UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1996
---------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to______________
Commission file number 0-16193
DS BANCOR, INC.
---------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1162884
-------- ----------
(State or other jurisdiction of IRS Employer
Incorporation or organization) Identification No.)
33 ELIZABETH STREET, DERBY, CONNECTICUT
---------------------------------------
(Address of principal executive offices)
06418
-----
(Zip Code)
(203) 736-1000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class: Common Stock, par value $1.00 per share
Outstanding at August 12, 1996: 3,031,527 shares
I N D E X
PAGE(S)
Part 1 -- Consolidated Financial Statements
A. Consolidated Statements of Position 1
B. Consolidated Statements of Earnings 2
C. Consolidated Statements of Stockholders' Equity 3
D. Consolidated Statements of Cash Flows 4
E. Notes to Consolidated Financial Statements 5 - 23
F. Selected Consolidated Financial and Other Data 24
G. Management's Discussion and Analysis 25 - 38
Part 2 -- Other Information 39
Signatures 40
DS BANCOR, INC.
CONSOLIDATED STATEMENTS OF POSITION
(DOLLAR AMOUNTS IN THOUSANDS)
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
(UNAUDITED)
ASSETS
Cash and due from banks (Note 1) $21,482 $18,425
Federal funds sold (Note 1) 6,895 2,305
Securities (Notes 1 & 2)
Trading 108 1,171
Available-for-sale 230,550 241,136
Held-to-maturity (fair value: $71,914 at
June 30, 1996 and $77,394 at December 31, 1995) 74,142 77,881
Loans held-for-sale (Notes 1 & 3) 4,222 2,035
Loans receivable (net of allowances for credit losses of $8,023
at June 30, 1996 and $6,906 at December 31, 1995)(Notes 1 & 3) 884,563 873,304
Federal Home Loan Bank of Boston stock, at cost (Note 8) 9,793 9,793
Accrued income receivable (Note 1) 7,415 7,746
Bank premises and equipment, net (Notes 1 & 6) 6,974 6,504
Deferred income tax asset, net (Notes 1 & 10) 3,914 3,293
Foreclosed assets (net of allowances of $17 at June 30, 1996
and $230 at December 31, 1995)(Notes 1 & 5) 3,862 3,712
Other assets (Note 13) 3,512 7,178
---------- ----------
TOTAL ASSETS $1,257,432 $1,254,483
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 7)
Non-interest bearing $39,401 $35,999
Interest bearing 991,592 1,022,146
---------- ----------
Total 1,030,993 1,058,145
Mortgagors' escrow 11,332 11,193
Advances from Federal Home Loan Bank of Boston (Note 8) 123,606 96,876
Other liabilities (Note 9) 7,253 7,460
---------- ----------
Total Liabilities 1,173,184 1,173,674
---------- ----------
STOCKHOLDERS' EQUITY (NOTES 1, 11 & 14)
Preferred stock, no par value; authorized
2,000,000 shares; none issued -- --
Common stock, par value $1.00; authorized 6,000,000 shares;
issued: 3,371,027 in 1996, 3,368,527 in 1995
outstanding: 3,031,527 in 1996, 3,029,027 in 1995 3,371 3,368
Additional paid-in capital 44,579 44,514
Retained earnings 41,226 37,014
Net unrealized (losses) gains on available-for-sale securities, net of
tax of $289 at June 30, 1996 and ($301) at December 31, 1995 (415) 426
Less: Treasury stock, at cost (339,500 shares) (4,513) (4,513)
---------- ----------
Total Stockholders' Equity 84,248 80,809
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,257,432 $1,254,483
---------- ----------
---------- ----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 1 -
DS BANCOR, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar amounts in thousands, except per share data)
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
-------- ------ ------ ------
(Unaudited)
INTEREST INCOME (NOTE 1)
Interest and fees on loans $17,671 $15,915 $34,928 $31,305
Taxable interest on securities 4,380 5,013 8,989 9,956
Dividends on securities 459 348 840 599
-------- -------- --------- ---------
Total interest income 22,510 21,276 44,757 41,860
-------- -------- --------- ---------
INTEREST EXPENSE
Deposits (Note 7) 11,128 11,425 23,302 22,004
Borrowed funds (Note 8) 1,458 1,239 2,686 2,391
Less: Penalties on premature time deposit withdrawals (30) (36) (56) (96)
-------- -------- --------- ---------
Net interest expense 12,556 12,628 25,932 24,299
-------- -------- --------- ---------
NET INTEREST INCOME 9,954 8,648 18,825 17,561
Provision for credit losses (Notes 1 & 3) 1,050 600 1,700 1,200
-------- -------- --------- ---------
Net interest income after provision for credit losses 8,904 8,048 17,125 16,361
-------- -------- --------- ---------
NON-INTEREST INCOME
Service charges and other income 804 595 1,497 1,255
Net realized securities gains (losses) (Note 2) 278 251 535 (1,347)
Net (loss) gain on sale of loans (186) 16 (242) 1,497
-------- -------- --------- ---------
Total non-interest income, net 896 862 1,790 1,405
-------- -------- --------- ---------
NON-INTEREST EXPENSE
Salaries and wages 2,163 2,108 4,108 4,022
Employee benefits (Note 9) 661 629 1,354 1,300
Occupancy (Note 6) 457 384 997 877
Furniture and equipment (Note 6) 276 317 519 573
Foreclosed asset expense, net (Notes 1 & 5) 391 525 886 973
Other 1,922 2,269 3,511 4,629
-------- -------- --------- ---------
Total non-interest expense 5,870 6,232 11,375 12,374
-------- -------- --------- ---------
Income before income taxes 3,930 2,678 7,540 5,392
Provision for income taxes (Note 10) 1,511 1,056 2,964 2,152
-------- -------- --------- ---------
NET INCOME $2,419 $1,622 $4,576 $3,240
-------- -------- --------- ---------
-------- -------- --------- ---------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (NOTE 1)
Primary 3,163,105 3,088,033 3,149,732 3,087,012
Fully diluted 3,200,877 3,093,858 3,200,432 3,093,655
EARNINGS PER SHARE (NOTE 1)
Primary $0.76 $0.53 $1.45 $1.05
Fully diluted $0.76 $0.52 $1.43 $1.05
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 2 -
DS BANCOR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)
(unaudited)
RETAINED EARNINGS
-----------------
ADDITIONAL UNREALIZED TOTAL
COMMON PAID-IN RETAINED GAINS & TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS LOSSES STOCK EQUITY
-------- -------- -------- -------- -------- --------
(NOTE 1)
Balance--December 31, 1994 $3,085 $37,780 $36,362 ($5,577) ($4,513) $67,137
Net income 3,240 3,240
Stock dividend declared on common
stock (5%--March 15, 1995) 137 3,283 (3,420) 0
Shares issued for fractional interest 12 12
Cash in lieu of fractional shares (12) (12)
Adjustment of unrealized losses, net 5,215 5,215
-------- -------- -------- -------- -------- --------
Balance--June 30, 1995 $3,222 $41,075 $36,170 ($362) ($4,513) $75,592
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Balance--December 31, 1995 $3,368 $44,514 $37,014 $426 ($4,513) $80,809
Net income 4,576 4,576
Cash dividend declared on common
stock ($.12 per share) (364) (364)
Stock options exercised
(2,500 shares) (Note 11) 3 65 68
Adjustment of unrealized losses, net (841) (841)
-------- -------- -------- -------- -------- --------
Balance--June 30, 1996 $3,371 $44,579 $41,226 ($415) ($4,513) $84,248
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
DS BANCOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
FOR THE SIX MONTHS ENDED JUNE 30,
1996 1995
---------- --------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,576 $3,240
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 1,700 1,200
Provision for estimated losses on foreclosed assets 425 900
Depreciation and amortization 410 453
Amortization of intangible assets 360 357
Net amortization of premiums/discounts on securities 413 263
Net accretion (amortization) of deferred loan fees (401) 1,226
Benefit for deferred income taxes (637) (58)
Decrease in deferred income tax asset 606 13
Net securities (gain) loss (395) 1,347
Net (loss) gain on sale of loans 161 (1,497)
Gains on sales of foreclosed assets (25) (21)
Net (increase) decrease in trading securities 1,063 (44)
Decrease (increase) in accrued income receivable 331 (214)
Net decrease in other assets 4,224 878
Decrease in other liabilities (207) (581)
-------- --------
Net cash provided by operating activities 12,604 7,462
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from matured securities available-for-sale 30,883 8,147
Proceeds from sale of securities available-for-sale 2,659 46,258
Proceeds from matured securities held-to-maturity 6,648 7,102
Purchase of securities available-for-sale (25,232) (52,912)
Purchase of securities held-to-maturity (3,000) (6,000)
Purchase of FHLBB stock -- (894)
Proceeds from loans sold to others 9,398 32,137
Purchases of loans from others (54,317) (25,774)
Net decrease in loans receivable 28,604 5,267
Premises and equipment additions (880) (237)
Proceeds from sale of foreclosed assets 904 586
Net decrease (increase) in foreclosed assets (45) 173
-------- --------
Net cash used in investing activities (4,378) 13,853
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits (27,152) 1,414
Net increase in mortgagors' escrow 139 731
Net decrease in Other borrowings -- 23,000
Net increase (decrease) in short term FHLBB advances 2,830 (26,574)
Proceeds from long term FHLBB advances 152,000 10,000
Repayment of long term FHLBB advances (128,100) (21,500)
Proceeds from issuance of common stock 68 12
Dividends paid to stockholders (364) (12)
-------- --------
Net cash provided (used) by financing activities (579) (12,929)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS 7,647 8,386
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,730 18,628
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $28,377 $27,014
-------- --------
-------- --------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
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, the Bank and Derby Financial Services Corp. 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 judgment
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.
-5-
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 judgment, 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. 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.
-6-
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 its subsidiaries 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.
RECLASSIFICATION. For comparative purposes, certain amounts in prior period
consolidated financial statements have been reclassified to conform with the
current period classifications.
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):
JUNE 30, 1996
----------------------------------------------------
GROSS UNREALIZED HOLDING
------------------------
AMORTIZED FAIR
COST GAINS LOSSES VALUE
---------- --------- ---------- ------------
TRADING
Marketable equities $ 85 $ 23 $ --- $ 108
---------- ------- -------- ----------
---------- ------- -------- ----------
AVAILABLE-FOR-SALE
U.S. Government and agency obligations $ 6,449 $ 11 $ 175 $ 6,285
Mortgage-backed securities 202,080 1,904 2,416 201,568
Other bonds and notes 2,176 2 10 2,168
---------- ------- -------- ----------
Total debt securities 210,705 1,917 2,601 210,021
Marketable equities 3,786 178 89 3,875
Preferred stock 15,662 30 332 15,360
Mutual funds 1,101 193 --- 1,294
---------- ------- -------- ----------
Total $231,254 $2,318 $3,022 $230,550
---------- ------- -------- ----------
---------- ------- -------- ----------
HELD-TO-MATURITY
Mortgage-backed securities $ 66,142 $ 19 $2,247 $ 63,914
Market preferred stock 8,000 --- --- 8,000
---------- ------- -------- ----------
Total $ 74,142 $ 19 $2,247 $ 71,914
---------- ------- -------- ----------
---------- ------- -------- ----------
-7-
DECEMBER 31, 1995
AMORTIZED GROSS UNREALIZED HOLDING FAIR
COST GAINS LOSSES VALUE
---------- --------- ----------- ----------
TRADING
Marketable equities $ 1,148 $ 23 $ --- $ 1,176
---------- --------- ----------- ----------
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
---------- ------- -------- ----------
---------- ------- -------- ----------
The scheduled contractual maturities of debt securities at June 30, 1996 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 $ 7,700 $ 7,524 $ --- $ ---
Due after one year through five years 176 178 --- ---
Due after five years through ten years --- --- --- ---
Due after ten years 749 751 --- ---
---------- ------- -------- ----------
8,625 8,453 --- ---
Mortgage-backed securities 202,080 201,568 66,142 63,914
---------- ------- -------- ----------
Total $210,705 $210,021 $66,142 $63,914
---------- ------- -------- ----------
---------- ------- -------- ----------
-8-
Proceeds and realized gains (losses) from sales of securities classified as
Available-for-sale were as follows:
FOR THE THREE MONTHS ENDED JUNE 30, 1996
----------------------------------------
GROSS REALIZED
-------------------
NET
PROCEEDS (LOSSES)
FROM SALES GAINS LOSSES GAINS
---------- ------ ------ --------
(Amounts in thousands)
Marketable equities $1,797 $244 $2 $242
----------- ------- ------- -------
----------- ------- ------- -------
FOR THE THREE MONTHS ENDED JUNE 30, 1995
----------------------------------------
GROSS REALIZED
-------------- NET
PROCEEDS (LOSSES)
FROM SALES GAINS LOSSES GAINS
---------- ----- ------ --------
(Amounts in thousands)
Marketable equities $ 521 $ 115 $ --- $ 115
----------- ------- ------- -------
----------- ------- ------- -------
FOR THE SIX MONTHS ENDED JUNE 30, 1996
--------------------------------------
GROSS REALIZED
--------------
NET
PROCEEDS (LOSSES)
FROM SALES GAINS LOSSES GAINS
---------- ----- ------ --------
(Amounts in thousands)
Marketable equities $862,539 $195 $42 $153 (a)
----------- ------- ------- -------
----------- ------- ------- -------
(A) EXCLUDES A $23,100 CAPITAL GAIN REALIZED ON MUTUAL FUNDS.
FOR THE SIX MONTHS ENDED JUNE 30, 1995
--------------------------------------
GROSS REALIZED
-------------- NET
PROCEEDS (LOSSES)
FROM SALES GAINS LOSSES GAINS
---------- ----- ------ --------
(Amounts in thousands)
U.S. Government and agency bonds $ 27,994 $ --- $1,223 $(1,223)
Other bonds and notes 17,583 --- 555 (555)
-------- ------- ------ --------
Total debt securities 45,577 --- 1,778 (1,778)
Marketable equities 575 124 --- 124
-------- ------- ------ ---------
Total $46,152 $124 $1,778 $(1,654)
-------- ------- ------ ---------
-------- ------- ------ ---------
At June 30, 1996, the aggregate amortized cost and fair value of securities
pledged as collateral against public funds and treasury tax and loan deposits
were both approximately $3.9 million.
-9-
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:
JUNE 30, DECEMBER 31,
1996 1995
---- ----
(Amounts in thousands)
MORTGAGE
Residential real estate $699,491 $695,419
Commercial real estate 34,774 31,234
Multi-family real estate 13,128 11,237
Residential construction 5,908 3,518
-------- --------
753,301 741,408
-------- --------
-------- --------
CONSUMER
Home equity lines of credit 81,688 78,523
Home equity installment 20,976 21,735
Collateral 3,206 3,330
All other 18,527 21,492
-------- --------
124,397 125,080
-------- --------
-------- --------
COMMERCIAL
Commercial 16,653 15,463
Real estate development 5,365 3,603
-------- --------
22,018 19,066
-------- --------
TOTAL 899,716 885,554
Net deferred loan fees, premiums & discounts (2,908) (3,309)
Allowances for credit losses (8,023) (6,906)
-------- --------
888,785 875,339
Residential real estate loans held-for-sale (4,222) (2,035)
-------- --------
LOANS RECEIVABLE, NET $884,563 $873,304
-------- --------
-------- --------
Loans are summarized between fixed and adjustable rates as follows:
JUNE 30, DECEMBER 31,
1996 1995
---- ----
(Amounts in thousands)
Fixed rate $237,741 $224,741
Adjustable rate 661,975 660,813
-------- --------
Total $899,716 $885,554
-------- --------
-------- --------
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 $144.8 million and $147.1 million at June 30, 1996 and December
31, 1995, respectively.
The recorded investment in impaired loans (Note 1) at June 30, 1996 approximated
$15.5 million and included approximately $11.3 million in mortgage loans, $2.3
million in consumer loans and $1.9 million in commercial loans. The amount of
the related Allowance for credit losses on these loans at June 30, 1996
approximated $1.9 million. The average recorded investment in impaired loans
during the six months ended June 30, 1996
-10-
was approximately $15.0 million. During the six months ended June 30, 1996,
amounts recognized as interest income on impaired loans were not significant.
The recorded investment in impaired loans 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.
Activity in the Allowances for credit losses for the periods indicated were as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
(Amounts in thousands)
MORTGAGE LOANS
Balance at beginning of period $4,490 $4,456 $4,183 $4,495
Provision for credit losses 300 600 950 1,000
Loan charge-offs (186) (963) (577) (1,407)
Recoveries 128 169 176 174
------- ------- ------- -------
Balance at end of period $4,732 $4,262 $4,732 $4,262
------- ------- ------- -------
------- ------- ------- -------
CONSUMER LOANS
Balance at beginning of period $1,666 $1,374 $1,751 $1,266
Provision for credit losses 750 --- 750 200
Loan charge-offs (229) (105) (315) (244)
Recoveries 116 22 117 69
------- ------- ------- -------
Balance at end of period $2,303 $1,291 $2,303 $1,291
------- ------- ------- -------
------- ------- ------- -------
COMMERCIAL LOANS
Balance at beginning of period $986 $1,023 $972 $1,042
Provision for credit losses --- --- --- ---
Loan charge-offs --- (27) (27) (48)
Recoveries 2 3 43 5
------- ------- ------- -------
Balance at end of period $988 $ 999 $988 $ 999
------- ------- ------- -------
------- ------- ------- -------
TOTAL ALLOWANCE FOR CREDIT LOSSES
Balance at beginning of period $7,142 $6,853 $6,906 $6,803
Provision for credit losses 1,050 600 1,700 1,200
Loan charge-offs (415) (1,095) (919) (1,699)
Recoveries 246 194 336 248
------- ------- ------- -------
Balance at end of period $8,023 $6,552 $8,023 $6,552
------- ------- ------- -------
------- ------- ------- -------
In connection with the Burritt transaction (Note 13), the Bank purchased two
loan pools at discounts of approximately $9.0 million and $1.3 million, which
were added to the Bank's Allowance for mortgage and consumer credit losses,
respectively, in 1992. During 1993, the Bank completed a valuation analysis of
these loans and allocated approximately $6.0 million from these amounts to a
purchased loan discount, which will be accreted to interest income over the
remaining terms of the acquired loans. At June 30, 1996, the Allowances for
credit losses, which totaled approximately $8.0 million, included approximately
$1.1 million allocated to the loans acquired in the Burritt transaction.
NOTE 4 - 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.
-11-
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:
JUNE 30, DECEMBER 31,
1996 1995
---- ----
(Amounts in thousands)
LOAN COMMITMENTS
Commitments to extend credit $ 14,476 $ 15,648
Commitments to purchase loans 7,500 6,151
Unadvanced commercial lines of credit 12,752 10,021
Unadvanced portion of construction loans 4,995 3,751
Unused portion of home equity lines of credit 76,113 65,458
Other consumer lines of credit 1,421 1,263
-------- --------
Total $117,257 $102,292
------- -------
------- -------
LETTERS OF CREDIT $ 2,146 $ 2,291
--------- ---------
--------- ---------
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 June 30, 1996, the Bank had commitments of $1.4 million to
sell mortgage loans.
NOTE 5 - FORECLOSED ASSETS
Foreclosed assets consisted of the following:
JUNE 30, DECEMBER 31,
1996 1995
---- ----
(Amounts in thousands)
One-to-four family residential $1,543 $1,384
Multi-family --- ---
Commercial real estate 10 10
Land 2,326 2,548
-------- --------
Total 3,879 3,942
Allowance for estimated losses (17) (230)
-------- --------
Foreclosed assets, net $3,862 $3,712
-------- --------
-------- --------
-12-
Activity in the Allowance for estimated losses on Foreclosed assets is as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
(Amounts in thousands)
Balance at beginning of period $102 $ 308 $230 $ 439
Provision charged to expense 125 400 425 900
Net losses charged to the allowance (210) (323) (638) (954)
------ ------ ------ ------
Balance at end of period $ 17 $ 385 $ 17 $ 385
------ ------ ------ ------
------ ------ ------ ------
Losses and expenses related to Foreclosed assets are summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
(Amounts in thousands)
Provision charged to expense $125 $ 400 $425 $ 900
Gain on sale of real estate (16) (14) (93) (21)
Holding costs and expenses 285 173 562 172
Rental income (3) (34) (8) (78)
------ ------ ------ ------
Foreclosed asset expense, net $391 $ 525 $886 $ 973
------ ------ ------ ------
------ ------ ------ ------
NOTE 6 - BANK PREMISES AND EQUIPMENT
Bank premises and equipment were comprised of the following:
JUNE 30, DECEMBER 31,
1996 1995
---- ----
(Amounts in thousands)
Buildings and land $7,389 $7,381
Leasehold improvements 1,257 870
Furniture and equipment 6,531 6,077
------ ------
15,177 14,328
Accumulated depreciation and amortization (8,203) (7,824)
------ -------
Bank premised and equipment, net $6,974 $6,504
------ ------
------ ------
Depreciation and amortization included in Non-interest expense aggregated
approximately $211,900 and $410,100 for the three and six months ended June 30,
1996, respectively, and $257,000 and $452,600 for the three and six months ended
June 30, 1995, respectively.
-13-
LEASES.
Rent expense for banking premises of $182,900 and $367,800 is included in
Occupancy expense in the accompanying Consolidated Statements of Earnings for
the three and six months ended June 30, 1996, respectively, and $174,000 and
$349,800 for the three and six months ended June 30, 1995, respectively.
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with initial or remaining terms of one year or more consist of
the following at June 30, 1996 (AMOUNTS IN THOUSANDS):
1996 $305
1997 536
1998 366
1999 224
2000 106
Thereafter 101
Total future minimum lease payments $1,638
These leases include options to renew for periods ranging from 3 to 22 years.
NOTE 7 - DEPOSITS
Deposits were comprised of the following:
JUNE 30, 1996 DECEMBER 31, 1995
--------------------------- -------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
RATES % AMOUNT RATES % AMOUNT
------- ------ ------- -------
Demand $ 39,401 $ 35,999
NOW 1.75-2.00(a) 45,130 1.75-2.00(a) 47,460
Regular and club savings 2.00 188,654 2.00 185,610
Money market deposit accounts 3.33 (b) 125,411 5.57 (b) 209,265
Time accounts 5.47 (b) 632,397 5.66 (b) 579,811
----------- -----------
Total $1,030,993 $1,058,145
----------- -----------
----------- -----------
a) RANGES INDICATE TIERS
b) WEIGHTED AVERAGE STATED RATE
Time accounts at June 30, 1996 mature as follows:
WEIGHTED AVERAGE
MATURITY STATED RATE AMOUNT
- -------- ----------------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
One year or less 5.38% $491,187
One to three years 5.55% 86,951
Beyond 6.16% 54,259
--------
Total 5.47% $632,397
--------
--------
Time deposit accounts of $100,000 or more approximated $49.6 million at June 30,
1996. Of that amount, approximately $36.7 million mature in one year or less,
$4.2 million mature after one year to two years, and $8.7 million mature after
two years.
-14-
Interest expense on deposits is summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
(Amounts in thousands)
NOW $ 229 $ 228 $ 455 $ 453
Regular and club savings 936 998 1,864 2,012
Money market deposits 1,268 2,868 4,026 5,510
Time savings 8,631 7,266 16,853 13,927
Escrow 64 65 104 102
-------- ------- ------- -------
Total interest expense on
deposits $ 11,128 $11,425 $23,302 $22,004
-------- ------- ------- -------
-------- ------- ------- -------
NOTE 8 - BORROWED FUNDS
Terms of the Advances from the Federal Home Loan Bank of Boston ("FHLBB") were
as follows:
JUNE 30, 1996 DECEMBER 31, 1995
--------------------- ---------------------
(Dollar amounts in thousands)
WEIGHTED WEIGHTED
AVERAGE AVERAGE
MATURITY/REPRICE DATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- --------------------- ------- ------------- ------- -------------
1996 $ 3,956 --- $ 1,011 ---
1996 95,740 5.48 71,955 5.45
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 $123,606 $96,876
-------- -------
-------- -------
The Bank has a cash management line of credit from the FHLBB in the amount of
$20.0 million at June 30, 1996. At June 30, 1996 and December 31, 1995, the
Bank had book overdrafts of approximately $4.0 million and $1.0 million,
respectively, which are included in advances from the FHLBB in the accompanying
Consolidated Statements of Position.
Interest expense on borrowed funds is summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
(Amounts in thousands)
FHLBB advances $1,458 $1,052 $2,686 $2,204
Repurchase agreements & other borrowings --- 187 --- 187
------ ------ ------ ------
Total interest expense on borrowed funds $1,458 $1,239 $2,686 $2,391
------ ------ ------ ------
------ ------ ------ ------
Stock of the FHLBB, mortgage loans and mortgage-backed securities with fair
values, as determined in accordance with FHLBB's collateral pledge agreement, at
least equal to the outstanding advances and any unused lines of credit were
pledged against outstanding advances from the FHLBB at June 30, 1996 and
December 31, 1995.
-15-
NOTE 9 - BENEFIT PLANS
A. RETIREMENT PLAN
The Bank sponsors a defined benefit pension plan which is noncontributory and
covers all full-time employees who meet certain age and length of service
requirements. Benefits are based on years of service and the employee's highest
compensation during any consecutive five year period during the last ten years
before normal retirement. The Bank's funding policy is to contribute annually
amounts at least equal to minimum required contributions under the Employee
Retirement Income Security Act of 1974 (ERISA). Contributions are intended to
provide not only for benefits attributed to service to date, but also for those
expected to be earned in the future.
The components of the net pension expense reflected in Employee benefits expense
were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
(Amounts in thousands)
Service cost-benefits earned during
the period $ 117 $ 87 $ 234 $ 174
Interest cost on projected benefit
obligation 105 95 210 190
Expected return on plan assets (112) (100) (224) (200)
Net amortization and deferral 10 (2) 20 (4)
----- ------ ----- -------
Net pension expense $ 120 $ 80 $ 240 $ 160
----- ------ ----- -------
----- ------ ----- -------
Assumptions used in the accounting were:
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
1996 1995
---- ----
(Amounts in thousands)
Discount/settlement rates 7.00% 8.50%
Rates of increase in compensation levels 5.00% 5.00%
Expected long-term rate of return on assets 9.50% 5.00%
The following table sets forth the Plan's funded status and amounts recognized
in the Consolidated Statements of Position:
DECEMBER 31, 1995,
-------------------
(Amounts in thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation - vested $(4,543)
Accumulated benefit obligation - nonvested (120)
--------
Total accumulated benefit obligation (4,663)
Effect of projected future compensation levels (1,964)
--------
Projected benefit obligation (PBO) for service
rendered to date (6,627)
Plan assets at fair value * 4,801
--------
PBO in excess of plan assets (1,826)
Unrecognized net asset existing at January 1, 1987 being
recognized over approximately 18 years (84)
Unrecognized net loss from past experience
different from that assumed, and effect of changes
in assumptions 1,785
--------
Accrued pension cost included in other liabilities $ (125)
--------
--------
* The plan's assets are allocated among equity securities and various short
and intermediate term bond funds.
-16-
B. DEFERRED COMPENSATION PLAN
The Bank has adopted deferred compensation agreements for its directors whereby
directors can defer earned fees to future years with benefits commencing at
retirement or pre-retirement benefits at death prior to retirement. The
deferred compensation expense for the three and six months ended June 30, 1996
was $26,700 and $53,400, respectively, and $25,100 and $50,200, respectively for
the three and six months ended June 30, 1995. 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 quarters ended June 30, 1996
and 1995, 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. The deferred compensation expense
for this plan for the three and six months ended June 30, 1996 was $26,700 and
$53,400, respectively.
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 to the Thrift Plan for each $1.00 contributed by participants up to three
percent of each participant's compensation. The Bank's expense during the three
and six months ended June 30, 1996 was $22,700 and $35,600, respectively, and
$21,300 and $40,400, respectively, for the three and six months ended June 30,
1995.
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
Company's Consolidated Statements of Position:
DECEMBER 31, 1995,
------------------
(Amounts in thousands)
Accumulated Postretirement Benefit Obligation
Retirees $ (488)
Fully eligible active plan participants (180)
Other active plan participants (1,561)
-------
Total APBO (2,229)
Unrecognized transition obligation 1,917
Unrecognized net gains from past experience different from
that assumed and effects of changes in assumptions (920)
-------
Accrued postretirement benefit cost included in
Other liabilities $(1,232)
-------
-------
The APBO includes approximately $2.1 million attributable to the Company's
postretirement health care plan.
-17-
Net periodic postretirement benefit cost reflected in Employee benefits expense
in the accompanying Consolidated Statements of Earnings included the following
components:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
(Amounts in thousands)
Service cost-benefits attributable to service during the period $ 56 $ 53 $112 $106
Interest cost on APBO 47 47 94 94
Amortization of transition obligation 19 17 38 34
---- ---- ---- ----
Net periodic postretirement benefit cost $122 $117 $244 $234
---- ---- ---- ----
---- ---- ---- ----
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.
The weighted-average discount rate used in determining the APBO was 7.00%.
NOTE 10 - INCOME TAXES
The allocation of federal and state income taxes between current and deferred
portions, calculated using the liability method is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,4
1996 1995 1996 1995
---- ---- ---- ----
(Amounts in thousands)
Current income tax provision
Federal $1,444 $ 806 $2,676 $1,619
State 478 294 925 591
------ ------ ------ ------
Total current 1,922 1,100 3,601 2,210
------ ------ ------ ------
Deferred income tax provision
Federal (303) (32) (506) (42)
State (108) (12) (131) (16)
------ ------ ------ ------
Total deferred (411) (44) (637) (58)
------ ------ ------ ------
Total provision for income taxes $1,511 $1,056 $2,964 $2,152
------ ------ ------ ------
The Company's effective income tax rate differed from the Federal statutory tax
rate as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------- -----------------------------------
1996 1995 1996 1995
--------------- ------------------ ---------------- -----------------
(Dollar amounts in thousands)
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ --- ------ ---
Tax at statutory Federal rate $1,340 34.0 $ 909 34.0 $2,567 34.0 $1,833 34.0
State tax * 244 6.2 187 7.0 524 7.0 380 7.0
Dividend income exclusion (75) (1.9) (41) (1.6) (129) (1.7) (63) (1.1)
Other 2 0.1 1 --- 2 --- 2 --
------ ---- ------ ---- ------ ---- ------ ----
Effective rate on operations $1,511 38.4 $1,056 39.4 $2,964 39.3 $2,152 39.9
------ ---- ------ ---- ------ ---- ------ ----
* Net of Federal tax benefit
-18-
The components of the net deferred income tax asset are as follows:
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
(Amounts in thousands)
Deferred income tax liability
Federal $474 $ 677
State 168 253
----- -----
642 930
----- -----
Deferred income tax asset
Federal 3,599 3,077
State 1,274 1,146
----- -----
4,873 4,223
----- -----
Net deferred income tax asset $4,231 $3,293
----- -----
----- -----
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:
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
(Amounts in thousands)
Allowances for losses $2,635 $2,141
Depreciation (148) (122)
Deferred loan fees (250) (185)
Deferred compensation 246 244
Loan expense 306 311
Employee benefits 907 745
Trading loss (9) (10)
Intangible asset 544 470
----- -----
4,231 3,594
Unrealized losses (289) (301)
----- -----
Net deferred tax asset $3,942 $3,293
----- -----
----- -----
A summary of the change in the net deferred income tax asset for the six months
ended June 30, 1996 and 1995 is as follows (AMOUNTS IN THOUSANDS):
Net deferred income tax asset at December 31, 1995 $3,293
Deferred tax provision:
Income and expense 637
Unrealized losses 12
------
Net deferred income tax asset at June 30, 1996 $3,942
------
------
Net deferred income tax asset at December 31, 1994 $7,293
Deferred tax provision:
Income and expense 58
Unrealized losses (3,712)
------
Net deferred income tax asset at June 30, 1995 $3,639
------
------
The Company has recorded a net deferred income tax asset of approximately $3.9
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.
-19-
Deductions from taxable income in prior years have been claimed as loan loss
provisions for qualifying (real estate) loans in accordance with the Internal
Revenue Code. Retained earnings includes a tax reserve for qualifying loans.
If the reserve is used for any purpose other than to absorb losses on loans, an
income tax liability could be incurred. Management does not anticipate that
this reserve will be made available for any other purposes. In accordance with
generally accepted accounting principles, no deferred income taxes have been
provided for this temporary difference.
NOTE 11 - STOCK OPTIONS
Under the Company's stock option plans, 453,080 shares of common stock, adjusted
to reflect stock dividends, if any, were reserved at June 30, 1996. 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
six months ended June 30, 1996 and 1995 inasmuch as management does not
anticipate exercise of SARS at this time.
The following table and the data below summarizes the shares subject to option
under the Plans which have been adjusted to reflect stock dividends declared:
FOR THE SIX MONTHS ENDED JUNE 30, 1996
--------------------------------------
Outstanding at beginning of period 351,140
Granted 50,520
Exercised (a) (3,602)
Canceled --
-------
Outstanding at end of period 398,058
-------
-------
(a) INCLUDES SARS
As of June 30, 1996, 398,058 options were exercisable at prices ranging from
$9.03 to $29.88.
At June 30, 1996, there were 398,058 options in the Plans that remained
outstanding. Through June 30, 1996, 154,216 options have been exercised and
45,590 options, adjusted to reflect subsequent stock dividends, have been
canceled. 55,025 options are available for grant.
During the six months ended June 30, 1996, 1,102 SARS were exercised which
resulted in payments to employees aggregating $18,800. During the six months
ended June 30, 1995, 18,321 SARS were exercised which resulted in payments to
employees aggregating $169,300. These amounts are included in Salary and wage
expense in the accompanying Consolidated Statements of Earnings for the six
months ended June 30, 1996 and 1995.
-20-
NOTE 12 - CONDENSED FINANCIAL INFORMATION OF DS BANCOR, INC.
(PARENT COMPANY ONLY)
The condensed Statements of Position for DS Bancor, Inc. were as follows:
JUNE 30, DECEMBER 31,
1996 1995
--------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
ASSETS
Cash in subsidiary bank $ 428 $ 812
Investment in bank subsidiary, at equity 83,443 79,658
Other assets 382 344
------- -------
TOTAL ASSETS $84,253 $80,814
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Other liabilities $ 5 $ 5
------- -------
STOCKHOLDERS' EQUITY
Common stock 3,371 3,368
Additional paid-in capital 44,579 44,514
Retained earnings 40,811 37,440
Less: Treasury stock. at cost (339,500 shares) (4,513) (4,513)
------- -------
TOTAL STOCKHOLDERS' EQUITY 84,248 80,809
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 84,253 $ 80,814
------- -------
The condensed Statements of Earnings were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
(AMOUNTS IN THOUSANDS)
INCOME
Other income $ 5 $ 13 $ 15 $ 26
-------- ------- -------- -------
Total income 5 13 15 26
-------- ------- -------- -------
EXPENSE
Other expense 72 41 102 89
-------- ------- -------- -------
Total expense 72 41 102 89
-------- ------- -------- -------
Income before income tax and change in
equity of subsidiary (67) (28) (87) (63)
Income tax benefit 28 11 36 26
-------- ------- -------- -------
Income before change in equity of subsidiary (39) (17) (51) (37)
Change in equity of subsidiary 2,458 1,639 4,627 3,277
-------- ------- -------- -------
NET INCOME $2,419 $1,622 $4,576 $3,240
-------- ------- -------- -------
WEIGHTED AVERAGE SHARES OUTSTANDING
Primary 3,163,105 3,088,033 3,149,732 3,087,012
Fully diluted 3,200,877 3,093,858 3,200,432 3,093,655
EARNINGS PER SHARE
Primary $0.76 $0.53 $1.45 $1.05
Fully diluted $0.76 $0.52 $1.43 $1.05
-21-
The condensed changes in the components of Stockholders' Equity for the six
months ended June 30, 1996 and 1995 were as follows:
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK
------ ------- -------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
Balance - December 31, 1994 $3,085 $37,780 $30,785 $(4,513)
Net income 3,240
Stock dividend declared on common stock 137 3,283 (3,420)
Shares issued for fractional interest 12
Cash in lieu of fractional shares (12)
Adjustment for unrealized losses, net 5,215
------ ------- ------- -------
Balance - June 30, 1995 $3,222 $41,075 $35,808 $(4,513)
------ ------- ------- -------
------ ------- ------- -------
Balance - December 31, 1995 $3,368 $44,514 $37,440 $(4,513)
Net income 4,576
Cash dividend declared on common stock (364)
Stock options exercised 3 65
Adjustment for unrealized losses, net (841)
------ ------- ------- -------
Balance - June 30, 1996 $3,371 $44,579 $40,811 $(4,513)
------ ------- ------- -------
------ ------- ------- -------
The condensed Statements of Cash Flows were as follows:
FOR THE SIX MONTHS ENDED
JUNE 30, 1996
------------------------
(AMOUNTS IN THOUSANDS)
CASH FLOWS USED BY OPERATING ACTIVITIES
Interest on deposit account $15 $26
Cash paid to suppliers (103) (89)
----- -----
Net cash used by operating activities (88) (63)
----- -----
CASH FLOWS APPLIED TO FINANCING ACTIVITIES
Dividends paid to stockholders (364) (12)
Issuance of common stock 68 12
----- -----
Net cash applied to financing activities (296) --
----- -----
Net decrease in cash (384) (63)
Cash at beginning of period 812 860
----- -----
CASH AT END OF PERIOD $428 $797
----- -----
----- -----
A reconciliation of net earnings to cash provided by operating activities was as
follows:
FOR THE SIX MONTHS ENDED
JUNE 30, 1996
------------------------
(AMOUNTS IN THOUSANDS)
Net income $4,576 $3,240
Items not resulting in cash flow:
Equity in undistributed earnings of subsidiary (4,627) (3,277)
Increase in income tax benefits receivable (37) (26)
------ ------
Net cash flow from operating activities $(88) $ (63)
------ ------
------ ------
-22-
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 $2.5 million, net of amortization, at
June 30, 1996 (Note 1).
NOTE 14 - 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 June 30, 1996, this ratio stood at 6.5%.
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 June 30, 1996:
RISKED-BASED
------------------
LEVERAGE RATIO TIER 1 TOTAL
-------------- ------ ------
DS Bancor 6.5% 11.21% 12.31%
Derby Savings Bank 6.5% 11.11% 12.21%
-23-
SELECTED FINANCIAL AND OTHER DATA
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
For The Quarter For The Six Months
Ended June 30, Ended June 30,
------------------- ------------------
1996 1995 1996 1995
------- ------- ------- -------
------- ------- ------- -------
OPERATING DATE: (UNAUDITED)
Interest Income $22,510 $21,276 $44,757 $41,860
Interest expense 12,558 12,628 25,932 24,299
------- ------- ------- -------
Net interest income 9,954 8,648 18,825 17,561
Provision for credit losses 1,050 600 1,700 1,200
------- ------- ------- -------
Net interest income after provision for credit losses 8,904 8,048 17,125 16,361
Non-interest income, net 896 862 1,790 1,405
Non-interest expense 5,870 6,232 11,375 12,374
------- ------- ------- -------
Income before income taxes 3,930 2,678 7,540 5,392
Provision for income taxes 1,511 1,056 2,964 2,152
------- ------- ------- -------
NET INCOME $2,419 $1,622 $4,576 $3,240
------- ------- ------- -------
------- ------- ------- -------
Per Share
Primary earnings $0.76 $0.53 $1,045.00 $1.05
Fully diluted earnings $0.76 $0.52 $1.43 $1.05
Dividend $0.06 -- $0.12 --
STATISTICAL DATA:
Net interest rate spread (a) 2.96% 2.68% 2.78% 2.77%
Net yield on average interest-earning assets (a) 3.30% 2.97% 3.12% 3.03%
Return on average assets (a) 0.78% 0.54% 0.74% 0.54%
Return on average stockholders' equity (a) 11.56% 8.56% 10.96% 8.82%
Average stockholders' equity to average assets 6.75% 6.32% 6.74% 6.16%
Dividend payout ration 7.52% -- 7.95% --
MARKET PRICES OF COMMON STOCK:
High $36.75 $26.75 $36.75 $27.50
Low $28.75 $23.00 $24.75 $21.75
At June 30, $36.50 $26.00 $36.50 $26.00
FINANCIAL CONDITION AND OTHER DATA AT: June 30, December 31,
1996 1995
---------- -------------
(UNAUDITED)
Total Assets $1,257,432 $1,254,483
Loan portfolio, net 888,785 875,339
Securities portfolio 304,800 320,188
Deposits 1,030,993 1,058,145
Federal Home Loan Bank of Boston advances 123,606 96,876
Stockholders' equity 84,248 80,809
Book value per share 27.79 26.68
Leverage ratio 6.51% 6.19%
Tier 1 capital to risk-weighted assets 11.21% 10.94%
Total capital to risk-weighted assets 12.31% 11.91%
Non-performing loans 15,563 13,768
Foreclosed assets 3,662 3,712
---------- ----------
Total non-performing assets 19,425 17,480
Restructured loans 3,706 4,385
Allowance for credit losses 8,023 (b) 6,906 (b)
Allowance as a percentage of non-performing loans 51.6% 50.2%
- ----------------------------------------------------
(a) ANNUALIZED.
(b) INCLUDES $1.1 MILLION AND $1.2 MILLION, ALLOCATED TO LOANS ACQUIRED AS
PART OF THE BURRITT TRANSACTION, FOR JUNE 30, 1996 AND DECEMBER 31, 1995,
RESPECTIVELY.
-24-
COMPARISON OF RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
GENERAL. Net income for the second quarter ended June 30, 1996 totaled
$2,419,000 or $.76 per share (fully diluted) compared to $1,622,000 or $.52 per
share (fully diluted) for the comparable period in 1995. Net income for the
three months ended June 30, 1996 represented an annualized return on average
assets of .78% compared to .54% for the corresponding period in 1995.
Income before taxes of $3.9 million for the current period represents a
$1.3 million or 46.8% increase compared to income before taxes for the prior
year period. This increase essentially resulted from a $1.3 million or 15.1%
increase in net interest income and a decline in non-interest expense of
$362,000 for the current quarter compared to the year earlier period. Non-
interest income for the second quarter of 1996 of $896,000 remained virtually
unchanged, posting a $34,000 increase from the second quarter of 1995, while the
provision for credit losses of $1.1 million in the current period represented a
$450,000 increase from the prior year period.
INTEREST INCOME. Interest and fee income from loans and interest from
investment securities increased $1.2 million or 5.8% during the three months
ended June 30, 1996 compared to the corresponding period in 1995. The increase
in interest income was due to the combined effect of an increase in the yield on
loan portfolio and an increase in the volume of average loans outstanding for
the quarter ended June 30, 1996 compared to the quarter ended June 30, 1995.
The average yield on interest-earning assets increased 16 basis points (100
basis points equals one percent) from 7.30% during the second quarter of 1995 to
7.46% during the current quarter. The increase in yield on interest-earning
assets reflects the Company's strategy of placing greater emphasis on variable
rate loan products as opposed to securities. Total interest-earning assets
increased $40.9 million to $1,206.3 million in the second quarter 1996 compared
to $1,165.4 million in the second quarter 1995. Total loans increased by $66.3
million over the comparison period while all other earning assets, comprised
predominantly of taxable securities, declined by $25.4 million. The yield on
loans increased by 22 basis points during this period from 7.63% to 7.85%. The
combination of higher yields and greater average loans outstanding produced $1.8
million in additional interest income in the second quarter of 1996 compared to
the same period in 1995. In contrast, the yield on taxable securities declined
by 13 basis points from 6.46% to 6.33% between the same periods, while the
average balance outstanding decreased by $20.2 million. The combined effect of
the decrease in yield and average outstanding balance resulted in a $417,000
decline in interest income from the securities portfolio between the two
periods.
INTEREST EXPENSE. Interest expense decreased by $72,000 or 0.6% during
the three months ended June 30, 1996 compared to the corresponding period in
1995. The cost of deposits decreased 15 basis points between the second
quarters of 1995 and 1996, falling from 4.53% to 4.38%. In April 1996, the Bank
changed the manner in which interest was determined on a category of money-
market deposit accounts, which contributed significantly to the decrease in the
cost of deposits. The effected money-market accounts, branded as No Maturity
CD's, had been linked to the prime rate minus 250 basis points. Subsequent to
the change, the rate is determined from time to time at the Bank's discretion,
which is more in keeping with market rates of interest for accounts of that
type. On the date of the change, the interest rate effective for $147.4 million
in No Maturity CD's dropped 200 basis points from 5.75% to 3.75%. As a result of
the change in interest paid for No Maturity CD's, the balance declined for that
account type from $176.6 million at year-end 1995 to $95.4 million at June 30,
1996. While No Maturity CD's declined by $81.1 million during the first six
months of 1996, a significant portion of those funds were reinvested in term
certificates of deposit. Term certificates of deposit increased by $52.6
million from $579.8 million at December 31, 1995 to $632.4 million at June 30,
1996.
Average deposits outstanding, including interest credited, increased by
$7.8 million between the three months ended June 30, 1996 and June 30, 1995.
The cost of deposits fell during the comparison periods by $291,000. Borrowed
funds, on average, increased in the second quarter 1996 relative to the second
quarter 1995 by $15.8 million, while the cost of borrowings increased by
$219,000.
NET INTEREST INCOME. Net interest income of $9.9 million for the quarter
ended June 30, 1996 represented a $1.3 million or 15.1% increase over the
comparable prior year quarter. The combined effect of an increase in the yield
of interest-earning assets and a decrease in the cost interest-bearing
liabilities resulted
-25-
in a substantial widening of the net interest rate margin between the comparison
periods from 2.97% for the second quarter 1995 to 3.30% for the second quarter
1996. The net interest rate spread increased by 28 basis points between the two
periods rising from 2.68% to 2.96%.
The following table summarizes the Bank's net interest income (including
dividends) and net yield on average interest-earning assets. Non-accruing
loans, for the purpose of this analysis, are included in average loans
outstanding during the periods indicated. For the purpose of these
computations, daily average amounts were used to compute average balances.
THREE MONTHS ENDED JUNE 30,
----------------------------------------------------------------------------------
1996 1995
----------------------------------- -------------------------------------
(AMOUNTS IN THOUSANDS)
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------ ---------- -------- ------
INTEREST-EARNING ASSETS
Loans $ 900,248 $17,671 7.85% $ 833,934 $15,915 7.63%
Taxable securities 293,814 4,651 6.33 313,982 5,068 6.46
Federal funds 2,399 33 5.50 8,093 120 5.93
FHLBB stock 9,793 155 6.33 9,360 173 7.39
---------- ------- ---------- --------
TOTAL INTEREST-EARNING ASSETS $1,206,254 22,510 7.46 $1,165,369 21,276 7.30
---------- -------- ------ ---------- -------- ------
INTEREST-BEARING LIABILITIES
Deposits $1,013,755 11,098 4.38 $1,005,909 11,389 4.53
Borrowed funds 103,352 1,458 5.64 87,509 1,239 5.66
---------- ------- ---------- --------
TOTAL INTEREST-BEARING LIABILITIES $1,117,107 12,556 4.50 $1,093,418 12,628 4.62
---------- ------- ------ ---------- -------- ------
NET INTEREST INCOME $ 9,954 $ 8,648
-------- --------
-------- --------
NET INTEREST RATE SPREAD 2.96% 2.68%
------ ------
------ ------
NET YIELD ON AVERAGE INTEREST-EARNING ASSETS 3.30% 2.97%
------ ------
------ ------
RATE/VOLUME ANALYSIS. The following table sets forth the changes in
interest earned and interest paid resulting from changes in volume and changes
in rates. Changes in interest earned or paid due to both rate and volume have
been allocated in proportion to the relationship of the absolute dollar amounts
of the changes in each. There were no material out of period items or
adjustments included in interest income or interest expense during the periods
indicated.
THREE MONTHS ENDED JUNE 30,
----------------------------------
1996 COMPARED TO 1995
----------------------------------
VOLUME RATE NET
------ ------ ------
(AMOUNTS IN THOUSANDS)
INTEREST EARNED ON:
Loans $1,292 $ 464 $1,756
Taxable securities (321) (96) (417)
Federal funds (79) (8) (87)
FHLBB stock 8 (26) (18)
------ ------ ------
INTEREST INCOME 900 334 1,234
------ ------ ------
INTEREST PAID ON:
Deposits 88 (379) (291)
Borrowed funds 224 (5) 219
------ ------ ------
INTEREST EXPENSE 312 (384) (72)
------ ------ ------
NET INTEREST INCOME $ 588 $ 718 $1,306
------ ------ ------
------ ------ ------
-26-
PROVISION FOR CREDIT LOSSES. The Bank provided $1.1 million for credit
losses for the second quarter of 1996 compared to $600,000 for the second
quarter 1995. The $450,000 increase in the provision for credit losses in the
1996 period relative to the 1995 period is primarily due to deterioration in the
Bank's purchased automobile loan portfolio (see Financial Condition). At the
end of the second quarter of 1996, the Company's allowance for credit losses
totaled $8.0 million, representing 51.6% of non-performing loans (non-performing
loans includes loans past due 90 days or more and non-accruing loans). The
allowance for credit losses includes $1.1 million allocated to the loans
acquired in the Burritt transaction (see notes to Consolidated financial
statements).
NON-INTEREST INCOME. Non-interest income increased $34,000 or 3.9% from
$862,000 during the second quarter of 1995 to $896,000 during the second quarter
of 1996. Net realized securities gains totaled $278,000 during the second
quarter of 1996, compared to $251,000 for the 1995 period. In the quarter ended
June 30, 1996, the Bank sold $8.0 million of residential mortgage loans at a net
loss of $179,500. This compared to a net gain of $16,000 on the sale of $1.1
million of residential real estate loans during the second quarter of 1995. The
Bank also recognized a net loss of $6,500 on the change in market value on loans
classified as held-for-sale during the second quarter of 1996. Service charges
and other income, comprised principally of loan service and deposit related
fees, increased by $209,000 or 35.1% from $595,000 for the second quarter of
1995 to $804,000 for the current quarter.
NON-INTEREST EXPENSE. Non-interest expense decreased $362,000 or 5.8% from
$6.2 million during the second quarter of 1995 to $5.9 million during the
corresponding period in 1996. The overall decline in non-interest expense was
in large part due to the reduction in the deposit insurance premium assessed by
the FDIC. In the second quarter 1995, the FDIC deposit insurance premium paid
by the Bank totaled $660,500. As a result of the full recapitalization of the
Bank Insurance Fund during 1995, the deposit insurance premium assessed by the
FDIC to the Bank for the second quarter of 1996 dropped to $250.
Salaries and employee benefits, the largest component of the Company's cost
of operations, totaled $2.8 million, increasing $87,000 or 3.2% in the 1996
period compared to the second quarter 1995. As required by the Statement of
Financial Accounting Standards No. 91, the Bank deferred certain direct costs
resulting from the origination of loans. These deferred costs, which are
principally comprised of salaries, employee benefits and other loan expenses,
totaled approximately $369,000 for the current quarter compared to $163,000 for
the year earlier period.
For the current quarter, foreclosed asset expense totaled $391,000 compared
to $525,000 for the comparable year earlier period. Included in this expense is
the provision for estimated losses on foreclosed assets, which amounted to
$125,000 in the current quarter compared to $400,000 for the year earlier
period. The Company expects that until the level of foreclosed assets declines
substantially, foreclosed asset expense will continue to be significant.
NET NON-INTEREST MARGIN. The net non-interest margin, the difference
between non-interest income and non-interest expense, as a percentage of average
assets (annualized) outstanding, increased by 19 basis points from (1.79%)
during the quarter ended June 30, 1995 to (1.60%) during the current 1996
period. Non-interest income, as a percentage of average assets (annualized),
was .29% for each of the quarters ended June 30, 1995 and 1996. Non-interest
expense, as a percentage of average assets (annualized), decreased 19 basis
points from 2.08% during the quarter ended June 30, 1995 to 1.89% during the
current quarter.
-27-
NET NON-INTEREST INCOME/EXPENSE ANALYSIS
AS A PERCENTAGE OF AVERAGE ASSETS
THREE MONTHS ENDED JUNE 30,
---------------------------
1996 1995
---------- ------------
NON-INTEREST INCOME .29 .29
---------- ------------
NON-INTEREST EXPENSE
Foreclosed asset .13 .18
FDIC insurance premium --- .22
Other 1.76 1.68
---------- ------------
TOTAL NON-INTEREST EXPENSE 1.89 2.08
---------- ------------
NET NON-INTEREST MARGIN (1.60) (1.79)
---------- ------------
---------- ------------
PROVISION FOR INCOME TAXES. The provision for income taxes during the
current quarter totaled $1.5 million reflecting a 38.3% effective income tax
rate, compared to $1.1 million or an effective income tax rate of 40.0% for the
comparable 1995 period.
COMPARISON OF RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
GENERAL. Net income for the six months ended June 30, 1996 totaled
$4,576,000 or $1.43 per share (fully diluted) compared to $3,240,000 or $1.05
per share (fully diluted) for the comparable period in 1995. Net income for the
six months ended June 30, 1996 represented an annualized return on average
assets of .74% compared to .54% for the corresponding period in 1995.
Income before taxes of $7.5 million for the current period represents a
$2.1 million or 39.8% increase compared to income before taxes for the prior
year period. This increase essentially resulted from a $1.2 million increase in
net interest income and a decline in non-interest expense of $1.0 million for
the current period compared to the year earlier period. Non-interest income for
the first six months of 1996 of $1.8 million increased by $385,000 over the
first six months of 1995, while the provision for credit losses of $1.7 million
in the current period represented a $500,000 increase from the prior year
period.
INTEREST INCOME. Interest and fee income from loans and interest from
investment securities increased $2.9 million or 6.9% during the six months ended
June 30, 1996 compared to the corresponding period in 1995. The increase in
interest income was due to the combined effect of an increase in the yield on
the loan portfolio and an increase in the volume of average loans outstanding
for the six months ended June 30, 1996 compared to the six months ended June 30,
1995.
The average yield on interest-earning assets increased 19 basis points (100
basis points equals one percent) from 7.23% during the first six months of 1995
to 7.42% during the current period. The yield on the loan portfolio increased
by 36 basis points between the comparison periods rising from 7.49% for the
first half of 1995 to 7.85% for the 1996 period. The increase in yield on
interest-earning assets reflects the Company's strategy of placing greater
emphasis on variable rate loan products as opposed to securities. Average
interest-earning assets increased $48.5 million to $1,207.0 million in the six
months ended June 30, 1996 compared to $1,158.6 million in the six months ended
June 30, 1995. Average loans outstanding increased $54.2 million between the
two periods. The combination of higher yields and greater average loans
outstanding produced $3.6 million in additional loan interest income in the
first six months of 1996 compared to the same period in 1995. In contrast, the
yield on taxable securities declined by 33 basis points from 6.54% to 6.21%
between the same periods and the average balance outstanding decreased by $1.7
million, the net effect of which resulted in a $553,000 decline in interest
income from the securities portfolio between the two periods. Total interest
income rose $2.9 million or 6.9% between the six months ended June 30, 1995 and
June 30, 1996 from $41.9 million to $44.8 million, respectively.
-28-
INTEREST EXPENSE. Interest expense increased $1.6 million or 6.7% to $25.9
million during the six months ended June 30, 1996 compared to $24.3 million for
the corresponding period in 1995. The increase in interest expense was due to
an increase in average interest-bearing liabilities outstanding between the two
periods and higher costs associated with both deposits and borrowings. Average
interest-bearing liabilities increased by $26.7 million or 2.5% to $1,117.3
million for the six months ended June 30, 1996 compared to $1,090.6 million for
the six months ended June 30, 1995. The growth in interest-bearing liabilities
was attributable to a $17.9 million increase in deposits and an $8.8 million
increase in borrowed funds. The cost of deposits increased 18 basis points from
4.36% for the period ended June 30, 1995 to 4.54% for the period ended June 30,
1996. The cost of borrowings increased by 10 basis points between the same
periods from 5.65% to 5.75%.
NET INTEREST INCOME. Net interest income of $18.8 million for the six
months ended June 30, 1996 represented a $1.3 million or 7.2% increase over the
comparable prior year period. Although the net interest rate spread increased
only one basis point, from 2.77% for the six months ended June 30, 1995 to 2.78%
for the comparable 1996 period, the rate of growth of interest-earning assets
was almost double that of interest-bearing liabilities, allowing the net yield
on interest-earning assets to increase 9 basis points from 3.03% for the six
month period ended June 30, 1995 to 3.12% for the June 30, 1996 period.
The following table summarizes the Bank's net interest income (including
dividends) and net yield on average interest-earning assets. Non-accruing
loans, for the purpose of this analysis, are included in average loans
outstanding during the periods indicated. For the purpose of these
computations, daily average amounts were used to compute average balances.
THREE MONTHS ENDED JUNE 30,
----------------------------------------------------------------------------------
1996 1995
----------------------------------- -------------------------------------
(AMOUNTS IN THOUSANDS)
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------ ---------- -------- ------
INTEREST-EARNING ASSETS
Loans $ 889,638 $34,928 7.85% $ 835,462 $31,305 7.49%
Taxable securities 302,485 9,388 6.21 304,187 9,941 6.54
Federal funds 5,127 132 5.15 9,814 283 5.77
FHLBB stock 9,793 309 6.31 9,130 331 7.25
---------- -------- ---------- --------
TOTAL INTEREST-EARNING ASSETS $1,207,043 44,757 7.42 $1,158,593 41,860 7.23
---------- ----------
---------- -------- ------ ---------- -------- ------
INTEREST-BEARING LIABILITIES
Deposits $1,023,837 23,246 4.54 $1,005,904 21,908 4.36
Borrowed funds 93,464 2,686 5.75 84,693 2,391 5.65
---------- -------- ---------- --------
TOTAL INTEREST-BEARING LIABILITIES $1,117,301 25,932 4.64 $1,090,597 24,299 4.46
---------- -------- ------ ---------- -------- ------
---------- ----------
NET INTEREST INCOME $18,825 $ 17,561
-------- --------
-------- --------
NET INTEREST RATE SPREAD 2.78% 2.77%
------ ------
------ ------
NET YIELD ON AVERAGE INTEREST-EARNING ASSETS 3.12% 3.03%
------ ------
------ ------
-29-
RATE/VOLUME ANALYSIS. The following table sets forth the changes in
interest earned and interest paid resulting from changes in volume and changes
in rates. Changes in interest earned or paid due to both rate and volume have
been allocated in proportion to the relationship of the absolute dollar amounts
of the changes in each. There were no material out of period items or
adjustments included in interest income or interest expense during the periods
indicated.
SIX MONTHS ENDED JUNE 30,
----------------------------------
1996 COMPARED TO 1995
----------------------------------
VOLUME RATE NET
------ ------ ------
(AMOUNTS IN THOUSANDS)
INTEREST EARNED ON:
Loans $2,086 $1,537 $3,623
Taxable securities (55) (498) (553)
Federal funds (123) (28) (151)
FHLBB stock 23 (45) (22)
------ ------ ------
INTEREST INCOME 1,931 966 2,897
------ ------ ------
INTEREST PAID ON:
Deposits 395 943 1,338
Borrowed funds 251 44 295
------ ------ ------
INTEREST EXPENSE 646 987 1,633
------ ------ ------
NET INTEREST INCOME $1,285 $ (21) $1,264
------ ------ ------
------ ------ ------
PROVISION FOR CREDIT LOSSES. The Bank provided $1.7 million for credit
losses for the first six months of 1996 compared to $1.2 million for the first
six months 1995. The increase in the provision for credit losses in the 1996
period relative to the 1995 period is primarily due to deterioration in the
Bank's purchased automobile loan portfolio (see Financial Condition). At the
June 30, 1996, the Company's allowance for credit losses totaled $8.0 million,
representing 51.6% of non-performing loans (non-performing loans includes loans
past due 90 days or more and non-accruing loans). The allowance for credit
losses includes $1.1 million allocated to the loans acquired in the Burritt
transaction (see notes to Consolidated financial statements).
NON-INTEREST INCOME. Non-interest income increased $385,000 or 27.4% from
$1.4 million during the first six months of 1995 to $1.8 million during the
first six months of 1996. During the first six months of 1996, net realized
securities gains totaled $535,000 compared to a net realized loss of $1.3
million for the 1995 period. During the six months ended June 30, 1996, the
Bank sold $9.6 million of residential mortgage loans at a net loss of $161,000.
The Bank also recognized a net loss of $81,000 on the change in market value on
loans classified as held-for-sale during the first six months of 1996. During
the first six months of 1995, there was a net gain on the sale of loans of $1.5
million. In a balance sheet restructuring effort during the first quarter of
1995, the Bank sold $45.6 million in investment securities and $29.5 million in
mortgage loans. As a result of those transactions during the six months ended
June 30, 1995, the Bank incurred a net loss of $288,000. Service charges and
other income, comprised principally of loan service and deposit related fees,
increased $242,000 or 19.3% from $1.3 million for the first six months of 1995
to $1.5 million for the current period.
NON-INTEREST EXPENSE. Non-interest expense decreased $1.0 million or 8.1%
from $12.4 million during the six months ended June 30, 1995 to $11.4 million
during the corresponding period in 1996. The primary reason for the decline in
non-interest expense was the reduction in the deposit insurance premium assessed
by the FDIC. In the first six months 1995 the FDIC deposit insurance premium
paid by the Bank totaled $1.3 million. As a result of the full recapitalization
of the Bank Insurance Fund during 1995, the deposit insurance premium assessed
by the FDIC to the Bank for the six months ended June 30, 1996 dropped to
$1,000.
Salaries and employee benefits, the largest component of the Company's cost
of operations, totaled $5.5 million, increasing $140,000 or 2.6% in the 1996
period compared to the first six months of 1995. As
-30-
required by the Statement of Financial Accounting Standards No. 91, the Bank
deferred certain direct costs resulting from the origination of loans. These
deferred costs, which are principally comprised of salaries, employee benefits
and other loan expenses, totaled approximately $744,000 for the current period
compared to $335,000 for the year earlier period.
For the current period, foreclosed asset expense totaled $886,000 compared
to $973,000 for the comparable year earlier period. Included in this expense is
the provision for estimated losses on foreclosed assets, which amounted to
$425,000 for the six months ended June 30, 1996 compared to $900,000 for the
year earlier period. The Company expects that until the level of foreclosed
assets declines substantially, foreclosed asset expense will continue to be
significant.
NET NON-INTEREST MARGIN. The net non-interest margin, as a percentage of
average assets (annualized) outstanding, increased by 29 basis points from
(1.84%) during the six months ended June 30, 1995 to (1.55%) during the current
1996 period. Non-interest income, as a percentage of average assets
(annualized), increased from .24% to .29% for the six months ended June 30, 1995
and 1996, respectively. Non-interest expense, as a percentage of average assets
(annualized), decreased 24 basis points from 2.08% during the six months ended
June 30, 1995 to 1.84% during the current period.
NET NON-INTEREST INCOME/EXPENSE ANALYSIS
AS A PERCENTAGE OF AVERAGE ASSETS
SIX MONTHS ENDED JUNE 30,
---------------------------
1996 1995
---------- ------------
NON-INTEREST INCOME .29 .24
---------- ------------
NON-INTEREST EXPENSE
Foreclosed asset .14 .17
FDIC insurance premium --- .22
Other 1.70 1.69
---------- ------------
TOTAL NON-INTEREST EXPENSE 1.84 2.08
---------- ------------
NET NON-INTEREST MARGIN (1.55) (1.84)
---------- ------------
---------- ------------
PROVISION FOR INCOME TAXES. The provision for income taxes during the six
months ended June 30, 1996 totaled $3.0 million reflecting a 39.3% effective
income tax rate, compared to $2.2 million or an effective income tax rate of
39.9% for the comparable 1995 period.
FINANCIAL CONDITION
The Company's assets totaled $1,257.4 million at June 30, 1996,
representing a $2.9 million or .2% increase from year end 1995. 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. 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
$749.5 million, representing 59.6% of total assets at June 30, 1996 compared to
$737.4 million or 58.8% of total assets at year end 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 remained virtually unchanged at $691.8
million or 77.5% of the Bank's total loan portfolio at June 30, 1996 compared to
$691.6 million, representing 78.4% of the total loan portfolio, at year end
1995. The Bank also had $4.2 million in residential loans classified as held
for sale at June 30, 1996 compared to $2.0 million at December 31, 1995.
Mortgage loans closed during the first six months of 1996 totaled $45.5 million
compared to $20.5 million closed during the first six months of 1995. As in
prior years, the Bank continued to supplement local loan origination through the
purchase of single family adjustable rate mortgage loans. The Bank purchased
$54.3 million of these loans during the first six months of 1996 compared to
$25.8 million during the comparable 1995 period. The origination and purchase
of adjustable rate loans is an integral part of the Bank's management of
interest rate risk.
-31-
Multi-family housing loans totaled $13.0 million or 1.5% of the total loan
portfolio at June 30, 1996 compared to $11.2 million or 1.3% of the total loan
portfolio at year end 1995. Loans to finance commercial real estate totaled
$34.6 million or 3.9% of the total loan portfolio at June 30, 1996. At year end
1995, this portfolio totaled $31.1 million, representing 3.5% of total loans.
Loans to finance real estate construction, primarily residential condominiums
and single family residences totaled $5.9 million or 0.7% of total loans at June
30, 1996 compared to $3.5 million or .4% of total loans at year end 1995.
Unadvanced construction commitments approximated $1.5 million at June 30, 1996
and $2.1 million at December 31, 1995.
The Company's investment in consumer loans totaled $125.3 million,
representing 14.0% of total loans at June 30, 1996, compared to $125.9 million
or 14.2% of total loans at year end 1995. The consumer loan portfolio is
primarily comprised of home equity lines of credit, which complement the Bank's
primary business of providing financing for single family residences. The home
equity line of credit, which is collateralized by the equity in residential real
property, has become the Bank's second largest investment in loans. Home equity
lines of credit totaled $159.5 million, with $81.7 million in use at June 30,
1996 compared to $144.0 million, with $78.5 million in use at year end 1995.
The remainder of the consumer loan portfolio is substantially comprised of home
equity loans and automobile loans. Home equity loans of $20.1 million at June
30, 1996 increased by $.9 million during the first six months 1996. Automobile
loans of $14.7 million at June 30, 1996 decreased by $3.2 million during the
first six months of 1996.
During 1995, the Company's automobile loan portfolio increased by $15.3
million to $17.9 million at December 31, 1995. The growth in the automobile
portfolio was attributable to the periodic purchase of $16.6 million of sub-
prime automobile loans from a third party provider and servicer. During the
first quarter of 1996, the Company took over the servicing of this portfolio
which totaled $15.8 million. The Company wrote-off $1.4 million of this
portfolio during the first six months of 1996, funded in large part by $1.2
million in cash reserve accounts which had been established in conjunction with
this portfolio. At June 30, 1996, $362,000 of this portfolio was classified as
repossessed collateral. If there is further deterioration in this portfolio,
the Company would be required to make additional provisions for credit losses in
subsequent periods which could be significant.
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 $22.0 million at June 30, 1996, reflecting a $3.0 million or 15.8%
increase from the $19.0 million invested at year end 1995. At June 30, 1996,
$5.4 million or 24.4% of this portfolio was invested in loans for the
development of real estate and $16.6 million or 75.6% was invested in loans for
various business needs. Unadvanced real estate development commitments totaled
approximately $3.5 million at June 30, 1996 and $1.6 million at December 31,
1995.
NON-PERFORMING ASSETS. At June 30, 1996, non-performing assets, which
include loans past due 90 days or more, non-accrual loans and foreclosed assets
(see Consolidated Financial Statements--Note 1) totaled $19.4 million,
representing 1.5% of total assets, compared to $17.5 million of non-performing
assets, or 1.4% of total assets, at year end 1995. At June 30, 1996, foreclosed
assets totaled $3.9 million, representing .3% of total assets, compared to $3.7
million or .3% of total assets at year end 1995.
-32-
The following table sets forth non-accrual loans and loans past due for 90
days or more, including loans in foreclosure ("non-performing loans"), and the
allowance for credit losses at the dates indicated:
June 30, 1996 December 31, 1995
---------------------------------------------- -----------------------------------------------
(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) $ 7,349 1.1% $ 7,251 1.0%
Commercial 1,414 4.1 1,495 4.8
Multi-family 2,547 19.5 2,354 21.1
------- -------
TOTAL MORTGAGE 11,310 1.5 $4,732 41.8% 11,100 1.5 $4,183 37.7%
------- -------
CONSUMER
HELOC 723 0.9 978 1.2
All other 1,602 3.7 480 1.0
------- -------
Total Consumer 2,325 1.9 2,303 99.1 1,458 1.2 1,751 120.1
------- -------
COMMERCIAL
Real estate
development 739 13.8 314 8.7
All other 1,189 7.2 896 5.8
------- -------
Total
Commercial 1,928 8.8 988 51.3 1,210 6.4 972 80.3
------- ------- ------- -------
TOTAL $15,563 1.7 $8,023 51.6 $13,768 1.6 $6,906 50.2
------- ------- ------- -------
------- ------- ------- -------
The following table summarizes the Bank's non-performing loans and foreclosed
assets ("non-performing assets") and restructured loans:
JUNE 30, DECEMBER 31,
-------------------- ---------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
NON-ACCRUAL LOANS:
Mortgage $11,015 $11,119 $10,658 $11,000 $12,302 $18,387 $18,984
Consumer 2,324 1,422 1,421 1,280 1,789 2,082 1,616
Commercial 1,928 1,317 1,210 1,576 3,215 3,901 8,108
------- ------- ------- ------- ------- ------- -------
TOTAL 15,267 13,858 13,289 13,856 17,306 24,370 28,708
------- ------- ------- ------- ------- ------- -------
ACCRUING LOANS
PAST DUE 90 DAYS:
Mortgage 295 162 442 1,186 2,317 3,006 4,096
Consumer 1 83 37 --- 249 1 151
------- ------- ------- ------- ------- ------- -------
TOTAL 296 245 479 1,186 2,566 3,007 4,247
------- ------- ------- ------- ------- ------- -------
TOTAL NON-PERFORMING LOANS 15,563 14,103 13,768 15,042 19,872 27,377 32,955
------- ------- ------- ------- ------- ------- -------
FORECLOSED ASSETS 3,879 5,531 3,942 6,195 9,379 10,456 7,305
Valuation
allowance (17) (385) (230) (439) (1,040) (438) (412)
-------
-33-
------- ------- ------- ------- ------- -------
TOTAL, NET 3,862 5,146 3,712 5,756 8,339 10,018 6,893
------- ------- ------- ------- ------- ------- -------
TOTAL NON-PERFORMING ASSETS $19,425 $19,249 $17,480 $20,798 $28,211 $37,395 $39,848
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
RESTRUCTURED LOANS $ 3,706 $ 3,782 $ 3,999 $ 3,826 $ 1,965 $ 8,262 $ 6,985
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
As detailed in the previous table, the level of non-performing loans
increased from $13.8 million at year end 1995 to $15.6 million at June 30, 1996.
Deterioration in the Bank's purchased automobile portfolio accounted for $1.1
million of the $1.8 million increase in non-performing loans during the first
six months of 1996. Automobile loans are included in the Consumer loan category
in the previous table. At June 30, 1996, the Bank had $3.9 million in
foreclosed real estate assets, consisting of 25 properties, compared to $3.7
million, consisting of 27 properties at year end 1995. During the first six
months of 1996, the Bank reclassified $2.0 million in real estate loans to
foreclosed assets. In addition, at June 30, 1996 the Bank had $362,000 in
automobile loans, consisting of 92 vehicles, reclassified as consumer loan
repossessions.
During the past several years, as the volume of assets acquired by the Bank
through the foreclosure process increased and the value of the underlying real
estate declined, the Bank adopted a policy of reappraising foreclosed assets on
at least an annual basis. This policy has assisted the Bank in quantifying the
net realizable value of these assets, and has provided the basis, as necessary,
for subsequent write-downs of the carrying amount of these assets.
Additionally, in order to provide for unidentified and possible future declines
in the value of foreclosed assets, the Bank maintains an allowance for estimated
losses on foreclosed assets through a provision which is charged to and included
in foreclosed asset expense. For the first six months of 1996, the Bank
provided $425,000 to this allowance compared to $900,000 for the comparable 1995
period. During the current period, the Bank charged $638,000 in specific write-
downs against this allowance compared to $954,000 during the comparable year
earlier period. At June 30, 1996, the allowance for estimated losses on
foreclosed assets totaled $17,000 compared to $230,000 at year end 1995.
The reduction of non-performing assets has been one of the primary
objectives of the Bank. A principal focus in 1996 will be a continuation of the
Bank's efforts to reduce the level of non-performing assets. Continued weakness
in the local economy suggests that progress in this area may be moderate. One
of the measures used to identify the trends in non-performing assets is the
level of loans past due 60 days. As noted in the following table, the amount of
loans past due 60 days has decreased to $8.6 million at June 30, 1996,
representing 1.0% of the total loan portfolio, compared to $9.3 million or 1.1%
of the total loan portfolio at year end 1995. Purchased automobile loans
accounted for $.7 million of loans past due 60 days at June 30, 1996.
The following table summarizes the Bank's accruing loans past due 60 days:
JUNE 30, DECEMBER 31,
-------------------- ---------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
LOANS PAST DUE
60 DAYS:
Mortgage $6,909 $5,397 $8,111 $5,014 $7,369 $8,829 $9,072
Consumer 1,588 324 994 1,015 651 815 525
Commercial 85 218 203 62 --- 95 353
------- ------- ------- ------- ------- ------- -------
TOTAL $8,582 $5,939 $9,308 $6,091 $8,020 $9,739 $9,950
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
The foundation of the Bank's program to reduce the level of non-performing
assets is the loan collection and workout process. In addition to the personnel
assigned to the collection/workout area, the Bank has an officer responsible for
the management and sale of foreclosed assets. This crucial function of the Bank
is supported by a standing committee of the Board of Directors, comprised of
individuals experienced in the areas of real estate sales and development, which
was established to assist and give advice on the management and disposition of
troubled assets.
-34-
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 22 properties for an aggregate consideration of $1.5 million in first
six months of 1996. During the comparable 1995 period, the Bank sold and closed
on 9 properties for an aggregate consideration of $900,000.
In order to maintain the quality of the loan portfolio, as well as to
provide for potential losses that are inherent in the lending process, the Bank
controls its lending activities through adherence to loan policies adopted by
the Board of Directors and stringent underwriting standards. To provide for
possible losses within the loan portfolio, the Company maintains an allowance
for credit losses. The allowance for credit losses is maintained through
provisions charged to income. These provisions are determined on a quarterly
basis, based upon management's review of the anticipated uncollectability of
loans, current economic conditions, historical trend analysis, real estate
deflation factors, overall portfolio quality, specific problem loans and an
assessment of the adequacy of the allowance for credit losses. Based on these
factors, the Company provided $1.7 million to the allowance for credit losses
during the six months ended June 30, 1996 compared to $1.2 million for the
comparable 1995 period. During the six months ended June 30, 1996, the Bank
wrote off $583,000 (net of recoveries). At June 30, 1996 the allowance for
credit losses totaled $8.0 million, which includes $1.1 million allocated to the
loans acquired in the Burritt transaction. In comparison, the allowance for
credit losses totaled $6.9 million at year end 1995, which included $1.2 million
allocated to the loans acquired in the Burritt transaction (see Consolidated
Financial Statements--Note 13). The allowance for credit losses represented
51.6% of non-performing loans at June 30, 1996, compared to 50.2% at year end
1995.
In addition to collection and workout efforts, management also monitors and
works closely with certain borrowers that may experience financial difficulties.
The debtors may be experiencing cash flow problems which inhibit their ability
to service their debt in accordance with its terms. This may result in a
modification of loan terms in order to assist a debtor who has been adversely
affected by the state of the economy. The modification of terms may be in the
form of the waiver of principal payments, a reduction in the interest rate or
the waiver of interest payments for a specified period of time. At June 30,
1996, in addition to non-performing assets, the Bank had $3.7 million in loans
which have been restructured.
INVESTMENT SECURITIES. The Bank's securities portfolio was $304.8 million
or 24.2% of total assets at June 30, 1996, down from $320.2 million or 25.5% at
December 31, 1995. 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. Under the provisions of Statement of
Financial Accounting Standards No. 115 ("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 June 30,
1996, the Bank had securities totaling $74.1 million classified as held-to-
maturity, compared to $77.9 million at December 31, 1995. These investments are
primarily comprised of intermediate and long-term fixed rate mortgage-backed
securities and are carried at amortized cost.
Securities classified as available-for-sale at June 30, 1996 totaled $230.6
million compared to $241.1 million at December 31, 1995. The available-for-sale
category was principally comprised of mortgage-backed securities with adjustable
rate interest features. SFAS 115 also requires that securities classified as
available-for-sale be carried at fair value with unrealized gains and losses,
net of tax effect, reported as a separate component of Stockholders' equity. At
June 30, 1996, the Bank had unrealized losses, net of tax effect, of $.4 million
compared to net unrealized gains, net of tax effect, of $.4 million at December
31, 1995.
The trading portfolio, which consists of equity securities, totaled $.9
million at June 30, 1996 compared to $1.2 million at December 31, 1995. This
portfolio is carried at fair value with changes in unrealized gains or losses
reflected in earnings. At June 30, 1996, the trading portfolio had net
unrealized holding gains of $23,000, unchanged from December 31, 1995.
-35-
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.
During the first six months of 1996, deposits decreased by $27.1 million or
2.6%, after interest credited of $23.2 million, from $1,058.1 million, funding
84.3% of total assets at year end 1995, to $1,031.0 million, funding 82.0% of
total assets at June 30, 1996. 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.
In April 1996, the Bank changed the manner in which interest was determined
on a category of money-market deposit accounts branded as No Maturity CD's. No
Maturity CD's had been linked to the prime rate minus 250 basis points.
Subsequent to the change, the rate is determined from time to time at the Bank's
discretion, which is more in keeping with market rates of interest for accounts
of that type. On the date of the change, the interest rate in effect for No
Maturity CD's dropped 200 basis points from 5.75% to 3.75%. As a result of the
change in interest paid for No Maturity CD's, the balance declined for that
account type from $176.6 million at year-end 1995 to $95.4 million at June 30,
1996. While No Maturity CD's declined by $81.1 million during the first six
months of 1996, a significant portion of those funds were reinvested in term
certificates of deposit. Term certificates of deposit increased by $52.6
million from $579.8 million at December 31, 1995 to $632.4 million at June 30,
1996.
The Bank also utilizes the FHLBB as an alternative source of funds. At
June 30, 1996, FHLBB advances totaled $123.6 million, funding 9.8% of total
assets, compared to $96.9 million, funding 7.7% of total assets at year end
1995. 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 $129.9 million in investable funds during
the first six months of 1996. In keeping with the Bank's asset and liability
management objectives (see "Asset/Liability Management"), the Bank periodically
may sell loans. The Bank sold $9.6 million in loans during the first six months
of 1996. The Bank has retained servicing on all loans that have been sold and
was servicing $144.8 million of mortgage loans for others at June 30, 1996. At
June 30, 1996 the Bank had $4.2 million in loans classified as held-for-sale,
net of a $81,000 lower market value adjustment, compared to $2.0 million at
December 31, 1995.
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 June 30, 1996, the Bank had approximately $750.0
million in qualifying collateral against which actual borrowings were $123.6
million.
As of June 30, 1996, 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 $257.2 million. The Company's short-term liquid
assets represented 22.6% 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 June 30, 1996 increased to
$84.2 million from $80.8 million at December 31, 1995. The $3.4 million or
4.3% increase in Stockholders' Equity was primarily attributable to
-36-
net income of $4.6 million for the six months ended June 30, 1996, partially
offset by a change in the unrealized loss on securities available-for-sale, net
of tax effect, of $941,000.
The Federal Reserve Board (the "FRB") and the FDIC have adopted risk-based
capital standards which require bank holding companies and banks, respectively,
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 June
30, 1996, the core deposit intangible totaled $2.5 million. This amount, in
addition to approximately $176,000 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 12.3% and a ratio of tier 1 capital to risk-weighted
assets of 11.2% at June 30, 1996. Derby Savings' ratio of total capital to
risk-weighted assets was 12.2% and its ratio of tier 1 capital to risk-weighted
assets was 11.1% at June 30, 1996.
The FRB and the FDIC have supplemented the risk-based capital requirements
with a required minimum leverage ratio of 3% of tier 1 capital to total assets.
The FRB and the FDIC have indicated that all but the most highly rated holding
companies, however, should maintain a leverage ratio of 4% to 5% of tier 1
capital to total assets. At June 30, 1996, the Company had a ratio of tier 1
capital to total assets of 6.5% and the Bank had a ratio of tier 1 capital to
total assets of 6.5%.
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
June 30, 1996, the Bank met the "well capitalized" criteria based on its capital
ratios at that date.
ASSET/LIABILITY MANAGEMENT. Derby Savings' asset liability management
program is based upon operating the Bank within a framework of fundamentally
matching interest-sensitive assets and interest-sensitive liabilities. The
purpose of pursuing this policy is to position the Bank to produce stable net
interest income through all phases of the business cycle and resulting interest
rate levels.
The table on the following page summarizes the Company's interest-sensitive
assets and interest-sensitive liabilities that mature or reprice during the
various time periods noted. Loans are net of deferred loan fees and net of
non-accruing loans.
-37-
JUNE 30, 1996 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 $169,556 $59,967 $36,654 $16,194 $7,383 $8,957 $811 $299,522
Federal funds sold 6,895 -- -- -- -- -- -- 6,895
---------- ---------- --------- --------- --------- --------- --------- ----------
Total investments 176,451 59,967 36,654 16,194 7,383 8,957 811 306,417
---------- ---------- --------- --------- --------- --------- --------- ----------
Loans:
Fixed-rate mortgages 6,034 5,882 25,255 25,354 57,944 52,186 28,191 200,846
Adjustable-rate mortgages 255,702 241,093 20,553 17,761 1,491 1,030 -- 537,630
Consumer loans 93,217 7,879 10,922 4,000 4,829 2,171 -- 123,018
Commercial loans 19,715 33 45 30 195 29 -- 20,047
---------- ---------- --------- --------- --------- --------- --------- ----------
Total loans 374,668 254,887 56,775 47,145 64,459 55,416 28,191 881,541
---------- ---------- --------- --------- --------- --------- --------- ----------
Total interest-sensitive
assets $551,119 $314,854 $93,429 $63,339 $71,842 $64,373 $29,002 $1,187,958
---------- ---------- --------- --------- --------- --------- --------- ----------
---------- ---------- --------- --------- --------- --------- --------- ----------
Liabilities:
Regular & club savings $188,654 $ -- $ -- $ -- $ -- $ -- $ -- $188,654
Certificates of deposit 294,724 197,912 85,604 54,157 -- -- -- 632,397
Money market accounts 125,411 -- -- -- -- -- -- 125,411
NOW accounts 45,130 -- -- -- -- -- -- 45,130
FHLBB advances 99,696 11,065 9,725 3,120 -- -- -- 123,606
---------- ---------- --------- --------- --------- --------- --------- ----------
Total interest-sensitive
liabilities $753,615 $208,977 $95,329 $57,277 $ -- $ -- $ -- $1,115,198
---------- ---------- --------- --------- --------- --------- --------- ----------
---------- ---------- --------- --------- --------- --------- --------- ----------
---------- ---------- --------- --------- --------- --------- --------- ----------
GAP (repricing difference) ($202,496) $105,877 ($1,900) $6,062 $71,842 $64,373 $29,002
Cumulative GAP ($202,496) ($96,619) ($98,519) ($92,457) ($20,615) $43,758 $72,760
Cumulative GAP/total assets (16.1%) (7.7%) (7.8%) (7.4%) (1.6%) 3.5% 5.8%
Ratio of interest-sensitive
assets to interest-
sensitive liabilities 73.1% 150.7% 98.0% 110.6% 106.5%
Cumulative ratio of
interest-sensitive
assets to interest-
sensitive liabilities 90.0% 90.7% 91.7% 98.2% 103.9% 106.5%
-38-
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Not Applicable
ITEM 2 CHANGES IN SECURITIES
Not Applicable
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its 1996 annual meeting of stockholders ("Annual
Meeting") on April 24, 1996. At the Annual Meeting, three directors were
elected for three-year terms and one director was elected for a one-year
term, and the stockholders ratified the appointment by the Board of
Directors of the firm of Friedberg, Smith & Co., P.C. as independent public
accountants of the Company for the year ending December 31, 1996.
(b) The names of the three directors elected at the Annual
Meeting to new three-year terms are as follows: Walter R. Archer Jr.,
Laura J. Donahue and John M. Rak. Harry P. DiAdamo Jr. was elected to a
new one-year term. In addition to these persons, the terms of office of
the following directors continue after the Annual Meeting: Achille A.
Apicella, John F. Costigan, Michael F. Daddona Jr., Angelo E. Dirienzo,
Christopher H.B. Mills, John P. Sponheimer and Gary M. Tompkins.
(c) The following votes were cast in the election of directors:
WITHHOLD
NOMINEES FOR AUTHORITY
-------- --- ---------
Walter R. Archer Jr. 2,221,813 14,889
Laura J. Donahue 2,222,045 14.657
John M. Rak 2,221,317 15,385
Harry P. DiAdamo Jr. 2,222,045 14,657
There were 2,228,867 votes cast FOR ratification of the
appointment of Friedberg, Smith & Co., as independent public accountants
for the Company for the year ending December 31, 1996, 4,874 votes were
cast AGAINST such ratification and 2,961 were abstentions.
There were no broker non-votes in either the election of
directors or as to ratification of the appointment of the firm selected to act
as the Company's independent accountants for 1996.
ITEM 5 OTHER INFORMATION
Not Applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Index
Exhibit Page of this
Number Report
------ ------------
27 Financial Data Schedule 42
-39-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DS BANCOR, INC.
----------------------------------
Registrant
Date: AUGUST 14, 1996 By: /S/HARRY P. DIADAMO, JR.
--------------- ----------------------------------
Harry P. DiAdamo Jr.
President & CEO
Date: AUGUST 14, 1996 By: /S/ALFRED T. SANTORO
--------------- ----------------------------------
Alfred T. Santoro
Vice President, Treasurer and CFO
-40-