30, 1995--2,882,352 shares,
December 31, 1994--2,745,071 shares 3,222 3,085
Additional paid-in capital 41,075 37,780
Retained earnings 36,170 36,362
Net unrealized losses on available-for-sale securities, net of
tax of $258 at June 30, 1995 and $3,970 at December 31, 1994 (362) (5,577)
Less: Treasury stock, at cost (339,500 shares) (4,513) (4,513)
---------- ----------
Total Stockholders' Equity 75,592 67,137
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,217,635 $1,222,690
---------- ----------
---------- ----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 1 -
DS BANCOR, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1994 1993 1994 1993
--------- --------- --------- ---------
(UNAUDITED)
Interest Income (Note 1)
Interest and fees on loans $15,915 $13,798 $31,305 $27,344
Taxable interest on securities 5,013 4,705 9,956 9,230
Dividends on investments 348 278 599 500
--------- --------- --------- ---------
Total interest income 21,276 18,781 41,860 37,074
--------- --------- --------- ---------
Interest Expense
Deposits (Note 7) 11,425 8,741 22,004 17,041
Borrowed funds (Note 8) 1,239 1,726 2,391 3,401
Less: Penalties on premature time deposit withdrawals (36) (23) (96) (36)
--------- --------- --------- ---------
Net interest expense 12,628 10,444 24,299 20,406
--------- --------- --------- ---------
Net Interest Income 8,648 8,337 17,561 16,668
Provision for credit losses (Notes 1 & 3) 600 400 1,200 1,000
--------- --------- --------- ---------
Net interest income after provision for credit losses 8,048 7,937 16,361 15,668
--------- --------- --------- ---------
Non-interest Income
Service charges and other income 595 586 1,255 1,169
Net securities gains (losses) (Note 2) 251 431 (1,347) 625
Net gain (loss) on sale of loans 16 (7) 1,497 79
--------- --------- --------- ---------
Total non-interest income, net 862 1,010 1,405 1,873
--------- --------- --------- ---------
Non-interest Expense
Salaries and wages 2,108 2,054 4,022 3,972
Employee benefits (Note 9) 629 577 1,300 1,152
Occupancy (Note 6) 384 480 877 1,125
Furniture and equipment (Note 6) 317 252 573 473
Foreclosed asset expense, net (Notes 1 & 5) 525 911 973 1,455
Other 2,269 2,258 4,629 4,446
--------- --------- --------- ---------
Total non-interest expense 6,232 6,532 12,374 12,623
--------- --------- --------- ---------
Income before income taxes 2,678 2,415 5,392 4,918
Provision for income taxes (Note 10) 1,056 966 2,152 1,977
--------- --------- --------- ---------
Net Income $1,622 $1,449 $3,240 $2,941
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of shares outstanding (Note 1)
Primary 2,944,390 2,929,689 2,943,397 2,910,029
Fully diluted 2,950,245 2,932,327 2,950,040 2,913,786
Earnings per share (Note 1)
Primary 0.55 0.49 1.10 1.01
Fully diluted 0.55 0.49 1.10 1.01
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 2 -
DS BANCOR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Retained Earnings
-----------------
Additional Unrealized Total
Common Paid-in Retained Gains & Treasury Stockholders'
Stock Capital Earnings Losses Stock Equity
------- ---------- -------- ---------- -------- -------------
(Note 1)
Balance--December 31, 1993 $2,991 $36,007 $30,652 $1,303 ($4,513) $66,440
Net income 2,941 2,941
Stock options exercised
(51,661 shares)(Note 11) 52 965 1,017
Adjustment for unrealized gains
(losses), net (2,579) (2,579)
------ ------- ------- ------- ------- -------
Balance--June 30, 1994 $3,043 $36,972 $33,593 ($1,276) ($4,513) $67,819
------ ------- ------- ------- ------- -------
------ ------- ------- ------- ------- -------
Balance--December 31, 1994 $3,085 $37,780 $36,362 ($5,577) ($4,513) $67,137
Net income 3,240 3,240
Stock dividend declared on common
stock (5%--March 15, 1995) 137 3,283 (3,420) 0
Shares issued for fractional interest 12 12
Cash in lieu of fractional shares (12) (12)
Adjustment of unrealized losses, net 5,215 5,215
------ ------- ------- ------- ------- -------
Balance--June 30, 1995 $3,222 $41,075 $36,170 ($362) ($4,513) $75,592
------ ------- ------- ------- ------- -------
------ ------- ------- ------- ------- -------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
DS BANCOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
1995 1994
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(UNAUDITED)
Cash flows from operating activities:
Net income $3,240 $2,941
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for credit losses 1,200 1,000
Provision for estimated losses on foreclosed assets 900 1,100
Depreciation and amortization 453 378
Amortization of intangible assets 357 491
Net amortization of premiums/discounts on securities 263 784
Net accretion (amortization) of deferred loan fees 1,226 (582)
Decrease in prepaid and deferred income taxes 13 (122)
Net securities loss (gain) 1,347 (692)
Net gain on sale of loans (1,497) (79)
Gains on sales of foreclosed assets (21) (24)
Proceeds from sale of trading securities 1,519 841
Purchases of trading securities (1,563) (1,690)
Decrease (Increase) in accrued income receivable (214) 200
Benefit for deferred income taxes (58) (181)
Net (increase) decrease in other assets 878 3,654
Increase (decrease) in other liabilities (581) (518)
------- --------
Net cash provided (used) by operating activities 7,462 7,501
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Cash flows from investing activities:
Proceeds from matured available-for-sale securities 8,147 45,751
Proceeds from sale of available-for-sale securities 46,258 38,803
Proceeds from matured held-to-maturity securities 7,102 0
Purchase of available-for-sale securities (52,912) (109,203)
Purchase of held-to-maturity securities (6,000) 0
Purchase of FHLBB stock (894) (877)
Proceeds from loans sold to others 32,137 10,187
Purchases of loans from others (25,774) (1,354)
Net increase in loans to customers 5,267 (56,118)
Premises and equipment additions (237) (371)
Proceeds from sale of foreclosed assets 586 2,287
Net decrease (increase) in foreclosed assets 173 (596)
------- --------
Net cash used in investing activities 13,853 (71,491)
------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits from customers 1,414 14,618
Net increase in mortgagors' escrow 731 1,266
Net decrease in Other borrowings 23,000 (1,450)
Net decrease in short term FHLBB advances (26,574) (12,863)
Proceeds from long term FHLBB advances 10,000 35,000
Repayment of long term FHLBB advances (21,500) --
Proceeds from issuance of common stock 12 1,017
Dividends paid to stockholders (12) --
------- --------
Net cash provided (used) by financing activities (12,929) 37,588
------- --------
Net decrease in cash and cash equivalents 8,386 (26,402)
Cash and cash equivalents at beginning of period 18,628 43,118
------- --------
Cash and cash equivalents at end of period $27,014 $16,716
------- --------
------- --------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by DS
Bancor, Inc. (the "Company"), its wholly owned subsidiary Derby Savings Bank
(the "Bank") and Derby Financial Services Corp., the Bank's wholly owned
subsidiary, and reflected in the accompanying consolidated financial statements.
The financial statements of Derby Financial Services Corp. are not significant
to 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 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
- 5 -
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). Beginning in
1995, the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan." Under the new standard, the 1995 allowance for credit losses
related to loans that are identified for evaluation in accordance with SFAS 114
is based on discounted cash flows using the loan's initial effective interest
rate or the fair value of the collateral for certain collateral dependent loans.
Prior to 1995, the allowance for credit losses related to these loans was based
on undiscounted cash flows or the fair value of the collateral for collateral
dependent loans.
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. This evaluation is inherently subjective as it
requires material estimates including the amounts and timing of future cash
flows expected to be received on impaired loans that may be susceptible to
significant change.
BANK PREMISES AND EQUIPMENT are stated at cost, less accumulated depreciation
and amortization. The Bank uses primarily accelerated methods of calculating
depreciation. Leasehold improvements are amortized over the shorter of the
estimated service lives or the terms of the leases. Bank premises are
depreciated over a period of between 30 and 40 years; furniture and equipment
are depreciated over a period of between 1 and 20 years. For income tax
purposes, the Bank uses the appropriate depreciation provisions of the Internal
Revenue Code.
FORECLOSED ASSETS are comprised of real estate acquired through foreclosure
proceedings or deeds accepted in lieu of foreclosure. Loans previously
classified as in-substance foreclosure but for which the Company had not taken
possession of the collateral have been reclassified to loans. This
reclassification did not impact the Company's financial condition or results of
operations. 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, 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.
- 6 -
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.
PRIMARY AND FULLY DILUTED EARNINGS PER SHARE are based on the weighted average
number of common shares outstanding during the period and additional common
shares assumed to be outstanding to reflect the dilutive effect of common stock
equivalents. Stock options and their equivalents are included in earnings per
share computations using the treasury stock method, which assumes that the
options are exercised at the beginning of the period. Proceeds from such
exercise are assumed to be used to repurchase common stock. The difference
between the number of common shares assumed to have been issued from the
exercise of options and the number of common shares assumed to have been
purchased are added to the weighted average number of common shares outstanding.
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.
The following is a summary of significant accounting policies followed by DS
Bancor, Inc. (the "Company"), its wholly owned subsidiary Derby Savings Bank
(the "Bank") and Derby Financial Services Corp., the Bank's wholly owned
subsidiary, and reflected in the accompanying consolidated financial statements.
The financial statements of Derby Financial Services Corp. are not significant
to the Bank's or the consolidated financial statements.
NOTE 2 - SECURITIES
A summary of the Bank's investment securities is as follows:
JUNE 30, 1995
-----------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Gross Gross
TRADING Amortized unrealized unrealized Fair
------- Cost gains losses value
--------- ---------- ---------- --------
Marketable equities $ 1,100 $ 25 $ 4 $ 1,121
-------- -------- -------- --------
-------- -------- -------- --------
- 7 -
JUNE 30, 1995
--------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Gross Gross
AVAILABLE-FOR-SALE Amortized unrealized unrealized Fair
------------------ Cost gains losses value
--------- ---------- ---------- --------
U.S. Government and agency bonds $ 23,131 $ 69 $ 2 $ 23,198
Mortgage-backed securities 180,541 1,404 2,142 179,803
Other bonds and notes 8,249 -- 99 8,150
-------- -------- -------- --------
Total debt securities 211,921 1,473 2,243 211,151
Marketable equities 8,321 230 66 8,485
Mutual funds 1,009 -- 14 995
-------- -------- -------- --------
Total $221,251 $ 1,703 $ 2,323 $220,631
-------- -------- -------- --------
-------- -------- -------- --------
JUNE 30, 1995
--------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Gross Gross
HELD-TO-MATURITY Amortized unrealized unrealized Fair
---------------- Cost gains losses value
--------- ---------- ---------- --------
U.S. Government and agency bonds $ 2,000 $ -- $ 14 $ 1,986
Mortgage-backed securities 97,977 47 1,981 96,043
-------- -------- -------- --------
Total debt securities 99,977 47 1,995 98,029
Money market preferred stock 3,500 -- -- 3,500
Total $103,477 $ 47 $ 1,995 $101,529
-------- -------- -------- --------
-------- -------- -------- --------
DECEMBER 31, 1994
--------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Gross Gross
TRADING Amortized Unrealized Unrealized Fair
------- Cost gains losses value
--------- ---------- ---------- --------
Marketable Equities $ 918 $ -- $ 148 $ 770
-------- -------- -------- --------
-------- -------- -------- --------
DECEMBER 31, 1994
--------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Gross Gross
AVAILABLE-FOR-SALE Amortized Unrealized Unrealized Fair
------------------ Cost Gains Losses Value
--------- ---------- ---------- --------
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
-------- -------- -------- --------
-------- -------- -------- --------
- 8 -
DECEMBER 31, 1994
--------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Gross Gross
HELD-TO-MATURITY Amortized Unrealized Unrealized Fair
---------------- Cost Gains Losses Value
--------- ---------- ---------- --------
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
-------- -------- -------- --------
-------- -------- -------- --------
The amortized cost and market value of debt securities by contractual maturity
is as follows:
JUNE 30, 1995
--------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
AVAILABLE-FOR-SALE HELD-TO-MATURITY
---------------------------- ----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ---------- ---------- --------
Due in one year or less $ 4,064 $ 4,060 $ 2,000 $ 1,986
Due after one year through five years 4,184 4,090 -- --
Due after five years through ten years 16,136 16,172 -- --
Due after ten years 6,995 7,026 -- --
-------- -------- -------- --------
31,379 31,348 2,000 1,986
Mortgage-backed securities 180,541 179,803 97,977 96,043
-------- -------- -------- --------
Total $211,920 $211,151 $ 99,977 $ 98,029
-------- -------- -------- --------
-------- -------- -------- --------
During the three months ended June 30, 1995, 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 Net
Proceeds realized realized gain
from sales gains losses (loss)
---------- ---------- ---------- --------
(AMOUNTS IN THOUSANDS)
AVAILABLE-FOR-SALE
------------------
Marketable equities $ 521 $ 115 -- $ 115
TRADING
-------
Realized gains 1,135 111 24 87
-------- ------- ------- -------
Total realized $ 1,656 $ 226 $ 24 202
-------- ------- -------
-------- ------- -------
Net unrealized gains--trading 49
-------
Total $ 251
-------
-------
- 9 -
During the three months ended June 30, 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 Net
Proceeds realized realized gain
from sales gains losses (loss)
---------- ---------- ---------- --------
(AMOUNTS IN THOUSANDS)
AVAILABLE-FOR-SALE
------------------
U.S. Government and agency bonds $ 4,020 $ 20 $ -- $ 20
Other bonds and notes 18,299 220 3 217
-------- ------- ------- -------
Total debt securities 22,319 240 3 237
Marketable equities 342 102 -- 102
-------- ------- ------- -------
Total available-for-sale 22,661 342 3 339
TRADING
-------
Realized gains 772 69 -- 69
-------- ------- ------- -------
Total realized $ 23,433 $ 411 $ 3 408
-------- ------- -------
-------- ------- -------
Net unrealized gains--trading 23
-------
Total $ 431
-------
-------
During the six months ended June 30, 1995, 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 Net
Proceeds realized realized gain
from sales gains losses (loss)
---------- ---------- ---------- --------
(AMOUNTS IN THOUSANDS)
AVAILABLE-FOR-SALE
------------------
U.S. Government and agency bonds $ 27,994 $ -- $ 1,223 $(1,223)
Other bonds and notes 17,583 -- 555 (555)
-------- ------- ------- -------
Total debt securities 45,577 -- 1,778 (1,778)
Marketable equities 575 124 -- 124
-------- ------- ------- -------
Total available-for-sale 46,152 124 1,778 (1,654)
TRADING
-------
Realized gains 1,519 162 24 138
-------- ------- ------- -------
Total realized $ 47,671 $ 286 $ 1,802 (1,516)
-------- ------- -------
-------- ------- -------
Net unrealized gains--trading 169
-------
Total $(1,347)
-------
-------
- 10 -
During the six months ended June 30, 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 Net
Proceeds realized realized gain
from sales gains losses (loss)
---------- ---------- ---------- --------
(AMOUNTS IN THOUSANDS)
AVAILABLE-FOR-SALE
------------------
U.S. Government and agency bonds $ 4,020 $ 20 $ --- $ 20
Other bonds and notes 33,930 455 4 451
-------- ------- ------- -------
Total debt securities 37,950 475 4 471
Marketable equities 434 119 47 72
-------- ------- ------- -------
Total available-for-sale 38,384 594 51 543
TRADING
-------
Realized gains 772 69 -- 69
-------- ------- ------- -------
Total realized $ 39,156 $ 663 $ 51 612
-------- ------- -------
-------- ------- -------
Net unrealized losses--trading (13)
-------
Total $ 625
-------
-------
At June 30, 1995, 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 $7.0 million, respectively.
NOTE 3 - LOANS RECEIVABLE AND LOANS HELD-FOR-SALE
The components of loans in the accompanying Consolidated Statements of Position
were as follows:
JUNE 30, DECEMBER 31,
1995 1994
-------- ------------
(AMOUNTS IN THOUSANDS)
MORTGAGE
Residential real estate $662,608 $687,582
Commercial real estate 28,259 28,731
Multi-family real estate 12,522 8,682
Residential construction 5,503 2,363
-------- --------
708,892 727,358
-------- --------
CONSUMER
Home equity lines of credit 69,829 70,358
Home equity installment 22,282 19,267
Collateral 3,290 3,014
All other 9,571 4,783
-------- --------
104,972 97,422
-------- --------
COMMERCIAL
Commercial 18,673 20,199
Real estate development 3,605 3,775
-------- --------
22,278 23,974
-------- --------
TOTAL 836,142 848,754
Net deferred loan fees, premiums & discounts (3,750) (2,524)
Allowances for credit losses (6,552) (6,803)
-------- --------
825,840 839,427
Residential real estate loans held-for-sale --- (55,190)
-------- --------
Loans receivable, net $825,840 $784,237
-------- --------
-------- --------
- 11 -
Loans are summarized between fixed and adjustable rates as follows:
JUNE 30, DECEMBER 31,
1995 1994
-------- ------------
(AMOUNTS IN THOUSANDS)
Fixed rate $208,900 $213,669
Adjustable rate 627,242 635,085
-------- --------
Total $836,142 $848,754
-------- --------
-------- --------
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 $154,800,000 and $129,300,000 at June 30, 1995 and December 31,
1994, respectively.
Loans outstanding at June 30, 1995 and December 31, 1994 included approximately
$14,103,000 and $15,042,000, respectively, of non-performing loans, which were
comprised of $11,281,000 in mortgage loans, $1,505,000 in consumer loans and
$1,317,000 in commercial loans at June 30, 1995 and $12,186,000 in mortgage
loans, $1,280,000 in consumer loans and $1,576,000 in commercial loans at
December 31, 1994. The average recorded investment in non-performing loans
during the three and six months ended June 30, 1995 was approximately
$14,133,000 and $14,901,000, respectively. The Company recognized interest
income on those non-performing loans of approximately $77,000 and $150,000 for
the three and six months ended June 30, 1995, respectively.
Activity in the allowances for credit losses for the periods indicated were as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1995 1994 1995 1994
------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
MORTGAGE LOANS
Balance at beginning of period $ 4,456 $ 4,497 $ 4,495 $ 4,605
Provision for credit losses 600 --- 1,000 350
Loan charge-offs (963) (465) (1,407) (924)
Recoveries 169 --- 174 1
------- ------- ------- -------
Balance at end of period $ 4,262 $ 4,032 $ 4,262 $ 4,032
------- ------- ------- -------
------- ------- ------- -------
CONSUMER LOANS
Balance at beginning of period $ 1,374 $ 1,047 $ 1,266 $ 1,193
Provision for credit losses --- 400 200 600
Loan charge-offs (105) (85) (244) (434)
Recoveries 22 16 69 19
------- ------- ------- -------
Balance at end of period $ 1,291 $ 1,378 $ 1,291 $ 1,378
------- ------- ------- -------
------- ------- ------- -------
COMMERCIAL LOANS
Balance at beginning of period $ 1,023 $ 1,233 $ 1,042 $ 1,181
Provision for credit losses --- --- --- 50
Loan charge-offs (27) (176) (48) (176)
Recoveries 3 2 5 4
------- ------- ------- -------
Balance at end of period $ 999 $ 1,059 $ 999 $ 1,059
------- ------- ------- -------
------- ------- ------- -------
TOTAL ALLOWANCE FOR CREDIT LOSSES
Balance at beginning of period $ 6,853 $ 6,777 $ 6,803 $ 6,979
Provision for credit losses 600 400 1,200 1,000
Loan charge-offs (1,095) (726) (1,699) (1,534)
Recoveries 194 18 248 24
------- ------- ------- -------
Balance at end of period $ 6,552 $ 6,469 $ 6,552 $ 6,469
------- ------- ------- -------
------- ------- ------- -------
- 12 -
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 June 30, 1995, the Allowances for
credit losses, which totaled approximately $6.6 million, included approximately
$1.4 million allocated to the loans acquired in the Burritt transaction.
NOTE 4 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
instruments expose the Bank to credit risk which is not included in the
accompanying Consolidated Statements of Position.
The Bank's exposure to credit risk is represented by the contractual amount of
those instruments and is summarized below:
JUNE 30, DECEMBER 31,
1995 1994
-------- ------------
(AMOUNTS IN THOUSANDS)
Loan Commitments
Commitments to extend credit $ 9,404 $ 10,783
Commitments to purchase loans 20,086 24,000
Unadvanced commercial lines of credit 9,704 8,232
Unadvanced portion of construction loans 3,003 2,904
Unused portion of Home Equity Lines of Credit 60,458 59,977
Other consumer lines of credit 1,631 994
-------- --------
Total $104,286 $106,890
-------- --------
-------- --------
Letters of credit $ 1,322 $ 1,463
-------- --------
-------- --------
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 June 30, 1995, the Bank had commitments to purchase approximately $24.4
million in securities. There were no outstanding commitments to sell securities
at June 30, 1995.
NOTE 5 - FORECLOSED ASSETS
Foreclosed assets consisted of the following:
JUNE 30, DECEMBER 31,
1995 1994
-------- ------------
(AMOUNTS IN THOUSANDS)
One-to-four family residential $ 2,009 $ 1,599
Multi-family 105 510
Commercial real estate 321 907
Land 3,096 3,179
------- -------
Total 5,531 6,195
Allowance for estimated losses (385) (439)
------- -------
Foreclosed assets, net $ 5,146 $ 5,756
------- -------
------- -------
- 13 -
Activity in the allowance for estimated losses on foreclosed assets is as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1995 1994 1995 1994
------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
Balance at beginning of period $ 308 $ 961 $ 439 $1,040
Provision charged to expense 400 700 900 1,100
Net losses charged to the allowance (323) (572) (954) (1,051)
------ ------ ------ ------
Balance at end of period $ 385 $1,089 $ 385 $1,089
------ ------ ------ ------
------ ------ ------ ------
Losses and expenses related to foreclosed assets are summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1994 1993 1994 1993
------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
Provision charged to expense $ 400 $ 700 $ 900 $1,100
Gain on sale of real estate (14) (23) (21) (24)
Holding cost and expenses 173 284 172 492
Rental income (34) (50) (78) (113)
------ ------ ------ ------
Foreclosed asset expense, net $ 525 $ 911 $ 973 $1,455
------ ------ ------ ------
------ ------ ------ ------
NOTE 6 - BANK PREMISES AND EQUIPMENT
Bank premises and equipment were comprised of the following:
JUNE 30, DECEMBER 31,
1995 1994
-------- ------------
(AMOUNTS IN THOUSANDS)
Buildings and land $ 7,260 $ 7,266
Leasehold improvements 990 836
Furniture and equipment 5,745 5,656
------- -------
13,995 13,758
Accumulated depreciation and amortization 7,378 6,783
------- -------
Bank premises and equipment, net $ 6,617 $ 6,975
------- -------
------- -------
Depreciation and amortization included in Non-interest expense aggregated
approximately $257,000 and $452,600 for the three and six months ended June 30,
1995, respectively, and $189,200 and $377,500 for the three and six months ended
June 30, 1994, respectively.
- 14 -
LEASES.
Rent expense for banking premises of $174,100 and $349,800 is included in
Occupancy expense for the three and six months ended June 30, 1995,
respectively, and $228,500 and $460,600 for the three and six months ended June
30, 1994, 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 June 30, 1995 (AMOUNTS IN THOUSANDS):
1995 $ 281
1996 532
1997 436
1998 263
1999 116
Thereafter 145
------
Total future minimum lease payments $1,773
------
------
These leases include options to renew for periods ranging from 3 to 22 years.
NOTE 7 - DEPOSITS
Deposits were comprised of the following:
JUNE 30, DECEMBER 31,
------------------------------------------------------------------------
1995 1994
------------------------------- --------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
WEIGHTED WEIGHTED
AVERAGE AVERAGE
STATED RATES AMOUNT STATED RATES AMOUNT
------------ ---------- ------------ -----------
Demand $ 29,383 $ 30,918
NOW 1.75-2.00%(a) 46,691 1.75-2.00%(a) 49,097
Regular and club savings 2.00 197,077 2.00 213,574
Money market deposit accounts 5.48 205,464 5.10 205,239
Time accounts 5.15 550,545 4.72 528,918
---------- ----------
Total deposits $1,029,160 $1,027,746
---------- ----------
---------- ----------
<FN>
(a) RANGES INDICATE TIERS
Time accounts at June 30, 1995 mature as follows:
WEIGHTED AVERAGE
MATURITY STATED RATE AMOUNT
-------- ---------------- ---------
(DOLLAR AMOUNTS IN THOUSANDS)
One year or less 5.20% $358,755
One to two years 6.06% 107,051
Two to three years 5.77% 31,529
Beyond 6.00% 53,210
--------
Total 5.48% $550,545
--------
--------
Time deposit accounts of $100,000 or more approximated $31,874,000 at June 30,
1995. Of that amount, approximately $10,236,000 mature in six months or less,
$7,848,000 mature after six months to one year, and $13,790,000 mature after one
year.
- 15 -
Interest expense on deposits is summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1995 1994 1995 1994
------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
NOW $ 228 $ 234 $ 453 $ 458
Regular and club savings 998 1,142 2,012 2,251
Money market deposits 2,868 1,847 5,510 3,364
Time savings 7,266 5,465 13,927 10,877
Escrow 65 53 102 91
------- ------- ------- -------
Total interest expense on deposits $11,425 $ 8,741 $22,004 $17,041
------- ------- ------- -------
------- ------- ------- -------
NOTE 8 - BORROWED FUNDS
Terms of the advances from the Federal Home Loan Bank of Boston ("FHLBB") were
as follows:
JUNE 30, DECEMBER 31,
MATURITY/REPRICE DATE 1995 1994
--------------------- -------------------------------------- --------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
WEIGHTED AVERAGE WEIGHTED AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- ---------------- --------- ----------------
1995 $ 1,560 --- $ 1,482 ---
1995 20,551 5.65 58,703 6.02
1996 27,050 4.95 27,050 4.95
1997 19,190 5.55 19,190 5.55
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 $ 73,071 $111,145
-------- --------
-------- --------
The Bank has a cash management line of credit from the FHLBB in the amount of
$10,672,000 at June 30, 1995. At June 30, 1995 and December 31, 1994, the Bank
had book overdrafts of $1,560,000 and $1,482,000, respectively, which are
included in advances from the FHLBB.
At June 30, 1995, the Bank had reverse repurchase agreements outstanding
totaling $23.0 million at a rate of 6.07%. There were no reverse repurchase
agreements outstanding at December 31, 1995.
The Company had a $3.0 million line of credit (Note 18) which was subsequently
paid off in June 1994.
Interest expense on borrowed funds is summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1995 1994 1995 1994
------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
FHLBB advances $1,052 $1,708 $2,204 $3,358
Line of credit --- 18 --- 43
Repurchase agreements & other borrowings 187 --- 187 ---
------ ------ ------ ------
Total expense on borrowed funds $1,239 $1,726 $2,391 $3,401
------ ------ ------ ------
------ ------ ------ ------
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 June 30, 1995 and
December 31, 1994.
- 16 -
NOTE 9 - 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:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1995 1994 1995 1994
------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
Service cost-benefits earned during the period $ 87 $100 $174 $200
Interest cost on projected benefit obligation 95 76 190 152
Expected return on plan assets (100) (98) (200) (195)
Net amortization and deferral (2) (3) (4) (5)
---- ---- ---- ----
Net pension expense $ 80 $ 75 $160 $152
---- ---- ---- ----
---- ---- ---- ----
Assumptions used in the accounting were:
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
1995 1994
---- ----
Discount/settlement rates 8.50% 7.00%
Rates of increase in compensation levels 5.00% 5.00%
Expected long-term rate of return on assets 9.50% 9.50%
The following table sets forth the Plan's funded status and amounts recognized
in the Consolidated Statements of Position:
DECEMBER 31, 1994
-----------------
(AMOUNTS IN THOUSANDS)
Actuarial present value of benefit obligations:
Accumulated benefit obligation - vested $(3,306)
Accumulated benefit obligation - nonvested (72)
-------
Total accumulated benefit obligation (3,378)
Effect of projected future compensation levels (1,174)
-------
Projected benefit obligation ("PBO") for service
rendered to date (4,552)
Plan assets, at fair value * 4,095
-------
PBO in excess of plan assets (457)
Unrecognized net asset existing at January 1, 1987
being recognized over approximately 18 years (93)
Unrecognized prior service cost (72)
Unrecognized net loss from past experience different
from that assumed and effects of changes in assumptions 556
-------
Accrued pension cost included in Other liabilities $ (66)
-------
-------
<FN>
* THE PLAN'S ASSETS ARE ALLOCATED AMONG EQUITY SECURITIES AND VARIOUS
SHORT AND INTERMEDIATE TERM BOND FUNDS.
- 17 -
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. As of May
1990, this plan was discontinued as to deferrals of additional fees. The
deferred compensation expense for the three months and six months ended June 30,
1995 was $25,100 and $50,200, respectively, and $24,100 and 48,100,
respectively, for the three and six months ended June 30, 1994. The Bank has
purchased life insurance policies which it intends to use to fund the retirement
benefits. For income tax purposes, no deduction is allowed for the insurance
premium expense or deferred compensation expense, but a deduction will be
allowed at the time compensation is paid to the participant. For the three and
six months ended June 30, 1995 and 1994, 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 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 three and six months ended June 30, 1995 was $21,300 and
$40,400, respectively, and $19,500 and $42,300, respectively, for the three and
six months ended June 30, 1994.
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 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
-----------------
(AMOUNTS IN THOUSANDS)
Accumulated Postretirement Benefit Obligation
Retirees $ (488)
Fully eligible active plan participants (180)
Other active plan participants (1,561)
-------
Total APBO (2,229)
Unrecognized transition obligation 1,917
Unrecognized net gains from past experience different from that
assumed and effects of changes in assumptions (920)
-------
Accrued postretirement benefit cost
included in Other liabilities $(1,232)
-------
-------
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:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1995 1994 1995 1994
------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
Service cost-benefits attributable to service during the period $ 53 $ 70 $106 $140
Interest cost on APBO 47 42 94 84
Amortization of transition obligation 17 26 34 51
---- ---- ---- ----
Net periodic postretirement benefit cost $117 $138 $234 $275
---- ---- ---- ----
---- ---- ---- ----
- 18 -
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.
The weighted-average discount rates used in determining the APBO was 8.5%.
NOTE 10 - INCOME TAXES
The allocation of federal and state income taxes between current and deferred
portions, calculated using the liability method is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1995 1994 1995 1994
------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
Current income tax provision
Federal $ 806 $ 748 $1,619 $1,580
State 294 272 591 578
------ ------ ------ ------
Total current 1,100 1,020 2,210 2,158
------ ------ ------ ------
Deferred income tax provision
Federal (32) (39) (42) (131)
State (12) (15) (16) (50)
------ ------ ------ ------
Total deferred (44) (54) (58) (181)
------ ------ ------ ------
Total provision for income taxes $1,056 $ 966 $2,152 $1,977
------ ------ ------ ------
------ ------ ------ ------
The Company's effective income tax rate differed from the Federal statutory tax
rate as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------- -------------------------------------
1995 1994 1995 1994
----------------- ----------------- ----------------- -----------------
(DOLLAR AMOUNTS IN THOUSANDS)
Amount % Amount % Amount % Amount %
------ ----- ------ ----- ------ ----- ------ -----
Tax at statutory Federal rate $ 909 34.0% $ 821 34.0% $1,833 34.0% $1,672 34.0%
State tax* 187 7.0 170 7.0 380 7.0 350 7.1
Dividend income exclusion (41) (1.6) (26) (1.1) (63) (1.1) (46) (0.9)
Other 1 -- 1 0.1 2 -- 1 --
------ ---- ------ ---- ------ ---- ------ ----
Effective rate on operations $1,056 39.4% $ 966 40.0% $2,152 39.9% $1,977 40.2%
------ ---- ------ ---- ------ ---- ------ ----
------ ---- ------ ---- ------ ---- ------ ----
<FN>
* NET OF FEDERAL TAX BENEFIT
The components of the net deferred income tax asset are as follows:
JUNE 30, 1995 DECEMBER 31, 1994
------------- -----------------
(AMOUNTS IN THOUSANDS)
Deferred income tax liability:
Federal $ 315 $ 273
State 121 104
------ ------
436 377
------ ------
Deferred income tax asset:
Federal 2,948 5,549
State 1,127 2,121
------ ------
4,075 7,670
------ ------
Net deferred income tax asset $3,639 $7,293
------ ------
------ ------
- 19 -
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:
JUNE 30, 1995 DECEMBER 31, 1994
------------- -----------------
(AMOUNTS IN THOUSANDS)
Allowances for losses $2,008 $2,023
Depreciation (62) (62)
Deferred loan fees (90) (59)
Deferred compensation 229 215
Loan expense 286 291
Employee benefits 626 539
Trading loss (9) 62
Intangible asset 393 314
------ ------
3,381 3,323
Unrealized losses 258 3,970
------ ------
Net deferred income tax asset $3,639 $7,293
------ ------
------ ------
A summary of the change in the net deferred income tax asset for the six months
ended June 30, 1995 and 1994 is as follows (AMOUNTS IN THOUSANDS):
Net deferred income tax asset at December 31, 1994 $7,293
Deferred tax provision:
Income and expense 58
Unrealized losses (3,712)
------
Net deferred income tax asset at June 30, 1995 $3,639
------
------
Deferred tax income asset at December 31, 1993 $2,055
Deferred tax provision:
Income and expense 181
Unrealized gains 1,836
------
Net deferred tax asset at June 30, 1994 $4,072
------
------
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 11 - STOCK OPTIONS
Under the Company's stock option plans 576,797 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
three months ended June 30, 1995 and 1994 inasmuch as management does not
anticipate exercise of SARS at this time.
- 20 -
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 SIX MONTHS ENDED JUNE 30, 1995
--------------------------------------
Outstanding at beginning of period 227,549
Granted 9,450
Exercised (a) (18,321)
Cancelled ---
-------
Outstanding at end of period 218,678
-------
-------
<FN>
(a) INCLUDES SARS
As of June 30, 1995, 218,678 options were exercisable at prices ranging from
$9.50 to $27.62.
At June 30, 1995, there were 218,678 options in the Plans that remained
outstanding. Through June 30, 1995, 146,239 options have been exercised and
220,503 options were available for grant.
During the six months ended June 30, 1995, 18,321 SARS were exercised which
resulted in payments to employees aggregating $169,300. These amounts are
included in Salary and wage expense for 1995.
NOTE 12 - CONDENSED FINANCIAL INFORMATION OF DS BANCOR, INC.
(PARENT COMPANY ONLY)
The condensed statements of position for DS Bancor, Inc. were as follows:
JUNE 30, DECEMBER 31,
1995 1994
-------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
ASSETS
Cash in subsidiary bank $ 797 $ 860
Investment in bank subsidiary, at equity 74,476 65,985
Other assets 329 303
------- -------
TOTAL ASSETS $75,602 $67,148
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Other liabilities $ 10 $ 11
------- -------
Total Liabilities 10 11
------- -------
STOCKHOLDERS' EQUITY
Common Stock 3,222 3,085
Additional paid-in capital 41,075 37,780
Retained earnings 35,808 30,785
Less: Treasury stock, at cost (339,500 shares) (4,513) (4,513)
------- -------
Total Stockholders' Equity 75,592 67,137
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $75,602 $67,148
------- -------
------- -------
- 21 -
The condensed statements of earnings were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1994 1993 1994 1993
------- ------- ------- -------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Income:
Dividends from subsidiary $ --- $ --- $ --- $ 567
Other income 13 --- 26 ---
------ ------ ------ ------
Total income 13 --- 26 567
------ ------ ------ ------
Expense:
Interest expense --- 18 --- 43
Other expense 41 88 89 147
------ ------ ------ ------
Total expense 41 106 89 190
------ ------ ------ ------
Income before income tax and change
in equity of subsidiary (28) (106) (63) 377
Income tax benefit (11) (44) (26) (79)
------ ------ ------ ------
Income before change in equity of subsidiary (17) (62) (37) 456
Change in equity of subsidiary 1,639 1,511 3,277 2,485
------ ------ ------ ------
Net income $1,622 $1,449 $3,240 $2,941
------ ------ ------ ------
------ ------ ------ ------
Weighted average shares outstanding
Primary 2,944,390 2,929,689 2,943,397 2,910,029
Fully Diluted 2,950,245 2,932,327 2,950,040 2,913,786
Earnings per share
Primary $ 0.55 $ 0.49 $ 1.10 $ 1.01
Fully diluted $ 0.55 $ 0.49 $ 1.10 $ 1.01
The condensed changes in the components of Stockholders' Equity for the six
months ended June 30, 1995 and 1994 were as follows:
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK
------ ---------- -------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
Balance - December 31, 1993 $2,991 $36,007 $31,955 $(4,513)
Net income 2,941
Stock options exercised
(51,661 shares)(Note 12) 52 965
Adjustment for unrealized gains (losses), net (2,579)
------ ------- ------- -------
Balance - June 30, 1994 $3,043 $36,972 $32,317 $(4,513)
------ ------- ------- -------
------ ------- ------- -------
Balance - December 31, 1994 $3,085 $37,780 $30,785 $(4,513)
Net income 3,240
Stock dividend declared on common stock 137 3,283 (3,420)
Shares issued for fractional interest 12
Cash in lieu of fractional shares (12)
Adjustment for unrealized losses, net 5,215
------ ------- ------- -------
Balance - June 30, 1995 $3,222 $41,075 $35,808 $(4,513)
------ ------- ------- -------
------ ------- ------- -------
- 22 -
The condensed statements of cash flows were as follows:
FOR THE SIX MONTHS ENDED JUNE 30,
1995 1994
(AMOUNTS IN THOUSANDS)
Cash flows from operating activities:
Dividends received from subsidiary $ --- $ 567
Tax benefit received from subsidiary --- 311
Interest paid --- (68)
Interest on deposit account 26 ---
Cash paid to suppliers (89) (135)
----- ------
Net cash provided from operating activities (63) 675
----- ------
Cash flows from financing activities:
Payment on notes payable--Bank --- (1,450)
Dividends paid to stockholders (12) ---
Issuance of common stock 12 1,017
----- ------
Net cash applied to financing activities --- (433)
----- ------
Net increase (decrease) in cash (63) 242
Cash at beginning of period 860 85
----- ------
Cash at end of period $ 797 $ 327
----- ------
----- ------
A reconciliation of net earnings to cash provided by operating activities was as
follows:
FOR THE SIX MONTHS ENDED JUNE 30,
1995 1994
(AMOUNTS IN THOUSANDS)
Net Income $3,240 $2,941
Items not resulting in cash flow:
Equity in undistributed earnings of subsidiary (3,277) (2,485)
Decrease (increase) in income tax
benefits receivable (26) 232
Decrease in accrued expenses --- (13)
------ -------
Net cash flow from operating activities $ (63) $ 675
------ -------
------ -------
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 8 AND 14).
- 23 -
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, and totaled $3.2 million at June 30, 1995 (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 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 June 30,
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.
- 24 -
NOTE 14 - 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 June 30, 1995, the level of assets classified
"substandard" represented 27.3% 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 June 30, 1995, delinquent loans totaled $32.8 million or
3.9% of total loans. Additionally, the Memorandum limits the payment of cash
dividends by the Bank to DS Bancor to the Company's debt service and non-salary
expenses.
In connection with the Burritt transaction, the FDIC modified the terms of the
Memorandum which pertained to the maintenance of capital ratios. The Memorandum
initially required that the Bank maintain a 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
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 June 30, 1995, the Bank's leverage ratio of tier 1 capital to total assets
ratio exceeded this level and stood at 5.9%.
- 25 -
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(Dollar amounts in thousands, except per share data)
For The Quarter For The Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
1995 1994 1995 1994
------- ------- ------- -------
(unaudited)
OPERATING DATA:
Interest income $21,276 $18,781 $41,860 $37,074
Interest expense 12,628 10,444 24,299 20,406
------- ------- ------- -------
Net interest income 8,648 8,337 17,561 16,668
Provision for credit losses 600 400 1,200 1,000
------- ------- ------- -------
Net interest income after provision for credit losses 8,048 7,937 16,361 15,668
Non-interest income 862 1,010 1,405 1,873
Non-interest expense 6,232 6,532 12,374 12,623
------- ------- ------- -------
Income before income taxes 2,678 2,415 5,392 4,918
Provision for income taxes 1,056 966 2,152 1,977
------- ------- ------- -------
Net Income $1,622 $1,449 $3,240 $2,941
------- ------- ------- -------
------- ------- ------- -------
Earnings Per Share
Primary $0.55 $0.49 $1.10 $1.01
Fully diluted $0.55 $0.49 $1.10 $1.01
STATISTICAL DATA:
Net interest rate spread (a) 2.68% 2.68% 2.77% 2.71%
Net yield on average interest-earning assets (a) 2.97% 2.84% 3.03% 2.86%
Return on average assets (a) 0.54% 0.47% 0.54% 0.48%
Return on average stockholders' equity (a) 8.56% 8.53% 8.82% 8.73%
Average stockholders' equity to average assets 6.32% 5.56% 6.16% 5.52%
MARKET PRICES OF COMMON STOCK:
High $26.75 $33.75 $27.50 $33.75
Low $23.00 $25.00 $21.75 $21.25
At June 30 $26.00 $29.75 $26.00 $29.75
FINANCIAL CONDITION AND OTHER DATA AT: June 30, December 31,
1995 1994
---------- ------------
(unaudited)
Total assets $1,217,635 $1,222,690
Loan portfolio, net 825,840 839,427
Securities portfolio 325,229 322,146
Deposits 1,029,160 1,027,746
Federal Home Loan Bank of Boston advances 73,071 111,145
Other borrowings 23,000 --
Stockholders' equity 75,592 67,137
Book value per share 26.23 23.30
Leverage ratio 5.98% 5.63%
Tier I capital to risk-weighted assets 10.89% 10.38%
Total capital to risk-weighted assets 11.87% 11.41%
Non-performing loans 14,103 15,042
Foreclosed assets 5,146 5,756
---------- ----------
Total non-performing assets 19,249 20,798
Restructured loans 4,168 4,213
Allowance for credit losses 6,552 (b) 6,803 (b)
Allowance as a percentage of non-performing loans 46.5% 45.2%
<FN>
(a) Annualized.
(b) Includes $1.4 million and $1.8 million, allocated to loans acquired as part
of the Burritt transaction, for June 30, 1995 and December 31, 1994,
respectively.
- 26 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
COMPARISON OF RESULTS OF OPERATION
FOR THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
GENERAL. Net income for the second quarter ended June 30, 1995 totaled
$1,622,000 or $.55 per share (fully diluted) compared to $1,449,000 or $.49 per
share (fully diluted) for the comparable period in 1994. Net income for the
three months ended June 30, 1995 represented an annualized return on average
assets of .54% compared to .47% for the comparable 1994 period. Current quarter
net income increased 11.9% compared to the year earlier period as the result of
higher net interest income and reduced non-interest expenses. These positive
changes were partially offset by a $200,000 increase in the provision for
credit losses and a $148,000 decrease in non-interest income for the quarter
ended June 30, 1995 compared to the prior year second quarter.
INTEREST INCOME. Interest and fee income from loans and interest on the
investment portfolio increased $2.5 million or 13.3% during the three months
ended June 30, 1995 compared to the corresponding period in 1994. The increase
in interest income was attributable to an increase in the yield on average
interest-earning assets, which was partially offset by the loss of interest
income resulting from a slight decrease in average interest-earning assets
outstanding.
The average yield on interest-earning assets increased 90 basis points (100
basis points equals one percent) from 6.40% during the second quarter of 1994 to
7.30% during the current quarter. The average yield on loans increased by 86
basis points to 7.63% over the comparison period while the average yield on
taxable investment securities increased by 93 basis points to 6.46%. This
increase was due to the upward repricing of assets between the two periods.
Average interest-earning assets decreased $8.0 million or 0.7% during the
current quarter compared to the year earlier period. The decrease in earning
assets resulted from the sale of certain loans and investment securities with a
portion of the proceeds used to reduce FHLBB borrowings. The remainder of the
sales proceeds were reinvested in higher yielding interest rate sensitive loans
and securities. (See "Financial Condition").
INTEREST EXPENSE. Interest expense increased $2.2 million or 20.9% during
the three months ended June 30, 1995 compared to the corresponding period in
1994. This increase was attributable to a rise in the average cost of funds
which was partially offset by a reduction in interest expense resulting from a
$29.8 million or 2.6% decrease in the average volume of interest-bearing
liabilities outstanding between the two periods.
The average cost of interest bearing liabilities increased 90 basis points
from 3.72% for the period ended June 30, 1994 to 4.62% for the current period.
The decline in the average volume of interest bearing liabilities between the
two periods reflects a decline in the average volume of outstanding borrowed
funds.
NET INTEREST INCOME. Net interest income, as a result of a $2.5 million
increase in interest income and a $2.2 million increase in interest expense,
increased $311,000 or 3.7% from $8,337,000 for the quarter ended June 30, 1994
to $8,648,000 during the current quarter. The net interest rate spread, the
difference between the yield on interest-earning assets and the cost of
interest-bearing liabilities, remained unchanged between the comparison periods
at 2.68%.
- 27 -
The following table summarizes the Bank'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.
Three Months Ended June 30,
---------------------------
1995 1994
---- -----
(AMOUNTS IN THOUSANDS)
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
Interest-earning assets:
Loans $ 833,934 $15,915 7.63% $ 815,029 $13,798 6.77%
Taxable investment securities 313,982 5,068 6.46 345,317 4,772 5.53
Federal funds 8,093 120 5.93 4,266 42 3.94
FHLBB stock 9,360 173 7.39 8,724 169 7.75
---------- ------- ---- ---------- ------- ------
Total interest-earning assets $1,165,369 21,276 7.30 $1,173,336 18,781 6.40
---------- ------- ---- ---------- ------- ------
---------- ------- ---- ---------- ------- ------
Interest-bearing liabilities:
Deposits $1,005,909 11,389 4.53 $ 998,815 8,718 3.49
Borrowed funds 87,509 1,239 5.66 124,364 1,726 5.55
---------- ------- ---- ---------- ------- ------
Total interest-bearing
liabilities $1,093,418 12,628 4.62 $1,123,179 10,444 3.72
---------- ------- ---- ---------- ------- ------
---------- ------- ---- ---------- ------- ------
Net interest income $ 8,648 $ 8,337
------- -------
------- -------
Net interest rate spread 2.68% 2.68%
---- ----
---- ----
Net yield on average interest-earning assets 2.97% 2.84%
---- ----
---- ----
RATE/VOLUME ANALYSIS. The following table sets forth the changes in
interest earned and interest paid resulting from changes in volume and changes
in rates. Changes in interest earned or paid due to both rate and volume have
been allocated in proportion to the relationship of the absolute dollar amounts
of the changes in each. There were no material out of period items or
adjustments included in interest income or interest expense during the periods
indicated.
Three Months Ended June 30,
---------------------------
1995 Compared to 1994
---------------------
Volume Rate Net
------ ------- -------
(AMOUNTS IN THOUSANDS)
Interest earned on:
Loans $ 326 $ 1,791 $ 2,117
Taxable investment securities (459) 755 296
Federal funds 50 28 78
FHLBB stock 12 (8) 4
------ ------- -------
Interest income (71) 2,566 2,495
------ ------- -------
Interest paid on:
Deposits 62 2,609 2,671
Borrowed funds (521) 34 (487)
------ ------- -------
Interest expense (459) 2,643 2,184
------ ------- -------
Net interest income $ 388 $ (77) $ 311
------ ------- -------
------ ------- -------
- 28 -
PROVISION FOR CREDIT LOSSES. The Bank provided $600,000 for credit losses
during the current quarter compared to $400,000 during the comparable 1994
period. At the end of the second quarter of 1995, the Company's allowance for
credit losses totaled $6.6 million, representing 46.5% of non-performing loans
(non-performing loans includes loans past due 90 days or more and non-accruing
loans). The allowance for credit losses includes $1.4 million allocated to the
loans acquired in the Burritt transaction (see notes to Consolidated financial
statements).
NON-INTEREST INCOME. Non-interest income declined $148,000 or 14.7% from
$1,010,000 in the second quarter of 1994 to $862,000 during the current quarter.
Service charges and other income, comprised principally of loan service and
deposit related fees, increased $11,000 from $586,000 for the second quarter of
1994 to $595,000 for the current quarter. Net securities gains of $202,000
realized on the sale of $1.7 million in securities and $49,000 in unrealized
gains in the securities Trading portfolio during the quarter ended June 30, 1995
represented a decrease from the prior year period of $180,000. In the quarter
ended June 30, 1994, $23.4 million in securities were sold at a net gain of
$408,000 and unrealized gains in the securities Trading portfolio totaled
$23,000. The Bank realized a net gain of $16,000 on the sale of $1.1 million in
loans during the current quarter compared to a net loss of $7,000 on the sale of
$1.2 million in the prior year period.
NON-INTEREST EXPENSE. Non-interest expense decreased $300,000 or 4.6% from
$6,532,000 during the second quarter of 1994 to $6,232,000 during the
corresponding period in 1995. Salaries and employee benefits, the largest
component of the Company's cost of operations, increased $106,000 or 4.0% from
$2,631,000 during the quarter ended June 30, 1994 to $2,737,000 during the
current quarter. Salaries and wages increased $54,000 or 2.6% during the
current quarter compared to the year earlier period. During the quarter, 17,008
stock appreciation rights were exercised which resulted in salary and wage
expense of $163,100. Employee benefits increased $52,000 or 9.0% during the
current quarter compared to the year earlier period.
All other operating expenses, in the aggregate, decreased $406,000 or 10.4%
during the current quarter compared to the comparable period in 1994. The
decline in all other expenses was substantially due to the decline in foreclosed
asset expense which totaled $525,000 in the current quarter compared to $911,000
for the year earlier period. Included in this expense is the provision for
estimated losses on foreclosed assets which amounted to $400,000 for the current
quarter compared to $700,000 for the year earlier period. (See Note 5 to
Consolidated Financial Statements). The Company expects that until the level of
foreclosed assets declines substantially, foreclosed asset expense will continue
to be significant.
The Bank, as required by the Statement of Financial Accounting Standards
No. 91, deferred costs resulting from the origination of loans, which will be
amortized as an adjustment to yield over the contractual term of the related
loans. These deferred costs, which are primarily comprised of salaries,
employee benefits, and other loan expenses, totaled $163,000 during the current
quarter compared to $613,000 during the year earlier period.
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 (annualized) outstanding, increased by 2 basis points from (1.81%) during
the quarter ended June 30, 1994 to (1.79%) during the current 1995 period. Non-
interest income as a percentage of average assets (annualized) decreased from
.33% to .29% for the quarters ended June 30, 1994 and 1995, respectively. Non-
interest expense as a percentage of average assets (annualized) decreased 6
basis points from 2.14% during the quarter ended June 30, 1994 to 2.08% during
the current quarter.
- 29 -
NET NON-INTEREST INCOME/EXPENSE ANALYSIS
AS A PERCENTAGE OF AVERAGE ASSETS
Three Months Ended June 30,
---------------------------
1995 1994
---- ----
Non-interest income .29 .33
----- -----
Non-interest expense
Foreclosed asset .18 .30
FDIC insurance .22 .24
Other 1.68 1.60
----- -----
Total non-interest expense 2.08 2.14
----- -----
Net non-interest margin (1.79) (1.81)
----- -----
----- -----
PROVISION FOR INCOME TAXES. The provision for income taxes during the
current quarter totaled $1,056,000 reflecting a 39.4% effective income tax rate
compared to $966,000 or an effective income tax rate of 40.0% for the comparable
1994 period.
COMPARISON OF RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994
GENERAL. Net income for the first six months of 1995 totaled $3,240,000 or
$1.10 per share (fully diluted) compared to $2,941,000 or $1.01 per share (fully
diluted) during the comparable period in 1994. Net income for the six months
ended June 30, 1995 and 1994 represented an annualized return on average assets
of .54% and .48% respectively.
Net income for the six months ended June 30, 1995 reflected an increase of
$299,000 or 10.2% compared to the 1994 period. For the current period compared
to the year earlier period, net interest income increased $893,000 or 5.4% and
non-interest expense declined $249,000 or 2.0%, both of which were substantially
offset by a $468,000 or 25.0% decline in non-interest income.
INTEREST INCOME. Interest and fee income from loans and interest and
dividend income on the investment portfolio increased $4,786,000 or 12.9% from
$37,074,000 for the first six months of 1994 to $41,860,000 for the first six
months of 1995. The increase in interest income was essentially due to the
increase in the yield on average interest-earning assets. Average
interest-earning assets outstanding in the six months ended June 30, 1995
declined by $5.1 million or 4.4% compared to the same period in 1994.
The average yield on interest-earning assets increased 86 basis points from
6.37% for the six months ended June 30, 1994 to 7.23% for the current period.
The average yield on loans for the first six months of 1995 increased to 7.49%
from 6.84% for the comparable 1994 period and the average yield on investment
securities increased to 6.54% during the same 1995 period compared to 5.33% in
1994.
INTEREST EXPENSE. Interest expense increased $3,893,000 or 19.1% from
$20,406,000 for the first six months of 1994 to $24,299,000 for the comparable
six month period in 1995. This increase was essentially due to the rise in the
average cost of funds during the current period compared to the year earlier
period. The average effective cost of interest-bearing liabilities increased 80
basis points from 3.66% for the six months ended June 30, 1994 to 4.46% for the
six months ended June 30, 1995.
NET INTEREST INCOME. As a result of the changes in interest income and
interest expense noted above, net interest income increased $893,000 or 5.4%
from $16,668,000 for the six months ended June 30, 1994 to $17,561,000 for the
same period in 1995. The net interest rate spread improved 6 basis points from
2.71% during the 1994 period to 2.77% during the corresponding period in 1995.
- 30 -
The following table summarizes the Bank'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.
Six Months Ended June 30,
-------------------------
1995 1994
---- -----
(AMOUNTS IN THOUSANDS)
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
Interest-earning assets:
Loans $ 835,462 $31,305 7.49% $ 799,918 $27,344 6.84%
Taxable investment securities 304,187 9,941 6.54 350,235 9,340 5.33
Federal funds 9,814 283 5.77 5,206 83 3.19
FHLBB stock 9,130 331 7.25 8,374 307 7.33
---------- ------- ---------- -------
Total interest-earning assets $1,158,593 41,860 7.23 $1,163,733 37,074 6.37
---------- ------- ---- ---------- ------- ------
---------- ----------
Interest-bearing liabilities:
Deposits $1,005,904 21,908 4.36 $ 992,378 17,005 3.43
Borrowed funds 84,693 2,391 5.65 123,056 3,401 5.53
---------- ------- ---------- -------
Total interest-bearing
liabilities $1,090,597 24,299 4.46 $1,115,434 20,406 3.66
---------- ------- ---- ---------- ------- ------
---------- ----------
Net interest income $17,561 $16,668
------- -------
------- -------
Net interest rate spread 2.77% 2.71%
---- ----
---- ----
Net yield on average interest-earning assets 3.03% 2.86%
---- ----
---- ----
RATE/VOLUME ANALYSIS. The following table sets forth the changes in
interest earned and interest paid resulting from changes in volume and changes
in rates. Changes in interest earned or paid due to both rate and volume have
been allocated in proportion to the relationship of the absolute dollar amounts
of the changes in each. There were no material out of period items or
adjustments included in interest income or interest expense during the periods
indicated.
Six Months Ended June 30,
-------------------------
1995 Compared to 1994
---------------------
Volume Rate Net
------ ------- -------
(AMOUNTS IN THOUSANDS)
Interest earned on:
Loans $1,252 $ 2,709 $3,961
Taxable investment securities (1330) 1,931 601
Federal funds 105 95 200
FHLBB stock 27 (3) 24
------ ------- -------
Interest income 54 4,732 4,786
------ ------- -------
Interest paid on:
Deposits 235 4,668 4,903
Borrowed funds (1,082) 72 (1,010)
------ ------- -------
Interest expense (847) 4,740 3,893
------ ------- -------
Net interest income $ 901 $ (8) $ 893
------ ------- -------
------ ------- -------
- 31 -
PROVISION FOR CREDIT LOSSES. During the first six months of 1995, the Bank
provided $1,200,000 for credit losses compared to $1,000,000 during the
comparable 1994 period. The Bank provided $600,000 during the quarter ended
March 31, 1995 and $600,000 during the second quarter of 1995. The Bank also
provided $900,000 for estimated losses on foreclosed assets during the six
months ended June 30, 1995 which is included in Foreclosed asset expense (See
"Non-interest Expense"). At June 30, 1995, the Company's allowance for credit
losses totaled $6.6 million, representing 46.5% of non-performing loans. (See
"Financial Condition").
NON-INTEREST INCOME. Non-interest income decreased $468,000 or 25.0% from
$1,873,000 in the first six months of 1994 to $1,405,000 during the current
period. Service charges and other income, comprised principally of loan service
and deposit related fees, increased $86,000 from $1,169,000 during the first six
months of 1994 to $1,255,000 for the current period. For the first six months
of 1995, the Bank incurred a net loss on the sale of investment securities
totaling $1.3 million compared to a net gain of $625,000 during the comparable
1994 period. Additionally, the Bank realized a net gain totaling $1.5 million
on the sale of loans during the first half of 1995 compared to a net gain of
$79,000 the same period in 1994. During the first quarter of 1995 the Bank sold
various securities totaling $45.6 million, resulting in a loss of $1.8 million
and loans totaling $29.5 million resulting in a gain of $1.5 million.
NON-INTEREST EXPENSE. Non-interest expense decreased $249,000 or 2.0% from
$12,623,000 during the first six months of 1994 to $12,374,000 during the
corresponding period in 1995. Salaries and employee benefits, the largest
component of the Company's cost of operations, increased $198,000 or 3.9% from
$5,124,000 during the 1994 period to $5,322,000 during the current period.
Salaries and wages increased $50,000 or 1.3% during the current period compared
to the year earlier period. Included in salary and wage expense for the first
six months of 1995 is $169,300 in payments to employees resulting from the
exercise of 18,321 SARS. Employee benefits increased $148,000 or 12.8% during
the current period compared to the year earlier period.
All other operating expenses, in the aggregate, decreased $447,000 or 6.0%
during the current period compared to the comparable period in 1994. The
decrease in the cost of operations was essentially due to the decline in
expenses related to foreclosed assets and the provision for estimated losses on
foreclosed assets. Additionally, occupancy expenses decreased resulting from
the termination of lease expenses related to the Burritt transaction. The
declines in these expenses were partially offset by increases in marketing
expenses.
Foreclosed asset expense totaled $973,000 during the current period
compared to $1,455,000 during the comparable 1994 period. For the current
period, Foreclosed asset expense includes a $900,000 provision for estimated
losses on foreclosed assets compared to a provision of $1,100,000 for the year
earlier period. (See Note 5 to Consolidated Financial Statements). The Company
expects that until the level of foreclosed assets declines substantially,
foreclosed asset expense will continue to be significant.
NET NON INTEREST MARGIN. The net non-interest margin, as a percentage of
average assets (annualized) outstanding, decreased by 8 basis points from (1.76)
during the period ended June 30, 1994 to (1.84%) during the current 1995 period.
Non-interest income, as a percentage of average assets (annualized), decreased
from .31% to .24% for the six month periods ended June 30, 1994 and 1995,
respectively. Non-interest expense, as a percentage of average assets
(annualized), was virtually unchanged at 2.08% during the six month period ended
June 30, 1995, from 2.07% during the prior year period.
- 32 -
NET NON-INTEREST INCOME/EXPENSE ANALYSIS
AS A PERCENTAGE OF AVERAGE ASSETS
Six Months Ended June 30,
---------------------------
1995 1994
---- ----
Non-interest income .24 .31
----- -----
Non-interest expense
Foreclosed asset .17 .24
FDIC insurance .22 .24
Other 1.69 1.59
----- -----
Total non-interest expense 2.08 2.07
----- -----
Net non-interest margin (1.84) (1.76)
----- -----
----- -----
PROVISION FOR INCOME TAXES. The provision for income taxes during the
current period totaled $2,152,000, reflecting a 39.9% effective income tax rate
compared to $1,977,000 or an effective income tax rate of 40.2% for the
comparable 1994 period.
FINANCIAL CONDITION
The Company's assets totaled $1.22 billion at June 30, 1995, representing a
$5.1 million or 0.4% decrease from year end 1994. The decline in assets during
the period is due to the sale of loans and investment securities during the
first quarter. During the first quarter 1995, the Bank sold $45.6 million of
investment securities and $29.5 million in mortgage loans. The investment
securities sold were comprised of fixed rate corporate and mortgaged-backed
securities, and the mortgage loans sold had fixed and adjustable interest rate
features. The proceeds from these transactions have been invested in higher
yielding interest rate sensitive loans and securities, and have been used to
reduce FHLBB advances. Net loans have decreased during the first six months of
1995 by $13.6 million and cash and investment securities have increased by $11.5
million.
The Bank, as of January 1, 1995, adopted the provisions of Statement of
Financial Accounting Standards Board No. 114, "Accounting by Creditors for
Impairment of a Loan ("SFAS 114"). SFAS 114 requires creditors to evaluate the
collectability of both contractual interest and 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 cash flow
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 adoption of this pronouncement has had the
effect of eliminating the in-substance foreclosed asset category, which is
classified within non-performing loans in the accompanying financial statements.
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
June 30, 1995, approximately $832.4 million, representing 68.4% of the Company's
assets, were comprised of loans, compared to $846.2 million or 69.2% of total
assets at December 31, 1994. The predominant focus of the Bank's lending
business has been to provide financing for residential real estate. At June 30,
1995, $658.5 million or 79.1% of the Bank's loans were for the financing of one-
to-four family residences. As 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
current 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.
- 33 -
At June 30, 1995, non-performing assets, which include loans past due 90 days
or more, non-accrual loans and foreclosed assets (see Consolidated Financial
Statements--Note 1), totaled $19.2 million, representing 1.6% of total assets,
down from the $20.8 million of non-performing assets, or 1.7% of total assets,
at year end 1994. At June 30, 1995, foreclosed assets totaled $5.1 million,
representing .4% of total assets, compared to $5.8 million or .5% of total
assets at year end 1994.
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:
June 30, 1995 December 31, 1994
--------------------------------------------------- ---------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
Allowance for Allowance for
Non-performing Loans Credit Losses Non-performing Loans Credit Losses
------------------------ --------------------- ------------------------- ---------------------
% of Non- % of Non-
% of Loans Performing % of Loans Performing
Loan Type Balance Outstanding Balance Loans Balance Outstanding Balance Loans
--------- ------- ----------- ------- ---------- ------- ----------- ------- ----------
Mortgage
1-4 Family $ 6,481 1.0% $ 8,095 1.2%
Commercial 1,575 5.6 1,643 5.8
Multi-family 3,225 25.9 2,448 28.2
------- -------
Total Mortgage 11,281 1.6 $ 4,262 37.8% 12,186 1.7 $ 4,495 36.9%
------- -------
Consumer
HELOC 1,106 1.6 816 1.2
All other 399 1.1 464 1.7
------- -------
Total Consumer 1,505 1.4 1,291 85.8 1,280 1.3 1,266 98.9
------- -------
Commercial
Real estate
development 585 16.2 788 20.9
All other 732 4.0 788 4.0
------- -------
Total Commercial 1,317 6.0 999 75.9 1,576 6.6 1,042 66.1
------- ------- ------- -------
Total $14,103 1.7 $ 6,552 46.5 $15,042 1.8 $ 6,803 45.2
------- ------- ------- -------
------- ------- ------- -------
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 $704.5 million, representing 57.9% of total assets at June 30,
1995 compared to $669.1 million or 54.7% of total assets at year end 1994.
Mortgage loans closed during the first half of 1995 totaled $20.5 million. In
the first half of 1994, as a result of a significant rise in refinance activity,
the Bank closed $133.6 million in mortgage loans.
As in prior years, and substantially due to the investment of funds
resulting from the sale of assets previously discussed, the Bank continued to
supplement local loan origination through the purchase of single family
adjustable rate mortgage loans. The Bank purchased $25.8 million of these loans
during the first half of 1995 compared to $2.0 million during the comparable
1994 period. The origination and purchase of adjustable rate loans is an
integral part of the Bank's management of interest rate risk.
- 34 -
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 $658.5
million or 79.1% of the Bank's total loan portfolio at June 30, 1995 compared to
$684.7 million, representing 80.9% of the total loan portfolio, at year end
1994. The level of non-performing one-to-four family residential loans totaled
$6.5 million or 1.0% of the loan portfolio at June 30, 1995 compared to $8.1
million or 1.2% of the portfolio at year end 1994.
Multi-family housing loans totaled $12.4 million or 1.5% of the total loan
portfolio at June 30, 1995 compared to $8.7 million or 1.0% of the total loan
portfolio at year end 1994. At June 30, 1995, non-performing loans totaled $3.2
million or 25.9% of this portfolio. At year end 1994, there were $2.5 million
or 28.2% of non-performing loans included in this category. Loans to finance
commercial real estate totaled $28.1 million or 3.4% of the total loan portfolio
at June 30, 1995, of which $1.6 million or 5.6% were non-performing. At year
end 1994, this portfolio totaled $28.5 million, representing 3.4% of total
loans, of which $1.6 million or 5.8% 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. This portfolio of loans totaled $3.6 million or 0.4%
of total loans at June 30, 1995 compared to $2.4 million or 0.3% of total loans
at year end 1994. At June 30, 1995, non-performing real estate construction
loans totaled $585,000 or 16.2% of these loans. At year end 1994, there were no
non-performing real estate construction loans. Unadvanced construction
commitments approximated $1.7 million at June 30, 1995 compared to approximately
$1.8 million at December 31, 1994.
The Company's investment in consumer loans totaled $105.7 million,
representing 12.7% of total loans at June 30, 1995, compared to $98.2 million or
11.6% of total loans at year end 1994. 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 $69.8 million in use at June 30,
1995 compared to $130.5 million, with $70.4 million in use at year end 1994. At
June 30, 1995, non-performing consumer loans totaled $1.5 million or 1.4% of
this portfolio. Home equity lines of credit included in this amount totaled
$1.1 million, representing 1.6% of HELOCs outstanding. In comparison, at year
end 1994, non-performing consumer loans totaled $1.3 million or 1.3% of the
consumer loan portfolio, including $.8 million, representing 1.2% 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 business needs. The Bank's investment in
commercial loans totaled $22.1 million at June 30, 1995, reflecting a $1.6
million or 6.8% decrease from the $23.7 million invested at year end 1994. At
June 30, 1995, $3.6 million or 16.3% of this portfolio was invested in loans for
the development of real estate and $18.5 million or 83.7% was invested in loans
for various business needs. Unadvanced real estate development commitments
totaled approximately $1.2 million at June 30, 1995 and $1.1 million at December
31, 1994. At June 30, 1995, non-performing commercial loans totaled $1.3
million, representing 6.0% of the commercial loan portfolio compared to $1.6
million or 6.6% at year end 1994.
- 35 -
NON-PERFORMING ASSETS. The following table summarizes the Bank's
non-performing loans and foreclosed assets ("non-performing assets") and
restructured loans:
At June 30, At December 31,
---------------------- -------------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
Non-accrual loans:
Mortgage . . . . . . . $11,119 $12,057 $11,000 $12,302 $18,387 $18,984 $18,081
Consumer . . . . . . . 1,422 1,567 1,280 1,789 2,082 1,683 1,920
Commercial . . . . . . 1,317 2,034 1,576 3,215 3,901 8,041 3,437
------- ------- ------- ------- ------- ------- -------
Total. . . . . . . . . . 13,858 15,658 13,856 17,306 24,370 28,708 23,438
------- ------- ------- ------- ------- ------- -------
Accruing loans past due
90 days:
Mortgage . . . . . . . 162 1,466 1,186 2,317 3,006 4,096 4,730
Consumer . . . . . . . 83 44 --- 249 1 151 230
Commercial . . . . . . --- --- --- --- --- --- ---
------- ------- ------- ------- ------- ------- -------
Total. . . . . . . . . . 245 1,510 1,186 2,566 3,007 4,247 4,960
------- ------- ------- ------- ------- ------- -------
Foreclosed assets. . . . 5,531 9,195 6,195 9,379 10,456 7,305 5,893
Valuation allowance. . . (385) (1,089) (439) (1,040) (438) (412) ---
------- ------- ------- ------- ------- ------- -------
Total, net . . . . . . . 5,146 8,106 5,756 8,339 10,018 6,893 5,893
------- ------- ------- ------- ------- ------- -------
Total non-performing
assets . . . . . . . . $19,249 $25,274 $20,798 $28,211 $37,395 $39,848 $34,291
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Restructured loans $ 4,168 $ 3,158 $ 4,213 $ 2,273 $ 8,262 $ 6,985 ---
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
As detailed in the table above, the level of non-performing loans decreased
from $15.7 million at year end 1994 to $13.9 million at June 30, 1995. At June
30, 1995, the Bank had $5.1 million in foreclosed assets, consisting of 36
properties, compared to $5.8 million, consisting of 37 properties at year end
1994. During the first half of 1995, the Bank reclassified $2.2 million in
loans to foreclosed assets.
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 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 maintains an allowance for estimated
losses on foreclosed assets through a provision which is charged to and included
in foreclosed asset expense. For the first half of 1995, the Bank provided
$900,000 to this allowance compared to $1,100,000 for the comparable 1994
period. During the current six month period, the Bank charged $954,000 in
specific write-downs against this allowance compared to $1,051,000 during the
comparable year earlier period. At June 30, 1995, the allowance for estimated
losses on foreclosed assets totaled $385,000 compared to $1.1 million at June
30, 1994.
The reduction of non-performing assets has been one of the primary
objectives of the Bank. 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 following table, the amount of
loans past due 60 days has decreased to $5.9 million at June 30, 1995,
representing .7% of the total loan portfolio compared to $6.1 million or .7% of
the total loan portfolio at year end 1994.
- 36 -
The following table summarizes the Bank's accruing loans past due 60 days:
At June 30, At December 31,
---------------------- -------------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
Loans past due 60 days:
Mortgage . . . . . . . $ 5,397 $ 3,110 $ 5,014 $ 7,369 $ 8,829 $ 9,072 $ 5,062
Consumer . . . . . . . 324 529 1,015 651 815 525 753
Commercial . . . . . . 218 109 62 --- 95 353 870
------- ------- ------- ------- ------- ------- -------
Total. . . . . . . . . . $ 5,939 $ 3,748 $ 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 28 properties for an aggregate consideration of $1.7 million in half of
1995. During the comparable 1994 period, the Bank sold and closed on 28
properties for an aggregate consideration of $2.4 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 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 $1.2 million to the allowance for credit losses
for the six months ended June 30, 1995 compared to $1.0 million for the same
period 1994. During the six months ended June 30, 1995, the Bank wrote off $1.5
million. At June 30, 1995, the allowance for credit losses totaled $6.6
million, which includes $1.4 million allocated to the loans acquired in the
Burritt transaction. In comparison, the allowance for credit losses totaled
$6.8 million at year end 1994, which included $1.8 million allocated to the
loans acquired in the Burritt transaction (see Consolidated Financial
Statements--Note 13). The allowance for credit losses represented 46.5% of
non-performing loans at June 30, 1995 compared to 45.2% at year end 1994.
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 June 30,
1995, in addition to non-performing assets, the Bank had $4.2 million in loans
which have been restructured, which is essentially unchanged from year end 1994.
- 37 -
The Bank's securities portfolio totaled $325.2 million or 26.7% of total
assets at June 30, 1995, virtually unchanged from $322.1 million or 26.4% of
total assets at December 31, 1994. 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 June 30, 1995,
the Bank had securities totaling $103.5 million classified as held-to-maturity
compared to $104.7 million at December 31, 1994. 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 June 30, 1995 totaled $220.6 million compared to $216.7
million at December 31, 1994. The available-for-sale category 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. As a result of
changes in interest rates and their effect on the market value of investments
and the sale of $45.6 million of available-for-sale securities at a loss of $1.8
million during the first six months of 1995, the Bank recorded an unrealized
loss, net of tax effect, of $362,000 which is included in stockholders' equity.
At December 31, 1994, the Bank had an unrealized loss, net of tax effect, of
$5.6 million. The trading portfolio, which consists of equity securities,
totaled $1.1 million at June 30, 1995. This portfolio is carried at fair value
with unrealized gains or losses included in earnings. At December 31, 1994,
there were $.8 million in securities classified as trading.
Cash and cash equivalents were $27.0 million at June 30, 1995 versus
$18.6 million at December 31, 1994.
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 and other borrowings.
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 proceeds in accordance with
established asset and liability management objectives.
During the six months ended June 30, 1995, deposits decreased by $1.4
million or 0.1%, after interest credited of $21.8 million, from $1.028 billion,
funding 84.1% of total assets at year end 1994, to $1.029 billion, funding 84.5%
of total assets at June 30, 1995. 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 and other borrowings as an alternative
source of funds. At June 30, 1995, FHLBB advances totaled $73.0 million,
funding 6.0% of total assets, compared to $111.1 million, funding 9.1% of total
assets at year end 1994. 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.
Other borrowings, short-term reverse repurchase agreements, totaled $23.0
million at June 30, 1995, funding 1.9% of total assets. The Bank did not
utilize other borrowings in the prior year period.
Amortization, prepayments and the sale of loans into the secondary market
supplied the Bank with an additional $104.8 million in investable funds during
the first six months of 1995. In keeping with the Bank's asset and liability
management objectives, the Bank periodically may sell loans. The Bank sold
$29.5 million in loans in the first half of 1995. These loans were included in
the loans held-for-sale category at year end 1994. Loans categorized as held-
for-sale that were not sold were returned to the mortgage loan portfolio. The
Bank has retained servicing on all loans that have been sold and, at June 30,
1995, was servicing $154.8 million of mortgage loans for others, compared to
$129.3 million at year end 1994.
- 38 -
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. The amortized balance of
$3.2 million at June 30, 1995, in addition to approximately $146,000 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 11.9% and a ratio of tier 1
capital to risk-weighted assets of 10.9% at June 30, 1995.
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 June 30, 1995, the Company had a ratio of tier 1 capital to total assets of
5.98%.
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 June 30, 1995, Derby
Savings' ratio of total capital to risk-weighted assets was 11.7% and its ratio
of tier 1 capital to risk-weighted assets was 10.7%.
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 June 30, 1995
was 5.89%.
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 had requested and the FDIC had approved an
extension of the December 31, 1994 target date to June 30, 1995. As of June 30,
1995, the Bank attained the required minimum leverage capital to asset ratio.
At June 30, 1995, the leverage capital to total assets ratio was 5.89%.
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), and a leverage ratio that
is less than 3%; (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 June 30, 1995, the Bank met the "well capitalized"
criteria based on its capital ratios at that date.
- 39 -
ASSET/LIABILITY MANAGEMENT. Derby Savings' asset liability management
program is based upon operating the Bank within a framework of fundamentally
matching interest-sensitive assets and interest-sensitive liabilities. The
purpose of pursuing this policy is to position the Bank to produce stable net
interest income through all phases of the business cycle and resulting interest
rate levels.
The table on the following page summarizes the Company's interest-sensitive
assets and interest-sensitive liabilities that mature or reprice during the
various time periods noted. Loans are net of deferred loan fees and net of
non-accruing loans.
- 40 -
JUNE 30, 1995 More Than More Than More Than
Six Months One Year Three Years
Six Months To One To Three To Five
or Less Year Years Years
---------- ---------- --------- ----------
(Dollar amounts in thousands)
Assets:
Investments:
Securities $171,359 $67,335 $39,402 $26,801
Federal funds sold 14,240 -- -- --
-------- -------- -------- -------
Total investments 185,599 67,335 39,402 26,801
-------- -------- -------- -------
Loans:
Fixed-rate mortgages 5,326 5,333 23,165 24,516
Adjustable-rate mortgages 242,077 234,786 25,984 11,048
Consumer loans 78,594 7,042 7,922 4,460
Commercial loans 20,429 41 111 30
Total loans 346,426 247,202 57,182 40,054
-------- -------- -------- -------
Total interest-sensitive assets $532,025 $314,537 $96,584 $66,855
-------- -------- -------- -------
Liabilities:
Regular & club savings $197,077 $ -- $ -- $ --
Certificates of deposit 233,704 125,643 137,202 53,996
Money market accounts 205,464 -- -- --
NOW accounts 46,691 -- -- --
FHLBB advances 22,111 23,100 23,140 4,720
Total interest-sensitive liabilities $705,047 $148,743 $160,342 $58,716
-------- -------- -------- -------
GAP (repricing difference) ($173,022) $165,794 ($63,758) $8,139
Cumulative GAP ($173,022) ($7,228) ($70,986) ($62,847)
Cumulative GAP/total assets -14.2% -0.6% -5.8% -5.2%
Ratio of interest-sensitive assets
to interest-sensitive liabilities 75.5% 211.5% 60.2% 113.9%
Cumulative ratio of interest-sensitive
assets to interest-sensitive liabilities 99.2% 93.0% 94.1%
JUNE 30, 1995 More Than More Than
Five Years 10 Years
To Ten To 20 More Than
Years Years 20 Years Total
---------- ---------- --------- ----------
(Dollar amounts in thousands)
Assets:
Investments:
Securities $9,979 $4,608 $194 $319,678
Federal funds sold -- -- -- 14,240
-------- -------- -------- ----------
Total investments 9,979 4,608 194 333,918
-------- -------- -------- ----------
Loans:
Fixed-rate mortgages 53,179 46,262 21,356 179,137
Adjustable-rate mortgages 384 -- -- 514,279
Consumer loans 4,186 2,120 -- 104,324
Commercial loans 163 21 -- 20,795
Total loans 57,912 48,403 21,356 818,535
-------- -------- -------- ----------
Total interest-sensitive assets $67,891 $53,011 $21,550 $1,152,453
-------- -------- -------- ----------
Liabilities:
Regular & club savings $ -- $ -- $ -- $197,077
Certificates of deposit -- -- -- 550,545
Money market accounts -- -- -- 205,464
NOW accounts -- -- -- 46,691
FHLBB advances -- -- -- 73,071
Total interest-sensitive liabilities $ -- $ -- $ -- $1,072,848
-------- -------- -------- ----------
GAP (repricing difference) $67,891 $53,011 $21,550
Cumulative GAP $5,044 $58,055 $79,605
Cumulative GAP/total assets 0.4% 4.8% 6.5%
Ratio of interest-sensitive assets
to interest-sensitive liabilities 107.4%
Cumulative ratio of interest-sensitive
assets to interest-sensitive liabilities 100.5% 105.4% 107.4%
- 41 -
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Not Applicable
ITEM 2 CHANGES IN SECURITIES
Not Applicable
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its 1995 annual meeting of stockholders ("Annual
Meeting") on April 26, 1995. At the annual meeting, four directors were elected
for three-year terms and the Company's stockholders ratified the appointment by
the Board of Directors of the firm of Friedberg, Smith and Co., P.C. as
independent public accountants of the Company for the year ending December 31,
1995.
(b) The names of the four directors elected at the annual meeting to new
three-year terms are as follows: Achille A. Apicella, John J. Brennan, John
F.Costigan and Angelo E. Dirienzo. In addition to these persons, the terms of
office of the following directors continue after the Annual Meeting: Michael F.
Daddona, Jr., Walter R. Archer Jr., Harry P. DiAdamo Jr., Laura J. Donahue,
Christopher H.B. Mills, John Rak, and John P. Sponheimer.
(c) The following votes were cast in the election of directors:
WITHHOLD
NOMINEES FOR AUTHORITY
-------- --- ---------
Achille A. Apicella 2,071,620 50,774
John J. Brennan 2,071,620 50,774
John F. Costigan 2,071,620 50,774
Angelo E. Dirienzo 2,071,620 50,774
There were 2,092,438 votes cast FOR ratification of the appointment of
Friedberg, Smith and Co., P.C., as independent public accountants for
the Company for the year ending December 31, 1995, 18,012 votes were
cast AGAINST such ratification, and 9,133 were abstentions.
There were no broker non-votes in either the election of directors or
as to ratification of the appointment of the firm selected to act as
the Company's independent accounts for 1995
ITEM 5 OTHER INFORMATION
Not Applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Index
Exhibit Page of this
Number Report
------ ------
27 Financial Data Schedule 44
- 42 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DS Bancor, Inc.
-------------------------------------
Registrant
Date: August 7, 1995 By: /S/ Harry P. DiAdamo, Jr.
------------------- -------------------------------------
Harry P. DiAdamo, Jr.
President & CEO
Date: August 7, 1995 By: /S/ Alfred T. Santoro
------------------- -------------------------------------
Alfred T. Santoro
Vice President, Treasurer and CFO
- 43 -