UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
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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
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(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
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class: Common Stock, par value $1.00 per share
Outstanding at November 10, 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 26 - 41
Part 2 -- Other Information 42
Signatures 43
Exhibits 44
DS BANCOR, INC.
CONSOLIDATED STATEMENTS OF POSITION
(DOLLAR AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1995 1994
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(UNAUDITED)
ASSETS
Cash and due from banks (Note 1) $15,273 $14,128
Federal funds sold (Note 1) 5,580 4,500
Securities (Notes 1 & 2)
Trading 755 770
Available-for-sale 228,000 216,674
Held-to-maturity (fair value: $98,507 at
September 30, 1995 and $96,928 at December 31, 1994) 100,461 104,702
Loans held-for-sale (Notes 1 & 3) -- 55,190
Loans receivable (net of allowances for credit losses of $6,747
at September 30, 1995 and $6,803 at December 31, 1994)(Notes 1 & 3) 852,747 784,237
Federal Home Loan Bank of Boston stock, at cost (Note 8) 9,793 8,899
Accrued income receivable (Note 1) 7,339 7,227
Bank premises and equipment, net (Notes 1 & 6) 6,453 6,975
Prepaid and deferred income taxes (Notes 1 & 10) 1,786 7,247
Foreclosed assets (net of allowances of $277 at September 30, 1995
and $439 at December 31, 1994)(Notes 1 & 5) 5,079 5,756
Other assets (Note 13) 4,257 6,385
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TOTAL ASSETS $1,237,523 $1,222,690
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----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 7)
Non-interest bearing $31,218 $30,918
Interest bearing 1,013,905 996,828
----------- -----------
Total 1,045,123 1,027,746
Mortgagors' escrow 5,866 11,885
Advances from Federal Home Loan Bank of Boston (Note 8) 90,312 111,145
Other borrowings (Note 8) 13,260 --
Other liabilities (Note 9) 4,811 4,777
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Total Liabilities 1,159,372 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--September 30, 1995--3,221,852 shares, December 31, 1994--
3,084,571 shares; outstanding--September 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 38,219 36,362
Net unrealized gains (losses) on available-for-sale securities, net of
tax of $106 at September 30, 1995 and net of tax benefit of $3,970
at December 31, 1994 148 (5,577)
Less: Treasury stock, at cost (339,500 shares) (4,513) (4,513)
----------- -----------
Total Stockholders' Equity 78,151 67,137
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,237,523 $1,222,690
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 1 -
DS BANCOR, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar amounts in thousands, except per share data)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30,
1995 1994 1995 1994
---------- ---------- ---------- ----------
(UNAUDITED)
INTEREST INCOME (NOTE 1)
Interest and fees on loans $16,606 $14,426 $47,911 $41,770
Taxable interest on securities 5,244 5,126 15,200 14,356
Dividends on investments 209 242 808 742
---------- --------- ---------- ----------
Total interest income 22,059 19,794 63,919 56,868
---------- --------- ---------- ----------
INTEREST EXPENSE
Deposits (Note 7) 12,049 9,218 34,053 26,259
Borrowed funds (Note 8) 1,461 1,793 3,852 5,194
Less: Penalties on premature time deposit withdrawals (24) (26) (120) (62)
---------- --------- ---------- ----------
Net interest expense 13,486 10,985 37,785 31,391
---------- --------- ---------- ----------
NET INTEREST INCOME 8,573 8,809 26,134 25,477
Provision for credit losses (Notes 1 & 3) 625 625 1,825 1,625
---------- --------- ---------- ----------
Net interest income after provision for credit losses 7,948 8,184 24,309 23,852
---------- --------- ---------- ----------
NON-INTEREST INCOME
Service charges and other income 633 647 1,888 1,816
Net securities gains (losses) (Note 2) 312 23 (1,035) 648
Net gain (loss) on sale of loans (1) 13 1,496 92
---------- --------- ---------- ----------
Total non-interest income, net 944 683 2,349 2,556
---------- --------- ---------- ----------
NON-INTEREST EXPENSE
Salaries and wages 1,938 1,945 5,960 5,917
Employee benefits (Note 9) 605 587 1,905 1,739
Occupancy (Note 6) 441 540 1,318 1,665
Furniture and equipment (Note 6) 376 282 949 755
Foreclosed asset expense, net (Notes 1 & 5) 427 664 1,400 2,119
Other 1,627 2,462 6,256 6,908
---------- --------- ---------- ----------
Total non-interest expense 5,414 6,480 17,788 19,103
---------- ---------- ---------- ----------
Income before income taxes 3,478 2,387 8,870 7,305
Provision for income taxes (Note 10) 1,429 966 3,581 2,943
---------- --------- ---------- ----------
NET INCOME $2,049 $1,421 $5,289 $4,362
---------- --------- ---------- ----------
---------- --------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (NOTE 1)
Primary 3,098,861 3,093,330 3,089,860 3,067,207
Fully diluted 3,098,861 3,094,535 3,096,266 3,070,114
EARNINGS PER SHARE (NOTE 1)
Primary 0.66 0.46 1.71 1.42
Fully diluted 0.66 0.46 1.71 1.42
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 4,362 4,362
Stock options exercised
(93,455 shares)(Note 11) 94 1,773 1,867
Adjustment for unrealized losses, net (4,235) (4,235)
--------- -------- -------- --------- ---------- ------------
Balance--September 30, 1994 $3,085 $37,780 $35,014 ($2,932) ($4,513) $68,434
--------- -------- -------- --------- ---------- ------------
--------- -------- -------- --------- ---------- ------------
Balance--December 31, 1994 $3,085 $37,780 $36,362 ($5,577) ($4,513) $67,137
Net income 5,289 5,289
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 gains, net 5,725 5,725
--------- -------- -------- --------- ---------- ------------
Balance--September 30, 1995 $3,222 $41,075 $38,219 $148 ($4,513) $78,151
--------- -------- -------- --------- ---------- ------------
--------- -------- -------- --------- ---------- ------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
DS BANCOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
FOR THE NINE MONTHS ENDED SEPTEMBER
-----------------------------------
1995 1994
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(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $5,289 $4,362
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for credit losses 1,825 1,625
Provision for estimated losses on foreclosed assets 1,200 1,585
Depreciation and amortization 766 589
Amortization of intangible assets 505 727
Net amortization of premiums/discounts on securities 421 1,007
Net accretion (amortization) of deferred loan fees 974 (937)
Decrease in prepaid and deferred income taxes 1,523 269
Net securities loss (gain) 1,035 (648)
Net gain on sale of loans (1,496) (92)
Gains on sales of foreclosed assets (63) (53)
Proceeds from sale of trading securities 2,852 772
Purchases of trading securities (2,429) (1,621)
Decrease (Increase) in accrued income receivable (112) (324)
Benefit for deferred income taxes (138) (237)
Net decrease in other assets 4,690 1,780
Increase (decrease) in other liabilities 34 (119)
---------- ----------
Net cash provided (used) by operating activities 16,876 8,685
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from matured available-for-sale securities 35,163 36,425
Proceeds from sale of available-for-sale securities 51,505 39,438
Proceeds from matured held-to-maturity securities 10,936 30,917
Purchase of available-for-sale securities (92,819) (54,502)
Purchase of held-to-maturity securities (7,000) (73,826)
Purchase of FHLBB stock (894) (877)
Proceeds from loans sold to others 32,724 12,124
Purchases of loans from others (63,797) (11,958)
Net (increase) decrease in loans to customers 14,464 (53,386)
Premises and equipment additions (244) (539)
Proceeds from sale of foreclosed assets 1,054 5,021
Net decrease (increase) in foreclosed assets 472 (129)
---------- ----------
Net cash used in investing activities (18,436) (71,292)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits from customers 17,377 8,811
Net increase in mortgagors' escrow (6,019) (4,303)
Net (increase) decrease in Other borrowings 13,260 (1,450)
Net (decrease) increase in short term FHLBB advances (28,132) 14,426
Proceeds from long term FHLBB advances 40,000 50,000
Repayment of long term FHLBB advances (32,701) (30,550)
Proceeds from issuance of common stock 12 1,867
Dividends paid to stockholders (12) --
---------- ----------
Net cash provided (used) by financing activities 3,785 38,801
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NET DECREASE IN CASH AND CASH EQUIVALENTS 2,225 (23,806)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,628 43,118
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $20,853 $19,312
---------- ----------
---------- ----------
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.
- 5 -
Prior to the implementation of SFAS 115, investment securities which were
intended to be held until maturity or as long-term investments were stated at
cost adjusted, where applicable, for amortization of premiums and accretion of
discounts generally computed using the interest method. Marketable equity
securities which were included in investment securities were carried at the
lower of aggregate cost or market value, and a valuation allowance was recorded
as a component of retained earnings, when the aggregate cost of marketable
equity securities temporarily exceeded market value. A loss was recognized in
earnings when the Bank's carrying value in an investment exceeded, other than
temporarily, its market value.
Gain or loss on securities sold is computed by the specific identification
method.
LOANS HELD FOR SALE generally consist of certain first mortgage loans that
management has identified will most likely be sold for reasons of managing rate
risk, liquidity, and/or asset growth, and are reflected at the lower of
aggregate cost or estimated market value. Net unrealized losses resulting from
market value less than cost are recognized through a valuation allowance by
charges against income.
LOANS RECEIVABLE that the Bank has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reflected at amortized cost
(unpaid principal balances reduced by any partial charge-offs or specific
valuation accounts) net of any net deferred fees or costs on originated loans or
any unamortized premiums or discounts on purchased loans, and less an Allowance
for credit losses.
Interest on loans is included in income as earned based on rates applied to
principal amounts outstanding. The accrual of interest income is generally
discontinued when a loan becomes past due 90 days or more as to contractual
payments of principal or interest. Income on purchased loans is adjusted for the
accretion of discounts and the amortization of premiums using the interest
method over the contractual lives of the loans, adjusted for estimated
prepayments.
Loan origination fees, net of certain direct related costs, are deferred and
amortized as an adjustment of loan yield over the life of the related loan.
Allowances for credit losses have been established by provisions charged to
income and decreased by loans charged off (net of recoveries). 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
- 6 -
Allowance for estimated losses on foreclosed assets. Costs relating to the
subsequent development or improvement of a property are capitalized when value
is increased. All other holding costs and expenses, net of rental income, if
any, are expensed as incurred.
CORE DEPOSIT INTANGIBLE. In connection with the Burritt transaction (Note 13),
the core deposit intangible is being amortized on a straight line basis over
seven years.
INCOME TAXES. Effective January 1, 1993, the Company adopted SFAS No. 109,
"Accounting for Income Taxes". SFAS 109 required a change from the deferred
method of accounting for income taxes of the Accounting Principles Board Opinion
11 ("APB 11") to the asset and liability method of accounting for income taxes.
Under the asset and liability method of SFAS 109, deferred income tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Pursuant to the deferred method under APB 11, which was applied in 1992 and
prior years, deferred income taxes were recognized for income and expense items
that were reported in different years for financial reporting purposes and
income tax purposes using the tax rate applicable for the year of the
calculation. Under the deferred method, deferred taxes were not adjusted for
subsequent changes in tax rates.
Provisions for income taxes are computed based on all taxable revenue and
deductible expense items included in the accompanying Consolidated Statement of
Earnings regardless of the period in which such items are recognized for income
tax filing purposes. The Company and its subsidiary file consolidated Federal
and combined Connecticut income tax returns.
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.
- 7 -
NOTE 2 - SECURITIES
A summary of the Bank's investment securities is as follows:
SEPTEMBER 30, 1995
-------------------------------------------
(AMOUNTS IN THOUSANDS)
GROSS GROSS
TRADING AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- --------- --------
Marketable equities $ 742 $ 13 $ --- $ 755
-------- -------- -------- --------
-------- -------- -------- --------
SEPTEMBER 30, 1995
-------------------------------------------
(AMOUNTS IN THOUSANDS)
GROSS GROSS
AVAILABLE-FOR-SALE AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- --------- --------
U.S. Government and agency bonds $ 13,297 $ 92 $ --- $ 13,389
Mortgage-backed securities 201,935 1,837 1,995 201,777
Other bonds and notes 4,185 --- 80 4,105
-------- -------- -------- --------
Total debt securities 219,417 1,929 2,075 219,271
Marketable equities 7,319 476 125 7,670
Mutual funds 1,010 49 --- 1,059
-------- -------- -------- --------
Total $227,746 $ 2,454 $ 2,200 $228,000
-------- -------- -------- --------
-------- -------- -------- --------
SEPTEMBER 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 $ --- $ 8 $ 1,992
Mortgage-backed securities 94,461 43 1,989 92,515
-------- -------- -------- --------
Total debt securities 96,461 43 1,997 94,507
Money market preferred stock 4,000 --- --- 4,000
-------- -------- -------- --------
Total $100,461 $ 43 $ 1,997 $ 98,507
-------- -------- -------- --------
-------- -------- -------- --------
DECEMBER 31, 1994
------------------------------------------
(AMOUNTS IN THOUSANDS)
GROSS GROSS
TRADING AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- --------- --------
Marketable Equities $ 918 $ --- $ 148 $ 770
-------- -------- -------- --------
-------- -------- -------- --------
- 8 -
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
-------- -------- -------- --------
-------- -------- -------- --------
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:
SEPTEMBER 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 $ --- $ --- $ 2,000 $ 1,992
Due after one year through five years 4,185 4,105 --- ---
Due after five years through ten years 5,322 5,359 --- ---
Due after ten years 7,975 8,030 --- ---
-------- ------- ------- -------
17,482 17,494 2,000 1,992
Mortgage-backed securities 201,935 201,777 94,461 92,515
-------- -------- -------- --------
Total $219,417 $219,271 $ 96,461 $ 94,507
-------- -------- -------- --------
-------- -------- -------- --------
- 9 -
During the three months ended September 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 $ 5,239 $ 211 $ 1 $ 210
TRADING
Realized gains 1,333 110 --- 110
-------- ------- ------- -------
Total realized $ 6,572 $ 321 $ 1 320
-------- ------- -------
-------- ------- -------
Net unrealized losses--trading (8)
-------
Total $ 312
-------
-------
During the three months ended September 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
Marketable equities $ 501 $ 88 $ --- $ 88
-------- ------- ------- -------
Total available-for-sale 501 88 --- 88
TRADING
Realized gains --- --- --- ---
-------- ------- ------- -------
Total realized $ 501 $ 88 $ --- 88
-------- ------- -------
-------- ------- -------
Net unrealized losses--trading (65)
-------
Total $ 23
-------
-------
During the nine months ended September 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 5,814 335 1 334
-------- ------- ------- -------
Total available-for-sale 51,391 335 1,779 (1,444)
TRADING
Realized gains 2,852 272 24 248
-------- ------- ------- -------
Total realized $ 54,243 $ 607 $ 1,803 (1,196)
-------- ------- -------
-------- ------- -------
Net unrealized gains--trading 161
-------
Total $(1,035)
-------
-------
- 10 -
During the nine months ended September 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)
---------- -------- -------- -------
AVAILABLE-FOR-SALE (AMOUNTS IN THOUSANDS)
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 936 206 46 160
-------- ------- ------- -------
Total available-for-sale 38,886 681 50 631
TRADING
Realized gains 772 69 -- 69
-------- ------- ------- -------
Total realized $ 39,658 $ 750 $ 50 700
-------- ------- -------
-------- ------- -------
Net unrealized losses--trading (52)
-------
Total $ 648
-------
-------
At September 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:
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
(AMOUNTS IN THOUSANDS)
MORTGAGE
Residential real estate $683,763 $687,582
Commercial real estate 26,496 28,731
Multi-family real estate 12,789 8,682
Residential construction 5,128 2,363
-------- --------
728,176 727,358
-------- --------
CONSUMER
Home equity lines of credit 70,910 70,358
Home equity installment 22,117 19,267
Collateral 3,529 3,014
All other 16,661 4,783
-------- --------
113,217 97,422
-------- --------
COMMERCIAL
Commercial 18,126 20,199
Real estate development 3,476 3,775
-------- --------
21,602 23,974
-------- --------
TOTAL 862,995 848,754
Net deferred loan fees, premiums & discounts (3,498) (2,524)
Allowances for credit losses (6,750) (6,803)
-------- --------
852,747 839,427
Residential real estate loans held-for-sale --- (55,190)
-------- --------
Loans receivable, net $852,747 $784,237
-------- --------
-------- --------
- 11 -
Loans are summarized between fixed and adjustable rates as follows:
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
(AMOUNTS IN THOUSANDS)
Fixed rate $218,228 $213,669
Adjustable rate 644,767 635,085
-------- --------
Total $862,995 $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 $150,500,000 and $129,300,000 at September 30, 1995 and December
31, 1994, respectively.
Loans outstanding at September 30, 1995 and December 31, 1994 included
approximately $14,503,000 and $15,042,000, respectively, of non-performing
loans, which were comprised of $11,881,000 in mortgage loans, $1,500,000 in
consumer loans and $1,122,000 in commercial loans at September 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 nine months ended September 30, 1995 was
approximately $14,617,000 and $14,806,000, respectively.
Activity in the allowances for credit losses for the periods indicated were as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
------- ------- ------- --------
(AMOUNTS IN THOUSANDS)
MORTGAGE LOANS
Balance at beginning of period $ 4,261 $ 4,032 $ 4,495 $ 4,605
Provision for credit losses 625 625 1,625 975
Loan charge-offs (462) (467) (1,869) (1,391)
Recoveries 42 2 215 3
------- ------- ------- -------
Balance at end of period $ 4,466 $ 4,192 $ 4,466 $ 4,192
------- ------- ------- -------
------- ------- ------- -------
CONSUMER LOANS
Balance at beginning of period $ 1,291 $ 1,378 $ 1,266 $ 1,193
Provision for credit losses --- --- 200 600
Loan charge-offs (22) (121) (266) (555)
Recoveries 14 25 83 44
------- ------- ------- -------
Balance at end of period $ 1,283 $ 1,282 $ 1,283 $ 1,282
------- ------- ------- -------
------- ------- ------- -------
COMMERCIAL LOANS
Balance at beginning of period $ 999 $ 1,059 $ 1,042 $ 1,181
Provision for credit losses --- --- --- 50
Loan charge-offs --- (19) (48) (195)
Recoveries 2 1 7 5
------- ------- ------- -------
Balance at end of period $ 1,001 $ 1,041 $ 1,001 $ 1,041
------- ------- ------- -------
------- ------- ------- -------
TOTAL ALLOWANCE FOR CREDIT LOSSES
Balance at beginning of period $ 6,551 $ 6,469 $ 6,803 $ 6,979
Provision for credit losses 625 625 1,825 1,625
Loan charge-offs (484) (607) (2,183) (2,141)
Recoveries 58 28 305 52
------- ------- ------- -------
Balance at end of period $ 6,750 $ 6,515 $ 6,750 $ 6,515
------- ------- ------- -------
------- ------- ------- -------
- 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 September 30, 1995, the Allowances
for credit losses, which totaled approximately $6.8 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:
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
(AMOUNTS IN THOUSANDS)
Loan Commitments
Commitments to extend credit $ 19,184 $ 10,783
Commitments to purchase loans 17,510 24,000
Unadvanced commercial lines of credit 9,679 8,232
Unadvanced portion of construction loans 3,014 2,904
Unused portion of Home Equity Lines of Credit 58,399 59,977
Other consumer lines of credit 1,752 994
-------- --------
Total $109,568 $106,890
-------- --------
-------- --------
Letters of credit $ 1,199 $ 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.
There were no outstanding commitments to purchase or sell securities at
September 30, 1995.
NOTE 5 - FORECLOSED ASSETS
Foreclosed assets consisted of the following:
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
(AMOUNTS IN THOUSANDS)
One-to-four family residential $ 1,780 $ 1,599
Multi-family --- 510
Commercial real estate 468 907
Land 3,108 3,179
------- -------
Total 5,356 6,195
Allowance for estimated losses (277) (439)
------- -------
Foreclosed assets, net $ 5,079 $ 5,756
------- -------
------- -------
- 13 -
Activity in the allowance for estimated losses on foreclosed assets is as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
Balance at beginning of period $ 385 $1,089 $ 439 $1,040
Provision charged to expense 300 485 1,200 1,585
Net losses charged to the allowance (408) (841) (1,362) (1,892)
------ ------ ------ ------
Balance at end of period $ 277 $ 733 $ 277 $ 733
------ ------ ------ ------
------ ------ ------ ------
Losses and expenses related to foreclosed assets are summarized as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
Provision charged to expense $ 300 $ 485 $1,200 $1,585
Gain on sale of real estate (42) (38) (63) (62)
Holding cost and expenses 189 291 361 783
Rental income (20) (74) (98) (187)
------ ------ ------ ------
Foreclosed asset expense, net $ 427 $ 664 $1,400 $2,119
------ ------ ------ ------
------ ------ ------ ------
NOTE 6 - BANK PREMISES AND EQUIPMENT
Bank premises and equipment were comprised of the following:
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
(AMOUNTS IN THOUSANDS)
Buildings and land $ 7,381 $ 7,266
Leasehold improvements 747 836
Furniture and equipment 5,961 5,656
------- -------
14,089 13,758
Accumulated depreciation and amortization 7,636 6,783
------- -------
Bank premises and equipment, net $ 6,453 $ 6,975
------- -------
------- -------
Depreciation and amortization included in Non-interest expense aggregated
approximately $313,400 and $766,000 for the three and nine months ended
September 30, 1995, respectively, and $219,900 and $589,400 for the three and
nine months ended September 30, 1994, respectively.
- 14 -
LEASES.
Rent expense for banking premises of $170,800 and $520,600 is included in
Occupancy expense for the three and nine months ended September 30, 1995,
respectively, and $209,500 and $670,100 for the three and nine months ended
September 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 September 30, 1995 (AMOUNTS IN THOUSANDS):
1995 $ 146
1996 560
1997 464
1998 291
1999 145
Thereafter 173
--------
Total future minimum
lease payments $1,779
--------
--------
These leases include options to renew for periods ranging from 3 to 22 years.
NOTE 7 - DEPOSITS
Deposits were comprised of the following:
SEPTEMBER 30, DECEMBER 31,
-------------------------------------------------------------
1995 1994
--------------------------------- -------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
WEIGHTED WEIGHTED
AVERAGE AVERAGE
STATED RATES AMOUNT STATED RATES AMOUNT
------------ ---------- ------------ -----------
Demand $ 31,218 $ 30,918
NOW 1.75-2.00%(a) 44,186 1.75-2.00%(a) 49,097
Regular and club savings 2.00 189,971 2.00 213,574
Money market deposit accounts 5.74 206,231 5.10 205,239
Time accounts 5.65 573,517 4.72 528,918
---------- ----------
Total deposits $1,045,123 $1,027,746
---------- ----------
---------- ----------
(a) RANGES INDICATE TIERS
Time accounts at September 30, 1995 mature as follows:
WEIGHTED AVERAGE
MATURITY STATED RATE AMOUNT
-------- --------------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
One year or less 5.45% $381,575
One to two years 6.11% 109,421
Two to three years 5.75% 28,401
Beyond 6.06% 54,120
--------
Total 5.65% $573,517
--------
--------
Time deposit accounts of $100,000 or more approximated $35,950,000 at September
30, 1995. Of that amount, approximately $14,216,000 mature in six months or
less, $6,876,000 mature after six months to one year, and $14,858,000 mature
after one year.
- 15 -
Interest expense on deposits is summarized as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
---- ---- ---- ----
(AMOUNTS IN THOUSANDS)
NOW $ 223 $ 235 $ 676 $ 693
Regular and club savings 977 2,180 2,989 5,544
Money market deposits 2,891 1,139 8,401 3,390
Time savings 7,924 5,635 21,851 16,512
Escrow 34 29 136 120
------- ------- ------- -------
Total interest expense on deposits $12,049 $ 9,218 $34,053 $26,259
------- ------- ------- -------
------- ------- ------- -------
NOTE 8 - BORROWED FUNDS
Terms of the advances from the Federal Home Loan Bank of Boston ("FHLBB") were
as follows:
SEPTEMBER 30, DECEMBER 31,
MATURITY/REPRICE DATE 1995 1994
----------------------- -------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
WEIGHTED AVERAGE WEIGHTED AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------------- -------- ----------------
1995 $ 2 --- $ 1,482 ---
1995 34,350 5.64 58,703 6.02
1996 32,050 5.08 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 $ 90,312 $111,145
-------- --------
-------- --------
The Bank has a cash management line of credit from the FHLBB in the amount of
$10,672,000 at September 30, 1995. At September 30, 1995 and December 31, 1994,
the Bank had book overdrafts of $2,000 and $1,482,000, respectively, which are
included in advances from the FHLBB.
At September 30, 1995, the Bank had reverse repurchase agreements outstanding
totaling $13.3 million at a rate of 5.83%. 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
---- ---- ---- ----
(AMOUNTS IN THOUSANDS)
FHLBB advances $1,028 $1,793 $3,232 $5,151
Line of credit --- --- --- 43
Repurchase agreements & other borrowings 433 --- 620 ---
------ ------ ------ ------
Total expense on borrowed funds $1,461 $1,793 $3,852 $5,194
------ ------ ------ ------
------ ------ ------ ------
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 September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
------ ------ ------ ------
(AMOUNTS IN THOUSANDS)
Service cost-benefits earned during the period $ 87 $100 $261 $300
Interest cost on projected benefit obligation 95 76 285 228
Expected return on plan assets (100) (97) (300) (292)
Net amortization and deferral (2) (2) (6) (7)
---- ---- ---- ----
Net pension expense $ 80 $ 77 $240 $229
---- ---- ---- ----
---- ---- ---- ----
Assumptions used in the accounting were:
FOR THE NINE MONTHS ENDED SEPTEMBER 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)
--------
--------
* 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 nine months ended
September 30, 1995 was $25,200 and $75,400, respectively, and $24,000 and
$72,100, respectively, for the three and nine months ended September 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 nine months ended September 30, 1995 and 1994, the Bank had no
insurance premium expenses inasmuch as policy loans were utilized to fund
premiums due.
In September 1995, both the Bank and the Company adopted a deferred compensation
plan for non-employee directors. Under the plan, non-employee directors may
elect to defer the payment of all or any portion of their Board or Committee
fees, with deferred amounts to be payable commencing upon the director's death,
disability or termination of service for reason other than death or disability.
Deferred amounts bear interest at a rate equal to the one year U.S. Treasury
rate, plus 50 basis points, adjusted monthly.
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 nine months ended September 30, 1995 was $18,100
and $58,500, respectively, and $21,000 and $63,300, respectively, for the three
and nine months ended September 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.
- 18 -
Net periodic postretirement benefit cost reflected in Employee benefits expense
included the following components:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
------ ------ ------ ------
(AMOUNTS IN THOUSANDS)
Service cost-benefits attributable to service during the period $ 53 $ 70 $159 $210
Interest cost on APBO 47 42 141 126
Amortization of transition obligation 17 25 51 76
---- ---- ---- ----
Net periodic postretirement benefit cost $117 $137 $351 $412
---- ---- ---- ----
---- ---- ---- ----
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
------ ------ ------ ------
(AMOUNTS IN THOUSANDS)
Current income tax provision
Federal $1,102 $ 751 $2,720 $2,331
State 406 271 998 849
------ ------ ------ ------
Total current 1,508 1,022 3,718 3,180
------ ------ ------ ------
Deferred income tax provision
Federal (57) (41) (99) (172)
State (22) (15) (38) (65)
------ ------ ------ ------
Total deferred (79) (56) (137) (237)
------ ------ ------ ------
Total provision for income taxes $1,429 $ 966 $3,581 $2,943
------ ------ ------ ------
------ ------ ------ ------
The Company's effective income tax rate differed from the Federal statutory tax
rate as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- --------------------------------
1995 1994 1995 1994
---------------- ----------------- --------------- -------------
(DOLLAR AMOUNTS IN THOUSANDS)
Amount % Amount % Amount % Amount %
------ ---- ------ ---- ------ ---- ------ ----
Tax at statutory Federal rate $1,183 34.0% $ 812 34.0% $3,016 34.0% $2,483 34.0%
State tax* 254 7.3 169 7.1 633 7.1 518 7.1
Dividend income exclusion (10) (0.3) (15) (0.6) (73) (0.8) (61) (0.8)
Other 2 0.1 -- -- 5 0.1 3 --
------- ----- ------- ----- ------- ----- ------- -----
Effective rate on operations $1,429 41.1% $ 966 40.5% $3,581 40.4% $2,943 40.3%
------- ----- ------- ----- ------- ----- ------- ------
------- ----- ------- ----- ------- ----- ------- ------
* NET OF FEDERAL TAX BENEFIT
- 19 -
The components of the net deferred income tax asset are as follows:
SEPTEMBER 30, 1995 DECEMBER 31, 1994
------------------ -----------------
(AMOUNTS IN THOUSANDS)
Deferred income tax liability:
Federal $ 371 $ 273
State 141 104
------ ------
512 377
------ ------
Deferred income tax asset:
Federal 2,874 5,549
State 1,098 2,121
------ ------
3,972 7,670
------ ------
Net deferred income tax asset $3,460 $7,293
------ ------
------ ------
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:
September 30, 1995 December 31, 1994
------------------ -----------------
(AMOUNTS IN THOUSANDS)
Allowances for losses $2,045 $2,023
Depreciation (62) (62)
Deferred loan fees (156) (59)
Deferred compensation 235 215
Loan expense 302 291
Employee benefits 669 539
Trading loss (5) 62
Intangible asset 432 314
------ ------
3,460 3,323
Unrealized losses (gains) (106) 3,970
------ ------
Net deferred income tax asset $3,354 $7,293
------ ------
------ ------
A summary of the change in the net deferred income tax asset for the nine months
ended September 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 137
Unrealized losses (4,076)
-------
Net deferred income tax asset at September 30, 1995 $3,354
-------
-------
Deferred tax income asset at December 31, 1993 $2,055
Deferred tax provision:
Income and expense 237
Unrealized gains 3,015
-------
Net deferred tax asset at September 30, 1994 $5,307
-------
-------
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.
- 20 -
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.
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 NINE MONTHS ENDED SEPTEMBER 30, 1995
Outstanding at beginning of period 227,549
Granted 129,450
Exercised (a) (19,634)
Cancelled ---
--------
Outstanding at end of period 337,365
--------
--------
(a) INCLUDES SARS
As of September 30, 1995, 337,365 options were exercisable at prices ranging
from $9.50 to $27.62.
At September 30, 1995, there were 337,365 options in the Plans that remained
outstanding. Through September 30, 1995, 147,552 options have been exercised
and 100,503 options were available for grant.
During the nine months ended September 30, 1995, 19,634 SARS were exercised
which resulted in payments to employees aggregating $177,900. These amounts are
included in Salary and wage expense for 1995.
- 21 -
NOTE 12 - CONDENSED FINANCIAL INFORMATION OF DS BANCOR, INC.
(PARENT COMPANY ONLY)
The condensed statements of position for DS Bancor, Inc. were as follows:
SEPTEMBER 30, DECEMBER 31,
1995 1994
----------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
ASSETS
Cash in subsidiary bank $ 776 $ 860
Investment in bank subsidiary, at equity 77,050 65,985
Other assets 340 303
--------- ---------
TOTAL ASSETS $78,166 $67,148
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Other liabilities $ 15 $ 11
------- -------
Total Liabilities 15 11
------- -------
STOCKHOLDERS' EQUITY
Common Stock 3,222 3,085
Additional paid-in capital 41,075 37,780
Retained earnings 38,367 30,785
Less: Treasury stock, at cost (339,500 shares) (4,513) (4,513)
------- -------
Total Stockholders' Equity 78,151 67,137
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $78,166 $67,148
------- -------
------- -------
- 22 -
The condensed statements of earnings were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
------ ------ ------ ------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Income:
Dividends from subsidiary $ --- $ --- $ --- $ 567
Other income 8 --- 34 ---
------- ------- ------- ------
Total income 8 --- 34 567
------- ------- ------- -------
Expense:
Interest expense --- 18 --- 43
Other expense 34 88 123 147
------- ------- ------- -------
Total expense 34 106 123 190
------- ------- ------- -------
Income before income tax and change
in equity of subsidiary (26) (106) (89) 377
Income tax benefit (11) (44) (37) (79)
------- ------- ------- -------
Income before change in equity of
subsidiary (15) (62) (52) 456
Change in equity of subsidiary 2,064 1,511 5,341 2,485
------- ------- ------- -------
Net income $2,049 $1,449 $5,289 $2,941
------- ------- ------- ------
------- ------- ------- ------
Weighted average shares outstanding
Primary 3,098,661 3,093,330 3,089,860 3,067,207
Fully Diluted 3,098,861 3,094,535 3,096,266 3,070,114
Earnings per share
Primary $ 0.66 $ 0.46 $ 1.71 $ 1.42
Fully diluted $ 0.66 $ 0.46 $ 1.71 $ 1.42
The condensed changes in the components of Stockholders' Equity for the nine
months ended September 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 4,362
Stock options exercised
(93,455 shares)(Note 12) 94 1,773
Adjustment for unrealized gains (losses), net (4,235)
------- ------- ------- --------
Balance - September 30, 1994 $3,085 $37,780 $32,082 $(4,513)
------ ------- ------- -------
------ ------- ------- -------
Balance - December 31, 1994 $3,085 $37,780 $30,785 $(4,513)
Net income 5,289
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 5,725
------- ------- ------- -------
Balance - September 30, 1995 $3,222 $41,075 $38,367 $(4,513)
------- ------- ------- -------
------- ------- ------- -------
- 23 -
The condensed statements of cash flows were as follows:
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1995 1994
---- ----
(AMOUNTS IN THOUSANDS)
Cash flows from operating activities:
Dividends received from subsidiary $ --- $ 567
Other income --- 80
Tax benefit received from subsidiary --- 28
Interest paid --- (68)
Interest on deposit account 34 ---
Cash paid to suppliers (118) (185)
----- -----
Net cash provided from operating activities (84) 422
----- -----
Cash flows from financing activities:
Payment on notes payable--Bank --- (1,450)
Dividends paid to stockholders (12) ---
Issuance of common stock 12 1,867
----- -----
Net cash applied to financing activities --- (417)
----- -----
Net increase (decrease) in cash (84) 839
Cash at beginning of period 860 85
----- -----
Cash at end of period $ 776 $ 924
----- -----
----- -----
A reconciliation of net earnings to cash provided by operating activities was as
follows:
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1995 1994
---- ----
(AMOUNTS IN THOUSANDS)
Net Income $5,289 $4,362
Items not resulting in cash flow:
Equity in undistributed earnings of subsidiary (5,341) (3,914)
Decrease (increase) in income tax
benefits receivable (37) (5)
Increase in accrued expenses 5 (21)
------ ------
Net cash flow from operating activities $ ( 84) $ 422
------ ------
------ ------
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).
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.
- 24 -
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 $3.0 million at September 30, 1995 (Note 1).
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 September
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.
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 August 1995, the Federal Deposit Insurance Corporation ("FDIC") and the
Connecticut Banking Commissioner terminated the Memorandum of Understanding (the
"Memorandum") entered into by Derby Savings Bank (the "Bank") in April 1992.
The Memorandum, as amended, required that the Bank achieve a tier 1 capital to
total assets ratio of at least 5.75% by June 30, 1995. Additionally, the
Memorandum limited the payment of cash dividends by the Bank to DS Bancor to the
Company's debt service and non-salary expenses.
By June 30, 1995, the Bank had achieved a tier 1 capital to total assets ratio
of 5.9%, which led to the termination of the Memorandum by the FDIC and the
Connecticut Banking Commissioner. At September 30, 1995, this ratio stood at
6.0%. In connection with the termination of the Memorandum, the Bank's Board of
Directors has adopted a policy that permit the payment of cash dividends by the
Bank to the Company of up to 10% of the Bank's net income.
- 25 -
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE QUARTER FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- ------------------------
1995 1994 1995 1994
-------- -------- --------- --------
OPERATING DATA: (UNAUDITED)
Interest income $22,059 $19,794 $63,919 $56,868
Interest expense 13,486 10,985 37,785 31,391
-------- -------- -------- --------
Net interest income 8,573 8,809 26,134 25,477
Provision for credit losses 625 625 1,825 1,625
-------- -------- -------- --------
Net interest income after provision for credit losses 7,948 8,184 24,309 23,852
Non-interest income 944 683 2,349 2,556
Non-interest expense 5,414 6,480 17,788 19,103
-------- -------- -------- --------
Income before income taxes 3,478 2,387 8,870 7,305
Provision for income taxes 1,429 966 3,581 2,943
-------- -------- -------- --------
NET INCOME $2,049 $1,421 $5,289 $4,362
-------- -------- -------- --------
-------- -------- -------- --------
EARNINGS PER SHARE
Primary $0.66 $0.46 $1.71 $1.42
Fully diluted $0.66 $0.46 $1.71 $1.42
STATISTICAL DATA:
Net interest rate spread (a) 2.55% 2.76% 2.69% 2.73%
Net yield on average interest-earning assets (a) 2.87% 2.96% 2.98% 2.90%
Return on average assets (a) 0.67% 0.46% 0.59% 0.48%
Return on average stockholders' equity (a) 10.49% 8.13% 9.40% 8.52%
Average stockholders' equity to average assets 6.38% 5.70% 6.23% 5.58%
MARKET PRICES OF COMMON STOCK:
High $29.13 $30.50 $29.13 $33.75
Low $25.25 $25.75 $21.75 $21.25
At September 30 $26.50 $26.50 $26.50 $26.50
FINANCIAL CONDITION AND OTHER DATA AT: SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1995 1994 1994
------------- ------------ -------------
(UNAUDITED)
Total assets $1,237,523 $1,222,690 $1,232,930
Loan portfolio, net 852,747 839,427 829,892
Securities portfolio 329,216 322,146 336,282
Deposits 1,045,123 1,027,746 1,015,032
Federal Home Loan Bank of Boston advances 90,312 111,145 138,867
Other borrowings 13,260 -- --
Stockholders' equity 78,151 67,137 68,43
Book value per share 25.82 22.19 22.61
Leverage ratio 6.06% 5.63% 5.49%
Tier I capital to risk-weighted assets 10.96% 10.38% 9.92%
Total capital to risk-weighted assets 11.95% 11.41% 10.88%
Non-performing loans 14,503 15,042 9,094
Foreclosed & in-substance foreclosed assets 5,079 5,756 11,686
---------- ---------- -----------
Total non-performing assets 19,582 20,798 20,780
Restructured loans 4,385 4,213 3,850
Allowance for credit losses 6,750 6,803 6,515
Allowance as a percentage of non-performing loans 46.5% 45.2% 71.6%
_________________________________________________
(a) Annualized.
- 26 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
COMPARISON OF RESULTS OF OPERATION
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
GENERAL. Net income for the third quarter ended September 30, 1995 totaled
$2,049,000 or $.66 per share (fully diluted) compared to net income of
$1,421,000 or $.46 per share (fully diluted) for the comparable period in 1994.
Net income for the three months ended September 30, 1995 represented an
annualized return on average assets of .67% compared to .46% for the comparable
1994 period. Net interest income, the primary component of the Company's
earnings, decreased $236,000 or 2.7% from $8.8 million for the third quarter of
1994 to $8.6 million for the current quarter. The provision for credit losses
for the current quarter was unchanged at $625,000 compared to the year earlier
period. Non-interest income increased to $944,000 for the quarter ended
September 30, 1995 from $683,000 for the comparable period in 1994, primarily as
the result of an increase in net gains on the sale of securities.
Non-interest expense declined by $1.1 million or 16.5% for the three months
ended September 30, 1995 to $5.4 million, compared to $6.5 million for the
comparable 1994 period. The decline in operating expense is primarily
attributable to a reduction in foreclosed asset expense and a reduction in
deposit insurance expense. During the current quarter, the Federal Deposit
Insurance Corporation ("FDIC") announced that the Bank Insurance Fund ("BIF")
was fully capitalized as of May 31, 1995. As a result, the FDIC refunded
insurance premium overpayments and interest to member banks for the period from
June 1, 1995 through September 30, 1995. Additionally, the FDIC, effective June
1, 1995, reduced the deposit insurance premiums paid by most BIF member banks.
The refund received by the Bank during the current quarter totaled $653,000,
which increased the Company's net income by $385,000 or $.12 per share (fully
diluted).
INTEREST INCOME. Interest and fee income from loans and income on the
securities portfolio increased $2.3 million or 11.4% during the three months
ended September 30, 1995, compared to the corresponding period in 1994. This
increase in interest income was essentially due to an increase in interest-
earning assets and an increase in the annualized yield on interest-earning
assets. The increase in average interest-earning assets was primarily within
the loan portfolio. Average loans outstanding increased $9.8 million or 1.2%
while the average of all other interest-earning assets decreased $4.3 million or
1.2%. The average yield on interest-earning assets increased 73 basis points
(100 basis points equals 1%) from 6.66% during the third quarter of 1994 to
7.39% during the current period. The increase in the average yield on interest-
earning assets, in large part, reflects the upward repricing of interest rate
sensitive assets included within the loan and securities portfolios of the Bank.
INTEREST EXPENSE. Interest expense increased $2.5 million or 22.8% during
the three months ended September 30, 1995, compared to the corresponding period
in 1994. Average interest-bearing liabilities declined by $13.1 million or 1.2%
between September 30, 1995 and September 30, 1994. The decrease in average
interest-bearing liabilities was the net result of an increase in deposits of
$13.7 million or 1.4% and a decrease in borrowings of $26.9 million or 20.1%
between the two periods. The average cost of funds increased from 3.90% during
the quarter ended September 30, 1994 to 4.84% for the current quarter. This
increase reflects the general increase in the level of short-term interest rates
between the two periods and a shift in deposits from regular savings to term
certificates of deposit.
NET INTEREST INCOME. Net interest income, as a result of a $2.3 million
increase in interest income and a $2.5 million increase in interest expense,
decreased $236,000 or 2.7% from $8.8 million for the quarter ended September 30,
1994 to $8.6 million for the current 1995 quarter. The net interest rate spread
decreased 21 basis point from 2.76% during the third quarter of 1994 to 2.55%
during the corresponding period in 1995.
- 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 September 30,
--------------------------------
1995 1994
---- ----
(DOLLAR AMOUNTS IN THOUSANDS)
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- -------- ------ -------- -------- ------
Interest-earning assets:
Loans $ 841,579 16,606 7.89% $ 831,826 $14,426 6.94%
Taxable investment securities 331,803 5,122 6.17 348,409 5,187 5.96
Federal funds 11,522 164 5.69 149 2 5.37
FHLBB stock 9,793 167 6.82 8,899 179 8.05
----------- ------- --------- -------
Total interest-earning assets $1,194,697 22,059 7.39 $1,189,283 19,794 6.66
---------- ------- ------ ---------- ------- ------
---------- ----------
Interest-bearing liabilities:
Deposits $1,010,515 12,025 4.76 $ 996,787 9,192 3.69
Borrowed funds 104,296 1,461 5.60 131,169 1,793 5.47
----------- ------- ----------- ------- ------
Total interest-bearing
liabilities $1,114,811 13,486 4.84 $1,127,956 10,985 3.90
---------- ------- ------ ---------- ------- ------
---------- ----------
Net interest income $ 8,573 $ 8,809
------- -------
------- -------
Net interest rate spread 2.55% 2.76%
----- -----
----- -----
Net yield on average interest-earning assets 2.87% 2.96%
----- -----
----- -----
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 September 30,
--------------------------------
1995 Compared to 1994
---------------------
Volume Rate Net
------ ------ -----
(AMOUNTS IN THOUSANDS)
Interest earned on:
Loans $ 171 $ 2,009 $ 2,180
Taxable investment securities (252) 187 (65)
Federal funds 162 -- 162
FHLBB stock 17 (29) (12)
------ ------- -------
Interest income 98 2,167 2,265
------ ------- -------
Interest paid on:
Deposits 128 2,705 2,833
Borrowed funds (375) 43 (332)
------ ------ ------
Interest expense (247) 2,748 2,501
------ ------- ------
Net interest income $ 345 $ (581) $ (236)
------ ------- ------
------ ------- ------
- 28 -
PROVISION FOR CREDIT LOSSES. The Bank provided $625,000 for credit losses
for both the current quarter and for the comparable 1994 period. In addition to
the provision for credit losses, the Bank also provided $300,000 for estimated
losses on foreclosed assets during the current quarter compared to $485,000
during the year earlier period, which is included in foreclosed asset expense
(See "Non-Interest Expense"). At the end of the current quarter, the Company's
allowance for credit losses totaled $6.7 million, representing 46.5% of non-
preforming loans. The allowance for credit losses includes $1.4 million
allocated to loans acquired in the Burritt transaction (see notes to
Consolidated Financial Statements).
NON-INTEREST INCOME. Non-interest income increased $261,000 from $683,000
during the quarter ended September 30, 1994 to $944,000 during the current
period. The increase primarily resulted from net realized securities gains of
$312,000 during the current quarter compared to $23,000 during the same period
in 1994. Service charges and other income of $633,000 and net loss on sale of
loans of $1,000 for the three months ended September 30, 1995 both represented a
$14,000 decline compared to the third quarter 1994.
NON-INTEREST EXPENSE. Non-interest expense decreased $1.1 million or 16.5%
from $6.5 million during the third quarter of 1994 to $5.4 million during the
current period. As mentioned previously, the FDIC refunded $653,000 in
insurance premium overpayments to the Bank and reduced the deposit insurance
assessment effective June 1, 1995. As a result, the FDIC deposit insurance
premium for the three months ended September 30, 1995 declined to $17,000 from
$659,000 for the comparable 1994 period.
Foreclosed asset expense totaled $427,000 during the current quarter
representing a 35.7% decline compared to the $664,000 in foreclosed asset
expense during the comparable 1994 period. Included in the current quarter
foreclosed asset expense is a $300,000 provision for estimated losses on
foreclosed assets compared to a $485,000 provision for the same period in 1994.
(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.
Salaries and employee benefits, the largest component of the Company's cost
of operations at $1.9 million, remained essentially unchanged between the third
quarters of 1995 and 1994.
The Bank, as required by the Statement of Financial Accounting Standards No.
91, defers costs resulting from the origination of loans, which are amortized as
an adjustment to yield over the contractual term of the related loans. These
deferred costs, which are primarily comprised of salaries, employee benefits,
and other loan expenses, totaled $247,000 during the current quarter compared to
$272,000 during the year earlier period.
- 29 -
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 43 basis points from (1.89%)
during the quarter ended September 30, 1994 to (1.46%) during the current 1995
period. Non-interest income as a percentage of average assets (annualized)
increased from .22% to .31% for the quarters ended September 30, 1994 and 1995,
respectively. Non-interest expense as a percentage of average assets
(annualized) decreased 34 basis points from 2.11% during the quarter ended
September 30, 1994 to 1.77% during the current quarter.
NET NON-INTEREST INCOME/EXPENSE ANALYSIS
AS A PERCENTAGE OF AVERAGE ASSETS
Three Months Ended September 30,
--------------------------------
1995 1994
---- ----
Non-interest income .31 .22
------ ------
Non-interest expense
Foreclosed asset .14 .22
FDIC insurance .01 .21
Other 1.62 1.68
------ ------
Total non-interest expense 1.77 2.11
------ ------
Net non-interest margin (1.46) (1.89)
------ ------
------ ------
PROVISION FOR INCOME TAXES. The provision for income taxes during the
current quarter totaled $1.4 million, reflecting a 41.1% effective income tax
rate compared to $966,000 or an effective income tax rate of 40.5% for the
comparable year earlier period.
- 30 -
COMPARISON OF RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
GENERAL. Net income for the nine months ended September 30, 1995 totaled
$5,289,000 or $1.71 per share (fully diluted) compared to net income of
$4,362,000 or $1.42 per share (fully diluted) for the same 1994 period. Net
income for the 1995 nine month period includes an FDIC refund to the Bank of
deposit insurance premium overpayment $653,000 during the third quarter. This
increased the Company's net income by $385,000 or $.12 per share (fully
diluted).
Net income for the current period reflects an increase of $927,000 or 21.3%
compared to net income for the comparable 1994 period. For the current period,
compared to the year earlier period, net interest income increased $657,000 or
2.6% and non-interest expense declined $1.3 million or 6.9%. These improvements
were partially offset by a $207,000 or 8.1% decrease in non-interest income and
an increase in the provision for credit losses of $200,000 in the nine months
ended September 30, 1995 compared to the similar 1994 period.
INTEREST INCOME. Interest and fee income from loans and interest on the
securities portfolio increased $7.1 million or 12.4% from $56.9 million for the
first nine months of 1994 to $63.9 million for the first nine months of 1995.
This increase in interest income was due to an increase in the average effective
yield on interest-earning assets, which was partially offset by a decline in
interest-earning assets.
Average interest-earning assets decreased $1.6 million or .1% during the
current period compared to the year earlier period. Average loans outstanding
increased $26.9 million or 3.3% and the average of all other interest-earning
assets declined $28.6 million or 7.9%. The average yield on interest-earning
assets increased 81 basis points from 6.47% for the nine months ended September
30, 1994 to 7.28% for the nine months ended September 30, 1995. The increase in
the yield on average-earning assets reflects the upward repricing of interest
rate sensitive assets included within the loan and securities portfolios of the
Bank.
INTEREST EXPENSE. Interest expense increased $6.4 million or 20.4% from
$31.4 million for the first nine months of 1994 to $37.8 million for the
comparable nine month period in 1995. This increase was due to an increase in
the cost of funds which was partially offset by a decrease in average interest-
bearing liabilities outstanding.
The average interest rate paid on interest-bearing liabilities increased
from 3.74% during the first nine months of 1994 to 4.59% during the current 1995
period. The level of short-term interest rates was higher during the current
period compared to the year earlier period. Due to the higher level of short-
term interest rates and the velocity of repricing, the average cost of deposits
rose 98 basis points from 3.51% as of September 30, 1994 to 4.49% for the
current period. The cost of borrowed funds increased from 5.51% to 5.63% during
the same period.
Average interest-bearing liabilities decreased $20.9 million or 1.9%
between the two nine month periods ending September 30, 1994 and 1995,
respectively. The decrease reflects an increase in average retail deposits of
$13.6 million or 1.4% and a decrease in average borrowings of $34.5 million or
27.5%.
NET INTEREST INCOME. Net interest income, as a result of a $7.1 million
increase in interest income, and a $6.4 million increase in interest expense,
increased $657,000 or 2.6% from $25.5 million for the nine months ended
September 30, 1994 to $26.1 million for the same period in 1995. The net
interest rate spread decreased 4 basis points from 2.73% during the 1994 period
to 2.69% during the corresponding period in 1994.
- 31 -
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.
Nine Months Ended September 30,
--------------------------------
1995 1994
---- ----
(DOLLAR AMOUNTS IN THOUSANDS)
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- -------- ------ -------- -------- ------
Interest-earning assets:
Loans $ 837,501 47,911 7.63% $ 810,555 $41,770 6.87%
Taxable investment securities 313,392 15,062 6.41 349,627 14,526 5.54
Federal funds 10,383 447 5.74 3,520 86 3.26
FHLBB stock 9,351 499 7.12 8,548 486 7.58
---------- ------- ---------- -------
Total interest-earning assets $1,170,627 63,919 7.28 $1,172,250 56,868 6.47
---------- ------- ------ ---------- ------- ------
---------- ----------
Interest-bearing liabilities:
Deposits $1,007,441 33,933 4.49 $ 993,848 26,197 3.51
Borrowed funds 91,228 3,852 5.63 125,760 5,194 5.51
---------- ------- ----------- -------
Total interest-bearing
liabilities $1,098,669 37,785 4.59 $1,119,608 31,391 3.74
---------- ------- ------ ---------- ------- ------
---------- ----------
Net interest income $26,134 $25,477
------- -------
------- -------
Net interest rate spread 2.69% 2.73%
----- -----
----- -----
Net yield on average interest-earning assets 2.98% 2.90%
----- -----
----- -----
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.
NINE MONTHS ENDED SEPTEMBER 30,
1995 COMPARED TO 1994
Volume Rate Net
------ ------ -----
(AMOUNTS IN THOUSANDS)
Interest earned on:
Loans $ 1,424 $ 4,717 $ 6,141
Taxable investment securities (1,599) 2,135 536
Federal funds 260 101 361
FHLBB stock 44 (31) 13
-------- -------- --------
Interest income 129 6,922 7,051
-------- -------- --------
Interest paid on:
Deposits 363 7,373 7,736
Borrowed funds (1,456) 114 (1,342)
-------- ------- --------
Interest expense (1,093) 7,487 6,394
-------- ------- --------
Net interest income $ 1,222 $ (565) $ 657
-------- -------- --------
-------- -------- --------
- 32 -
PROVISION FOR CREDIT LOSSES. During the first nine months of 1995, the
Company provided $1.8 million for credit losses compared to $1.6 million during
the comparable 1994 period. In addition to the provision for credit losses, the
Bank also provided $1.2 million for estimated losses on foreclosed assets during
the current period compared to $1.6 million during the year earlier period.
These foreclosesd asset provisions are included in foreclosed asset expense (see
"Non-Interest Expense").
NON-INTEREST INCOME. Non-Interest income decreased $207,000 or 8.1% from
$2.6 million during the first nine months of 1994 to $2.4 million during the
comparable 1995 period. Service charges and other income, comprised principally
of loan service and deposit related fees, remained essentially unchanged between
the two periods at $1.9 million. For the first nine months of 1995, the Bank
incurred a net loss on the sale of securities totaling $1.0 million compared to
a net gain of $648,000 during the comparable 1994 period. Additionally, the
Bank realized a net gain totaling $1.5 million on the sale of loans during the
1995 period compared to a net gain of $92,000 for the same 1994 period. During
the first quarter of 1995, the Bank sold various securities totaling $45.6
million, resulting in a loss of $1.8 million, and sold loans totaling $29.5
million, resulting in a gain of $1.5 million.
NON-INTEREST EXPENSE. Non-Interest expense declined $1.3 million or 6.9%
from $19.1 million during the first nine months of 1994 to $17.8 million during
the current 1995 period. Salaries and employee benefits, the largest component
of the Company's cost of operations, increased $209,000 or 2.7% from $7.7
million during the nine months ended September 30, 1994 to $7.9 million during
the current nine month period. Salaries and wages increased $43,000 or .7%
between the two periods. Included in salary and wage expense for the first nine
months of 1995 is $177,900 in payment to employees resulting in the exercise of
19,634 SARS. Employee benefits increased $166,000 or 9.6% during the current
period compared to the year earlier period, reflecting the increased cost of the
insurance benefit plan covering hospitalization and group life.
Foreclosed asset expense totaled $1.4 million during the current period
compared to $2.1 million during the comparable 1994 period. Included in the
current period foreclosed asset expense is a $1.2 million provision for
estimated losses on foreclosed assets compared to a $1.6 million provision for
the same period in 1994. (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.
All other operating expenses, in the aggregate, decreased $805,000 or 8.6%
during the current period compared to the nine months ended September 30, 1994.
The decrease in the cost of operations was, in large part, due to a $653,000
refund of FDIC deposit insurance in the third quarter of 1995. Additionally,
occupancy expenses decreased by $347,000, primarily as the result of termination
of lease expenses related to the Burritt transaction (See Note 13 to
Consolidated Financial Statements). Furniture and equipment expense increased
$194,000 or 25.7% from $755,000 during the first nine months of 1994 to $949,000
in the current period.
The Bank, as required by the Statement of Financial Accounting Standards
No. 91, defers certain direct costs resulting from the origination of loans,
which are amortized as an adjustment of yield over the contractual period of the
related loans. These deferred costs, which are principally comprised of
salaries, employee benefits, and other loan expenses, totaled $582,000 during
the current nine month period compared to $1.3 million during the comparable
1994 period.
- 33 -
NET NON-INTEREST MARGIN. The net non-interest margin, as a percentage of
average assets (annualized) outstanding, increased by 9 basis points from (1.80)
during the period ended September 30, 1994 to (1.71%) during the current 1995
period. Non-interest income, as a percentage of average assets (annualized),
declined from .28% to .26% for the nine month periods ended September 30, 1994
and 1995, respectively. Non-interest expense, as a percentage of average assets
(annualized), decreased 11 basis points from 2.08% during the nine month period
ended September 30, 1994 to 1.97% during the current period.
NET NON-INTEREST INCOME/EXPENSE ANALYSIS
AS A PERCENTAGE OF AVERAGE ASSETS
Nine Months Ended September 30,
-------------------------------
1995 1994
----- -----
Non-interest income .26 .28
----- -----
Non-interest expense
Foreclosed asset .15 .23
FDIC insurance .15 .23
Other 1.67 1.62
----- -----
Total non-interest expense 1.97 2.08
----- -----
Net non-interest margin (1.71) (1.80)
------ ------
------ ------
PROVISION FOR INCOME TAXES. The provision for income taxes during the
current period totaled $3.6 million, reflecting a 40.4% effective income tax
rate, compared to $2.9 million or an effective income tax rate of 40.3% for the
comparable 1994 period.
FINANCIAL CONDITION
The Company's assets totaled $1.24 billion at September 30, 1995,
representing a $14.8 million or 1.2% increase from year end 1994. Net loans
increased during the first nine months of 1995 by $13.3 million and cash and
securities increased by $9.3 million. All other assets, primarily prepaid and
deferred income taxes, declined by $7.8 million from year end 1994. During the
first quarter 1995, the Bank sold $45.6 million of securities and $29.5 million
in mortgage loans. The 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.
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.
- 34 -
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
September 30, 1995, approximately $859.5 million, representing 69.5% 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
September 30, 1995, $679.9 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 and into 1995, 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. Loans to consumers increased by
$15.8 million or 8.0% to $114.0 million during the first nine months of 1995.
The Company continued to control the level of non-performing assets, which
include loans past due 90 days or more, non-accrual loans and foreclosed assets
(see Consolidated Financial Statements--Note 1). At September 30, 1995, non-
performing assets totaled $19.6 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 September 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:
September 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 $ 7,892 1.2% $ 8,095 1.2%
Commercial 1,575 6.0 1,643 5.8
Multi-family 2,414 19.0 2,448 28.2
------- -------
Total Mortgage 11,881 1.6 $ 4,466 37.6% 12,186 1.7 $ 4,495 36.9%
------- -------
Consumer
HELOC 1,008 1.4 816 1.2
All other 492 1.1 464 1.7
------- ------
Total Consumer 1,500 1.3 1,283 85.5 1,280 1.3 1,266 98.9
------- ------
Commercial
Real estate
development 314 9.0 788 20.9
All other 808 4.5 788 4.0
------- -------
Total Commercial 1,122 5.2 1,001 89.2 1,576 6.6 1,042 66.1
------- ------- ------- -------
Total $14,503 1.7 $ 6,750 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 $724.1 million, representing 58.5% of total assets at September
30, 1995 compared to $669.1 million or 54.7% of total assets at year end 1994.
Mortgage loans closed during the first nine months of 1995 totaled $30.0
million. In the first nine months of 1994, as a result of a significant rise in
refinance activity, the Bank closed $157.4 million in mortgage loans.
- 35 -
As in prior years, and in part due to the investment of funds resulting
from the sale of assets previously discussed, the Bank continued to supplement
local loan originations through the purchase of single family adjustable rate
mortgage loans. The Bank purchased $63.8 million of these loans during the
first nine months of 1995 compared to $12.0 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.
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 $679.9
million or 79.1% of the Bank's total loan portfolio at September 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 $7.9 million or 1.2% of the loan portfolio at September 30, 1995
compared to $8.1 million or 1.2% of the portfolio at year end 1994.
Multi-family housing loans totaled $12.7 million or 1.5% of the total loan
portfolio at September 30, 1995 compared to $8.7 million or 1.0% of the total
loan portfolio at year end 1994. At September 30, 1995, non-performing loans
totaled $2.4 million or 19.1% 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 $26.8 million or 3.1% of the total
loan portfolio at September 30, 1995, of which $1.6 million or 6.0% 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 $5.1 million or 0.6%
of total loans at September 30, 1995 compared to $2.4 million or .3% of total
loans at year end 1994. At September 30, 1995 and at December 31, 1994 there
were no non-performing real estate construction loans. Unadvanced construction
commitments approximated $2.2 million at September 30, 1995 compared to
approximately $1.8 million at December 31, 1994.
The Company's investment in consumer loans totaled $114.0 million,
representing 13.3% of total loans at September 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 $129.8 million, with $70.9 million
in use at September 30, 1995 compared to $130.5 million, with $70.4 million in
use at year end 1994. At September 30, 1995, non-performing consumer loans
totaled $1.5 million or 1.3% of this portfolio. Home equity lines of credit
included in this amount totaled $1.0 million, representing 1.4% 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 $21.5 million at September 30, 1995, reflecting a $2.2
million or 9.5% decrease from the $23.7 million invested at year end 1994. At
September 30, 1995, $3.5 million or 16.2% of this portfolio was invested in
loans for the development of real estate and $18.0 million or 83.8% was invested
in loans for various business needs. Unadvanced real estate development
commitments totaled approximately $787,000 at September 30, 1995 and $1.1
million at December 31, 1994. At September 30, 1995, non-performing commercial
loans totaled $1.1 million, representing 5.2% of the commercial loan portfolio
compared to $1.6 million or 6.6% at year end 1994.
- 36 -
NON-PERFORMING ASSETS. The following table summarizes the Bank's
non-performing loans and foreclosed assets ("non-performing assets") and
restructured loans:
September 30, December 31,
-------------------- ------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Non-accrual loans:
Mortgage............. $11,653 $10,549 $11,000 $12,302 $18,387 $18,984 $18,081
Consumer............. 1,414 1,279 1,280 1,789 2,082 1,683 1,920
Commercial........... 1,122 1,715 1,576 3,215 3,901 8,041 3,437
-------- -------- -------- -------- -------- -------- -------
Total.................. 14,189 13,543 13,856 17,306 24,370 28,708 23,438
-------- -------- -------- -------- -------- -------- -------
Accruing loans past due
90 days:
Mortgage............. 228 583 1,186 2,317 3,006 4,096 4,730
Consumer............. 86 148 --- 249 1 151 230
Commercial........... --- --- --- --- --- --- ---
-------- -------- -------- -------- -------- -------- -------
Total.................. 314 731 1,186 2,566 3,007 4,247 4,960
-------- -------- -------- -------- -------- -------- -------
Foreclosed assets...... 5,355 7,239 6,195 9,379 10,456 7,305 5,893
Valuation allowance.... (277) (733) (439) (1,040) (438) (412) ---
-------- -------- -------- -------- -------- -------- -------
Total, net............. 5,078 6,506 5,756 8,339 10,018 6,893 5,893
-------- -------- -------- -------- -------- -------- -------
Total non-performing
assets............... $19,581 $20,780 $20,798 $28,211 $37,395 $39,848 $34,291
-------- -------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------- -------
Restructured loans $ 4,385 $ 3,158 $ 4,213 $ 2,273 $ 8,262 $ 6,985 ---
-------- -------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------- -------
As detailed in the table above, the level of non-performing loans increased
from $14.3 million at year end 1994 to $14.5 million at September 30, 1995. At
September 30, 1995, the Bank had $5.4 million in foreclosed assets, consisting
of 32 properties, compared to $5.8 million, consisting of 37 properties at year
end 1994. During the first nine months of 1995, the Bank reclassified $3.5
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. In the nine month period ended September 30, 1995,
the Bank provided $1.2 million to this allowance compared to $1.6 million for
the comparable 1994 period. During the current nine month period, the Bank
charged $1.4 million in specific write-downs against this allowance compared to
$1.9 million during the comparable year earlier period. At September 30, 1995,
the allowance for estimated losses on foreclosed assets totaled $277,000
compared to $733,000 at September 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 remained essentially unchanged at $6.0 million at
September 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.
- 37 -
The following table summarizes the Bank's accruing loans past due 60 days:
September 30, December 31,
-------------------- ------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Loans past due 60 days:
Mortgage............. $ 5,391 $ 6,792 $ 5,014 $ 7,369 $ 8,829 $ 9,072 $ 5,062
Consumer............. 506 716 1,015 651 815 525 753
Commercial........... 79 617 62 --- 95 353 870
-------- ------ ------ ------ ------ ------ ------
Total.................. $ 5,976 $ 8,125 $ 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 an officer 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 48 properties for an aggregate consideration of $2.8 million through
the first three quarters of 1995. During the comparable 1994 period, the Bank
sold and closed on 51 properties for an aggregate consideration of $5.5 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
seeks to control 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 $1.8 million to the
allowance for credit losses for the nine months ended September 30, 1995
compared to $1.6 million for the same period 1994. During the nine months ended
September 30, 1995, the Bank wrote off $1.9 million. At September 30, 1995 the
allowance for credit losses totaled $6.8 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 September 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 September
30, 1995, in addition to non-performing assets, the Bank had $4.4 million in
loans which have been restructured, compared to $4.2 million at year end 1994.
- 38 -
The Bank's securities portfolio was $329.2 million or 26.6% of total assets
at September 30, 1995, compared to $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 September 30, 1995, the Bank had
securities totaling $100.5 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
September 30, 1995 totaled $228.0 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 $51.4
million of available-for-sale securities at a loss of $1.4 million during the
first nine months of 1995, the Bank recorded an unrealized gain, net of tax
effect, of $148,000 which is included in stockholders' equity at September 30,
1995. 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 $755,000 at September 30, 1995. This portfolio is carried at fair value
with unrealized gains or losses included in earnings. At December 31, 1994,
there were $770,000 in securities classified as trading.
Cash and cash equivalents were $20.9 million at September 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. 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 nine months ended September 30, 1995, deposits increased by
$17.4 million or 1.7%, after interest credited of $33.8 million, from $1.028
billion, funding 84.1% of total assets at year end 1994, to $1.045 billion,
funding 84.5% of total assets at September 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 September 30, 1995, FHLBB advances totaled $90.3 million,
funding 7.3% 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 $13.3
million at September 30, 1995, funding 1.1% 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 $155.5 million in investable funds during
the first nine months of 1995. In keeping with the Bank's asset and liability
management objectives, the Bank periodically may sell loans. The Bank sold
$31.2 million in loans through September 30, 1995. The majority of 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 September 30, 1995, was servicing $150.5 million of mortgage loans
for others, compared to $129.3 million at year end 1994.
- 39 -
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
$3.0 million at September 30, 1995, in addition to approximately $144,000 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 11.95% and a
ratio of tier 1 capital to risk-weighted assets of 10.96% at September 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 September 30, 1995, the Company had a ratio of tier 1 capital to total assets
of 6.06%.
Derby Savings Bank is also required by the FDIC to meet risk-based ratios
the same as those adopted by the FRB for the Company. At September 30, 1995,
Derby Savings' ratio of total capital to risk-weighted assets was 11.79% and its
ratio of tier 1 capital to risk-weighted assets was 10.80%.
The FDIC has also adopted a minimum leverage ratio of 3% of tier 1 capital
to total assets. The FDIC has also indicated that all but the most highly rated
banks should maintain a leverage ratio of 4% to 5% of tier 1 capital to total
assets. Derby Savings' ratio of tier 1 capital to total assets at September 30,
1995 was 5.98%.
On August 16, 1995 the FDIC terminated the Memorandum of Understanding
("MOU") entered into by the Bank in April 1992. The MOU, as amended, required
among other things that the Bank achieve a leverage capital ratio at or above
5.75% by June 30, 1995. As of June 30 1995 the Bank had achieved a leverage
capital to total assets ratio of 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 September 30, 1995, the Bank met the "well
capitalized" criteria based on its capital ratios at that date.
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 -
SEPTEMBER 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 $200,735 $50,441 $38,193 $19,809
Federal funds sold 5,580 -- -- --
---------- ---------- ---------- ----------
Total investments 206,315 50,441 38,193 19,809
---------- ---------- ---------- ----------
Loans:
Fixed-rate mortgages 5,185 5,611 23,469 24,217
Adjustable-rate mortgages 278,060 220,406 21,060 11,590
Consumer loans 79,451 8,916 12,904 4,166
Commercial loans 20,003 41 97 30
---------- ---------- ---------- ----------
Total loans 382,699 234,974 57,530 40,003
---------- ---------- ---------- ----------
TOTAL INTEREST-SENSITIVE ASSETS $589,014 $285,415 $95,723 $59,812
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
LIABILITIES:
Regular & club savings $189,971 $ -- $ -- $ --
Certificates of deposit 251,560 129,586 136,994 55,377
Money market accounts 206,231 -- -- --
NOW accounts 44,186 -- -- --
FHLBB advances 55,352 11,050 19,790 4,120
---------- ---------- ---------- ----------
TOTAL INTEREST-SENSITIVE LIABILITIES $747,300 $140,636 $156,784 $59,497
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
GAP (repricing difference) ($158,286) $144,779 ($61,061) $315
Cumulative GAP ($158,286) ($13,507) ($74,568) ($74,253)
Cumulative GAP/total assets -12.8% -1.1% -6.0% -6.0%
Ratio of interest-sensitive assets
to interest-sensitive liabilities 78.8% 202.9% 61.1% 100.5%
Cumulative ratio of interest-sensitive
assets to interest-sensitive liabilities 98.5% 92.9% 93.3%
SEPTEMBER 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 $7,837 $6,244 $178 $323,437
Federal funds sold -- -- -- 5,580
---------- ---------- ---------- ----------
Total investments 7,837 6,244 178 329,017
---------- ---------- ---------- ----------
Loans:
Fixed-rate mortgages 52,977 46,137 23,559 181,155
Adjustable-rate mortgages 129 -- -- 531,245
Consumer loans 4,845 2,293 -- 112,575
Commercial loans 142 21 -- 20,334
---------- ---------- ---------- ----------
Total loans 58,093 48,451 23,559 845,309
---------- ---------- ---------- ----------
TOTAL INTEREST-SENSITIVE ASSETS $65,930 $54,695 $23,737 $1,174,326
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
LIABILITIES:
Regular & club savings $ -- $ -- $ -- $189,971
Certificates of deposit -- -- -- 573,517
Money market accounts -- -- -- 206,231
NOW accounts -- -- -- 44,186
FHLBB advances -- -- -- 90,312
---------- ---------- ---------- ----------
TOTAL INTEREST-SENSITIVE LIABILITIES $ -- $ -- $ -- $1,104,271
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
GAP (repricing difference) $65,930 $54,695 $23,737
Cumulative GAP ($8,323) $46,372 $70,109
Cumulative GAP/total assets -0.7% 3.7% 5.7%
Ratio of interest-sensitive assets
to interest-sensitive liabilities 106.3%
Cumulative ratio of interest-sensitive
assets to interest-sensitive liabilities 99.2% 104.2% 106.3%
- 41 -
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Not Applicable
ITEM 2 CHANGES IN SECURITIES
Not Applicable
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5 OTHER INFORMATION
Not Applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Index
Exhibit Page of this
Number Report
------ ------
10.1 Derby Savings Bank's Deferred 44
Compensation Plan for Directors
10.2 DS Bancor Inc.'s Deferred 49
Compensation Plan for Directors
10.3 Derby Savings Bank's Split Dollar 54
Life Insurance Agreement (Endorsement
Method) entered into on October 5,
1995 by and between Derby Savings
Bank and Alfred T. Santoro.
27 Financial Data Schedule 57
- 42 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
DS Bancor, Inc.
--------------------------------
Registrant
Date: November 13, 1995 By: /S/ Harry P. DiAdamo, Jr.
-------------------- --------------------------------
Harry P. DiAdamo, Jr.
President & CEO
Date: November 13, 1995 By: /S/ Alfred T. Santoro
-------------------- ---------------------------------
Alfred T. Santoro
Vice President, Treasurer and CFO
- 43 -