EXHIBIT 13
174.
FELLOW SHAREHOLDERS:
During 1996 Derby Savings Bank will celebrate it's 150th anniversary. This
annual report addresses some of the reasons for our success.
PRESIDENT DIADAMO. A key perspective is PEOPLE. As President of Derby
Savings, I would like to offer a few insights. As a society, Americans have
always recognized and appreciated the values of perseverance and hard work.
Ultimately, these attributes have become virtues incorporated into the self-
appraisal of every successful individual. These characteristics, I feel, have
been, and continue to be, particularly prominent in the people that have guided
and served Derby Savings.
When I joined the Bank over 15 years ago as a member of the Board of
Directors, I did so because I wished to be part of a living, vital and integral
segment of The Greater Valley Community. Since becoming President, my staff and
I have worked with a goal of making Derby Savings an even greater contributor to
The Valley and Connecticut, as a whole. It is my feeling that collectively all
of our people ... from those who founded the Company in 1846 to those who have
made it the tenth largest financial institution in Connecticut today ... have
provided exceptional service. DERBY SAVINGS HAS SURVIVED AND PROSPERED FOR 150
YEARS. We have done so because we cared enough about the Company, as well as
ourselves, to work hard.
As we celebrate our 150th anniversary, I am pleased to report that the
Company had net income for 1995 of $7,613,000 or $2.45 per share, a 33.3%
increase from net income for 1994 of $5,710,000 or $1.86 per share.
Stockholders' equity totaled $80.8 million at December 31, 1995 and represented
6.5% of total assets. This equated to a book value of $26.68 per share compared
to $22.19 at year end 1994. The Company's Tier 1 capital ratio at December 31,
1995 was 6.2%. Additionally, the Company's ratio of total capital to risk-
weighted assets was 11.9% and its ratio of Tier 1 capital to risk-weighted
assets was 11.0%.
CHAIRMAN DADDONA. As Chairman of the Board, I was pleased when the Board
of Directors recently declared a cash dividend of $.06 per share, the first cash
dividend declared by the Company since 1992. The restoration of the cash
dividend was due to our 1995 earnings performance and the lifting in August 1995
by the FDIC and the Connecticut Banking Department of the Memorandum of
Understanding entered into by the Bank in April 1992.
Going forward the Company's goal will be to continue to improve earnings.
In this regard, although the Connecticut economy continues to show signs of
economic weakness, in 1996 we expect to focus on consumer, commercial and
business lending and on controlling expenses.
In closing, we are both honored and privileged to serve this fine
institution and to acknowledge that without our top-notch employees we would not
be where we are today. Also, we thank our loyal customers ... both old and new
... for banking with DSB. And on behalf of the Board of Directors, we thank
you, our stockholders, for your support of the Company.
Michael F. Daddona Jr. Harry P. DiAdamo Jr.
Chairman President & CEO
SELECTED FINANCIAL AND OTHER DATA
(Dollar amounts in thousands, except per share data)
DS BANCOR, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------------------------------------------------
AT AND FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
--------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
OPERATING DATA:
Interest income $86,589 $77,282 $74,335 $54,144 $57,796
Interest expense 51,575 42,818 43,816 31,885 39,469
-------- -------- -------- -------- --------
Net interest income 35,014 34,464 30,519 22,259 18,327
Provision for credit losses 2,525 2,325 2,475 1,375 4,400
-------- -------- -------- -------- --------
Net interest income after provision
for credit losses 32,489 32,139 28,044 20,884 13,927
Non-interest income 3,684 3,101 7,343 3,071 1,695
Non-interest expense 23,540 25,610 27,113 15,897 13,166
-------- -------- -------- -------- --------
Income before income taxes and
cumulative effect
of a change in accounting principle 12,633 9,630 8,274 8,058 2,456
Provision for income taxes 5,020 3,920 3,348 3,217 1,645
-------- -------- -------- -------- --------
Income before cumulative effect of
a change in accounting principle 7,613 5,710 4,926 4,841 811
Cumulative effect of a change in method
of accounting for income taxes -- -- 1,548 -- --
-------- -------- -------- -------- --------
NET INCOME $7,613 $5,710 $6,474 $4,841 $811
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
EARNINGS PER SHARE--PRIMARY (a):
Income before cumulative effect of a
change in accounting principle $2.46 $1.86 $1.65 $1.65 $0.28
Cumulative effect of a change in method
of accounting for income taxes -- -- 0.52 -- --
-------- -------- -------- -------- --------
Net Income $2.46 $1.86 $2.17 $1.65 $0.28
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
EARNINGS PER SHARE--FULLY DILUTED (a):
Income before cumulative effect of a
change in accounting principle $2.45 $1.86 $1.63 $1.65 $0.28
Cumulative effect of a change in method
of accounting for income taxes -- -- 0.51 -- --
-------- -------- -------- -------- --------
Net Income $2.45 $1.86 $2.14 $1.65 $0.28
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
PER SHARE (a):
Book value $26.68 $22.19 $22.66 $19.98 $18.13
Dividend -- -- -- -- $0.19
MARKET PRICES OF COMMON STOCK:
High $29.13 $33.75 $22.75 $18.50 $14.00
Low $21.75 $21.00 $14.25 $8.00 $6.00
At December 31, $25.50 $22.25 $22.50 $18.25 $8.50
FINANCIAL CONDITION AND OTHER DATA:
Total assets $1,254,483 $1,222,690 $1,194,121 $1,190,707 $669,545
Loans, net 875,339 839,427 787,091 721,146 525,927
Securities 320,188 322,146 322,599 271,515 101,212
Deposits 1,058,145 1,027,746 1,006,221 994,931 522,180
Federal Home Loan Bank of Boston advances 96,876 111,145 104,991 120,771 83,136
Other borrowings -- -- 1,450 2,091 2,936
Stockholders' equity 80,809 67,137 66,440 58,585 53,104
Leverage ratio 6.19% 5.63% 5.11% 4.51% 7.93%
Tier 1 capital to risk-weighted assets 10.94% 10.38% 8.87% 7.87% 10.66%
Total capital to risk-weighted assets 11.91% 11.41% 9.89% 9.12% 11.40%
Non-performing loans 13,768 15,042 19,872 27,377 32,955
Foreclosed assets, net 3,712 5,756 8,339 10,018 6,893
-------- -------- -------- -------- --------
Total non-performing assets 17,480 20,798 28,211 37,395 39,848
Allowance for credit losses 6,906 (b) 6,803 (b) 6,979 (b) 13,937 (b) 3,674
Allowance as a percentage of non-performing loans 50.2% 45.2% 35.1% 50.9% 11.1%
Number of banking offices 22 22 23 22 10
STATISTICAL DATA:
Net interest rate spread 2.67% 2.76% 2.55% 3.04% 2.68%
Net yield on average interest-earning assets 2.97 2.94 2.68 3.24 3.02
Return on average assets 0.63 0.47 0.54 0.66 0.13
Return on average stockholders' equity 9.95 8.34 10.30 8.44 1.47
Average stockholders' equity to average assets 6.31 5.58 5.26 7.80 8.54
Dividend payout ratio (a) -- --- --- --- 69.79
(a) Adjusted retroactively to reflect stock dividends declared.
(b) Includes $1.2 million, $1.8 million, $2.3 million and
$10.4 million, allocated to loans acquired as part of the Burritt
transaction, for December 31, 1995, 1994, 1993 and 1992, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
DS Bancor, Inc. (the "Company" or "DS Bancor") is the holding company for
Derby Savings Bank ("Derby Savings" or the "Bank"). The Company's principal
asset consists of all of the outstanding shares of Derby Savings Bank. Derby
Savings is a state chartered savings bank headquartered in Derby, Connecticut.
The Bank, which was organized in 1846, conducts business from 22 banking offices
located in New Haven, Fairfield and Hartford counties.
Deposits at Derby Savings are federally insured by the Bank Insurance Fund
("BIF") administered by the Federal Deposit Insurance Corporation (the "FDIC")
and the Bank is subject to comprehensive regulation, examination and supervision
by the FDIC and the Banking Commissioner of the State of Connecticut. The
Company, as a bank holding company, is subject to regulation by the Board of
Governors of the Federal Reserve System.
BUSINESS. Derby Savings is primarily engaged in the business of obtaining
funds in the form of deposits and borrowings and investing such funds in
residential and commercial mortgage loans, other consumer and commercial loans,
and a variety of investment securities.
Deposits are the primary source of funds for the Bank. In obtaining
deposits, Derby Savings faces strong competition from other financial
institutions both inside and outside of its primary market areas. In order to
attract and retain deposits, management has continually broadened the line of
products and related services to meet the diverse investment objectives of its
depositors. The Bank offers a variety of deposit products including consumer
and commercial checking accounts, money market accounts, flexible term
certificates of deposit, retirement accounts, regular savings and automated
teller machines with a link to regional and international shared networks.
As a Connecticut chartered savings bank, Derby Savings has statutory
authority to invest funds in a multiplicity of assets. The Bank has
historically concentrated its lending activities in the consumer segment of the
Bank's market area, primarily in the origination of first mortgage loans for the
purchase, refinance or construction of one-to-four family homes. Complementing
the business of financing residential real estate, the Bank also has emphasized
the origination of home equity lines of credit ("HELOC's"). Apart from
residential mortgage loans, HELOC's represent the single most significant loan
product offered by the Bank.
While the Bank expects that residential first mortgage loans and HELOC's
will continue to constitute the preponderance of new loan originations, the Bank
has begun implementing strategies and allocating resources to increase the level
of commercial real estate lending and small business lending within
its market area. During 1995 the Bank converted to a new commercial loan data
processing system and added employees experienced in commercial real estate
lending and commercial and industrial lending, including Small Business
Administration (SBA) loans. Going forward the Bank will focus on growing
revenues, improving interest margins and diversifying the loan portfolio through
enhanced business development efforts in these areas.
BRANCH OFFICES. During the past several years, the Bank has pursued a
diversified branching strategy which departs from the design of traditional
banking facilities. The focus of this strategy is to design branch facilities
to meet the demographic needs of the Bank's target market while minimizing the
Bank's cost of operations and maximizing customer service. All of the Bank's
branches offer a full range of deposit and loan products. Seventeen of the
Bank's branches are traditional full-service offices which, among other things,
offer full teller and platform customer service, drive-up window service and
automated teller machines. The design of five of the Bank's branch offices
departs from traditional banking facilities with the absence of conventional
teller stations and drive-up windows. These "Savings Centers" are designed to
emphasize the issuance of certificate of deposit products through the delivery
of superior personalized service in a non-traditional banking environment.
In January 1996, the Bank relocated its Stratford branch office. The
original Stratford office, opened in 1989 as a Savings Center, experienced
significant growth in its deposit base and corresponding customer transaction
activity, outstripping the physical capacity of the facility. To better serve
existing customers, and to provide for continued growth, the office was
relocated within Stratford to a high traffic retail area known as Paradise
Green. The new facility, which is in close proximity to the former office, is a
traditional branch offering full teller and platform customer service and an
automated teller machine.
In keeping with the Bank's overall strategy as a broad-based community
bank, the Bank has filed an application for the establishment of a new, full
service branch office in the town of Hamden. The Hamden location will expand
the Bank's service area within New Haven county and complement the Bank's
existing branch network. It is anticipated that the Hamden branch will be
opened in mid-1996. In addition, the Bank is actively searching for new branch
sites which will offer an opportunity to increase earnings, build upon the
Bank's existing retail network and enhance the franchise value of the Company.
TECHNOLOGY. The technology revolution taking place in the banking industry
today is having a dramatic impact on the delivery of quality customer
service and products. Recognizing the vital role that technology plays in the
Bank's ability to compete effectively, the Bank undertook and completed a
comprehensive review and analysis of its data processing systems in 1995. The
systems study culminated in the selection of a third party data processing
provider and a commitment by the Company to invest in system improvements.
These enhancements, already underway at year-end, will serve as the platform
allowing the Bank to deliver quality products and services in a cost effective
and efficient manner as we approach the 21st century.
REGULATORY MATTERS. In August 1995, the Federal Deposit Insurance
Corporation and the Connecticut Banking Commissioner terminated the Memorandum
of Understanding (the "Memorandum") originally entered into with Derby Savings
in 1992. The Memorandum, as amended, required, among other things, that the
Bank achieve a tier 1 capital to total assets ratio of at least 5.75% and that
adversely classified assets and delinquent loans be reduced to certain targeted
levels. Additionally, the Memorandum had limited the payment of cash dividends
by the Bank to DS Bancor to the Company's debt service and non-salary expenses.
DIVIDENDS. The Company paid 5% stock dividends in March and November
1995. The per share amounts for the current and prior periods have been
retroactively adjusted to give effect to this stock dividend. On January 23,
1996, the Board of Directors of the Company declared a cash dividend of $.06 per
share on its common stock, payable March 1, 1996 to stockholders of record on
February 16, 1996.
DERBY FINANCIAL SERVICES. Complementing the financial services offered to
the communities served by the Bank, Derby Financial Services, the Bank's wholly
owned subsidiary, began offering brokerage services in 1993. Through an
arrangement with Liberty Securities Corporation, a NASD registered broker-
dealer, the products offered include various equity securities, bonds and mutual
funds.
FINANCIAL CONDITION
GENERAL. The Company's assets totaled $1,254.5 million at December 31,
1995, representing a $31.8 million or 2.6% increase from year end 1994. This
level of growth was consistent with the $28.6 million or 2.4% increase
experienced in 1994. Asset growth in 1995 was attributable to growth in the
Bank's loan portfolio which was essentially funded by an increase in the Bank's
deposit base.
In determining the appropriate type and mix of the Company's assets and
liabilities, management seeks to maximize current and future net interest income
within acceptable levels of interest rate and credit risk, while
simultaneously meeting customer needs and satisfying liquidity and capital
requirements. The Company's statement of position reflects management's
continuous pursuit of an allocation of resources and funding sources necessary
to achieve these objectives.
SOURCES AND USES OF FUNDS. The assets of the Company are primarily
invested in loans to individuals and, to a lesser extent, the businesses located
in the Bank's market area. At December 31, 1995, loans totaled approximately
$882.2 million, representing 70.3% of the Company's assets, compared to $846.2
million or 69.2% of total assets at December 31, 1994. Investment securities of
$320.2 million or 25.5% of total assets remained virtually unchanged from $322.1
million or 26.3% of total assets at prior year end. Cash and cash equivalents
were $20.7 million at December 31, 1995 compared to $18.6 million at December
31, 1994. All other assets of $38.2 million at year end 1995 reflected a
decline from $42.5 million at year end 1994. The decline in other assets was
primarily attributable to a $2.0 million reduction in foreclosed assets and a
$4.0 million reduction in the net deferred income tax asset during 1995
resulting from the tax effect attributable to the change in the unrealized
gain/loss on securities available-for-sale.
LOANS. 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 $737.4 million, representing 58.8% of total
assets and 83.6% of total loans at year end 1995. Mortgage loans, including
$2.0 million of loans held-for-sale at December 31, 1995 and $55.2 million of
loans held-for-sale at December 31, 1994, increased by $13.1 million or 1.8%
during 1995.
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 $691.6
million or 78.4% of the Bank's total loan portfolio at year end 1995 compared to
$684.7 million, or 80.9% of the total loan portfolio, at year end 1994.
During 1995, the volume of residential mortgage loan originations in the
Bank's market area, at requisite rates of return and interest rate sensitivity,
was inadequate to support the Bank's demand. As in prior years, the Bank
supplemented its own local loan originations with the purchase of single family
adjustable rate mortgage loans. The Bank purchased $97.1 million of these loans
during 1995 compared to $21.9 million in 1994.
Multi-family housing loans totaled $11.2 million or 1.3% of the total loan
portfolio at year end 1995 compared to $8.7 million or 1.0% of the total
loan portfolio at year end 1994. Loans to finance commercial real estate
totaled $31.1 million or 3.5% of the total loan portfolio at December 31, 1995,
representing an increase of $2.6 million from the prior year end. In an effort
to expand this portfolio, the Bank added an experienced commercial real estate
loan officer to its staff in the fourth quarter of 1995.
Loans to finance real estate construction, primarily residential
condominiums and single family residences, increased slightly to $3.5 million or
0.4% of total loans at December 31, 1995 from $2.4 million or 0.3% of total
loans at year end 1994. Unadvanced construction commitments approximated $2.1
million at year end 1995 compared to $1.8 million at year end 1994.
As local residential mortgage loan origination activity declined, increased
emphasis was given by the Bank to financing the growing needs of the consumer
loan market. The Company's investment in consumer loans increased by 28.2%
from $98.2 million at December 31, 1994 to $125.9 million at December 31, 1995.
The Company's investment in consumer loans represented 10.0% of total assets at
year end 1995 compared to 8.0% 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. HELOC's totaled $144.0 million, with $78.5
million in use at year end 1995 compared to $130.5 million, with $70.3 million
in use at year end 1994. HELOC's in use accounted for 62.4% of consumer loans
and 8.9% of total loans at December 31, 1995 compared to 71.6% and 8.3%,
respectively, at December 31, 1994.
The remainder of the consumer loan portfolio is substantially comprised of
home equity loans and automobile loans. Home equity loans increased by $2.5
million or 12.8% to $21.7 million at December 31, 1995 compared to the prior
year end. Automobile loans increased from $2.3 million at December 31, 1994 to
$17.9 million at December 31, 1995. The growth in the Bank's automobile loan
portfolio was attributable to the periodic purchase of $16.6 million of loans
from a third party provider.
In addition to mortgage and consumer lending, 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 $19.0 million at year end 1995, reflecting a $4.7 million or 20.0%
decrease from the $23.7 million invested at year end 1994. At December 31,
1995, $3.6 million or 18.9% of this portfolio was invested in loans for the
development of real estate and $15.4 million or 81.1% was invested in loans
for various business needs. Unadvanced real estate development commitments
totaled $1.6 million at year end 1995 compared to $1.1 million at year end 1994.
In an effort to diversify the assets of the Company, in tandem with
increasing the allocation of resources in interest rate sensitive loans, the
Bank increased its commercial lending staff with the addition of a loan officer
experienced in SBA lending and accounts receivable financing. The Bank has
established two regional offices, located in Derby and New Britain, to pursue
the origination of commercial loans. Each location is staffed with loan
officers as well as support staff. In addition to business calls made by
commercial loan officers, the Bank also relies on branch managers to assist in
the development of new business activity and to service existing relationships.
INVESTMENT SECURITIES. The Bank's securities portfolio was $320.2 million
or 25.5% of total assets at December 31, 1995, virtually unchanged from $322.1
million or 26.4% 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 and 2). At December 31, 1995, the Bank had securities
totaling $77.9 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 December 31, 1995 totaled
$241.1 million compared to $216.7 million at December 31, 1994. The available-
for-sale category at year end 1995 was principally comprised of mortgage-backed
securities with adjustable rate interest features. SFAS 115 also requires that
securities classified as available-for-sale be carried at fair value with
unrealized gains and losses, net of tax effect, reported as a separate component
of Stockholders' equity. At December 31, 1995, the Bank had unrealized gains,
net of tax effect, of $0.4 million compared to net unrealized losses, net of tax
effect, of $5.6 million at December 31, 1994. The $6.0 million adjustment of
unrealized gains reflected in Stockholders' Equity was, in part, the result of
the sale of $52.9 million of investment securities at a net loss of $1.1 million
and the decline in interest rates
that occurred during 1995.
The Financial Accounting Standards Board (FASB) issued a Special Report, "A
Guide to Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities," that provided additional guidance relating to
the application of SFAS 115. In connection with the issuance of this Special
Report, the FASB allowed financial institutions to review their portfolio
classification between held-to-maturity, available-for-sale and trading and make
a one-time reclassification of securities between categories during the period
from November 15, 1995 to December 31, 1995. As a result of the reassessment
between classifications of its portfolio, the Bank reclassified $20.4 million of
securities from the held-to-maturity category to the available-for-sale
category. The reallocated securities were mortgage-backed passthroughs that
exhibited certain levels of price volatility given movements in interest rates.
The trading portfolio, which consists of equity securities, totaled $1.2
million at year end 1995 compared to $0.8 million at December 31, 1994. During
1995, the Bank recognized a net trading gain of $516,000 from securities sales
of $5.9 million. This portfolio is carried at fair value with changes in
unrealized gains or losses reflected in earnings. At December 31, 1995, the
trading portfolio had unrealized holding gains of $23,000 compared to unrealized
holding losses of $148,000 at December 31, 1994. These amounts are reflected in
the Company's Consolidated Statements of Earnings for the years ended December
31, 1995 and 1994, respectively.
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 Federal Home Loan Bank of Boston
("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 the sale of
securities.
In 1995, deposits increased by $30.4 million or 3.0%, after interest
credited of $46.2 million, from $1.027.7 million, funding 84.1% of total assets
at year end 1994, to $1.058.1 million, funding 84.3% of total assets at year end
1995. In comparison, deposits increased by $21.5 million or 2.1% after interest
credited of $35.9 million in 1994. Retail deposits are essentially derived from
the communities in which the Bank's offices are located. The Bank offers a wide
variety of deposit accounts which include money market deposit accounts,
certificates of deposit and regular savings.
The Bank also utilizes the FHLBB as an alternative source of funds. At
year end 1995, FHLBB advances totaled $96.9 million, funding 7.7% 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.
Amortization, prepayments and the sale of loans into the secondary market
supplied the Bank with an additional $211.9 million in investable funds in 1995,
compared to $123.0 million in 1994. In keeping with the Bank's asset and
liability management objectives (see "Asset/Liability Management"), the Bank
periodically may sell loans. The Bank has retained servicing on all loans that
have been sold and was servicing $147.1 million of mortgage loans for others at
December 31, 1995.
ASSET/LIABILITY MANAGEMENT. The primary function of the Company's asset
and liability management program is to identify and manage interest rate risk
and allocate the resources of the Bank to stabilize and increase the level of
net interest income through all phases of the business cycle and resulting
interest rate levels. This objective is administered through the matching of
the interest rate sensitivity of the Bank's sources and uses of funds. The
Bank's Asset Liability Management Committee is responsible for managing interest
rate risk within tolerable variances as established in the Company's
Asset/Liability Policy.
The Bank monitors the overall interest rate sensitivity of its financial
structure through simulation modeling under various levels of interest rates and
attendant volumes. Interest rate sensitivity is measured and managed based on
information provided by an earnings simulation model that is used to evaluate
the effect of prospective upward and downward changes in interest rates on net
interest income and net income. The model includes maturity and repricing
information as well as additional assumptions which affect balances under
various interest rate scenarios, such as the susceptibility of loans and
mortgage-related securities to prepayment variations. At December 31, 1995, the
simulated impact of rising and falling interest rate environments on net
interest income was within the Board-approved tolerance levels.
The Company also monitors its exposure to interest rate risk as reflected
in the difference between rate sensitive assets and rate sensitive liabilities
repricing within various time frames, commonly referred to as "static gap."
While this evaluation of interest rate sensitivity is useful, it fails to
accurately reflect the impact of volumes and timing of interest rate
sensitivity. Although the Bank does not rely on the static gap analysis as an
accurate measure of interest rate risk, it does in general strive to maintain a
ratio of rate sensitive assets to rate sensitive liabilities over a time horizon
of one year, within a range of 90% to 110%. The ratio of interest-sensitive
assets to interest-sensitive liabilities, as measured over a twelve month
horizon at December 31, 1995, was 97.7% compared to 91.1% at year end 1994.
To minimize the interest rate risk associated with its loan portfolio, the
Company emphasizes the origination of interest rate sensitive loans. In 1995,
the Bank originated $44.9 million in mortgage loans, of which $29.1 million or
64.8% had adjustable rate features, compared to $127.2 million or 77.0% with
adjustable rate features for 1994. Even though the Bank remained competitive in
its loan pricing, the decline in mortgage loan originations in 1995 compared to
1994 was reflective of the soft real estate market in Connecticut and the
sluggish demand for both home purchases and refinancings. In response to the
inadequate local loan demand, the Bank supplemented mortgage loan originations
with the purchase of single family adjustable rate mortgage loans. These
purchases totaled $97.1 million during 1995 compared to $21.9 million during
1994. At December 31, 1995, adjustable rate mortgage loans of $554.4 million
comprised 74.8% of total mortgage loans. In addition, the Bank originated $50.8
million of HELOC's in 1995 which adjust to changes in the prime rate, compared
to $31.3 million in 1994. At December 31, 1995, adjustable rate HELOC's
outstanding of $78.5 million accounted for 62.4% of consumer loans compared to
$70.4 million or 71.6% at year end 1994.
As an integral part of interest rate risk, the Bank closely monitors the
composition of fixed and variable rate loans in the loan portfolio. From time
to time, in order to achieve the desired balance between interest sensitive
assets and liabilities and to be able to meet the credit needs of the local
community, the Bank sells mortgage loans in the secondary market. The Company
sold $32.6 million in loans in 1995 of which $7.4 million were fixed rate and
$25.2 million were adjustable rate. In 1994 the Company sold $12.1 million in
mortgage loans, all of which were fixed rate. At December 31, 1994, the Bank
had $55.2 million in loans which were identified as held-for-sale, of which $7.6
million were fixed rate and $47.6 million were adjustable rate. Of the $55.2
million in loans identified as held-for-sale at December 31, 1994, $29.3 million
were sold in 1995 with the remainder returned to the Bank's loan portfolio.
During 1995, as interest rates trended downward, the interest rate
sensitivity of deposits increased slightly as customers opted to shorten the
maturity of their term deposit accounts. By the latter half of the year, the
decline in interest rates reached a level at which interest rates on maturing
deposit accounts approximated then current deposit interest rates and, as such,
indicated a stabilization in the cost of this funding source. The steady flow
of funds from regular savings to higher yielding deposit accounts, however,
caused a rise in the overall cost of deposits. The regular savings account type
has historically been classified as a fixed rate long-term core deposit funding
source. However, as rates declined and the rate on this account type was
reduced, the account took on characteristics of a variable rate product.
Regular savings accounts declined from $213.6 million or 20.8% of total deposits
at year end 1994 to $185.6 million or 17.5% of total deposits at year end 1995.
Term certificates of deposit increased $50.9 million or 9.6% during 1995,
representing 54.8% of total deposits compared to 51.5% of total deposits at year
end 1994.
The Company manages the interest rate sensitivity of its source of funds by
attracting longer term certificates of deposit when the market will permit,
emphasizing core deposits which are less sensitive to changes in interest rates,
and borrowing longer term FHLBB advances. At December 31, 1995, interest-
sensitive liabilities subject to interest rate adjustments in the next twelve
months, primarily comprised of deposits, and to a lesser extent, advances from
the FHLBB, totaled $902.7 million. In comparison, at year end 1994, this amount
totaled $886.0 million. The $16.7 million increase in rate sensitive
liabilities was more than offset by an increase in rate sensitive assets during
this period, resulting in a more evenly matched static gap position relative to
year end 1994. At December 31, 1995, rate sensitive assets subject to interest
rate adjustments in the next twelve months, primarily comprised of adjustable
rate loans, and to a lesser extent, variable rate securities, totaled $879.4
million compared to $807.1 million at year end 1994.
The following table summarizes the Company's interest-sensitive assets and
interest-sensitive liabilities at December 31, 1995 that mature or reprice
during the various time periods noted. Loans are net of deferred loan fees,
premiums and discounts, and non-accruing loans.
DECEMBER 31, 1995 MORE THAN MORE THAN MORE THAN MORE THAN MORE THAN
SIX MONTHS ONE YEAR THREE YEARS FIVE YEARS 10 YEARS
SIX MONTHS TO ONE TO THREE TO FIVE TO TEN TO 20 MORE THAN
OR LESS YEAR YEARS YEARS YEARS YEARS 20 YEARS TOTAL
---------- ---------- ---------- --------- --------- --------- --------- ---------
(DOLLAR AMOUNTS IN THOUSANDS)
ASSETS:
Investments:
Securities $182,760 $64,029 $38,569 $18,783 $4,903 $4,632 $198 $313,874
Federal funds sold 2,305 -- -- -- -- -- -- 2,305
--------- --------- --------- --------- --------- --------- --------- ----------
Total investments 185,065 64,029 38,569 18,783 4,903 4,632 198 316,179
--------- --------- --------- --------- --------- --------- --------- ----------
Loans:
Fixed-rate mortgages 5,283 5,510 23,872 24,280 53,451 47,311 24,850 184,557
Adjustable-rate mortgages 286,666 218,139 17,955 12,248 4,029 3,104 -- 542,141
Consumer loans 87,977 9,199 16,276 3,869 5,104 2,072 -- 124,497
Commercial loans 17,472 15 85 28 141 19 -- 17,760
--------- --------- --------- --------- --------- --------- --------- ----------
Total loans 397,398 232,863 58,188 40,425 62,725 52,506 24,850 868,955
--------- --------- --------- --------- --------- --------- --------- ----------
TOTAL INTEREST-SENSITIVE ASSETS $582,463 $296,892 $ 96,757 $ 59,208 $ 67,628 $ 57,138 $ 25,048 $1,185,134
--------- --------- --------- --------- --------- --------- --------- ----------
--------- --------- --------- --------- --------- --------- --------- ----------
LIABILITIES:
Regular & club savings $185,610 $ -- $ -- $ -- $ -- $ -- $ -- $ 185,610
Certificates of deposit 228,352 156,769 137,999 56,691 -- -- -- 579,811
Money market accounts 209,265 -- -- -- -- -- -- 209,265
NOW accounts 47,460 -- -- -- -- -- -- 47,460
FHLBB advances 54,412 18,554 20,790 3,120 -- -- -- 96,876
--------- --------- --------- --------- --------- --------- --------- ----------
TOTAL INTEREST-SENSITIVE LIABILITIES $725,099 $175,323 $158,789 $59,811 $ -- $ -- $ -- $1,119,022
--------- --------- --------- --------- --------- --------- --------- ----------
--------- --------- --------- --------- --------- --------- --------- ----------
GAP (repricing difference) ($142,636) $121,569 ($62,032) ($603) $67,628 $ 57,138 $ 25,048
Cumulative GAP ($142,636) ($21,067) ($83,099) ($83,702) ($16,074) $ 41,064 $ 66,112
Cumulative GAP/total assets -11.4% -1.7% -6.6% -6.7% -1.3% 3.3% 5.3%
Ratio of interest-sensitive assets
to interest-sensitive liabilities 80.3% 169.3% 60.9% 99.0% 105.9%
Cumulative ratio of interest-sensitive
assets to interest-sensitive liabilities 97.7% 92.2% 92.5% 98.6% 103.7% 105.9%
ASSET QUALITY. The Connecticut economy, although showing some signs of
economic vitality, continues to lag behind the national recovery. Nonetheless,
the Company has experienced continued success in 1995 in the reduction of non-
performing assets. Non-performing assets, which include loans past due 90 days
or more, non-accrual loans, and foreclosed assets (see Consolidated Financial
Statements - Note 1) declined by $3.3 million or 16% during the year ended
December 31, 1995 compared to the prior year period. Non-performing assets
comprised 1.4% of the Company's total assets at year end 1995 compared to 1.7%
at prior year end.
The following table summarizes the Bank's non-performing loans and
foreclosed assets ("non-performing assets"), and restructured loans:
DECEMBER 31,
-----------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS)
Non-accrual loans:
Mortgage $10,658 $11,000 $12,302 $18,387 $18,984
Consumer 1,421 1,280 1,789 2,082 1,616
Commercial 1,210 1,576 3,215 3,901 8,108
------- ------- ------- ------- -------
Total 13,289 13,856 17,306 24,370 28,708
------- ------- ------- ------- -------
Accruing loans past
due 90 days:
Mortgage 442 1,186 2,317 3,006 4,096
Consumer 37 --- 249 1 151
------- ------- ------- ------- -------
Total 479 1,186 2,566 3,007 4,247
------- ------- ------- ------- -------
Total non-performing
loans 13,768 15,042 19,872 27,377 32,955
------- ------- ------- ------- -------
Foreclosed assets 3,942 6,195 9,379 10,456 7,305
Valuation allowance (230) (439) (1,040) (438) (412)
------- ------- ------- ------- -------
Total, net 3,712 5,756 8,339 10,018 6,893
------- ------- ------- ------- -------
Total non-performing
assets $17,480 $20,798 $28,211 $37,395 $39,848
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Restructured loans $ 4,385 $ 4,213 $ 2,273 $ 8,262 $ 6,985
------- ------- ------- ------- -------
------- ------- ------- ------- -------
NON-PERFORMING LOANS. Non-performing loans include non-accrual loans and
accruing loans past due 90 days or more. It is the Company's general policy to
account for a loan as non-accrual when the loan becomes 90 days delinquent or
when collection of interest becomes doubtful. In certain cases, loans may
remain on accrual status past 90 days when it is determined that continued
accrual is warranted because the loan is well secured and in the process of
collection.
As detailed in the table above, the level of non-performing loans declined
by $1.2 million or 8.5% from $15.0 million at year end 1994 to $13.8 million at
year end 1995. Non-performing mortgage loans of $11.1 million or 80.6% of total
non-performing loans at December 31, 1995, declined $1.1
million from prior year end. Non-performing consumer loans of $1.5 million or
10.6% of total non-performing loans at December 31, 1995 increased by $0.2
million from prior year end. Commercial non-performing loans of $1.2 million or
8.8% of total non-performing loans, declined by $0.4 million during 1995.
FORECLOSED ASSETS. During 1995 the Bank continued to make significant
progress in reducing the level of foreclosed assets. At year end 1995, the Bank
had $3.7 million in foreclosed assets, consisting of 27 properties compared to
$5.8 million, consisting of 37 properties at year end 1994.
In addition to the personnel assigned to loan review and 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 59 properties for an aggregate consideration of $4.6 million in 1995.
During the prior year, the Bank sold and closed on 60 properties for an
aggregate consideration of $6.2 million.
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 1995, the Bank provided $1.5 million to this
allowance compared to $2.2 million in 1994. During 1995, the Bank charged $1.7
million in specific write-downs against this allowance compared to $2.8 million
during the prior year. At December
31, 1995, the allowance for estimated losses on foreclosed assets totaled $0.2
million compared to $0.4 million at year end 1994.
RESTRUCTURED LOANS. In addition to non-performing assets, the Company also
had $4.4 million of restructured loans at year end 1995 compared to $4.2 million
at year end 1994. Loans are considered restructured when the Bank, for economic
or legal reasons related to the borrower's financial difficulties, grants a
concession that it would not otherwise grant. Restructured debt may include
changing repayment terms, reducing stated interest rates and reducing the
amounts of principal and/or interest due, or extending the maturity date. The
restructuring of a loan is intended to recover as much of the Company's
investment as possible. Restructured loans do not include $1.8 million of
modified one-to-four family residential mortgage loans at December 31, 1995.
Residential loans are considered modified when the original terms of the loan
are changed to accommodate short-term financial difficulties of the borrower.
The terms of the modified one-to-four family residential mortgage loans are
consistent with loans then currently written on purchase money mortgages and
refinances and the borrowers meet income guidelines and other underwriting
criteria based on the terms of the modified loan.
DELINQUENT LOANS. One of the measures used to identify the trends in non-
performing assets is the level of loans past due 60 days. As noted in the table
below, the amount of loans past due 60 days has increased to $9.3 million at
December 31, 1995, representing 1.1% of the total loan portfolio compared to
$6.1 million or 0.7% of the total loan portfolio at year end 1994. This
increase suggests that the level of non-performing assets may increase in 1996.
However, management believes that the increase is temporary and does not
indicate a trend toward higher levels of non-performing assets.
The following table summarizes the Bank's accruing loans past due 60 days:
DECEMBER 31,
-----------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS)
Loans past due 60 days:
Mortgage $ 8,111 $ 5,014 $ 7,369 $ 8,829 $ 9,072
Consumer 994 1,015 651 815 525
Commercial 203 62 --- 95 353
------- ------- ------- ------- -------
Total $ 9,308 $ 6,091 $ 8,020 $ 9,739 $ 9,950
------- ------- ------- ------- -------
------- ------- ------- ------- -------
ALLOWANCE FOR CREDIT LOSSES. In order to maintain the quality of the
loan portfolio, as well as to provide for potential losses that are inherent in
the lending process, the Bank controls its lending activities through adherence
to loan policies adopted by the Board of Directors and stringent underwriting
standards.
The Company maintains an allowance for credit losses to provide for possible
losses within the loan portfolio.
The following table sets forth non-performing loans and the Allowance for
credit losses at the dates indicated:
DECEMBER 31,
---------------------------------------------------------------------------------------------------
1995 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 $ 7,251 1.0% $ 8,095 1.2%
Commercial 1,495 4.8 1,643 5.8
Multi-family 2,354 21.1 2,448 28.2
------- -------
Total 11,100 1.5 $ 4,183 37.7% 12,186 1.7 $ 4,495 36.9%
------- -------
Consumer
HELOC 978 1.2 816 1.2
All other 480 1.0 464 1.7
------- -------
Total 1,458 1.2 1,751 120.1 1,280 1.3 1,266 98.9
------- -------
Commercial
Real estate
development 314 8.7 788 20.9
All other 896 5.8 788 4.0
------- -------
Total 1,210 6.4 972 80.3 1,576 6.6 1,042 66.1
------- ------- --------
Total Loans $13,768 1.6 $ 6,906 50.2 $15,042 1.8 $ 6,803 45.2
------- ------- --------
------- ------- --------
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 analyses, real estate deflation factors,
overall portfolio quality, specific problem loans and an assessment of the
adequacy of the Allowance for credit losses. Based on these factors, the
Company provided $2.5 million to the Allowance for credit losses during 1995
compared to $2.3 million during 1994. During the year ended December 31, 1995,
the Bank wrote off $2.4 million (net of recoveries). At December 31, 1995, the
Allowance for credit losses totaled $6.9 million which includes $1.2 million
allocated to the loans acquired in the Burritt transaction (see Consolidated
Financial Statements--Note 13). 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. The Allowance for credit losses
represented 50.2% of non-performing loans at year end 1995, compared to 45.2% at
year end 1994.
The following table summarizes the transactions in the Allowance for credit
losses for the periods indicated:
AT AND FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
------- ------- -------
(AMOUNTS IN THOUSANDS)
Mortgage Loans
Balance at beginning of period $ 4,495 $ 4,605 $11,166
Provision for credit losses 1,725 1,675 1,925
Acquired allowance --- --- (5,958)
Loan charge-offs (2,306) (1,848) (2,857)
Recoveries 269 63 329
------- ------- -------
Balance at end of period $ 4,183 $ 4,495 $ 4,605
------- ------- -------
------- ------- -------
Consumer Loans
Balance at beginning of period $ 1,266 $ 1,193 $1,987
Provision for credit losses 800 600 50
Acquired allowance --- --- (5)
Loan charge-offs (399) (573) (860)
Recoveries 84 46 21
------- ------- -------
Balance at end of period $ 1,751 $ 1,266 $ 1,193
------- ------- -------
------- ------- -------
Commercial Loans
Balance at beginning of period $ 1,042 $ 1,181 $784
Provision for credit losses --- 50 500
Loan charge-offs (78) (195) (114)
Recoveries 8 6 11
------- ------- -------
Balance at end of period $ 972 $ 1,042 $ 1,181
------- ------- -------
------- ------- -------
Total Allowance for Credit Losses
Balance at beginning of period $ 6,803 $ 6,979 $13,937
Provision for credit losses 2,525 2,325 2,475
Acquired allowance --- --- (5,963)
Loan charge-offs (2,783) (2,616) (3,831)
Recoveries 361 115 361
------- ------- -------
Balance at end of period $ 6,906 $ 6,803 $ 6,979
------- ------- -------
------- ------- -------
LIQUIDITY. The Bank monitors its liquidity position to ensure that it is
able to meet its need for funds. In general, the Bank maintains a level of
asset-based liquidity which is consistent with its current business plan. The
volume of liquid assets carried by the Bank will vary from time to time based on
management's business objectives, which in part, will be influenced by expected
economic activity. During periods of economic expansion, coupled with a
commensurate increase in loan demand, or during a period of disintermediation,
financial resources may be allocated from asset-based liquidity to fund these
demands. In the event that asset-based liquidity is at a minimum, the Bank will
rely upon liability based liquidity to augment its funding needs. This source
of liquidity is primarily provided by the FHLBB. As a member of the FHLBB, the
Bank is eligible to borrow against certain qualifying collateral assets as
defined by the FHLBB. At December 31, 1995, the Bank had $759.7 million in
qualifying collateral against which actual borrowings were $96.9 million.
As of December 31, 1995, the Company had short-term liquid assets
consisting of cash, due from banks, federal funds, unpledged available-for-sale
securities, and loans held-for-sale of $252.6 million. The Company's short-term
liquid assets represented 22.4% of the Company's liquidity base, defined as all
withdrawable deposit accounts, less the unpaid balance of loans secured by such
accounts, and the principal amount of all borrowings payable on demand in one
year or less.
CAPITAL RESOURCES. Stockholders' Equity at December 31, 1995
increased to $80.8 million from $67.1 million at December 31, 1994. The $13.7
million or 20.4% increase in Stockholders' Equity was primarily attributable to
net income of $7.6 million for the year ended December 31, 1995 and a positive
change in the unrealized gain/loss on securities available-for-sale, net of tax
effect, of $6.0 million.
The Federal Reserve Board (the "FRB") has adopted risk-based capital
standards which require bank holding companies to maintain a minimum ratio of
total capital to risk-weighted assets of 8.0%. Of the required capital, 4.0%
must be tier 1 capital. Tier 1 capital is primarily common stockholders' equity
and certain categories of perpetual preferred stock. As part of the Burritt
transaction (see Consolidated Financial Statements--Note 13), Derby paid the
FDIC a premium of $6.2 million. Of the premium paid, $5.0 million was recorded
as a core deposit intangible. At December 31, 1995, the core deposit intangible
totaled $2.8 million. This amount, in addition to approximately $142,000 of
other intangible assets resulting from the transaction, are required to be
deducted from the Company's and the Bank's capital prior to determining
regulatory capital requirements. After giving effect to the transaction, the
Company had a ratio of total capital to risk-weighted assets of 11.9% and a
ratio
of tier 1 capital to risk-weighted assets of 10.9% at December 31, 1995.
The FRB has supplemented the risk-based capital requirements with a
required minimum leverage ratio of 3% of tier 1 capital to total assets. The
FRB indicated that all but the most highly rated holding companies, however,
should maintain a leverage ratio of 4% to 5% of tier 1 capital to total assets.
At December 31, 1995, the Company had a ratio of tier 1 capital to total assets
of 6.2%.
Derby Savings Bank is also required by the FDIC to meet risk-based ratios
the same as those adopted by the FRB for the Company. At December 31, 1995,
Derby Savings' ratio of total capital to risk-weighted assets was 11.8% and its
ratio of tier 1 capital to risk-weighted assets was 10.8%.
The FDIC has also adopted a minimum leverage ratio of 3% of tier 1 capital
to total assets. The FDIC has also indicated that all but the most highly rated
banks should maintain a leverage ratio of 4% to 5% of tier 1 capital to total
assets. Derby Savings' ratio of tier 1 capital to total assets at December 31,
1995 was 6.1%.
Under the FDIC's prompt corrective action regulation, a savings bank
is considered: (i) "well capitalized" if the savings bank has a total risk-based
capital ratio of 10% or greater, a tier 1 risk-based capital ratio of 6% or
greater, and a leverage ratio of 5% or greater (provided the savings bank is not
subject to an order, written agreement, capital directive or prompt corrective
action to meet and maintain a specified capital level for any capital measure);
(ii)"adequately capitalized" if the institution has a total risk-based capital
ratio of 8% or greater, a tier 1 risk-based capital ratio of 4% or greater, and
a leverage ratio of 4% or greater (3% or greater if the institution is rated
composite 1 in its most recent report of examination); (iii) "undercapitalized"
if the institution has a total risk-based capital ratio that is less than 8%, a
tier 1 risk-based capital ratio that is less than 4% (3% if the institution is
rated composite 1 in its most recent report of examination); (iv)"significantly
undercapitalized" if the institution has a total risk-based capital ratio that
is less than 6%, a tier 1 risk-based capital ratio that is less than 3%, or a
leverage ratio that is less than 3%; and (v) "critically undercapitalized" if
the institution has a ratio of tangible equity to total assets that is equal to
or less than 2%. The regulation also permits the FDIC to determine that a
savings bank should be placed in a lower category based on other information
such as a savings institution's examination report, after written notice. At
December 31, 1995, the Bank met the "well capitalized" criteria based on its
capital ratios at that date.
RESULTS OF OPERATIONS
GENERAL. The net income of the Company is principally derived from the
banking operation of its wholly owned subsidiary, Derby Savings Bank. The net
income of Derby Savings is dependent to a substantial extent on the difference
between interest and fee income on its loans plus interest and dividends on its
securities portfolio and its cost of money, consisting principally of the
interest paid on its deposit accounts and, to a lesser extent, interest paid on
its borrowings.
The difference between interest income and interest expense is referred to
as net interest income. The difference between the combined weighted average
yield on loans and securities and the combined weighted average cost of deposits
and borrowings is referred to as the net interest rate spread. Interest income
from interest-earning assets depends primarily on the volume of such assets
outstanding during the period and the interest rates and fees earned thereon.
Derby Savings' interest expense is a function of the average amount of deposits
and borrowed money outstanding during the period and the interest rates paid
thereon.
The following table reflects average yields and costs during the periods
indicated:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Average yield:
Mortgage loans 7.41% 6.73% 7.23% 8.47% 9.75%
Other loans 9.36 8.25 7.61 7.79 9.87
Securities 6.40 5.75 5.17 6.25 7.86
All interest-earning assets 7.34 6.58 6.54 7.87 9.51
Average cost:
Deposits 4.57 3.61 3.81 4.59 6.71
Borrowings 5.70 5.53 5.48 6.15 7.45
All interest-bearing liabilities 4.67 3.82 3.99 4.83 6.83
Net interest rate spread 2.67 2.76 2.55 3.04 2.68
Net yield on average
interest-earning assets (a) 2.97 2.94 2.68 3.24 3.02
(a) NET INTEREST INCOME DIVIDED BY AVERAGE INTEREST-EARNING ASSETS.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994
NET INCOME. Net income for the year ended December 31, 1995 was a record
$7,613,000 or $2.45 per share (fully diluted) compared to $5,710,000 or $1.86
per share (fully diluted) for the prior year. Net income for 1995 represents a
$1,903,000 or 33.3% increase above 1994 net income. The improvement in net
income was primarily attributable to $0.5 million or 1.6% increase in net
interest income, a $0.6 million or 18.8% increase in non-interest income and a
$2.1 million or 8.1% decline in non-interest expense.
For 1995, net income represented a return on average assets and a return on
average stockholders' equity of 0.63% and 9.95%, respectively, compared to 0.47%
and 8.34%, respectively, for 1994.
INTEREST INCOME. Interest and fee income on loans and interest and
dividends on the securities portfolio increased $9.3 million or 12.0% from $77.3
million during 1994 to $86.6 million during 1995. The increase in interest
income realized in 1995 compared to 1994 highlights the success of the Company's
strategy to place greater emphasis on variable rate loan products as opposed to
securities, and also the continued reduction of non-performing assets. Average
loans outstanding increased by $27.7 million or 3.4% and average investment
securities decreased by $28.3 million or 8.2% in 1995 compared to 1994. The
average yield on the Company's loan portfolio increased by 76 basis points (100
basis points equals 1%) from 6.95% for 1994 to 7.71% for 1995. The average
yield on the Company's investment securities increased 58 basis points from
5.72% to 6.40%. The change in the mix of earning assets, combined with higher
yields experienced on both loans and securities during 1995, resulted in an
increase in the overall yield on earning assets from 6.58% in 1994 to 7.34% in
1995.
The volume of average earning assets increased by $6.4 million or 0.5% from
$1,173.8 million in 1994 to $1,180.2 million in 1995. Contributing to the
growth in average earning assets, non-performing assets, which includes non-
performing loans and foreclosed assets, declined 15.9% from $20.8 million or
1.7% of total assets at December 31, 1994 to $17.5 million or 1.4% of total
assets at December 31, 1995. Average non-earning assets declined by $19.0
million or 36.5% between 1994 and 1995.
INTEREST EXPENSE. Interest expense increased $8.8 million or 20.5% from
$42.8 million during 1994 to $51.6 million during 1995. The increase in
interest expense was due to a change in the mix of interest-bearing liabilities
and an increase in the average cost of funds. Mitigating these factors, in
part, was a decline in average interest-bearing liabilities outstanding during
the year. Average interest-bearing liabilities decreased by $14.5 million or
1.3% from $1,119.6 million in 1994 to $1,105.1 million in 1995.
Average interest-bearing deposits increased by $15.6 million between 1994
and 1995. The average cost of deposits rose from 3.61% in 1994 to 4.57% in
1995. This rise in the average cost of deposits resulted from a shift in
deposit funds from lower costing regular savings to higher costing certificates
of deposit and an increase in the interest rate paid on money market deposit
accounts linked to the prime rate, which increased during 1995. Additionally,
the cost of certificate of deposit accounts increased as accounts that matured
during the first half of the year renewed at interest rates higher than those
that were previously being paid. Average borrowed funds declined by $30.1
million or 24.4% from $123.2 million in 1994 to $93.1 million in 1995. The
average cost of borrowings increased 17 basis points during this period to
5.70%. The cost of total interest-bearing liabilities for the Bank increased 85
basis points to 4.67% in 1995.
NET INTEREST INCOME. Net interest income, the primary component of the
Company's earnings, increased $.5 million or 1.6% to $35.0 million for 1995 from
$34.5 million for 1994. As a result of the 76 basis point improvement in the
average yield on interest-earning assets and the 85 basis point increase in the
average cost of interest-bearing liabilities, the net interest rate spread
decreased 9 basis points to 2.67% for 1995 from 2.76% for 1994. The combined
effect of an increase in average interest-earning assets and a decrease in
average interest-bearing liabilities improved the Company's net yield on
interest-earning assets by 3 basis points from 2.94% for 1994 to 2.97% for 1995.
The following table summarizes net interest income:
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS)
Interest income:
Loans $65,148 $56,802 $53,428 $44,568 $51,208
Securities 21,441 20,480 20,907 9,576 6,588
------- ------- ------- ------- -------
Total 86,589 77,282 74,335 54,144 57,796
------- ------- ------- ------- -------
Interest expense:
Deposits 46,267 36,008 37,599 25,493 32,585
Borrowings 5,308 6,810 6,217 6,392 6,884
------- ------- ------- ------- -------
Total 51,575 42,818 43,816 31,885 39,469
------- ------- ------- ------- -------
Net interest income $35,014 $34,464 $30,519 $22,259 $18,327
------- ------- ------- ------- -------
------- ------- ------- ------- -------
RATE/VOLUME ANALYSIS. The most significant impact on the Company's net
income between periods is derived from the interaction of changes in the volume
of, and rates earned or paid, on interest-earning assets and interest-bearing
liabilities.
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, which cannot be segregated, have
been allocated in proportion to the relationship of the absolute dollar amounts
of the changes in each.
For the Years Ended December 31,
-------------------------------------
1995 Compared to 1994
---------------------
Volume Rate Net
------ ------ -------
(AMOUNTS IN THOUSANDS)
Interest earned on:
Loans $ 1,976 $ 6,370 $ 8,346
Taxable investment securities (1,695) 2,248 553
Federal funds 316 102 418
FHLBB stock 61 (71) (10)
------- ------- -------
Interest income 658 8,649 9,307
------- ------- -------
Interest paid on:
Deposits 571 9,688 10,259
Borrowed funds (1,710) 208 (1,502)
------- ------- -------
Interest expense (1,139) 9,896 8,757
------- ------- -------
Net interest income $ 1,797 $(1,247) $ 550
------- ------- -------
------- ------- -------
PROVISION FOR CREDIT LOSSES. During 1995, the Bank provided $2.5 million
for credit losses compared to $2.3 million during 1994. In addition to the
provision for credit losses, the Bank also provided $1.5 million for estimated
losses on foreclosed assets during 1995 compared to $2.2 million during 1994.
These provisions are included in foreclosed asset expense (see "Non-interest
Expense").
NON-INTEREST INCOME. Non-interest income is derived from fees which the
Bank charges for various loan and deposit account services, fees generated from
other ancillary services provided by the Bank, and net securities and loan
gains. During 1995, the income generated from these sources totaled $3.7
million compared to $3.1 million for the prior year, reflecting an increase of
$0.6 million or 19.4%.
Service charges and other fee income increased $0.3 million or 10.3% and
totaled $2.7 million for 1995 compared to $2.4 million earned in 1994.
During the first quarter of 1995, the Bank sold $47.7 million of
investment securities and $29.5 million in mortgage loans. The Bank recorded
a loss of $1.8 million on the sale of the securities and a gain of $1.5
million on the sale of the loans, resulting in a net loss on the combined
sale of assets of $0.3 million. The proceeds from these transactions were
invested in higher yielding interest rate sensitive loans and securities, and
were used to reduce FHLBB advances. As a result of subsequent transactions
within the securities portfolio, the Company recognized net gains on the sale
of securities, which reduced the loss on the sale of securities for 1995 to
$0.5 million compared to a
net gain on the sale of securities of $0.5 million during 1994.
NON-INTEREST EXPENSE. Non-interest expense totaled $23.5 million or 1.94%
of average assets during 1995 compared to $25.6 million or 2.09% of average
assets in 1994. The $2.1 million or 8.1% decrease in the Company's cost of
operations was due to a decline in the cost associated with managing foreclosed
properties and in the cost of FDIC insurance.
Salaries and employee benefits, the largest component of the Company's cost
of operations, increased $0.4 million or 4.2% from $10.1 million during 1994 to
$10.6 million during 1995. Salaries increased $0.3 million or 3.3% during 1995
compared to the prior year. Included in salary expense in 1995 was $178,000 in
compensation expense resulting from the exercise of stock appreciation rights.
Compensation expense resulting from the exercise of stock appreciation rights in
1994 totaled $122,000. Employee benefit expense increased $0.2 million or 7.5%
during the year from $2.3 million for 1994 to $2.5 million in 1995.
During 1995, the Bank continued to incur expenses with the foreclosure
process and the management of foreclosed assets. These expenses include all of
the direct costs associated with acquiring, holding, managing, marketing and
disposing of these assets. In 1995, the Bank incurred foreclosed asset
expenses, net of gains on sale of foreclosed property, of $0.3 million compared
to $0.7 million in 1994 (see Consolidated Financial Statements--Note 4).
Subsequent to an initial estimate of value of the underlying real estate
securing loans in the foreclosure process, the Bank updates appraisals at least
on an annual basis. In order to provide for unidentified and possible future
declines in the value of foreclosed assets, the Bank maintains an allowance for
estimated losses on foreclosed assets. For the year ended December 31, 1995,
the Bank provided $1.5 million to this allowance compared to $2.2 million for
the prior year. The Company expects that until the level of foreclosed assets
declines substantially, foreclosed asset expense will continue to be
significant.
The FDIC insurance premium paid by the Bank in 1995 totaled $1.5 million
compared to $2.8 million in 1994. The FDIC announced in 1995 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 and the deposit
insurance premiums assessed most BIF member banks, including the Bank, were
reduced effective June 1, 1995. The refund received by Derby Savings Bank
totaled $653,000, which increased the Company's net income by $385,000 or $.12
per share (fully diluted) for 1995. Additionally, the Bank has been notified by
the FDIC that its deposit insurance premium assessment will be essentially
eliminated for 1996.
As required by the Statement of Financial Accounting Standards No. 91 ("SFAS
91"), "Accounting for Non-refundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases," the Bank defers certain
direct costs resulting from the origination of loans, which will be amortized as
an adjustment of yield over the contractual term of the related loans. These
deferred costs, which are principally comprised of salaries, employee benefits
and other loan expenses, totaled approximately $0.9 million during 1995 compared
to $1.5 million during 1994.
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, increased by 20 basis points during 1995 compared to 1994. Non-interest
income increased 5 basis points from .25% during 1994 to .30% during 1995. Non-
interest expense decreased 15 basis points from 2.09% during 1994 to 1.94%
during 1995.
NET NON-INTEREST INCOME/EXPENSE ANALYSIS
(As a percent of average assets)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Non-interest income .30 .25 .61 .42 .26
----- ----- ----- ----- -----
Non-interest expense
Foreclosed asset expense .15 .24 .40 .51 .39
FDIC insurance premium .12 .23 .20 .16 .16
Other 1.67 1.62 1.67 1.49 1.49
----- ----- ----- ----- -----
Total non-interest expense 1.94 2.09 2.27 2.16 2.04
----- ----- ----- ----- -----
Net non-interest margin (1.64) (1.84) (1.66) (1.74) (1.77)
----- ----- ----- ----- -----
----- ----- ----- ----- -----
PROVISION FOR INCOME TAXES. The provision for income taxes for 1995
totaled $5.0 million, reflecting a 39.7% effective income tax rate compared to
$3.9 million, representing an effective income tax rate of 40.7% for 1994 (see
Consolidated Financial Statements--Note 9)
COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1993
GENERAL. Net income for the year ended December 31, 1994 totaled
$5,710,000 or $1.86 per share (fully diluted) compared to $6,474,000 or $2.14
per share (fully diluted) for the prior year. Net income for 1993 includes
$1,548,000 or $.51 per share (fully diluted) attributable to the adoption of
Financial Accounting Standards Board Statement No. 109. This amount represents
the cumulative effect of a change in accounting for income taxes effective
January 1, 1993. Net income for 1994 represents a $784,000 or 15.9% increase
above 1993 income before the cumulative effect of the change in accounting
principle of $4,926,000 or $1.63 per share (fully diluted). As a result of the
5% stock
dividend paid by the Company on March 29, 1995 and November 24, 1995, the per
share amounts for the current and prior periods have been retroactively
adjusted. The improvement in net income was primarily attributable to $4.0
million or 12.9% increase in net interest income and a $1.5 million or 5.5%
decline in non-interest expense. These improvements were offset, in part, by a
$4.2 million or 57.8% decline in non-interest income.
For 1994, net income represented a return on average assets and a return on
average stockholders' equity of 0.47% and 8.34%, respectively, compared to 0.54%
and 10.30%, excluding the effect of the change in accounting principle,
respectively, for 1993.
INTEREST INCOME. Interest and fee income on loans and interest and
dividends on the securities portfolio increased $3.0 million or 4.0% from $74.3
million during 1993 to $77.3 million during 1994. The increase in interest
income was essentially due to the increased volume of interest-earning assets
resulting from a modest growth in the volume of average assets and a decline in
the volume of average non-interest-earning assets.
Average interest-earning assets increased $36.5 million or 3.2% during
1994 compared to the prior year. The increase in average interest-earning
assets was concentrated within the loan portfolio which increased $85.1 million
or 11.6%, while the average of all other interest-earning assets declined $48.6
million or 12.0%. These changes highlight the Bank's efforts, during 1994, to
place greater emphasis on loans as opposed to securities. The average yield on
interest-earning assets improved by 4 basis points from 6.54% during 1993 to
6.58% during 1994.
INTEREST EXPENSE. Interest expense decreased $1.0 million or 2.3% from
$43.8 million during 1993 to $42.8 million during 1994. The decline in interest
expense was due to a decline in the average cost of funds during the current
year which was partially offset by the interest expense resulting from an
increase in average interest-bearing liabilities.
Average interest-bearing liabilities increased $20.4 million or 1.9%
during 1994 compared to the prior year. The growth was essentially evenly
divided between average deposits which increased $10.6 million or 1.1% and
average borrowed funds, consisting of FHLBB advances, which increased $9.8
million or 8.7%. Although the level of interest rates trended upward through
most of 1994, the Bank's average cost of funds lagged behind this trend. In
addition to the lag effect of repricing certificates of deposit throughout 1994,
the interest rates paid by the Bank were, for the most part, at levels less than
the general level of interest rates. As a result, the Bank's average cost of
funds declined 17 basis points from 3.99% for 1993 to 3.82% for 1994.
NET INTEREST INCOME. Net interest income, the primary component of the
Company's earnings, increased $4.0 million or 12.9% to $34.5 million for 1994
from $30.5 million for 1993. As a result of the 4 basis point improvement in
the average yield on interest-earning assets and the 17 basis point decline in
the average cost of interest-bearing liabilities, the net interest rate spread
increased 21 basis points to 2.76% for 1994 from 2.55% for 1993. Additionally,
the Company's net yield on interest-earning assets averaged 2.94% for 1994
compared to 2.68% for 1993.
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, which cannot be segregated, have been allocated in proportion to the
relationship of the absolute dollar amounts of the changes in each.
For the Years Ended December 31,
---------------------------------
1994 Compared to 1993
---------------------
Volume Rate Net
------ ------ ------
(AMOUNTS IN THOUSANDS)
Interest earned on:
Loans $5,994 $(2,620) $ 3,374
Taxable investment securities (1,175) 1,473 298
Federal funds (734) 90 (644)
FHLBB stock 74 16 90
Other interest-earning assets (86) (85) (171)
------ ------ ------
Interest income 4,073 (1,126) 2,947
------ ------ ------
Interest paid on:
Deposits 400 (1,991) (1,591)
Borrowed funds 542 51 593
------ ------ ------
Interest expense 942 (1,940) (998)
------ ------ ------
Net interest income $3,131 $ 814 $3,945
------ ------ ------
------ ------ ------
PROVISION FOR CREDIT LOSSES. During 1994, the Bank provided $2.3
million for credit losses compared to $2.5 million during 1993. In addition
to the provision for credit losses, the Bank also provided $2.2 million for
estimated losses on foreclosed assets during 1994 compared to $4.3 million
during 1993. These provisions are included in foreclosed asset expense (see
"Non-interest expense").
NON-INTEREST INCOME. Non-interest income is derived from fees which
the Bank charges for various loan and deposit account services, fees
generated from other ancillary services provided by the Bank, and net
securities and loan gains. During 1994, the income generated from these
sources totaled $3.1 million compared to $7.3 million for the prior year,
reflecting a decrease of $4.2 million or 57.8%.
Service charges and other fee income declined $3.6 million or 59.7% and
totaled $2.5 million for 1994 compared to $6.1 million earned in 1993. During
1993, as part of the Burritt transaction (see Consolidated Financial
Statements--
Note 13), the Bank was servicing loans for the FDIC on an interim basis (through
September 30, 1993), which resulted in $3.7 million in fee income.
Net securities and loan gains totaled $648,000 in 1994 compared to
$1,256,000 in 1993, reflecting a decline of $608,000 or 48.4%. This decline
was due to a decline in the volume of loans sold at net gains during 1994
compared to 1993. In keeping with the Bank's asset and liability management
objectives (see "Asset/Liability Management"), the Bank may sell fixed rate
mortgage loans in the secondary markets. In 1994, the Bank sold $12.1
million in fixed rate mortgage loans, resulting in gains of $102,000 compared
to fixed rate mortgage loan sales of $30.0 million in 1993, resulting in
gains of $834,000. The Bank, during 1994, realized net gains of $546,000 on
the sale of various securities compared to net gains of $422,000 in 1993.
The proceeds from these transactions have been allocated to fund the Bank's
loan demand and other securities purchases.
NON-INTEREST EXPENSE. Non-interest expense totaled $25.6 million or
2.09% of average assets during 1994 compared to $27.1 million or 2.27% of
average assets in 1993. The $1.5 million or 5.5% decrease in the Company's
cost of operations was due to a decline in foreclosed asset expense which
more than offset increases in several other categories of expense during 1994
compared to 1993.
Salaries and employee benefits, the largest component of the Company's
cost of operations, increased $0.5 million or 5.2% from $9.6 million during
1993 to $10.1 million during 1994. Salaries increased $74,000 or 1.0% during
1994 compared to the prior year. This increase resulted from the exercise of
stock appreciation rights which resulted in compensation expense of $122,000.
Employee benefits increased $0.4 million or 21.1% during the year from $1.9
million for 1993 to $2.3 million in 1994. The increased cost of employee
benefits was primarily in pension and postretirement benefit costs,
reflecting the increased number of eligible participants resulting from the
Burritt transaction.
During 1994, the Bank continued to incur expenses with the foreclosure
process and the management of foreclosed and in-substance foreclosed assets.
These expenses include all of the direct costs associated with acquiring,
holding, managing, marketing and disposing of these assets. In 1994, the
Bank incurred foreclosed asset expenses of $0.8 million compared to $0.9
million in 1993 (see Consolidated Financial Statements--Note 7). Subsequent
to an initial estimate of value of the underlying real estate securing loans
in the foreclosure process, the Bank updates appraisals at least on an annual
basis. In order to provide for unidentified and possible future declines in
the value of foreclosed assets the Bank maintains an allowance for estimated
losses on foreclosed assets. For the year ended December 31, 1994, the Bank
provided $2.2 million to this allowance compared to $4.3 million for the
prior year. The Company expects that
until the level of foreclosed assets declines substantially, foreclosed asset
expense will continue to be significant.
The FDIC insurance premium paid by the Bank in 1994 totaled $2.8
million compared to $2.4 million in 1993. The increased volume of insured
deposits assumed in connection with the Burritt transaction and the lag in
computing the FDIC insurance premium, in large part, accounted for the
increase in the premium paid in 1994 compared to 1993.
Data processing expense totaled $1.3 million in 1994, reflecting a
decrease of $0.7 million or 35.0% compared to the $2.0 million incurred in
1993. The decline is largely attributable to the elimination, in the third
quarter of 1993, of the former data processing center operated by Burritt.
The Bank continued to operate the center through August 1993 in order to
service loans for the FDIC. (See Consolidated Financial Statements--Note 13).
Marketing expense increased $.5 million or 62.5% from $0.8 million for
1993 to $1.3 million for 1994. The increase reflects the increased promotion
of the Bank's products and services to the markets it serves.
As required by SFAS 91, the Bank defers certain direct costs resulting
from the origination of loans, which will be amortized as an adjustment of
yield over the contractual term of the related loans. These deferred costs,
which are principally comprised of salaries, employee benefits and other loan
expenses, totaled approximately $1.5 million during 1994 compared to $1.8
million during 1993.
NET NON-INTEREST MARGIN. The net non-interest margin declined by 18
basis points during 1994 compared to 1993. Non-interest income decreased 36
basis points from .61% during 1993 to .25% during 1994. Non-interest expense
decreased 18 basis points from 2.27% during 1993 to 2.09% during 1994.
PROVISION FOR INCOME TAXES. The provision for income taxes for 1994
totaled $3.9 million, reflecting a 40.7% effective income tax rate compared
to $3.3 million, representing an effective income tax rate of 40.5% for 1993
(see Consolidated Financial Statements--Note 9)
The following table summarizes the Company's net interest income
(including dividends) and net yield on average interest-earning assets.
Non-accruing loans, for the purpose of this analysis, are included in average
loans outstanding during the periods indicated. For the purpose of these
computations, daily average amounts were used to compute average balances.
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
1995 1994 1993
-------------------------------- ------------------------------ ---------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- ---------- ------- -------- ---------- ------- --------- --------- ------
(DOLLAR AMOUNTS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans $845,423 $65,148 7.71% $817,699 $56,802 6.95% $732,635 $53,428 7.29%
Taxable securities 316,508 20,269 6.40 344,778 19,716 5.72 366,216 19,418 5.30
Federal funds 8,810 508 5.77 2,700 90 3.33 25,080 734 2.93
FHLBB stock 9,461 664 7.02 8,636 674 7.80 7,682 584 7.60
Other interest-earning
assets -- -- -- -- -- -- 5,747 171 2.98
---------- ------- --------- -------- --------- -------
Total interest-earning
assets 1,180,202 86,589 7.34 1,173,813 77,282 6.58 1,137,360 74,335 6.54
---------- ------- ---- --------- -------- ---- --------- ------- ----
NON-INTEREST-EARNING ASSETS:
Cash and due from banks 15,793 14,382 16,156
Premises and equipment, net 6,710 7,028 5,960
Accrued income receivable 6,856 6,424 6,700
Other assets 10,381 30,979 41,422
Less allowance for credit
losses (6,717) (6,814) (12,701)
---------- ---------- ---------
Total non-interest-
earning assets 33,023 51,999 57,537
---------- ---------- ---------
TOTAL ASSETS $1,213,225 $1,225,812 $1,194,897
---------- ---------- ---------
---------- ---------- ---------
INTEREST-BEARING
LIABILITIES:
Deposits $1,012,013 46,267 4.57 $996,450 36,008 3.61 $985,875 37,599 3.81
Borrowed funds 93,097 5,308 5.70 123,190 6,810 5.53 113,376 6,217 5.48
---------- ------- --------- -------- --------- -------
Total interest-bearing
liabilities 1,105,110 51,575 4.67 1,119,640 42,818 3.82 1,099,251 43,816 3.99
---------- ------- ---- --------- -------- ---- --------- ------- ----
NON-INTEREST-BEARING
LIABILITIES:
Demand deposits 32,121 30,179 26,409
Other (503) 7,568 6,390
---------- ---------- ---------
Total non-interest-
bearing liabilities 31,618 37,747 32,799
---------- ---------- ---------
STOCKHOLDERS' EQUITY 76,497 68,425 62,847
---------- ---------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,213,225 $1,225,812 $1,194,897
---------- ---------- ---------
---------- ---------- ---------
NET INTEREST INCOME $35,014 $34,464 $30,519
------- -------- -------
------- -------- -------
NET INTEREST RATE SPREAD 2.67% 2.76% 2.55%
---- ---- ----
---- ---- ----
NET YIELD ON AVERAGE
INTEREST-EARNING ASSETS 2.97% 2.94% 2.68%
---- ---- ----
FOR THE YEARS ENDED DECEMBER 31,
1992 1991
------------------------------- ---------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- ---------- ------- -------- ---------- -------
(DOLLAR AMOUNTS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans $534,606 $44,568 8.34% $523,720 $51,208 9.78%
Taxable securities 123,562 8,301 6.72 69,183 5,580 8.07
Federal funds 18,235 555 3.04 8,171 469 5.74
FHLBB stock 5,601 439 7.84 5,104 458 8.97
Other interest-earning
assets 5,865 281 4.79 1,353 81 5.99
---------- ------- --------- --------
Total interest-earning
assets 687,869 54,144 7.87 607,531 57,796 9.51
---------- ------- ---- --------- -------- ----
NON-INTEREST-EARNING ASSETS:
Cash and due from banks 6,504 5,227
Premises and equipment, net 5,513 5,911
Accrued income receivable 5,296 5,682
Other assets 34,837 24,099
Less allowance for credit
losses (4,491) (3,075)
---------- ----------
Total non-interest-
earning assets 47,659 37,844
---------- ----------
TOTAL ASSETS $735,528 $645,375
---------- ----------
---------- ----------
INTEREST-BEARING
LIABILITIES:
Deposits $555,878 25,493 4.59 $485,853 32,585 6.71
Borrowed funds 103,886 6,392 6.15 92,430 6,884 7.45
---------- ------- --------- --------
Total interest-bearing
liabilities 659,764 31,885 4.83 578,283 39,469 6.83
---------- ------- ---- --------- -------- ----
NON-INTEREST-BEARING
LIABILITIES:
Demand deposits 12,495 9,667
Other 5,917 2,303
---------- ----------
Total non-interest-
bearing liabilities 18,412 11,970
---------- ----------
STOCKHOLDERS' EQUITY 57,352 55,122
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $735,528 $645,375
---------- ----------
---------- ----------
NET INTEREST INCOME $22,259 $18,327
------- --------
------- --------
NET INTEREST RATE SPREAD 3.04% 2.68%
---- ----
---- ----
NET YIELD ON AVERAGE
INTEREST-EARNING ASSETS 3.24% 3.02%
---- ----
---- ----
IMPACT OF INFLATION AND CHANGING PRICES
The impact of inflation is reflected in the increased cost of the Company's
operations. Since the primary assets and liabilities of the Bank are monetary
in nature, to the extent that inflation affects interest rates, it will in turn
affect the net income of the Company.
NEWLY ADOPTED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"). SFAS 121 requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the carrying
amount of an asset is deemed to not be recoverable, an estimate of the future
cash flows will be computed and compared to the carrying amount of the asset.
If such amount is less than the carrying amount, an impairment loss will be
recognized and measured as the amount by which the carrying amount of the asset
exceeds the fair value. This statement also requires that long-lived assets and
certain identifiable intangibles to be disposed of be reported at the lower of
carrying amount or fair value less cost to sell. The Bank will be required to
adopt this statement on a prospective statement beginning January 1, 1996.
Management does not expect the adoption of SFAS 121 to have a material effect on
the Bank's financial condition.
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Rights an Amendment to SFAS 65" ("SFAS 122").
SFAS 122 amends SFAS 65, "Accounting for Certain Mortgage Banking Activities,"
to require recognition as a separate asset of the value of the rights to service
mortgage loans for others, however those servicing rights are acquired.
Mortgage servicing rights acquired through either servicing or origination of
mortgage loans and the subsequent sale or securitization of those loans with
servicing retained will require that those rights be allocated a cost as part of
the total cost of the mortgage loan based on their relative fair values if it is
practicable to estimate those fair values. If it is not practicable to estimate
the fair values, the entire cost of purchasing or originating the loans will be
allocated to the mortgage loans and no cost will be allocated to the mortgage
servicing rights. Loans purchased or originated with a definitive plan to sell
or securitize and retain the mortgage servicing rights will require the
provision of this statement to be applied at the date of origination or
purchase. Additionally, this statement requires that capitalized mortgage
servicing rights be assessed for impairment based on the fair value of those
rights; any
impairment should be recognized through a valuation allowance. The Bank will be
required to adopt this statement on a prospective basis beginning January 1,
1996. Management has not yet determined the effect, if any, which the adoption
will have on the Bank's financial condition.
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-
Based Compensation." The new rules are effective for calendar-year 1996.
However, companies will be required to include in that year's financial
statements information about options granted in 1995. The standard encourages
but does not require companies to account for stock compensation awards based on
their fair value at the date the awards are granted, with the resulting
compensation cost shown as an expense. If they continue to apply current
accounting requirements, companies will have to disclose in a note to the
financial statements what the net income and earnings per share would have been
had they followed the new accounting method. Management has not yet determined
how the Bank will apply the provisions of the pronouncement nor the effect, if
any, the application would have on the Bank's financial statements.
MARKET FOR COMMON STOCK
The Company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol "DSBC".
The following table sets forth, for the periods indicated, market price
information regarding the Company's common stock as reported by Nasdaq:
STOCK PRICE
-----------------
HIGH LOW
----- ------
1994
First Quarter $27.50 $21.25
Second Quarter 33.75 25.00
Third Quarter 30.50 25.75
Fourth Quarter 28.50 21.00
1995
First Quarter 27.50 21.75
Second Quarter 26.75 23.00
Third Quarter 29.13 25.25
Fourth Quarter 26.50 23.33
1996
First Quarter
(through March 12) 30.50 24.75
As of December 31, 1995, the Company had approximately 890 stockholders
of record for the 3,029,027 outstanding shares of its common stock. This does
not reflect the number of persons or entities who hold their stock in nominee
or "street" name through various brokerage firms.
DIVIDENDS
Payment of dividends by the Company on its stock is subject to various
restrictions. Under Delaware law, the Company may pay dividends out of
surplus or, in the event there is no surplus, out of net profits for the
fiscal year in which the dividend is declared and/or the preceding fiscal
year. Dividends may not be paid out of net profits, however, if the capital
of the Company has been diminished to an amount less than the aggregate
amount of capital represented by all classes of preferred stock. Pursuant to
Connecticut law, cash dividends may be paid by the Bank to the Company out of
net profits, defined as the remainder of earnings from current operations
plus actual recoveries on loans and investments and other assets, after
deducting all current operating expenses, actual losses, accrued dividends on
preferred stock and all federal and state taxes. The total dividends
declared by the Bank in any calendar year may not exceed the total of its net
profits for that year combined with its net profits for the preceding two
years.
The Company paid 5% stock dividends on its common stock on March 29,
1995 and November 24, 1995. Additionally, a cash dividend of $.06 per share
was paid on March 1, 1996.
CONSOLIDATED STATEMENTS OF POSITION
DS BANCOR, INC. AND SUBSIDIARY
- ---------------------------------------------------------------------------------------------------------------
DECEMBER 31,
------------------------------
1995 1994
------------ ------------
(DOLLAR AMOUNTS IN THOUSANDS)
ASSETS
Cash and due from banks (Note 1) $18,425 $14,128
Federal funds sold (Note 1) 2,305 4,500
Securities (Notes 1, 2 & 7)
Trading 1,171 770
Available-for-sale 241,136 216,674
Held-to-maturity (fair value: $77,394 in 1995 and $96,928 in 1994) 77,881 104,702
Loans held-for-sale (Notes 1, 3 & 7) 2,035 55,190
Loans receivable (net of allowances for credit losses of $6,906 in 1995
and $6,803 in 1994) (Notes 1, 3, 7 & 15) 873,304 784,237
Federal Home Loan Bank of Boston stock, at cost (Note 7) 9,793 8,899
Accrued income receivable (Note 1) 7,746 7,227
Bank premises and equipment, net (Notes 1 & 5) 6,504 6,975
Deferred income tax asset, net (Notes 1 & 9) 3,293 7,293
Foreclosed assets (net of allowances of $230 in 1995 and
$439 in 1994) (Notes 1, 4 & 15) 3,712 5,756
Other assets (Note 13) 7,178 6,339
------------ ------------
TOTAL ASSETS $1,254,483 $1,222,690
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits (Note 6)
Non-interest bearing $35,999 $30,918
Interest bearing 1,022,146 996,828
------------ ------------
Total 1,058,145 1,027,746
Mortgagors' escrow 11,193 11,885
Advances from Federal Home Loan Bank of Boston (Note 7) 96,876 111,145
Other liabilities (Note 8) 7,460 4,777
------------ ------------
Total Liabilities 1,173,674 1,155,553
------------ ------------
Commitments & Contingent Liabilities (Notes 5 & 10)
Stockholders' Equity (Notes 1, 11, 12 & 19)
Preferred stock, no par value; authorized
2,000,000 shares; none issued -- --
Common stock, par value $1.00; authorized 6,000,000 shares;
issued: 3,368,527 shares in 1995, 3,084,571 in 1994;
outstanding: 3,029,027 in 1995, 2,745,071 in 1994 3,368 3,085
Additional paid-in capital 44,514 37,780
Retained earnings 37,014 36,362
Net unrealized gains (losses) on securities available-for-sale,
net of tax effect of ($301) in 1995 and $3,970 in 1994 426 (5,577)
Less: Treasury stock, at cost (339,500 shares) (4,513) (4,513)
------------ ------------
Total Stockholders' Equity 80,809 67,137
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,254,483 $1,222,690
------------ ------------
------------ ------------
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF EARNINGS
DS BANCOR, INC. AND SUBSIDIARY
- ---------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Interest Income (Note 1)
Interest and fees on loans $65,148 $56,802 $53,428
Taxable interest on securities 20,147 19,528 20,020
Dividends on securities 1,294 952 887
---------- ---------- ---------
Total interest income 86,589 77,282 74,335
---------- ---------- ---------
Interest Expense
Deposits (Note 6) 46,408 36,102 37,679
Borrowed funds (Note 7) 5,308 6,810 6,217
Less: Penalties on premature time deposit withdrawals (141) (94) (80)
---------- ---------- ---------
Net interest expense 51,575 42,818 43,816
---------- ---------- ---------
Net interest income 35,014 34,464 30,519
Provision for credit losses (Notes 1 & 3) 2,525 2,325 2,475
---------- ---------- ---------
Net interest income after provision for credit losses 32,489 32,139 28,044
---------- ---------- ---------
Non-interest Income
Service charges and other income (Note 14) 2,705 2,453 6,087
Net securities (losses) gains (Note 2) (520) 546 422
Net gain on sale of loans 1,499 102 834
---------- ---------- ---------
Total non-interest income, net 3,684 3,101 7,343
---------- ---------- ---------
Non-interest Expense
Salaries and wages 8,074 7,820 7,746
Employee benefits (Note 8) 2,485 2,312 1,868
Occupancy (Note 5) 1,814 2,094 2,148
Furniture and equipment (Note 5) 1,363 1,039 907
Foreclosed asset expense, net (Notes 1 & 4) 1,776 2,904 4,801
Other (Note 14) 8,028 9,441 9,643
---------- ---------- ---------
Total non-interest expense 23,540 25,610 27,113
---------- ---------- ---------
Income before income taxes and cumulative effect
of a change in accounting principle 12,633 9,630 8,274
Provision for income taxes, net (Note 9) 5,020 3,920 3,348
---------- ---------- ---------
Income before cumulative effect of a change in accounting principle 7,613 5,710 4,926
Cumulative effect of a change in method of accounting for
income taxes (Notes 1 & 9) -- -- 1,548
---------- ---------- ---------
Net Income $7,613 $5,710 $6,474
---------- ---------- ---------
---------- ---------- ---------
Weighted average number of shares outstanding (Notes 1 & 12)
Primary 3,091,578 3,070,492 2,978,004
Fully Diluted 3,103,253 3,072,672 3,019,457
Earnings per share--Primary (Notes 1 & 12)
Income before cumulative effect of a change in accounting principle $2.46 $1.86 $1.65
Cumulative effect of a change in method of accounting for
income taxes -- -- 0.52
---------- ---------- ---------
Net Income $2.46 $1.86 $2.17
---------- ---------- ---------
---------- ---------- ---------
Earnings per share--Fully diluted (Notes 1 & 12)
Income before cumulative effect of a change in accounting principle $2.45 $1.86 $1.63
Cumulative effect of a change in method of accounting for
income taxes -- -- 0.51
---------- ---------- ---------
Net Income $2.45 $1.86 $2.14
---------- ---------- ---------
---------- ---------- ---------
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DS BANCOR, INC. AND SUBSIDIARY
- -----------------------------------------------------------------------------------------------------------------------
REATAINED EARNINGS
------------------
ADDITIONAL UNREALIZED TOTAL
COMMON PAID-IN RETAINED GAINS TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS (LOSSES) STOCK EQUITY
------- ------- ------- ------- ------- -------
NOTE 1
(DOLLAR AMOUNTS IN THOUSANDS)
Balance--January 1, 1993 $2,865 $33,971 $26,340 ($78) ($4,513) $58,585
Net income 6,474 6,474
Stock dividend declared on
common (5%--
February 26, 1993)
(Note 12) 126 2,029 (2,155) --
Shares issued for fractional
interest 7 7
Cash in lieu of fractional
shares (7) (7)
Adjustment of unrealized
gains, net 1,381 1,381
------- ------- ------- ------- ------- -------
Balance--December 31, 1993 2,991 36,007 30,652 1,303 (4,513) 66,440
Net income 5,710 5,710
Stock options exercised
(93,455 shares) (Notes
11 & 12) 94 1,773 1,867
Adjustment of unrealized
losses, net (6,880) (6,880)
------- ------- ------- ------- ------- -------
Balance--December 31, 1994 3,085 37,780 36,362 (5,577) (4,513) 67,137
Net income 7,613 7,613
Stock dividend declared
on common stock
(5%--March 15, 1995 and
5%--November 10, 1995)
(Note 12) 280 6,658 (6,938) --
Shares issued for fractional
interest 12 12
Cash in lieu of fractional
shares (23) (23)
Stock options exercised
(3,062 shares) (Notes
11 & 12) 3 64 67
Adjusted of unrealized
gains, net 6,003 6,003
------- ------- ------- ------- ------- -------
Balance--December 31, 1995 $3,368 $44,514 $37,014 $426 ($4,513) $80,809
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
DS BANCOR, INC. AND SUBSIDIARY
- ----------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
(AMOUNTS IN THOUSANDS)
Cash Flows from Operating Activities
Net income $7,613 $5,710 $6,474
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 2,525 2,325 2,475
Provision for estimated losses on foreclosed assets 1,500 2,235 4,250
Depreciation and amortization 1,111 807 692
Amortization of intangible assets 716 956 1,255
Net amortization of premiums/discounts on securities 601 1,208 2,077
Net amortization (accretion) of deferred loan fees 30 (83) (557)
Benefit for deferred income taxes (271) (340) (879)
Decrease (increase) in deferred income tax asset -- 492 112
Net securities losses (gains) 1,059 (625) (422)
Net gain on sale of loans (1,499) (102) (834)
Gains on sales of foreclosed assets (120) (93) (349)
Net increase in securities trading (401) (770) --
Increase in accrued income receivable (519) (686) (2,280)
Cumulative effect of change in accounting principle -- -- (1,548)
Net (increase) decrease in other assets (1,555) 1,507 19,234
Net increase (decrease) in other liabilities 2,683 234 (1,307)
Other, net -- 74 --
-------- -------- --------
Net cash provided by operating activities 13,473 12,849 28,393
-------- -------- --------
Cash Flows from Investing Activities
Proceeds from sale of securities -- -- 62,175
Proceeds from matured securities available-for-sale 54,928 43,553 --
Proceeds from sale of securities available-for-sale 52,908 39,020 --
Proceeds from matured securities held-to-maturity 15,178 34,895 145,708
Purchase of securities available-for-sale (103,541) (54,779) --
Purchase of securities held-to-maturity (8,500) (73,827) (261,069)
Purchase of FHLBB stock (894) (877) (1,405)
Proceeds from loans sold to others 34,111 12,245 30,820
Purchases of loans from others (97,112) (21,938) (8,813)
Net decrease (increase) in loans receivable 24,527 (47,714) (95,400)
Bank premises and equipment additions (640) (794) (2,259)
Proceeds from sale of foreclosed assets 2,170 3,328 3,590
Net decrease in foreclosed assets -- 44 552
-------- -------- --------
Net cash used by investing activities (26,865) (66,844) (126,101)
-------- -------- --------
Cash Flows from Financing Activities
Net increase in deposits 30,399 21,525 11,290
Net increase (decrease) in mortgagors' escrow (692) 1,409 1,997
Net decrease in repurchase agreements & other borrowings -- (1,450) (641)
Net increase (decrease) in short term FHLBB advances (26,822) 11,754 12,745
Proceeds from long term FHLBB advances 54,604 35,000 13,000
Repayment of long term FHLBB advances (42,051) (40,600) (41,525)
Proceeds from issuance of common stock 79 1,867 7
Dividends paid to stockholders (23) -- (7)
-------- -------- --------
Net cash provided (used) by financing activities 15,494 29,505 (3,134)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (Note 1) 2,102 (24,490) (100,842)
Cash and cash equivalents at beginning of year 18,628 43,118 143,960
-------- -------- --------
Cash and cash equivalents at end of year $20,730 $18,628 $43,118
-------- -------- --------
-------- -------- --------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $51,716 $42,912 $43,838
Income taxes 3,493 3,089 4,208
Loans transferred to foreclosed assets 3,414 3,208 12,081
Foreclosed assets transferred to loans -- 1,173 3,499
Loans transferred to loans held-for-sale -- 55,190 --
Bank-financed foreclosed asset sales 1,908 2,352 2,427
See notes to consolidated financial statements.
NOTE 1 - SIGNIFICANT 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 accompanying
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 disclosure of contingent assets and liabilities as of
the dates of the Consolidated Statements of Financial Position and reported
amounts of income and expenses in the Consolidated Statements of Earnings for
the periods then ended. 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 satisfaction of loans (foreclosed
assets). Such estimates reflect the realization that the Bank's foreclosed
assets and a substantial portion of the Bank's mortgage loans receivable are
related to real estate located in markets in Connecticut, which have experienced
value fluctuations in recent years.
While management uses available information to recognize possible losses on
loans and foreclosed assets, including the services of professional appraisers
for significant properties, future adjustments to the Allowance for credit
losses and the Allowance for estimated losses on foreclosed assets may be
necessary based on changes in economic and real estate market conditions in and
around the Bank's service area. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
Allowance for credit losses and the Allowance for estimated losses on foreclosed
assets and may require the Bank to recognize adjustments based on their
judgement 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 are accounted for in accordance with the provisions of Statement of
Financial Accounting Standard ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115 requires the
classification of investment securities into categories of Held-to-maturity,
Available-for-sale or Trading. Investments in debt securities are classified as
Held-to-maturity only if there is a positive intent and ability to hold those
securities to maturity. Carrying basis is measured at amortized cost adjusted
for amortization of premiums and accretion of discounts generally computed using
the level yield method. Equity securities and debt securities not classified as
Held-to-maturity are classified as either Available-for-sale or Trading.
Classifications as Available-for-sale are measured at fair value, with
unrealized holding gains and losses, net of related income taxes, reported net
as a separate component of Stockholders' Equity until realized. Trading
securities are measured at fair value with unrealized holding gains and losses
reflected in Non-interest income.
Declines in the fair value below amortized cost that are other than temporary
for individual securities Available-for-sale and Held-to-maturity are recognized
as write-downs of the individual securities to their fair value, with the
write-downs included as a charge to operations as realized losses.
Mortgage-backed securities are accounted for in the same manner as debt
securities and consist of certificates that are participation interests in pools
of long-term first mortgage loans.
Gain or loss on dispositions of securities is based on the net proceeds and
adjusted carrying amount of the securities sold using 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, if any,
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.
Effective January 1, 1995, the Bank implemented the provisions of SFAS Nos.
114/118, "Accounting by Creditors for Impairment of a Loan." The basic
provisions of these statements eliminate the financial statement classification
of in-substance foreclosed assets as foreclosed assets, resulting in the
classification of such amounts and related specific allowance for credit losses
as Loans receivable. Additionally, these statements address the accounting for
loans considered impaired and the recognition of impairment. A loan is
considered impaired when, in management's judgement, current information and
events indicate it is probable that collection of all amounts due according to
the contractual terms of the loan agreement will not be met. The provisions of
these statements are prospective, with any adjustments resulting from initial
application reflected as an adjustment to the provision for credit losses. In-
substance foreclosed assets prior to January 1, 1995 have been reclassified to
Loans receivable for comparability purposes (Note 3). The effect on the
accompanying Consolidated Financial Statements of adopting these statements was
not significant.
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 and all previously unpaid accrued interest is reversed when a loan
becomes past due 90 days or more as to contractual payment of principal or
interest, or is determined to be impaired. Interest 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 and certain direct related costs are deferred, and the net
fee or cost is amortized as an adjustment of loan yield over the life of the
related loan.
Allowances for credit losses have been established by provisions charged to
income and decreased by loans charged off (net of recoveries). These Allowances
represent amounts which, in management's judgment, are adequate to absorb
possible losses on loans that may become uncollectible based on such factors as
the Bank's past loan loss experience, changes in the nature and volume of the
loan portfolio, current and prospective economic conditions that may affect the
borrowers' ability to pay, overall portfolio quality, and review of specific
problem loans.
BANK PREMISES AND EQUIPMENT are stated at cost, less accumulated depreciation
and amortization. The Bank uses primarily accelerated methods of calculating
depreciation. Leasehold improvements are amortized over the shorter of 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 include real estate properties acquired through foreclosure
proceedings or deeds accepted in lieu of foreclosure. 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 values
are reflected by charges or credits to the Allowance for estimated losses on
foreclosed assets. Costs relating to the subsequent development or improvement
of a property are capitalized when value is increased. All other holding costs
and expenses, net of rental income, if any, are expensed as incurred.
CORE DEPOSIT INTANGIBLE. In connection with the Burritt transaction (Note 13),
the core deposit intangible is being amortized on a straight line basis over
seven years.
INCOME TAXES. 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 income 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. The effect on deferred
income tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Provisions for income taxes are computed based on all taxable revenue and
deductible expense items included in the accompanying Consolidated Statements of
Earnings regardless of the period in which such items are recognized for income
tax filing purposes. The Company and it subsidiary file consolidated Federal
and combined Connecticut income tax returns.
The Company adopted the provisions of SFAS No. 109, "Accounting for Income
Taxes" ("SFAS 109") effective January 1, 1993. As a result, the Company
recorded a cumulative one-time benefit in the accompanying Consolidated
Statements of Earnings for the year ended December 31, 1993, which reflects the
change in method of accounting for income taxes.
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 No. 87, "Employers' Accounting for
Pensions" and SFAS No. 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.
FINANCIAL INSTRUMENTS include substantially all of the Bank's financial assets
and liabilities, and certain off-balance-sheet rights and/or obligations. Such
items generally reflect cash and cash equivalents and contractual rights or
obligations to receive cash or other financial instruments, respectively.
Derivative financial instruments are financial instruments used to construct a
transaction that is derived from and reflects the underlying value of assets,
other instruments or various indices. The primary purpose of derivative
financial instruments is to transfer price risk associated with the fluctuations
in asset values rather than borrow or lend funds. Such items include forward
contracts, interest rate swap contracts, options and futures, and other
financial instruments with similar characteristics, which include the Bank's
off-balance-sheet financial instruments. All derivative financial instruments
held or issued by the Bank are held or issued for purposes other than trading.
In accordance with SFAS No. 105, "Disclosure of Information About Financial
Instruments with Off-Balance-Sheet Risk and Concentrations of Credit Risk," SFAS
No. 107, "Disclosures About Fair Value of Financial Instruments," and SFAS No.
119, "Disclosure About Derivative Financial Instruments and Fair Value of
Financial Instruments," the Bank is required to disclose information about
financial instruments with off-balance-sheet market or credit risk and
concentrations of credit risk associated with its financial instruments, (Notes
15 and 16), fair values of its financial instruments (Note 16), and information
about its derivative financial instruments (Note 16), respectively.
RECLASSIFICATION. Certain reclassifications have been made to the accompanying
1994 and 1993 Consolidated Financial Statements to conform to the 1995
presentation.
NOTE 2 - SECURITIES
Securities have been classified in the accompanying Consolidated Statements of
Financial Position according to management's intent. Carrying amounts and
approximate fair values of Securities were as follows (amounts in thousands):
December 31, 1995
-----------------------------------------------------
Gross unrealized holding
Amortized ------------------------ Fair
Cost Gains Losses Value
---------- -------- -------- --------
TRADING
Marketable equities $ 1,148 $23 $ --- $ 1,171
-------- -------- -------- --------
-------- -------- -------- --------
AVAILABLE-FOR-SALE
U.S. Government and agency obligations $ 8,297 $ 109 $ --- $ 8,406
Mortgage-backed securities 213,538 2,378 1,826 214,090
Other bonds and notes 4,175 3 11 4,167
-------- -------- -------- --------
Total debt securities 226,010 2,490 1,837 226,663
Marketable equities 13,329 307 294 13,342
Mutual funds 1,070 61 --- 1,131
-------- -------- -------- --------
Total $240,409 $ 2,858 $ 2,131 $241,136
-------- -------- -------- --------
-------- -------- -------- --------
HELD-TO-MATURITY
U.S. Government and agency obligations $ 2,000 $ --- $ --- $ 2,000
Mortgage-backed securities 70,881 62 549 70,394
-------- -------- -------- --------
Total debt securities 72,881 62 549 72,394
Money market preferred stock 5,000 --- --- 5,000
-------- -------- -------- --------
Total $ 77,881 $ 62 $ 549 $ 77,394
-------- -------- -------- --------
-------- -------- -------- --------
December 31, 1994
-----------------------------------------------------
Gross unrealized holding
Amortized ------------------------ Fair
Cost Gains Losses Value
---------- -------- -------- --------
TRADING
Marketable equities $ 918 $ --- $ 148 $ 770
-------- -------- -------- --------
-------- -------- -------- --------
AVAILABLE-FOR-SALE
U.S. Government and agency obligations $ 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
-------- -------- -------- --------
-------- -------- -------- --------
HELD-TO-MATURITY
U.S. Government and agency obligations $ 2,000 $ --- $ 60 $ 1,940
Mortgage-backed securities 102,702 --- 7,714 94,988
-------- -------- -------- --------
Total $104,702 $ --- $ 7,774 $ 96,928
-------- -------- -------- --------
-------- -------- -------- --------
The scheduled contractual maturities of debt securities at
December 31, 1995 are as follows:
Available-for-sale Held-to-maturity
-------------------- --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Due in one year or less $ --- $ --- $ 2,000 $ 2,000
Due after one year through five years 4,175 4,167 --- ---
Due after five years through ten years 5,322 5,359 --- ---
Due after ten years 2,975 3,047 --- ---
-------- -------- -------- --------
12,472 12,573 2,000 2,000
Mortgage-backed securities 213,538 214,090 70,881 70,394
-------- -------- -------- --------
Total $226,010 $226,663 $ 72,881 $ 72,394
-------- -------- -------- --------
-------- -------- -------- --------
Proceeds from sales of securities, realized gains (losses) from sales of
securities, and unrealized holding gains (losses) on securities classified as
Trading were as follows:
For the Year Ended December 31, 1995
-----------------------------------------------------
Gross realized Net
Proceeds -------------------------- (losses)
from sales Gains Losses gains
---------- --------- ---------- ---------
(AMOUNTS IN THOUSANDS)
AVAILABLE-FOR-SALE
U.S. Government and agency obligations $ 27,964 $ --- $ 1,223 $(1,223)
Other bonds and notes 17,583 --- 555 (555)
-------- ------- ------- -------
45,547 --- 1,778 (1,778)
Marketable equities 7,361 720 1 719
-------- ------- ------- -------
Total 52,908 720 1,779 (1,059)
TRADING
Net trading gains realized 5,946 --- --- 516
Net trading unrealized holding gains --- --- --- 23
-------- ------- ------- -------
Total, net $ 58,854 $ 720 $ 1,779 $ (520)
-------- ------- ------- -------
-------- ------- ------- -------
For the Year Ended December 31, 1994
-------------------------------------------------------
Gross realized Net
Proceeds -------------------------- gains
from sales Gains Losses (losses)
---------- --------- ---------- ---------
(AMOUNTS IN THOUSANDS)
AVAILABLE-FOR-SALE
U.S. Government and agency obligations $ 4,020 $ 20 $ --- $ 20
Other bonds and notes 33,929 455 3 452
-------- ------- ------- -------
37,949 475 3 472
Marketable equities 1,071 208 55 153
-------- ------- ------- -------
Total 39,020 683 58 625
TRADING
Net trading gains realized 772 --- --- 69
Net trading unrealized holding losses --- --- --- (148)
-------- ------- ------- -------
Total, net $ 39,792 $ 683 $ 58 $ 546
-------- ------- ------- -------
-------- ------- ------- -------
Proceeds from the sales of debt securities during the year ended
December 31, 1993 were approximately $59.2 million. Gross gains of
approximately $497,000 and gross losses of approximately $365,000 were realized
on those sales.
At December 31, 1995, the aggregate amortized cost, which approximated fair
value, of securities pledged as collateral against public funds and treasury tax
and loan deposits was approximately $7.0 million.
The aggregate amortized cost and fair value of securities issued by a single
issuer, excluding obligations of the U.S. Government and its agencies, which
exceeded 10% of Stockholders' Equity at December 31, 1995, are as follows:
AMORTIZED FAIR
COST VALUE
--------- -------
(AMOUNTS IN THOUSANDS)
Cumbs Inc. $12,696 $12,856
Greenwich Capital Acceptance Inc. 14,311 14,739
Salomon Brothers Mortgage
Securities VII, Inc. 16,507 16,713
------- -------
$43,514 $44,308
------- -------
------- -------
The Financial Accounting Standards Board issued a "Special Report" in November
1995, "A Guide to Implementation of SFAS 115" (Note 1). This guide provided
additional guidance as to the criteria for the financial statement
classifications prescribed in SFAS 115. As a result of this additional
guidance, the Bank could reassess the appropriateness of the classification of
all its securities held. Accordingly, the Bank reclassified securities Held-to-
maturity with an aggregate amortized cost of approximately $20.4 million, which
approximated fair value, to the classification of Available-for-sale.
NOTE 3 - LOANS RECEIVABLE AND LOANS HELD-FOR-SALE
The components of Loans receivable, net in the accompanying Consolidated
Statements of Position were as follows:
DECEMBER 31,
-----------------------------
1995 1994
-------- --------
(AMOUNTS IN THOUSANDS)
MORTGAGE
Residential real estate $695,419 $687,582
Commercial real estate 31,234 28,731
Multi-family real estate 11,237 8,682
Residential construction 3,518 2,363
-------- --------
741,408 727,358
-------- --------
CONSUMER
Home equity lines of credit 78,523 70,358
Home equity installment 21,735 19,267
Collateral 3,330 3,014
All other 21,492 4,783
-------- --------
125,080 97,422
-------- --------
COMMERCIAL
Commercial 15,463 20,199
Real estate development 3,603 3,775
-------- --------
19,066 23,974
-------- --------
885,554 848,754
Net deferred loan fees, premiums &
discounts (3,309) (2,524)
Allowance for credit losses (6,906) (6,803)
-------- --------
875,339 839,427
Residential real estate loans
held-for-sale (2,035) (55,190)
-------- --------
Loans receivable, net $873,304 $784,237
-------- --------
-------- --------
Loans are summarized between fixed and adjustable rates as follows:
DECEMBER 31,
-----------------------------
1995 1994
-------- ---------
(AMOUNTS IN THOUSANDS)
Fixed rate $224,741 $213,669
Adjustable rate 660,813 635,085
-------- --------
Total $885,554 $848,754
-------- --------
-------- --------
The Bank has sold certain mortgage loans and retained the related servicing
rights (Note 20). The principal balances of loans serviced for others, which
are not included in the accompanying Consolidated Statements of Position, were
approximately $147.1 million and $129.3 million at December 31, 1995 and 1994,
respectively.
The recorded investment in impaired loans (Note 1) at December 31, 1995
approximated $13.8 million and included approximately $11.1 million in mortgage
loans, $1.5 million in consumer loans and $1.2 million in commercial loans. The
amount of the related Allowance for credit losses on these loans at December 31,
1995 approximated $1.6 million. The average recorded investment in impaired
loans during the year ended December 31, 1995 was approximately $14.6 million.
During the year ended December 31, 1995, amounts recognized as interest income
on impaired loans were not significant.
The recorded investment in impaired loans at January 1, 1995 was approximately
$15.1 million and included approximately $12.2 million in mortgage loans, $1.3
million in consumer loans and $1.6 million in commercial loans. These loans
were reflected as non-performing loans at December 31, 1994 in accordance with
accounting principles in effect at that date (Note 1).
Activity in the Allowances for credit losses for each of the three years in the
period ended December 31, 1995 was as follows:
MORTGAGE CONSUMER COMMERCIAL TOTAL
-------- -------- ---------- ------
(AMOUNTS IN THOUSANDS)
Balance - January 1, 1993 $11,166 $1,987 $ 784 $13,937
Provision for credit losses 1,925 50 500 2,475
Acquired allowance adjustment * (5,958) (5) --- (5,963)
Loans charged off (2,857) (860) (114) (3,831)
Recoveries of loans previously
charged off 329 21 11 361
------- ------ ------ -------
Balance - December 31, 1993 4,605 1,193 1,181 6,979
Provision for credit losses 1,675 600 50 2,325
Loans charged off (1,848) (573) (195) (2,616)
Recoveries of loans previously
charged off 63 46 6 115
------- ------ ------ -------
Balance - December 31, 1994 4,495 1,266 1,042 6,803
Provision for credit losses 1,725 800 --- 2,525
Loans charged off (2,306) (399) (78) (2,783)
Recoveries of loans previously
charged off 269 84 8 361
------- ------ ------ -------
Balance - December 31, 1995 $ 4,183 $1,751 $ 972 $ 6,906
------- ------ ------ -------
------- ------ ------ -------
* In connection with the Burritt transaction (Note 13), the Bank purchased
loans at a discount of approximately $10.4 million, which was added to the
Bank's Allowance for credit losses as of December 31, 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 is being
accreted to interest income over the remaining terms of the acquired loans. At
December 31, 1995 and 1994, the Allowance for credit losses, which totaled
approximately $6.9 million and $6.8 million, respectively, included
approximately $1.2 million and $1.8 million, respectively, allocated to the
loans acquired in the Burritt transaction.
NOTE 4 - FORECLOSED ASSETS
Foreclosed assets consisted of the following:
DECEMBER 31,
------------------------
1995 1994
------- --------
(AMOUNTS IN THOUSANDS)
One-to-four family residential $ 1,384 $ 1,599
Multi-family --- 510
Commercial real estate 10 907
Land 2,548 3,179
------- -------
3,942 6,195
Allowance for estimated losses (230) (439)
------- -------
Foreclosed assets, net $ 3,712 $ 5,756
------- -------
------- -------
Activity in the Allowance for estimated losses on Foreclosed assets was as
follows:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
---- ---- ----
(AMOUNTS IN THOUSANDS)
Balance at January 1 $ 439 $1,040 $ 438
Provision charged to expense 1,500 2,235 4,250
Net losses charged to the allowance (1,709) (2,836) (3,648)
------- ------- -------
Balance at December 31 $ 230 $ 439 $1,040
------- ------- -------
------- ------- -------
Losses and expenses related to Foreclosed assets are summarized as follows:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
---- ---- ----
(AMOUNTS IN THOUSANDS)
Provision charged to expense $1,500 $2,235 $4,250
Gain on sales (120) (93) (349)
Holding costs and expenses 532 1,005 1,057
Rental income (136) (243) (157)
------- ------- -------
Foreclosed asset expense, net $1,776 $2,904 $4,801
------- ------- -------
------- ------- -------
NOTE 5 - BANK PREMISES AND EQUIPMENT
Bank premises and equipment were comprised of the following:
DECEMBER 31,
---------------------------
1995 1994
-------- --------
(AMOUNTS IN THOUSANDS)
Buildings and land $ 7,381 $ 7,266
Leasehold improvements 870 836
Furniture and equipment 6,077 5,656
------- -------
14,328 13,758
Accumulated depreciation and amortization 7,824 6,783
------- -------
Bank premises and equipment, net $ 6,504 $ 6,975
------- -------
------- -------
Depreciation and amortization included in Non-interest expense aggregated
approximately $1.1 million, $806,900 and $692,100 for the years ended December
31, 1995, 1994 and 1993, respectively.
Rent expense for banking premises of $705,400, $847,100 and $792,500 is included
in Occupancy expense in the accompanying Consoliated Statements of Earnings for
the years ended December 31, 1995, 1994 and 1993, respectively.
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with initial or remaining terms of one year or more consist of
the following at December 31, 1995 (amounts in thousands):
Years Ending December 31, Amount
------------------------- ------
1996 $ 628
1997 536
1998 366
1999 224
2000 105
Thereafter 101
------
Total future minimum lease payments $1,960
------
------
These leases include options to renew for periods ranging from 3 to 22 years.
NOTE 6 - DEPOSITS
Deposits were comprised of the following:
DECEMBER 31,
----------------------------------------------------
1995 1994
---------------------- -------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
RATES % AMOUNT RATES % AMOUNT
----------- ---------- ------------ ----------
Demand $ 35,999 $ 30,918
NOW 1.75-2.00(a) 47,460 1.75-2.00(a) 49,097
Regular and club savings 2.00 185,610 2.00 213,574
Money market deposit accounts 5.57 (b) 209,265 5.10 (b) 205,239
Time accounts 5.66 (b) 579,811 4.72 (b) 528,918
---------- ----------
Total deposits $1,058,145 $1,027,746
---------- ----------
---------- ----------
(a) Ranges indicate tiers
(b) Weighted average stated rate
Time accounts at December 31, 1995 mature as follows:
WEIGHTED AVERAGE
YEAR OF MATURITY STATED RATE AMOUNT
---------------- ---------------- ---------
(DOLLAR AMOUNTS IN THOUSANDS)
1996 5.47% $385,121
1997 6.10% 113,438
1998 5.54% 24,561
Beyond 6.11% 56,691
--------
Total 5.66% $579,811
--------
--------
Time deposit accounts of $100,000 or more approximated $38.0 million at December
31, 1995. Of that amount, approximately $14.6 million mature in six months or
less, $7.8 million mature after six months to one year, and $15.6 million mature
after one year.
Interest expense on deposits is summarized as follows:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
------- ------- -------
(AMOUNTS IN THOUSANDS)
NOW $ 901 $ 931 $ 1,108
Regular and club savings 3,937 4,488 5,928
Money market deposits 11,320 7,979 5,970
Time accounts 30,058 22,530 24,453
Escrow 192 174 220
------- ------- -------
Total interest expense on deposits $46,408 $36,102 $37,679
------- ------- -------
------- ------- -------
NOTE 7 - BORROWED FUNDS
Terms of the Advances from the Federal Home Loan Bank of Boston ("FHLBB") were
as follows:
DECEMBER 31,
-------------------------------------------------------------
MATURITY/REPRICE DATE 1995 1994
- --------------------- ----------------------- -----------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
WEIGHTED AVERAGE WEIGHTED AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- ---------------- --------- ----------------
1995 $ --- ---% $ 1,482 ---%
1995 --- --- 58,703 6.02
1996 1,011 --- --- ---
1996 71,955 5.45 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 $ 96,876 $111,145
-------- --------
-------- --------
The Bank has a cash management line of credit from the FHLBB in the amount of
$20.0 million at December 31, 1995. At December 31, 1995 and 1994, the Bank had
book overdrafts of approximately $1.0 million and $1.5 million, respectively,
which are included in Advances from the FHLBB in the accompanying Consolidated
Statements of Position.
The Company had a $3.0 million line of credit (Note 18) which was paid off in
June 1994.
The Bank had borrowings during the year ended December 31, 1995 from Securities
Sold under Agreements to Repurchase ("Repurchase agreements"). There were no
outstanding Repurchase agreements at December 31, 1995. The approximate average
daily balance, maximum month-end balance and weighted average interest rate for
Repurchase agreements for the year ended December 31, 1995 were $12.2 million,
$36.3 million and 5.96%, respectively.
Interest expense on borrowed funds is summarized as follows:
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
------ ------ ------
(AMOUNTS IN THOUSANDS)
FHLBB $4,579 $6,767 $6,098
Line of credit --- 43 112
Repurchase agreements 729 --- 7
------ ------ ------
Total interest expense on borrowed funds $5,308 $6,810 $6,217
------ ------ ------
------ ------ ------
Stock of the FHLBB, mortgage loans and mortgage-backed securities with fair
values, as determined in accordance with FHLBB's collateral pledge agreement, at
least equal to the outstanding advances and any unused lines of credit were
pledged against outstanding advances from the FHLBB at December 31, 1995 and
1994.
NOTE 8 - BENEFIT PLANS
A. RETIREMENT PLAN
The Bank sponsors a defined benefit pension plan which is noncontributory and
covers all full-time employees who meet certain age and length of service
requirements. Benefits are based on years of service and the employee's highest
compensation during any consecutive five year period during the last ten years
before normal retirement. The Bank's funding policy is to contribute annually
amounts at least equal to minimum required contributions under the Employee
Retirement Income Security Act of 1974 (ERISA). Contributions are intended to
provide not only for benefits attributed to service to date, but also for those
expected to be earned in the future.
The components of the net pension expense reflected in Employee benefits expense
were as follows:
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---- ---- ----
(AMOUNTS IN THOUSANDS)
Service cost-benefits earned during the period $347 $400 $264
Interest cost on projected benefit obligation 381 305 272
Actual return on plan assets (637) 67 (400)
Net amortization and deferral 229 (466) 75
---- ---- ----
Net pension expense $320 $306 $211
---- ---- ----
---- ---- ----
Assumptions used in the accounting were:
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
----- ----- -----
Discount/settlement rates 7.00% 7.00% 7.00%
Rates of increase in compensation levels 5.00% 5.00% 5.50%
Long-term rate of return on assets 9.50% 9.50% 9.50%
The following table sets forth the plan's funded status and amounts recognized
in the Consolidated Statements of Position:
DECEMBER 31,
--------------------------------
1995 1994
-------- --------
(AMOUNTS IN THOUSANDS)
Actuarial present value of benefit obligations:
Accumulated benefit obligation - vested $(4,543) $(3,306)
Accumulated benefit obligation - nonvested (120) (72)
-------- --------
Total accumulated benefit obligation (4,663) (3,378)
Effect of projected future compensation levels (1,964) (1,174)
-------- --------
Projected benefit obligation (PBO) for service
rendered to date (6,627) (4,552)
Plan assets, at fair value * 4,801 4,095
-------- --------
PBO in excess of plan assets (1,826) (457)
Unrecognized net asset existing at January 1, 1987
being recognized over approximately 18 years (84) (93)
Unrecognized net loss resulting from past experience different
from that assumed, and effects of changes in assumptions 1,785 484
-------- --------
Accrued pension cost included in Other liabilities $ (125) $(66)
-------- --------
-------- --------
* The plan's assets are allocated among equity securities and various
short and intermediate term bond funds.
B. DEFERRED COMPENSATION PLAN
The Bank has adopted deferred compensation agreements for its directors whereby
directors can defer earned fees to future years with benefits commencing at
retirement or pre-retirement benefits at death prior to retirement. The
deferred compensation expense for the years ended December 31, 1995, 1994 and
1993 was $115,300, $96,100 and $92,600, respectively. The Bank has purchased
life insurance policies which it intends to use to fund the retirement benefits.
For income tax purposes, no deduction is allowed for the insurance premium
expense or deferred compensation expense, but a deduction will be allowed at the
time compensation is paid to the participant. For the years ended December 31,
1995, 1994 and 1993, 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 to the Thrift Plan for each $1.00 contributed by participants up to
three percent of each participant's compensation. The Bank's expense during the
years ended December 31, 1995, 1994 and 1993 was $91,700, $85,800 and $71,600,
respectively.
D. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Bank provides certain health care and life insurance benefits for retired
employees. Substantially all of the Bank's employees become eligible if they
reach normal retirement age while still working for the Bank. These benefits
are provided through an insurance company whose premiums are based on the
benefits paid during the year. The premiums paid by the Bank are based on the
retiree's length of service with the Bank.
The following table sets forth the accumulated postretirement benefit obligation
("APBO") reconciled to the accrued postretirement benefit cost included in the
accompanying Consolidated Statements of Position:
DECEMBER 31,
----------------------
1995 1994
-------- --------
(AMOUNTS IN THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees $ (518) $ (488)
Fully eligible active plan participants (213) (180)
Other active plan participants (1,973) (1,561)
-------- --------
Total APBO (2,704) (2,229)
Unrecognized transition obligation 1,812 1,917
Unrecognized net gain resulting from past experience
different from that assumed, and effects
of changes in assumptions (780) (920)
-------- --------
Accrued postretirement benefit cost
included in Other liabilities $(1,672) $(1,232)
-------- --------
-------- --------
The APBO includes approximately $2.1 million attributable to the Company's
postretirement health care plan.
Net periodic postretirement benefit cost reflected in Employee benefits expense
in the accompanying Consolidated Statements of Earnings included the following
components:
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
------ ------ ------
(AMOUNTS IN THOUSANDS)
Service cost-benefits attributable to
service during the period $ 212 $ 280 $ 168
Interest cost on APBO 187 168 176
Amortization 68 102 105
------ ------ ------
Net periodic postretirement benefit cost $ 467 $ 550 $ 449
------ ------ ------
------ ------ ------
For measurement purposes, a 13.0% annual rate of increase in the per capita cost
of covered health care benefits was assumed in 1995. The rate was assumed to
decrease gradually to 4.0% in year 12 and remain at that level thereafter. The
health care cost trend rate assumption has a significant effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rates by
1% in each year would increase the accumulated postretirement benefit obligation
as of December 31, 1995 by approximately $406,000 and the aggregate of the
service and interest cost components of net periodic postretirement benefit
expense for the year then ended by approximately $73,000.
The weighted-average discount rates used in determining the accumulated
postretirement benefit obligation were 7.0%, 8.5% and 7.0% in 1995, 1994 and
1993, respectively.
NOTE 9 - INCOME TAXES
The components of federal and state income tax provisions consisted of the
following:
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
------- ------- -------
(AMOUNTS IN THOUSANDS)
Current income tax provision
Federal $3,872 $3,102 $3,070
State 1,419 1,158 1,157
------- ------- -------
Total current income tax provision 5,291 4,260 4,227
------- ------- -------
Deferred income tax benefit
Federal (214) (246) (636)
State (57) (94) (243)
------- ------- -------
Total deferred income tax benefit (271) (340) (879)
------- ------- -------
Provision for income taxes, net $5,020 $3,920 $3,348
------- ------- -------
------- ------- -------
The Company's effective income tax rate differed from the Federal statutory tax
rate as follows:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
(DOLLAR AMOUNTS IN THOUSANDS)
AMOUNT % AMOUNT % AMOUNT %
------- ----- ------- ----- ------- ----
Tax at statutory Federal rate $4,296 34.0 $3,274 34.0 $2,814 34.0
State tax* 899 7.1 703 7.3 603 7.3
Dividend income exclusion (150) (1.2) (67) (0.7) (72) (0.9)
Other (25) (0.2) 10 0.1 3 0.1
------- ----- ------- ----- ------- ----
Effective rate on operations $5,020 39.7 $3,920 40.7 $3,348 40.5
------- ----- ------- ----- ------- ----
------- ----- ------- ----- ------- ----
* NET OF FEDERAL TAX BENEFIT
The components of the net deferred income tax asset are as follows:
DECEMBER 31,
--------------------------
1995 1994
------ ------
(AMOUNTS IN THOUSANDS)
Deferred income tax liability
Federal $ 677 $ 273
State 253 104
------ ------
930 377
------ ------
Deferred income tax asset
Federal 3,077 5,549
State 1,146 2,121
------ ------
4,223 7,670
------ ------
Net deferred income tax asset $3,293 $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 as follows:
DECEMBER 31,
----------------------
1995 1994
------- -------
(AMOUNTS IN THOUSANDS)
Allowances for losses $2,141 $2,023
Depreciation (122) (62)
Deferred loan fees (185) (59)
Deferred compensation 244 215
Loan expense 311 291
Employee benefits 745 539
Trading (gains) losses (10) 62
Intangible asset 470 314
------- -------
3,594 3,323
Unrealized (gains) losses (301) 3,970
------- -------
Net deferred income tax asset $3,293 $7,293
------- -------
------- -------
A summary of the change in the net deferred income tax asset is as follows:
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
------- ------- -------
(AMOUNTS IN THOUSANDS)
Net deferred income tax asset -- beginning $7,293 $2,055 $ 556
Cumulative effect of a change in accounting principle --- --- 1,548
Deferred income tax provision:
Income and expense 271 340 879
Unrealized (gains) losses (4,271) 4,898 (928)
------- ------- -------
Net deferred income tax asset -- ending $3,293 $7,293 $2,055
------- ------- -------
------- ------- -------
The Company has recorded a net deferred income tax asset of approximately $3.3
million.Realization is dependent on various factors and is not assured.
However, management is of the opinion that it is more likely than not that all
of the net deferred tax asset will be realized.
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.
Effective January 1, 1993, the Company adopted SFAS 109. As a result, the
Company recorded a cumulative one-time benefit of this change in accounting
principle of approximately $1.5 million or $.52 per share (fully diluted) in the
accompanying Consolidated Statements of Earnings for the year ended December 31,
1993.
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
The accompanying Consolidated Financial Statements do not reflect various
commitments and contingent liabilities which arise in the normal course of
business and which involve elements of credit risk, interest-rate risk and
liquidity risk. These commitments and contingent liabilities are described in
Note 16.
The Company is party to litigation and claims arising from the normal course of
business. After consultation with legal counsel, management is of the opinion
that the liabilities, if any, arising from such litigation and claims will not
be material to the consolidated financial position.
NOTE 11 - STOCK OPTIONS
Under the Company's stock option plans 456,682 shares, adjusted to reflect stock
dividends, if any, of common stock were reserved at December 31, 1995. 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 have been granted in tandem with stock
options under the Company's 1985 Stock Option Plan.
In accordance with generally accepted accounting principles, compensation
accruals are required for SARS when the market value exceeds the option exercise
price. However, compensation expense should be measured according to the terms
the Company's SARS holders are most likely to elect based upon the facts
available each period. Accordingly, no expense accruals have been made for the
years ended December 31, 1995, 1994 and 1993 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 plan which have been adjusted to reflect stock dividends declared:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994
-------- --------
Outstanding at beginning of period 237,918 292,290
Granted 135,918 47,512
Exercised (22,696) (101,884)
-------- --------
Outstanding at end of period 351,140 237,918
-------- --------
-------- --------
As of December 31, 1995, 351,140 options were exercisable at prices ranging from
$9.03 to $26.30.
At December 31, 1995, there were 351,140 options in the plan that remained
outstanding. Through December 31, 1995, 150,614 options have been exercised and
45,590 options, adjusted to reflect subsequent stock dividends, have been
cancelled. 105,542 options are available for grant.
During the year ended December 31, 1995, 19,634 SARS were exercised which
resulted in payments to employees aggregating $177,900. During 1994, 8,429 SARS
were exercised which resulted in payments to employees aggregating $121,700.
These amounts are included in Salary and wage expense in the accompanying
Consolidated Statements of Earnings for the years ended December 31, 1995 and
1994. During the year ended 1993, there were no SARS exercised.
NOTE 12 - STOCKHOLDERS' EQUITY
A. DIVIDENDS.
Pursuant to Connecticut law, cash dividends may be paid by the Bank to the
Company out of net profits, defined as the remainder of earnings from current
operations plus actual recoveries on loans and investments and other assets,
after deducting all current operating expenses, actual losses, accrued dividends
on preferred stock and all federal and state taxes. The total dividends
declared by the Bank in any calendar year shall not exceed the total of its net
profits for that year combined with its net profits for the preceding two years.
In connection with the termination of the Memorandum of Understanding (the
"Memorandum") with the Connecticut Commissioner of Banking and the FDIC, the
Bank's Board of Directors has adopted a policy that limits the payment of cash
dividends by the Bank to the Company to 10% of the Bank's net income (Note 19).
A cash dividend of $.06 per share, aggregating approximately $182,000, will be
paid by the Company on March 1, 1996 to stockholders of record at February 16,
1996.
The Board of Directors declared 5% stock dividends on March 15, 1995 and
November 10, 1995. Cash was paid in lieu of fractional shares for the November
10, 1995 dividend. For the March 15, 1995 dividend, due to the restrictions
stipulated under the Memorandum regarding dividends, the Company arranged for
the sale of the aggregate fractional interests and distributed the cash proceeds
to the stockholders. In accordance with generally accepted accounting
principles, weighted average shares outstanding, and thus earnings per share,
for each of the periods have been retroactively adjusted.
B. STOCK OPTIONS EXERCISED.
During the year ended December 31, 1995, 3,062 stock options were exercised,
resulting in an increase to Additional paid-in capital of approximately $64,000.
During the year ended December 31, 1994, 93,455 stock options were exercised,
resulting in an increase to Additional paid-in capital of approximately $1.8
million, which includes tax benefits of approximately $678,000.
NOTE 13 - ACQUISITION OF BURRITT INTERFINANCIAL BANCORPORATION
On December 4, 1992, Derby Savings entered into an Insured Deposit Purchase and
Assumption Agreement with the FDIC, pursuant to which Derby purchased certain
assets and assumed the insured deposits and certain other liabilities of Burritt
Interfinancial Bancorporation, New Britain, Connecticut in an FDIC-assisted
transaction.
In the transaction, the Bank assumed approximately $460 million of insured
deposits and approximately $5.5 million of other liabilities of Burritt. The
assets of Burritt acquired included, among others, loans totaling approximately
$169.3 million that were purchased at a $10.4 million discount (Note 3). The
Bank recorded approximately $5.0 million as a core deposit intangible, which is
included in Other assets and approximated $2.8 million, net of amortization, at
December 31, 1995 (Note 1).
As part of the transaction, the Bank entered into an interim management
agreement with the FDIC pursuant to which the Bank would service loans which at
December 31, 1992 totaled approximately $258.9 million. The fees earned by the
Bank for providing this service amounted to approximately $3.7 million in 1993.
The servicing of these loans for the FDIC ended September 30, 1993.
NOTE 14 - NON-INTEREST INCOME AND NON-INTEREST EXPENSE
Included in Service charges and other income were the following:
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
------ ------ ------
(AMOUNTS IN THOUSANDS)
Fees on loans $ 729 $ 552 $ 551
Fees on loans serviced for the FDIC (Note 13) --- --- 3,681
Deposit service charges 784 814 867
All other, none greater than 1% of income 1,192 1,087 988
------ ------ ------
Total $2,705 $2,453 $6,087
------ ------ ------
------ ------ ------
Included in Other Non-interest expense were the following:
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
------ ------ ------
(AMOUNTS IN THOUSANDS)
Data processing $1,345 $1,266 $2,035
FDIC insurance premium 1,518 2,770 2,435
Marketing 1,285 1,291 821
Amortization of intangible assets (Note 13) 709 711 712
All other, none greater than 1% of income 3,171 3,403 3,640
------ ------ ------
Total $8,028 $9,441 $9,643
------ ------ ------
------ ------ ------
NOTE 15 - SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK
The Bank is primarily engaged in the business of providing credit secured by
residential real estate to the consumer segment of the Bank's market area within
Connecticut. The concentration of the Bank's loan portfolio by type of loan at
December 31, 1995 and 1994, is set forth in Note 3. These loans include
one-to-four family mortgages, construction loans and home equity loans
aggregating approximately $802.8 million and $783.3 million at December 31, 1995
and 1994, respectively, or approximately 90.7% and 92.3% of total loans,
respectively. Approximately 85.6% and 95.8% of these loans are secured by
residential real estate located in Connecticut at December 31, 1995 and 1994,
respectively.
The Bank also has loan commitments, including unused lines of credit and amounts
not yet advanced on construction loans, secured by Connecticut real estate. In
addition, at December 31, 1995 a substantial portion of the Bank's foreclosed
assets (Note 4) is located in those same markets. Accordingly, the ultimate
collectibility of a substantial portion of the Bank's loan portfolio and the
recovery of a substantial portion of the carrying amount of foreclosed assets
are particularly susceptible to changes in real estate market conditions in
Connecticut.
In the normal course of business, the Bank may have deposits in correspondent
accounts substantially in excess of depository insurance limits. To reduce the
credit risk associated with such activities, the Bank periodically reviews the
financial condition of such correspondent banks.
NOTE 16 - FINANCIAL INSTRUMENTS
A. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and
manage its interest rate risk. These financial instruments substantially
include commitments to extend credit and commitments to sell mortgage loans.
These instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of amounts recognized in the accompanying Consolidated
Statements of Position. The contract or notional amounts of these instruments
reflect the extent of the Bank's involvement in particular classes of financial
instruments.
The Bank's exposure to credit loss in the event of non-performance by the
counterparty for commitments to extend credit is represented by the contractual
notional amount of those instruments. The Bank's exposure to market risk
associated with commitments to sell residential mortgage loans relates to the
possible inability of counterparties to meet contract terms or the Bank's
inability to originate loans to fulfill these commitments.
COMMITMENTS TO EXTEND CREDIT. Loan commitments are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. These financial instruments are recorded in the financial statements
when they are funded or when related fees are incurred or received. Loan
commitments are subject to the same credit policies as loans and generally have
fixed expiration dates or other termination clauses. Since commitments may
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of the collateral obtained
is based on management's credit evaluation of the counterparty. Collateral held
is primarily residential and commercial real property. Interest rates are
generally variable with the exception of the unadvanced portions of construction
loans, which have fixed rates of interest and generally mature within one year.
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.
The Bank's exposure to credit risk is represented by the contractual notional
amount of those instruments and is summarized below:
DECEMBER 31,
-----------------------
1995 1994
-------- --------
(AMOUNTS IN THOUSANDS)
Loan Commitments
Commitments to extend credit $ 15,648 $ 10,783
Commitments to purchase loans 6,151 24,000
Unadvanced commercial lines of credit 10,021 8,232
Unadvanced portion of construction loans 3,751 2,904
Unused portion of home equity lines of credit 65,458 59,977
Other consumer lines of credit 1,263 994
-------- --------
Total $102,292 $106,890
-------- --------
-------- --------
Letters of credit $ 2,291 $ 1,463
-------- --------
-------- --------
COMMITMENTS TO SELL RESIDENTIAL MORTGAGE LOANS. The Bank enters into forward
commitments to sell residential mortgage loans to reduce market risk associated
with originating loans for sale in the secondary market. In order to fulfill a
forward commitment, the Bank delivers originated loans at prices specified by
the contracts. At December 31, 1995, the Bank had no commitments to sell
mortgage loans.
B.FAIR VALUES OF FINANCIAL INSTRUMENTS
Estimating the fair values of the Bank's financial instruments includes the use
of information that is highly subjective. The subjective factors include, among
other things, the estimated timing and amount of cash flows, risk
characteristics, and credit quality and interest rates, all of which are subject
to change. As a result, fair values estimated could be significantly different
from amounts actually realized or paid at settlement or maturity of the
financial instruments. The following methods and assumptions were used to
estimate the fair value of each class of financial instruments.
CASH AND SHORT-TERM INVESTMENTS.
For those short-term instruments, the carrying amount is a reasonable estimate
of fair value.
SECURITIES.
Fair values for investment securities are based on quoted market prices.
LOANS HELD-FOR-SALE AND LOANS RECEIVABLE.
The fair values for loans are estimated using discounted cash flow analyses.
Discount rates used are comprised of the risk-free rate associated with the
remaining term to maturity, adjusted for risk and the expenses associated with
servicing the loans. Fair values of purchased mortgages are estimated using the
quoted market prices for securities collateralized by similar loans.
FHLBB STOCK AND ACCRUED INCOME RECEIVABLE.
The carrying amount approximates fair value.
DEPOSITS.
The fair values disclosed for interest and non-interest checking, passbook
savings, money market deposit accounts and mortgagors' escrow are equal to the
amount payable on demand at the reporting date. The fair values of certificates
of deposit are estimated using rates currently offered for deposits of similar
remaining maturities.
ADVANCES FROM THE FHLBB.
The fair values of advances from the FHLBB are estimated using rates which
approximate the rates currently being offered by the FHLBB for similar remaining
maturities.
OFF-BALANCE-SHEET INSTRUMENTS.
The fair values of commitments to extend credit and unadvanced lines of credit
are estimated based on interest rates and fees currently charged to enter into
similar
transactions, considering the remaining terms of the commitments and the
creditworthiness of the potential borrowers. The fair value of commitments to
sell residential mortgage loans are estimated based on secondary market prices
available for commitments with similar terms.
Using the preceding assumptions, the estimated fair values of the Bank's
financial instruments are as follows:
DECEMBER 31,
---------------------------------------------------------------------
1995 1994
----------------------------- ----------------------------
(AMOUNTS IN THOUSANDS)
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
Financial Assets
Cash and short term investments $ 20,730 $ 20,730 $ 18,628 $ 18,628
Securities 320,188 319,701 322,146 314,372
Loans held-for-sale 2,035 2,035 55,190 57,951
Loans receivable, net 873,304 885,002 784,237 769,951
FHLBB stock 9,793 9,793 8,899 8,899
Accrued income receivable 7,746 7,746 7,227 7,227
Financial Liabilities
Deposits and escrow 1,069,338 1,071,988 1,039,631 1,037,556
Advances from FHLBB 96,876 97,471 111,145 111,322
Off-Balance-Sheet Financial Instruments
Commitments to extend credit --- * --- *
Commitments to sell mortgage loans --- --- --- *
* AMOUNTS WERE NOT SIGNIFICANT.
NOTE 17 - RELATED PARTY TRANSACTIONS
At December 31, 1995 and 1994 loans to directors aggregated approximately
$558,000 and $1.2 million, respectively. During the year ended December 31,
1995, no new loans were granted to directors, former directors' loans totaled
approximately $394,000, and repayments totaled approximately $239,000. During
the years ended December 31, 1995, 1994 and 1993, payments aggregating
approximately $190,000, $364,000 and $509,000, respectively, were made for
legal, insurance and appraisal services to entities in which certain directors
have an interest. These loans and payments were made in the ordinary course of
business. The loans were granted on substantially the same terms, including
interest rates and collateral on loans, as those prevailing at the same time for
comparable transactions with others.
NOTE 18 - CONDENSED FINANCIAL INFORMATION OF DS BANCOR, INC.
(PARENT COMPANY ONLY)
The condensed Statements of Position for DS Bancor, Inc. were as follows:
DECEMBER 31,
-----------------------
1995 1994
-------- --------
(AMOUNTS IN THOUSANDS)
ASSETS
Cash in subsidiary bank $812 $860
Investment in bank subsidiary, at equity 79,658 65,985
Other assets 344 303
-------- --------
TOTAL ASSETS $80,814 $67,148
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Other liabilities $5 $11
-------- --------
STOCKHOLDERS' EQUITY
Common stock 3,368 3,085
Additional paid-in capital 44,514 37,780
Retained earnings 37,440 30,785
Less: Treasury stock, at cost (339,500 shares) (4,513) (4,513)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 80,809 67,137
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $80,814 $67,148
-------- --------
-------- --------
The condensed Statements of Earnings were as follows:
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1995 1994 1993
------- ------- -------
(DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
INCOME
Dividends from subsidiary $ --- $ 567 $ 873
Other 50 39 ---
------- ------- -------
Total income 50 606 873
------- ------- -------
EXPENSE
Interest expense * --- 43 113
Other 148 265 181
------- ------- -------
Total expense 148 308 294
------- ------- -------
Income (loss) before income taxes and change
in equity of subsidiary (98) 298 579
Income tax benefit 41 109 119
------- ------- -------
Income (loss) before change in equity
of subsidiary (57) 407 698
Change in equity of subsidiary 7,670 5,303 4,228
------- ------- -------
Income before cumulative effect of a change
in accounting principle 7,613 5,710 4,926
Cumulative effect of change in
accounting principle (Note 9) --- --- 1,548
------- ------- -------
NET INCOME $7,613 $5,710 $6,474
------- ------- -------
------- ------- -------
WEIGHTED AVERAGE SHARES OUTSTANDING (NOTES 1 & 12)
Primary 3,091,578 3,070,492 2,978,004
Fully Diluted 3,103,253 3,072,672 3,019,457
EARNINGS PER SHARE--PRIMARY (NOTES 1 & 12)
Income before cumulative effect of a
change in accounting principle $ 2.46 $ 1.86 $ 1.65
Cumulative effect of a change in
accounting principle --- --- .52
------- ------- -------
Net income $ 2.46 $ 1.86 $ 2.17
------- ------- -------
------- ------- -------
EARNINGS PER SHARE--FULLY DILUTED (NOTES 1 & 12)
Income before cumulative effect of a
change in accounting principle $ 2.45 $ 1.86 $ 1.63
Cumulative effect of a change in
accounting principle --- --- .51
------- ------- -------
Net income $ 2.45 $ 1.86 $ 2.14
------- ------- -------
------- ------- -------
* The Board of Directors authorized and the Company established a $3.0
million line of credit to partially fund the repurchase of the
Company's common stock in 1989 and 1990. This loan, which had an
interest rate of prime plus one percent, was paid in full in June,
1994. (Notes 7 & 19).
The condensed changes in the components of Stockholders' Equity for the years
ended December 31, 1995, 1994 and 1993 were as follows:
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK
------ ---------- --------- ---------
(DOLLAR AMOUNTS IN THOUSANDS)
Balance - January 1, 1993 $2,865 $33,971 $26,262 $(4,513)
Net income 6,474
Stock dividend declared on common stock (Note 12) 126 2,029 (2,155)
Shares issued for fractional interest 7
Cash in lieu of fractional shares (7)
Adjustment for unrealized security gains of
subsidiary (Note 2) 1,381
------ ---------- --------- ---------
Balance - December 31, 1993 2,991 36,007 31,955 (4,513)
Net income 5,710
Stock options exercised (93,455 shares) (Note 11) 94 1,773
Adjustment for unrealized security losses of
subsidiary (Note 2) (6,880)
------ ---------- --------- ---------
Balance - December 31, 1994 3,085 37,780 30,785 (4,513)
Net income 7,613
Stock dividend declared on common stock (Note 12) 280 6,658 (6,938)
Shares issued for fractional interest 12
Cash in lieu of fractional shares (23)
Stock options exercised (3,062 shares) (Note 11) 3 64
Adjustment for unrealized security gains of
subsidiary (Note 2) 6,003
------ ---------- --------- ---------
Balance - December 31, 1995 $3,368 $44,514 $37,440 $(4,513)
------ ---------- --------- ---------
------ ---------- --------- ---------
The condensed Statements of Cash Flows were as follows:
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
1995 1994 1993
------ ------- ------
(AMOUNTS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Dividends received from subsidiary $ --- $ 567 $ 873
Interest income 50 39 ---
Tax benefit received from subsidiary --- 80 ---
Interest paid --- (68) (123)
Cash paid to suppliers (154) (260) (205)
------ ------- ------
Net cash (used) provided by
operating activities (104) 358 545
------ ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable--Bank --- (1,450) (483)
Dividends paid to stockholders (23) --- (7)
Issuance of common stock 79 1,867 7
------ ------- ------
Net cash provided (used) by financing
activities 56 417 (483)
------ ------- ------
NET INCREASE (DECREASE) IN CASH (48) 775 62
CASH AT BEGINNING OF YEAR 860 85 23
------ ------- ------
CASH AT END OF YEAR $ 812 $ 860 $ 85
------ ------- ------
------ ------- ------
A reconciliation of net income to cash (used) provided by operating activities
was as follows:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
-------- -------- --------
(AMOUNTS IN THOUSANDS)
Net income $ 7,613 $ 5,710 $ 6,474
Items not resulting in cash flow:
Equity in undistributed earnings of subsidiary (7,670) (5,303) (5,776)
Increase in income tax benefits receivable (41) (29) (119)
Decrease in accrued expenses (6) (20) (34)
-------- -------- --------
Net cash flow from operating activities $ (104) $ 358 $ 545
-------- -------- --------
-------- -------- --------
NOTE 19 - REGULATORY MATTERS
DS Bancor and 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 FDIC and the Connecticut Banking Commissioner terminated the
Memorandum entered into by 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 December 31, 1995, this ratio stood at
6.1%. In connection with the termination of the Memorandum, the Bank's Board of
Directors has adopted a policy that limits the payment of cash dividends by the
Bank to the Company up to 10% of the Bank's net income.
The following table summarizes the capital ratios of DS Bancor and Derby Savings
Bank at December 31, 1995:
RISK-BASED
----------------
LEVERAGE RATIO TIER 1 TOTAL
-------------- ------ ------
DS Bancor 6.2% 10.94% 11.91%
Derby Savings Bank 6.1% 10.78% 11.76%
NOTE 20 - RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the FASB issued Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"). SFAS 121 requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the carrying
amount of an asset is deemed to not be recoverable, an estimate of the future
cash flows will be computed and compared to the carrying amount of the asset.
If such amount is less than the carrying amount, an impairment loss will be
recognized and measured as the amount by which the carrying amount of the asset
exceeds the fair value. This statement also requires that long-lived assets and
certain identifiable intangibles to be disposed of be reported at the lower of
carrying amount or fair value less cost to sell. The Bank will be required to
adopt this statement on a prospective basis beginning January 1, 1996.
Management does not expect the adoption of SFAS 121 to have a material effect on
the Bank's financial condition.
In May 1995, the FASB issued Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Rights an Amendment to SFAS 65" ("SFAS 122").
SFAS 122 amends SFAS 65, "Accounting for Certain Mortgage Banking Activities,"
to require recognition as a separate asset of the value of the rights to service
mortgage loans for others, however those servicing rights are acquired.
Mortgage servicing rights acquired through either servicing or origination of
mortgage loans and the subsequent sale or securitization of those loans with
servicing retained will require that those rights be allocated a cost as part of
the total cost of the mortgage loan based on their relative fair values if it is
practicable to estimate those fair values. If it is not practicable to estimate
the fair values, the entire cost of purchasing or originating the loans will be
allocated to the mortgage loans and no cost will be allocated to the mortgage
servicing rights. Loans purchased or originated with a definitive plan to sell
or securitize and retain the mortgage servicing rights will require the
provision of this statement to be applied at the date of origination or
purchase. Additionally, this statement requires that capitalized mortgage
servicing rights be assessed for impairment based on the fair value of those
rights; any impairment should be recognized through a valuation allowance. The
Bank will be required to adopt this statement on a prospective basis beginning
January 1, 1996. Management has not yet determined the effect, if any, which
the adoption will have on the Bank's financial condition.
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation." The new rules are effective for calendar-year 1996. However,
companies will be required to include in that year's financial statements
information about options granted in 1995. The standard encourages but does not
require companies to account for stock compensation awards based on their fair
value at the date the awards are granted, with the resulting compensation cost
shown as an expense. If they continue to apply current accounting requirements,
companies will have to disclose in a note to the financial statements what the
net income and earnings per share would have been had they followed the new
accounting method. Management has not yet determined how the Bank will apply
the provisions of the pronouncement nor the effect, if any, the application
would have on the Bank's financial statements.
NOTE 21 - QUARTERLY RESULTS OF EARNINGS
(UNAUDITED)
The following is a summary of the quarterly results of consolidated earnings for
the years ended December 31, 1995 and 1994 (AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE DATA):
QUARTERS ENDED
-----------------------------------------------------
12/31/95 9/30/95 6/30/95 3/31/95
-------- ------- ------- -------
Interest income $22,670 $22,059 $21,276 $20,584
Interest expense 13,790 13,486 12,628 11,671
-------- ------- ------- -------
Net interest income 8,880 8,573 8,648 8,913
Provision for credit losses 700 625 600 600
-------- ------- ------- -------
Net interest income after
provision for credit losses 8,180 7,948 8,048 8,313
Non-interest income, net 1,335 944 862 543
Non-interest expense 5,752 5,414 6,232 6,142
-------- ------- ------- -------
Income before income taxes 3,763 3,478 2,678 2,714
Provision for income taxes, net 1,439 1,429 1,056 1,096
-------- ------- ------- -------
Net income $ 2,324 $ 2,049 $ 1,622 $ 1,618
-------- ------- ------- -------
-------- ------- ------- -------
Earnings per share--Primary (a) $ 0.75 $ 0.66 $ 0.53 $ 0.53
Earnings per share--Fully Diluted (a) $ 0.75 $ 0.66 $ 0.52 $ 0.53
12/31/94 9/30/94 6/30/94 3/31/94
-------- ------- ------- -------
Interest income $ 20,414 $19,794 $18,781 $18,293
Interest expense 11,427 10,985 10,444 9,962
-------- ------- ------- -------
Net interest income 8,987 8,809 8,337 8,331
Provision for credit losses 700 625 400 600
-------- ------- ------- -------
Net interest income after
provision for credit losses 8,287 8,184 7,937 7,731
Non-interest income, net 545 683 1,010 863
Non-interest expense 6,507 6,480 6,532 6,091
-------- ------- ------- -------
Income before income taxes 2,325 2,387 2,415 2,503
Provision for income taxes, net 977 966 966 1,011
-------- ------- ------- -------
Net income $ 1,348 $ 1,421 $ 1,449 $ 1,492
-------- ------- ------- -------
-------- ------- ------- -------
Earnings per share--Primary (a) $ 0.44 $ 0.46 $ 0.47 $ 0.49
Earnings per share--Fully Diluted (a) $ 0.44 $ 0.46 $ 0.47 $ 0.49
(a) ADJUSTED RETROACTIVELY TO REFLECT STOCKS DIVIDEND DECLARED (NOTE 12).
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
DS Bancor, Inc.
Derby, Connecticut
We have audited the accompanying consolidated statements of position of
DS Bancor, Inc. and Subsidiary as of December 31, 1995 and 1994, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the accompanying consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of DS Bancor, Inc. and Subsidiary as of December 31, 1995 and
1994, and the results of their operations, changes in their stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the accompanying consolidated financial
statements, effective January 1, 1995, the Bank adopted the provisions of
Statements of Financial Accounting Standards Nos. 114 and 118, "Accounting by
Creditors for Impairment of a Loan."
Friedberg, Smith & Co., P.C.
Bridgeport, Connecticut
February 23, 1996
DIRECTORS - DS BANCOR, INC. & DERBY SAVINGS BANK
Michael F. Daddona Jr. Angelo E. Dirienzo
CHAIRMAN OF THE BOARD; RETIRED SUPERINTENDENT OF SCHOOLS
OWNER/GENERAL MANAGER Sherman Board of Education
Automated Services
Laura J. Donahue, Esq.
John F. Costigan ATTORNEY
CORPORATE SECRETARY; Donahue & Donahue
RETIRED EXECUTIVE VICE PRESIDENT
Derby Savings Bank Christopher H.B. Mills (1)
CHIEF EXECUTIVE
Achille A. Apicella, CPA North Atlantic Small Companies Trust
PRESIDENT PLC
Apicella, Testa & Co.
John M. Rak
OWNER
Walter R. Archer Jr. John M. Rak Real Estate
PRESIDENT
Burtville Associates & John P. Sponheimer, Esq.
Archer Landfill Service Co. PARTNER
Hoyle & Sponheimer
Harry P. DiAdamo Jr.
PRESIDENT, TREASURER & CEO Gary M. Tompkins
Derby Savings Bank EXECUTIVE ASSISTANT/OPERATIONS
DIRECTOR
Automated Services
(1) DIRECTOR, DS BANCOR, INC., ONLY
================================================================================
ADVISORY BOARDS
NEW BRITAIN/HARTFORD REGION NEW HAVEN/FAIRFIELD REGION
Anthony M. Arcesi Clifford D. Hoyle
Anthony J. Bafundo Morton A. Miller
Maryann E. Cichowski Patricia A. Morgan
Sal N. Gionfriddo David M. Rifkin
Nancy B. Heiser Leon Sylvester
Allan J. Kleban Peter J. Vartelas
Daniel J. O'Connell
Janusz S. Podlasek
Annelisa Santoro
================================================================================
BANK COUNSEL INVESTOR RELATIONS
Hoyle & Sponheimer Katherine C. Partesano
Assistant Vice President
Telephone (203) 736-5127
SPECIAL COUNSEL
Hogan & Hartson L.L.P.
COMMON STOCK INFORMATION
Listing: NASDAQ NMS Symbol: DSBC
INDEPENDENT PUBLIC ACCOUNTANTS
Friedberg, Smith & Co., P.C.
ANNUAL MEETING OF STOCKHOLDERS
REGISTRAR AND TRANSFER AGENT April 24, 1996, 10:00 a.m.
American Stock Transfer & Trust Co. Grassy Hill Lodge
40 Wall Street, 46th Floor 77 Sodom Lane
New York, NY 10005 Derby, CT 06418
1-800-937-5449
DS BANCOR, INC.
OFFICERS:
Harry P. DiAdamo Jr. John F. Costigan
PRESIDENT & CEO CORPORATE SECRETARY
Alfred T. Santoro
VICE PRESIDENT,
TREASURER & CFO
- --------------------------------------------------------------------------------
DERBY SAVINGS BANK
OFFICERS:
Harry P. DiAdamo Jr.
PRESIDENT,
TREASURER & CEO
Alfred T. Santoro
EXECUTIVE VICE PRESIDENT
& CFO
Thomas H. Wells
SENIOR VICE PRESIDENT &
CHIEF LENDING OFFICER
Lynn A. Miller
SENIOR VICE PRESIDENT
BRANCH ADMINISTRATION
Nina M. Allen
VICE PRESIDENT
RETAIL LOAN SERVICING
William W. Cote'
VICE PRESIDENT
LEGAL SERVICES
John Dada
VICE PRESIDENT
MARKETING
David A. Dedman
VICE PRESIDENT
COMMERCIAL REAL ESTATE LENDING
Kenneth J. Doughty
VICE PRESIDENT
RETAIL LENDING
Jason M. Gordon
VICE PRESIDENT
COMMERCIAL LENDING
Donald E. Keagan
VICE PRESIDENT & CONTROLLER
Thomas J. Laskowski
VICE PRESIDENT
DEPOSIT SERVICING
Robert V. Ouellette
VICE PRESIDENT
COMMERCIAL LENDING
Janice A. Sheehy
VICE PRESIDENT
COMMERCIAL LENDING
Bonita L. Smith
VICE PRESIDENT
HUMAN RESOURCES
Elmina G. Taylor
VICE PRESIDENT
REGIONAL BRANCH MANAGER
Gary M. Toole
VICE PRESIDENT
COMMERCIAL REAL ESTATE LENDING
Frederick I. Wilson
VICE PRESIDENT
OPERATIONS
Rita L. Finnegan
AUDITOR
SUBSIDIARY:
DERBY FINANCIAL SERVICES
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OFFICES
CORPORATE HEADQUARTERS
33 Elizabeth Street
Derby, CT 06418
AVON
Tri-Town Plaza
320 West Main Street
Avon, CT 06001
DERBY
One Elizabeth Street
Derby, CT 06418
Orange-Derby Shopping Center
Derby, CT 06418
EAST HARTFORD
471 Main Street
East Hartford, CT 06118
FAIRFIELD
1919 Black Rock Turnpike
Fairfield, CT 06430
GLASTONBURY
119 Hebron Avenue
Glastonbury, CT 06033
NEW BRITAIN
185 Main Street
New Britain, CT 06050
435 South Main Street
New Britain, CT 06051
275 Newington Avenue
New Britain, CT 06053
681 West Main Street
New Britain, CT 06050
NEWINGTON
260 Hartford Avenue
Newington, CT 06111
ORANGE
35 Old Tavern Road
Orange, CT 06477
PLAINVILLE
54 East Street
Plainville, CT 06062
ROCKY HILL
2049 Silas Dean Highway
Rocky Hill, CT 06067
SEYMOUR
15 New Haven Road
Seymour, CT 06483
SHELTON
502 Howe Avenue
Shelton, CT 06484
506 Shelton Avenue
Shelton, CT 06484
SOUTHBURY
325 Main Street South
Southbury, CT 06488
STRATFORD
3520 Main Street
Stratford, CT 06497
TRUMBULL
952 White Plains Road
Trumbull, CT 06611
WEST HARTFORD
1253 New Britain Avenue
West Hartford, CT 06110
970 Farmington Avenue
West Hartford, CT 06107
Member FDIC
Equal Housing Lender
Equal Opportunity Employer