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 September 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
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Commission file number 0-16193
DS BANCOR, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1162884
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(State or other jurisdiction of IRS Employer
Incorporation or organization) Identification No.)
33 Elizabeth Street, Derby, Connecticut
---------------------------------------
(Address of principal executive offices)
06418
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(Zip Code)
(203) 736-1000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class: Common Stock, par value $1.00 per share
Outstanding at November 12, 1996: 3,031,527 shares
INDEX
Page(s)
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Part 1 -- Consolidated Financial Statements
A. Consolidated Statements of Position 1
B. Consolidated Statements of Earnings 2
C. Consolidated Statements of Stockholders' Equity 3
D. Consolidated Statements of Cash Flows 4
E. Notes to Consolidated Financial Statements 5 - 23
F. Selected Consolidated Financial and Other Data 24
G. Management's Discussion and Analysis 25 - 39
Part 2 -- Other Information 40
Signatures 41
DS BANCOR, INC.
CONSOLIDATED STATEMENTS OF POSITION
(DOLLAR AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
ASSETS
Cash and due from banks (Note 1) $15,854 $18,425
Federal funds sold (Note 1) -- 2,305
Securities (Notes 1 & 2)
Trading 1,837 1,171
Available-for-sale 255,103 241,136
Held-to-maturity (fair value: $69,441 at
September 30, 1996 and $77,394 at December 31, 1995) 71,292 77,881
Loans held-for-sale (Notes 1 & 3) 712 2,035
Loans receivable (net of allowances for credit losses of $7,369
at September 30, 1996 and $6,906 at December 31, 1995)(Notes 1 & 3) 876,572 873,304
Federal Home Loan Bank of Boston stock, at cost (Note 8) 9,793 9,793
Accrued income receivable (Note 1) 7,547 7,746
Bank premises and equipment, net (Notes 1 & 6) 6,975 6,504
Deferred income tax asset, net (Notes 1 & 10) 4,080 3,293
Foreclosed assets (net of allowances of $2 at September 30, 1996
and $230 at December 31, 1995)(Notes 1 & 5) 4,515 3,712
Other assets (Note 13) 5,143 7,178
----------- ----------
TOTAL ASSETS $1,259,423 $1,254,483
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits (Note 7)
Non-interest bearing $40,681 $35,999
Interest bearing 989,308 1,022,146
----------- ----------
Total 1,029,989 1,058,145
Mortgagors' escrow 5,277 11,193
Advances from Federal Home Loan Bank of Boston (Note 8) 128,185 96,876
Other liabilities (Note 9) 9,484 7,460
----------- ----------
Total Liabilities 1,172,935 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 43,395 37,014
Net unrealized (losses) gains on available-for-sale securities, net of
tax of $240 at September 30, 1996 and ($301) at December 31, 1995 (344) 426
Less: Treasury stock, at cost (339,500 shares) (4,513) (4,513)
----------- ----------
Total Stockholders' Equity 86,488 80,809
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,259,423 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
---------- --------- -------- --------
(UNAUDITED)
INTEREST INCOME (NOTE 1)
Interest and fees on loans $17,535 $16,606 $52,463 $47,911
Taxable interest on securities 4,819 5,244 13,815 15,200
Dividends on securities 527 209 1,360 808
--------- -------- ------- --------
Total interest income 22,881 22,059 67,638 63,919
--------- -------- ------- --------
INTEREST EXPENSE
Deposits (Note 7) 10,933 12,049 34,235 34,053
Borrowed funds (Note 8) 1,849 1,461 4,535 3,852
Less: Penalties on premature time deposit withdrawals (30) (24) (86) (120)
--------- -------- ------- --------
Net interest expense 12,752 13,486 38,684 37,785
--------- -------- ------- --------
NET INTEREST INCOME 10,129 8,573 28,954 26,134
Provision for credit losses (Notes 1 & 3) 1,250 625 2,950 1,825
--------- -------- ------- --------
Net interest income after provision for credit losses 8,879 7,948 26,004 24,309
--------- -------- ------- --------
NON-INTEREST INCOME
Service charges and other income 689 633 2,186 1,888
Net realized securities gains (losses) (Note 2) 157 312 692 (1,035)
Net (loss) gain on sale of loans (2) (1) (244) 1,496
--------- -------- ------- --------
Total non-interest income, net 844 944 2,634 2,349
--------- -------- ------- --------
NON-INTEREST EXPENSE
Salaries and wages 2,289 1,938 6,397 5,960
Employee benefits (Note 9) 685 605 2,039 1,905
Occupancy (Note 6) 495 441 1,492 1,318
Furniture and equipment (Note 6) 307 376 826 949
Foreclosed asset expense, net (Notes 1 & 5) 207 427 1,093 1,400
Other 1,904 1,627 5,415 6,256
--------- -------- ------- --------
Total non-interest expense 5,887 5,414 17,262 17,788
--------- -------- ------- --------
Income before income taxes 3,836 3,478 11,376 8,870
Provision for income taxes (Note 10) 1,485 1,429 4,449 3,581
--------- -------- ------- --------
NET INCOME $2,351 $2,049 $6,927 $5,289
--------- -------- ------- --------
--------- -------- ------- --------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (NOTE 1)
Primary 3,197,870 3,098,357 3,165,719 3,089,358
Fully diluted 3,204,790 3,098,357 3,203,938 3,095,764
EARNINGS PER SHARE (NOTE 1)
Primary $0.74 $0.66 $2.19 $1.71
Fully diluted $0.73 $0.66 $2.16 $1.71
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 5,289 5,289
Stock dividend declared on common
stock (5%--March 15, 1995) 137 3,283 (3,420) 0
Shares issued for fractional interest 12 12
Cash in lieu of fractional shares (12) (12)
Changes in unrealized gains
(losses), net 5,725 5,725
------- -------- ------- -------- -------- ----------
Balance--September 30, 1995 $3,222 $41,075 $38,219 $148 ($4,513) $78,151
------- -------- ------- -------- -------- ----------
------- -------- ------- -------- -------- ----------
Balance--December 31, 1995 $3,368 $44,514 $37,014 $426 ($4,513) $80,809
Net income 6,927 6,927
Cash dividend declared on common
stock ($.18 per share) (546) (546)
Stock options exercised
(2,500 shares) (Note 11) 3 65 68
Changes in unrealized gains
(losses), net (770) (770)
------- -------- ------- -------- ------- ---------
Balance--September 30, 1996 $3,371 $44,579 $43,395 ($344) ($4,513) $86,488
------- -------- ------- -------- ------- ---------
------- -------- ------- -------- ------- ---------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
DS BANCOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1996 1995
-------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $6,927 $5,289
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 2,950 1,825
Provision for estimated losses on foreclosed assets 525 1,200
Depreciation and amortization 649 766
Amortization of intangible assets 539 505
Net amortization of premiums/discounts on securities 607 421
Net (amortization) accretion of deferred loan fees (593) 974
Benefit for deferred income taxes (246) (138)
Decrease in deferred income tax asset -- 1,523
Net securities (gain) loss (418) 1,035
Net loss (gain) on sale of loans 244 (1,496)
Gains on sales of foreclosed assets (199) (63)
Net (increase) decrease in trading securities (666) 423
Decrease (increase) in accrued income receivable 199 (112)
Net decrease in other assets 2,014 4,690
Decrease in other liabilities 2,024 34
-------- --------
Net cash provided by operating activities 14,556 16,876
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from matured securities available-for-sale 38,206 35,163
Proceeds from sale of securities available-for-sale 2,734 51,505
Proceeds from matured securities held-to-maturity 9,952 10,936
Purchase of securities available-for-sale (56,788) (92,819)
Purchase of securities held-to-maturity (3,500) (7,000)
Purchase of FHLBB stock -- (894)
Proceeds from loans sold to others 16,410 32,724
Purchases of loans from others (67,423) (63,797)
Net decrease in loans receivable 43,993 14,464
Premises and equipment additions (1,120) (244)
Proceeds from sale of foreclosed assets 1,345 1,054
Net decrease in foreclosed assets -- 472
-------- --------
Net cash used in investing activities (16,191) (18,436)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits (28,156) 17,377
Net decrease in mortgagors' escrow (5,916) (6,019)
Net decrease in Other borrowings -- 13,260
Net decrease in short term FHLBB advances (641) (28,132)
Proceeds from long term FHLBB advances 181,050 40,000
Repayment of long term FHLBB advances (149,100) (32,701)
Proceeds from issuance of common stock 68 12
Dividends paid to stockholders (546) (12)
-------- --------
Net cash provided (used) by financing activities (3,241) 3,785
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,876) 2,225
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,730 18,628
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $15,854 $20,853
-------- --------
-------- --------
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." 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.
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):
SEPTEMBER 30, 1996
--------------------------------------------------
AMORTIZED GROSS UNREALIZED HOLDING FAIR
------------------------
COST GAINS LOSSES VALUE
----------- ------- -------- -------
TRADING
Marketable equities $ 1,764 $ 75 $ 2 $ 1,837
----------- ------- -------- -------
----------- ------- -------- -------
AVAILABLE-FOR-SALE
U.S.Government and agency obligations $ 10,448 $ 20 $ 173 $ 10,295
Mortgage-backed securities 212,643 1,456 2,224 211,875
Other bonds and notes 2,177 5 4 2,178
----------- ------- -------- -------
Total debt securities 225,268 1,481 2,401 224,348
Marketable equities 3,981 352 129 4,204
Preferred stock 16,662 18 328 16,352
Mutual funds 9,776 423 --- 10,199
----------- ------- -------- -------
Total $255,687 $2,274 $2,858 $255,103
----------- ------- -------- -------
----------- ------- -------- -------
HELD-TO-MATURITY
Mortgage-backed securities $ 63,292 $29 $1,880 $61,441
Money market preferred stock 8,000 --- --- 8,000
----------- ------- -------- -------
Total $ 71,292 $29 $1,880 $69,441
----------- ------- -------- -------
----------- ------- -------- -------
-7-
DECEMBER 31, 1995
--------------------------------------------------
AMORTIZED GROSS UNREALIZED HOLDING FAIR
------------------------
COST GAINS LOSSES VALUE
----------- ------- -------- -------
TRADING
Marketable equities $ 1,148 $ 23 $ --- $ 1,171
----------- ------- -------- --------
----------- ------- -------- --------
AVAILABLE-FOR-SALE
U.S.Government and agency $ 8,297 $ 109 $ --- $ 8,406
obligations
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 September 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 $ 2,000 $ 1,996 $ --- $ ---
Due after one year through five years 177 181 --- ---
Due after five years through ten years 749 753 --- ---
Due after ten years 9,700 9,543 --- ---
-------- -------- ------- -------
12,625 12,473 --- ---
Mortgage-backed securities 212,643 211,875 63,292 61,441
-------- -------- ------- -------
Total $225,268 $224,348 $63,292 $61,441
-------- -------- ------- -------
-------- -------- ------- -------
-8-
Proceeds and realized gains (losses) from sales of securities classified as
Available-for-sale were as follows:
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------------------------------
GROSS REALIZED
--------------------
PROCEEDS NET
FROM SALES GAINS LOSSES GAINS
---------- ----------- --------- --------
(AMOUNTS IN THOUSANDS)
Marketable equities $52 $1 $1 $ ---
---------- ----------- --------- --------
---------- ----------- --------- --------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------------------------------
GROSS REALIZED
--------------------
PROCEEDS NET
FROM SALES GAINS LOSSES GAINS
---------- ----------- --------- --------
(AMOUNTS IN THOUSANDS)
Marketable equities $5,239 $ 211 $ 1 $ 210
---------- ----------- --------- --------
---------- ----------- --------- --------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------------------------------
GROSS REALIZED
--------------------
PROCEEDS NET
FROM SALES GAINS LOSSES GAINS
---------- ----------- --------- --------
(AMOUNTS IN THOUSANDS)
Marketable equities $1,849 $245 $3 $242 (a)
---------- ----------- --------- ---------
---------- ----------- --------- ---------
(A) EXCLUDES A $23,100 CAPITAL GAIN REALIZED ON MUTUAL FUNDS.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
--------------------------------------------------------
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 5,814 335 1 334
---------- ----------- --------- ---------
Total $ 51,391 $335 $1,779 $(1,444)
---------- ----------- --------- ---------
---------- ----------- --------- ---------
At September 30, 1996, the aggregate amortized cost and fair value of securities
pledged as collateral against public funds and treasury tax and loan deposits
were approximately $4.0 million and $3.9 million, respectively.
-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:
SEPTEMBER 30, DECEMBER 31,
1996 1995
----------------------------------
(AMOUNTS IN THOUSANDS)
MORTGAGE
Residential real estate $678,713 $695,419
Commercial real estate 37,293 31,234
Multi-family real estate 13,064 11,237
Residential construction 6,264 3,518
--------- ---------
735,334 741,408
--------- ---------
CONSUMER
Home equity lines of credit 88,009 78,523
Home equity installment 22,004 21,735
Collateral 3,153 3,330
All other 15,623 21,492
--------- ---------
128,789 125,080
--------- ---------
COMMERCIAL
Commercial 16,514 15,463
Real estate development 6,732 3,603
--------- ----------
23,246 19,066
--------- ----------
TOTAL 887,369 885,554
Net deferred loan fees, premiums & discounts (2,716) (3,309)
Allowances for credit losses (7,369) (6,906)
--------- ----------
877,284 875,339
Residential real estate loans held-for-sale (712) (2,035)
--------- ----------
LOANS RECEIVABLE, NET $876,572 $873,304
--------- ----------
--------- ----------
Loans are summarized between fixed and adjustable rates as follows:
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- --------------
(AMOUNTS IN THOUSANDS)
Fixed rate $229,658 $224,741
Adjustable rate 657,711 660,813
-------- --------
Total $887,369 $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 $148.4 million and $147.1 million at September 30, 1996
and December 31, 1995, respectively.
The recorded investment in impaired loans (Note 1) at September 30, 1996
approximated $15.9 million and included approximately $12.7 million in
mortgage loans, $1.9 million in consumer loans and $1.3 million in commercial
loans. The amount of the related Allowance for credit losses on these loans
at September 30, 1996 approximated $1.7 million. The average recorded
investment in impaired loans during the nine months ended
-10-
September 30, 1996 was approximately $15.2 million. During the nine months
ended September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
-------- ------- -------- --------
(AMOUNTS IN THOUSANDS)
MORTGAGE LOANS
Balance at beginning of period $4,732 $4,261 $4,183 $4,495
Provision for credit losses 100 625 1,050 1,625
Loan charge-offs (562) (462) (1,139) (1,869)
Recoveries 24 42 200 215
-------- ------- -------- --------
Balance at end of period $4,294 $4,466 $4,294 $4,466
-------- ------- -------- --------
-------- ------- -------- --------
CONSUMER LOANS
Balance at beginning of period $2,303 $1,291 $1,751 $1,266
Provision for credit losses 1,150 --- 1,900 200
Loan charge-offs (1,492) (22) (1,807) (266)
Recoveries 2 14 119 83
-------- ------- -------- --------
Balance at end of period $1,963 $1,283 $1,963 $1,283
-------- ------- -------- --------
-------- ------- -------- --------
COMMERCIAL LOANS
Balance at beginning of period $988 $999 $972 $1,042
Provision for credit losses --- --- --- ---
Loan charge-offs (54) --- (81) (48)
Recoveries 178 2 221 7
-------- ------- -------- --------
Balance at end of period $1,112 $1,001 $1,112 $1,001
-------- ------- -------- --------
-------- ------- -------- --------
TOTAL ALLOWANCE FOR CREDIT LOSSES
Balance at beginning of period $8,023 $6,551 $6,906 $6,803
Provision for credit losses 1,250 625 2,950 1,825
Loan charge-offs (2,108) (484) (3,027) (2,183)
Recoveries 204 58 540 305
-------- ------- -------- --------
Balance at end of period $7,369 $6,750 $7,369 $6,750
-------- ------- -------- --------
-------- ------- -------- --------
In connection with the Burritt transaction (Note 13), the Bank purchased two
loan pools at discounts of approximately $9.0 million and $1.3 million, which
were added to the Bank's Allowance for mortgage and consumer credit losses,
respectively, in 1992. During 1993, the Bank completed a valuation analysis
of these loans and allocated approximately $6.0 million from these amounts to
a purchased loan discount, which will be accreted to interest income over the
remaining terms of the acquired loans. At September 30, 1996, the Allowances
for credit losses, which totaled approximately $7.4 million, included
approximately $.8 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:
SEPTEMBER 30, DECEMBER 31,
1996 1995
---------- -----------
(AMOUNTS IN THOUSANDS)
LOAN COMMITMENTS
Commitments to extend credit $ 11,876 $15,648
Commitments to purchase loans --- 6,151
Unadvanced commercial lines of credit 15,213 10,021
Unadvanced portion of construction loans 7,602 3,751
Unused portion of home equity lines of credit 76,340 65,458
Other consumer lines of credit 1,371 1,263
-------- --------
Total $112,402 $102,292
-------- --------
-------- --------
LETTERS OF CREDIT $2,079 $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 September 30, 1996, the Bank had no
commitments to sell mortgage loans.
NOTE 5 - FORECLOSED ASSETS
Foreclosed assets consisted of the following:
SEPTEMBER 30, DECEMBER 31,
1996 1995
---------- -----------
(AMOUNTS IN THOUSANDS)
One-to-four family residential $1,916 $1,384
Commercial real estate 10 10
Land 2,591 2,548
------- ------
Total 4,517 3,942
Allowance for estimated losses (2) (230)
------- ------
Foreclosed assets, net $4,515 $3,712
------- -------
------- -------
-12-
Activity in the Allowance for estimated losses on Foreclosed assets is as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
--------- --------- --------- ---------
(AMOUNTS IN THOUSANDS)
Balance at beginning of period $ 17 $ 385 $ 230 $ 439
Provision charged to expense 100 300 525 1,200
Net losses charged to the allowance (115) (408) (753) (1,362)
--------- --------- --------- ---------
Balance at end of period $ 2 $ 277 $ 2 $ 277
--------- --------- --------- ---------
--------- --------- --------- ---------
Losses and expenses related to Foreclosed assets are summarized as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
--------- --------- --------- ---------
(AMOUNTS IN THOUSANDS)
Provision charged to expense $ 100 $ 300 $ 525 $1,200
Gain on sale of real estate (106) (42) (199) (63)
Holding costs and expenses 215 189 777 361
Rental income (2) (20) (10) (98)
--------- --------- --------- ---------
Foreclosed asset expense, net $ 207 $ 427 $1,093 $1,400
--------- --------- --------- ---------
--------- --------- --------- ---------
NOTE 6 - BANK PREMISES AND EQUIPMENT
Bank premises and equipment were comprised of the following:
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- --------------
(AMOUNTS IN THOUSANDS)
Buildings and land $7,795 $7,381
Leasehold improvements 831 870
Furniture and equipment 6,767 6,077
---------- ----------
15,393 14,328
Accumulated depreciation and amortization (8,418) (7,824)
---------- ----------
Bank premised and equipment, net $6,975 $6,504
---------- ----------
---------- ----------
Depreciation and amortization included in Non-interest expense aggregated
approximately $238,500 and $648,600 for the three and nine months ended
September 30, 1996, respectively, and $313,400 and $766,000 for the three and
nine months ended September 30, 1995, respectively.
-13-
LEASES.
Rent expense for banking premises of $191,100 and $558,900 is included in
Occupancy expense in the accompanying Consolidated Statements of Earnings for
the three and nine months ended September 30, 1996, respectively, and
$170,800 and $520,600 for the three and nine months ended September 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 September 30, 1996 (AMOUNTS IN THOUSANDS):
1996 $ 162
1997 578
1998 408
1999 256
2000 129
Thereafter 108
-------
Total future minimum lease payments $1,641
-------
-------
These leases include options to renew for periods ranging from 3 to 22 years.
NOTE 7 - DEPOSITS
Deposits were comprised of the following:
SEPTEMBER 30, 1996 DECEMBER 31, 1995
----------------------- ------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
RATES % AMOUNT RATES % AMOUNT
---------- ---------- ----------- ----------
Demand $ 40,681 $ 35,999
NOW 1.75-2.00 (a) 42,940 1.75-2.00 (a) 47,460
Regular and club savings 2.00 182,406 2.00 185,610
Money market deposit
accounts 3.28 (b) 109,620 5.57 (b) 209,265
Time accounts 5.47 (b) 654,342 5.66 (b) 579,811
---------- ----------
Total $1,029,989 $1,058,145
---------- ----------
---------- ----------
A) RANGES INDICATE TIERS
B) WEIGHTED AVERAGE STATED RATE
Time accounts at September 30, 1996 mature as follows:
WEIGHTED AVERAGE
MATURITY STATED RATE AMOUNT
-------- ------------------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
One year or less 5.39% $522,465
One to three years 5.52% 80,300
Beyond 6.20% 51,577
----------
Total 5.47% $654,342
----------
----------
Time deposit accounts of $100,000 or more approximated $52.4 million at
September 30, 1996. Of that amount, approximately $41.0 million mature in
one year or less, $3.0 million mature after one year to two years, and $8.4
million mature after two years.
-14-
Interest expense on deposits is summarized as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
--------- --------- --------- ---------
(AMOUNTS IN THOUSANDS)
NOW $ 225 $ 680 $ 223 $ 676
Regular and club savings 933 977 2,797 2,989
Money market deposits 971 2,891 4,997 8,401
Time savings 8,763 7,924 25,616 21,851
Escrow 41 34 145 136
-------- --------- -------- --------
Total interest expense on deposits $10,933 $12,049 $34,235 $34,053
-------- --------- -------- --------
-------- --------- -------- --------
NOTE 8 - BORROWED FUNDS
Terms of the Advances from the Federal Home Loan Bank of Boston ("FHLBB") were
as follows:
SEPTEMBER 30, 1996 DECEMBER 31, 1995
-------------------------- --------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
WEIGHTED WEIGHTED
AVERAGE AVERAGE
MATURITY/REPRICE DATE BALANCE INTEREST RATE BALANCE INTEREST RATE
--------------------- ---------- --------------- --------- ---------------
1996 $ 671 --- $ 1,011 ---
1996 103,604 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 $128,185 $96,876
--------- --------
--------- --------
The Bank has a cash management line of credit from the FHLBB in the amount of
$20.0 million at September 30, 1996. At September 30, 1996 and December 31,
1995, the Bank had book overdrafts of approximately $.7 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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
FHLBB advances $1,849 $1,028 $4,535 $3,232
Repurchase agreements --- 433 --- 620
------- ------- ------- -------
Total interest expense on borrowed
funds $1,849 $1,461 $4,535 $3,852
------- ------- ------- -------
------- ------- ------- -------
Stock of the FHLBB, mortgage loans and mortgage-backed securities with fair
values, as determined in accordance with FHLBB's collateral pledge agreement, at
least equal to the outstanding advances and any unused lines of credit were
pledged against outstanding advances from the FHLBB at September 30, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
------- ------- ------- --------
(AMOUNTS IN THOUSANDS)
Service cost-benefits earned during the period $ 117 $ 87 $ 351 $ 261
Interest cost on projected benefit obligation 105 95 315 285
Expected return on plan assets (112) (100) (336) (300)
Net amortization and deferral 10 (2) 30 (6)
------- ------- ------ ------
Net pension expense $ 120 $ 80 $ 360 $ 240
------- ------- ------ ------
------- ------- ------ ------
Assumptions used in the accounting were:
FOR THE NINE MONTHS ENDED SEPTEMBER 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% 9.50%
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 nine months
ended September 30, 1996 was $26,700 and $80,100, respectively, and $25,200
and $75,400, respectively for the three and nine months ended September 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 September 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.
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 nine months ended
September 30, 1996 was $39,300 and $74,900, respectively, and $18,100 and
$58,500, respectively, for the three and nine months ended September 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 Accompanying Consolidated Statements of Position:
DECEMBER 31, 1995,
(AMOUNTS IN THOUSANDS)
Accumulated Postretirement Benefit Obligation
Retirees $ (518)
Fully eligible active plan participants (213)
Other active plan participants (1,973)
--------
Total APBO (2,704)
Unrecognized transition obligation 1,812
Unrecognized net gains from past experience different from
that assumed and effects of changes in assumptions (780)
--------
Accrued postretirement benefit cost included in Other liabilities $(1,672)
--------
--------
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
------ ------ ------ ------
(AMOUNTS IN THOUSANDS)
Service cost-benefits attributable to service during the period $ 56 $ 53 $168 $159
Interest cost on APBO 47 47 141 141
Amortization of transition obligation 19 17 57 51
------ ------ ------ ------
Net periodic postretirement benefit cost $122 $117 $366 $351
------ ------ ------ ------
------ ------ ------ ------
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 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
Current income tax provision
Federal $ 816 $1,102 $3,492 $2,720
State 278 406 1,203 998
------- ------- ------- -------
Total current 1,094 1,508 4,695 3,718
------- ------- ------- -------
Deferred income tax provision (benefit)
Federal 288 (57) (218) (99)
State 103 (22) (28) (38)
------- ------- ------- -------
Total deferred income tax provision (benefit) 391 (79) (246) (137)
------- ------- ------- -------
Total provision for income taxes, net $1,485 $1,429 $4,449 $3,581
------- ------- ------- -------
------- ------- ------- -------
The Company's effective income tax rate differed from the Federal statutory
tax rate as follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
-------------- -------------- ------------- -------------
(DOLLAR AMOUNTS IN THOUSANDS)
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ ----- ------ ----- ------ ----- ------ -----
Tax at statutory Federal rate $1,301 34.0 $1,183 34.0 $3,868 34.0 $3,016 34.0
State tax * 251 6.5 254 7.3 775 6.8 633 7.1
Dividend income exclusion (92) (2.4) (10) (0.3) (221) (1.9) (73) (0.8)
Other 25 0.6 2 0.1 27 0.2 5 0.1
------ ----- ------ ----- ------ ----- ------ -----
Effective rate on operations $1,485 38.7 $1,429 41.1 $4,449 39.1 $3,581 40.4
------ ----- ------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ ----- ------ -----
* NET OF FEDERAL TAX BENEFIT
-18-
The components of the net deferred income tax asset are as follows:
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- -----------
(AMOUNTS IN THOUSANDS)
Deferred income tax liability
Federal $ 750 $ 677
State 264 253
------ ------
1,014 930
------ ------
Deferred income tax asset
Federal 3,761 3,077
State 1,333 1,146
------ ------
5,094 4,223
------ ------
Net deferred income tax asset $4,080 $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:
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- -----------
(AMOUNTS IN THOUSANDS)
Allowances for losses $2,335 $2,141
Depreciation (189) (122)
Deferred loan fees (443) (185)
Deferred compensation 248 244
Loan expense 332 311
Employee benefits 1,004 745
Trading gains (30) (10)
Intangible asset 583 470
------ ------
3,840 3,594
Unrealized (gains) losses 240 (301)
------ ------
Net deferred tax asset $4,080 $3,293
------ ------
------ ------
A summary of the change in the net deferred income tax asset for the nine months
ended September 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 246
Unrealized losses 541
------
Net deferred income tax asset at September 30, 1996 $4,080
------
------
Net deferred income tax asset at December 31, 1994 $7,293
Deferred tax provision:
Income and expense 137
Unrealized gains (4,076)
------
Net deferred income tax asset at September 30, 1995 $3,354
------
------
The Company has recorded a net deferred income tax asset of approximately
$4.1 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 September 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. No expense accruals have been made for the
nine months ended September 30, 1996 and 1995 inasmuch as amounts which
management anticipates may be exercised are not significant.
The following table and the data below summarizes the shares subject to
option under the Plans which have been adjusted to reflect stock dividends
declared:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 September 30, 1996, 398,058 options were exercisable at prices ranging
from $9.06 to $29.88.
At September 30, 1996, there were 398,058 options in the Plans that remained
outstanding. Through September 30, 1996, 154,216 options have been exercised
and 45,590 options, adjusted to reflect subsequent stock dividends, have been
canceled. 55,022 options are available for grant.
During the nine months ended September 30, 1996, 1,102 SARS were exercised which
resulted in payments to employees aggregating $18,800. During the nine months
ended September 30, 1995, 19,634 SARS were exercised which resulted in payments
to employees aggregating $177,900. These amounts are included in Salary and
wage expense in the accompanying Consolidated Statements of Earnings for the
nine months ended September 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:
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- -------------
(DOLLAR AMOUNTS IN THOUSANDS)
ASSETS
Cash in subsidiary bank $ 186 $ 812
Investment in bank subsidiary, at equity 85,952 79,658
Other assets 391 344
------- -------
TOTAL ASSETS $86,529 $80,814
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Other liabilities $ 41 $ 5
------- -------
STOCKHOLDERS' EQUITY
Common stock 3,371 3,368
Additional paid-in capital 44,579 44,514
Retained earnings 43,051 37,440
Less: Treasury stock, at cost (339,500 shares) (4,513) (4,513)
------- -------
TOTAL STOCKHOLDERS' EQUITY 86,488 80,809
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $86,529 $80,814
------- -------
------- -------
The condensed Statements of Earnings were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
--------- --------- --------- ---------
(AMOUNTS IN THOUSANDS)
INCOME
Other income $ 3 $ 8 $ 18 $ 34
--------- --------- --------- ---------
Total income 3 8 18 34
--------- --------- --------- ---------
EXPENSE
Other expense 99 34 201 123
--------- --------- --------- ---------
Total expense 99 34 201 123
--------- --------- --------- ---------
Loss before income tax and
change in equity of subsidiary (96) (26) (183) (89)
Income tax benefit (10) (11) (46) (37)
--------- --------- --------- ---------
Loss before change in equity
of subsidiary (86) (15) (137) (52)
Change in equity of subsidiary 2,437 2,064 7,064 5,341
--------- --------- --------- ---------
NET INCOME $2,351 $2,049 $6,927 $5,289
--------- --------- --------- ---------
--------- --------- --------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING
Primary 3,197,870 3,098,357 3,165,719 3,089,358
Fully diluted 3,204,790 3,098,357 3,203,938 3,095,764
EARNINGS PER SHARE
Primary $0.74 $0.66 $2.19 $1.71
Fully diluted $0.73 $0.66 $2.16 $1.71
-21-
The condensed changes in the components of Stockholders' Equity for the nine
months ended September 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 5,289
Stock dividend declared on common stock 137 3,283 (3,420)
Shares issued for fractional interest 12
Cash in lieu of fractional shares (12)
Adjustment for unrealized losses, net 5,725
--------- ---------- ---------- ---------
Balance - September 30, 1995 $3,222 $41,075 $38,367 $(4,513)
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
Balance - December 31, 1995 $3,368 $44,514 $37,440 $(4,513)
Net income 6,927
Cash dividend declared on common stock (546)
Stock options exercised 3 65
Adjustment for unrealized losses, net (770)
--------- ---------- ---------- ---------
Balance - September 30, 1996 $3,371 $44,579 $43,051 $(4,513)
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
The condensed Statements of Cash Flows were as follows:
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
--------- ---------
(AMOUNTS IN THOUSANDS)
CASH FLOWS USED BY OPERATING ACTIVITIES
Interest on deposit account $ 18 $ 34
Cash paid to suppliers (166) (118)
--------- ---------
Net cash used by operating activities (148) (84)
--------- ---------
CASH FLOWS APPLIED TO FINANCING ACTIVITIES
Dividends paid to stockholders (546) (12)
Issuance of common stock 68 12
--------- ---------
Net cash applied to financing activities (478) --
--------- ---------
Net decrease in cash (626) (84)
Cash at beginning of period 812 860
--------- ---------
CASH AT END OF PERIOD $186 $776
--------- ---------
--------- ---------
-22-
A reconciliation of net earnings to cash provided by operating activities was as
follows:
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
--------- ---------
(AMOUNTS IN THOUSANDS)
Net income $6,927 $5,289
Items not resulting in cash flow:
Equity in undistributed earnings of (7,064) (5,341)
subsidiary
Increase in income tax benefits receivable (47) (37)
Increase in accrued expenses 36 5
--------- ---------
Net cash flow from operating activities $(148) $(84)
--------- ---------
--------- ---------
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 $2.3 million,
net of amortization, at September 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 September 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 September 30, 1995, the Bank had achieved a tier 1 capital to total assets
ratio of 5.9%, which led to the termination of the Memorandum by the FDIC and
the Connecticut Banking Commissioner. At September 30, 1996, this ratio
stood at 6.7%. 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 September 30, 1996:
RISKED-BASED
----------------------
LEVERAGE RATIO TIER 1 TOTAL
----------------- -------- --------
DS Bancor 6.7% 11.29% 12.27%
Derby Savings Bank 6.7% 11.22% 12.21%
-23-
SELECTED FINANCIAL AND OTHER DATA
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE QUARTER FOR THE NINE
MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ ---------------------
1996 1995 1996 1995
---------- ------------ ----------- --------
OPERATING DATA: (UNAUDITED)
Interest income $22,881 $22,059 $67,638 $63,919
Interest expense 12,752 13,486 38,684 37,785
---------- ------------ ----------- --------
Net interest income 10,129 8,573 28,954 26,134
Provision for credit losses 1,250 625 2,950 1,825
---------- ------------ ----------- --------
Net interest income after provision for credit losses 8,879 7,948 26,004 24,309
Non-interest income, net 844 944 2,634 2,349
Non-interest expense 5,887 5,414 17,262 17,788
---------- ------------ ----------- --------
Income before income taxes 3,836 3,478 11,376 8,870
Provision for income taxes 1,485 1,429 4,449 3,581
---------- ------------ ----------- --------
NET INCOME $2,351 $2,049 $6,927 $5,289
---------- ------------ ----------- --------
---------- ------------ ----------- --------
PER SHARE
Primary earnings $0.74 $0.66 $2.19 $1.71
Fully diluted earnings $0.73 $0.66 $2.16 $1.71
Dividend $0.06 -- $0.18 --
STATISTICAL DATA:
Net interest rate spread (a) 2.97% 2.55% 2.85% 2.69%
Net yield on average interest-earning assets (a) 3.33% 2.87% 3.19% 2.98%
Return on average assets (a) 0.75% 0.67% 0.74% 0.59%
Return on average stockholders' equity (a) 10.60% 10.49% 10.96% 9.40%
Average stockholders' equity to average assets 6.87% 6.38% 6.78% 6.23%
Dividend payout ratio 7.74% -- 7.88% --
MARKET PRICES OF COMMON STOCK:
High $38.50 $29.13 $38.50 $29.13
Low $32.32 $25.25 $24.75 $21.75
At September 30, $37.00 $26.50 $37.00 $26.50
FINANCIAL CONDITION AND OTHER DATA AT: SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
Total assets $1,259,423 $1,254,483
Loan portfolio, net 877,284 875,339
Securities portfolio 328,232 320,188
Deposits 1,029,989 1,058,145
Federal Home Loan Bank of Boston advances 128,185 96,876
Stockholders' equity 86,488 80,809
Book value per share 28.53 26.68
Leverage ratio 6.71% 6.19%
Tier 1 capital to risk-weighted assets 11.29% 10.94%
Total capital to risk-weighted assets 12.27% 11.91%
Non-performing loans 15,864 13,768
Foreclosed assets 4,515 3,712
------------- ------------
Total non-performing assets 20,379 17,480
Restructured loans 5,037 4,385
Allowance for credit losses 7,369 (b) 6,906 (b)
Allowance as a percentage of non-performing loans 46.5% 50.2%
- --------------------------------------------------
(a) ANNUALIZED.
(b) INCLUDES $1.1 MILLION AND $1.2 MILLION, ALLOCATED TO LOANS ACQUIRED AS PART
OF THE BURRITT TRANSACTION, FOR SEPTEMBER 30, 1996 AND DECEMBER 31, 1995,
RESPECTIVELY.
- 24 -
PROPOSED ACQUISITION OF DS BANCOR BY WEBSTER FINANCIAL CORPORATION
On October 8, 1996, the Company entered into an Agreement and Plan of Merger
("Agreement") with Webster Financial Corporation ("Webster") and Webster
Acquisition Corp. Pursuant to the Agreement, Webster has agreed to acquire the
Company in a tax free stock-for-stock exchange. Under the Agreement, Company
stockholders will receive between 1.117 and 1.365 shares of Webster common
stock for each share of Company common stock, subject to a possible further
adjustment as described below. The exchange ratio will be determined by
dividing $43.00 by the average closing price of Webster common stock for a
specified 15-day period preceding the closing date subject to a collar
adjustment.
If Webster's average closing price is between $31.50 and $38.50, the exchange
ratio will be adjusted so that the Company stockholders receive Webster common
stock with a value equal to $43.00. If Webster's average closing price is
greater than $38.50, the exchange ratio will be fixed at 1.117 shares of Webster
for each share of Company stock. If Webster's average closing price is below
$31.50 but more than or equal to $28.00, the exchange ratio will be fixed at
1.365. If Webster's closing price is below $28.00, the Company can terminate
the transaction unless Webster increases the exchange ratio to a level that
provides Company stockholders with a value equal to that received at a $28.00
Webster average closing price.
The transaction must be approved by stockholders of Webster and the Company
and by federal and state bank regulatory authorities, and is subject to various
customary closing conditions. The Agreement has been approved by the board of
directors of both Webster and the Company. The Company has granted Webster an
option, exercisable under certain conditions, to purchase 564,296 newly issued
shares of Company common stock at a price per share equal to $36.50. The
Agreement contains mutual provisions for expense reimbursement and a breakup
fee under certain conditions. Subject to receipt of the requisite stockholder
and regulatory approvals and satisfaction of the other closing conditions, it
is expected that the transaction will close sometime in the first quarter of
1997.
COMPARISON OF RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
GENERAL. Net income for the third quarter ended September 30, 1996 totaled
$2,351,000 or $.73 per share (fully diluted) compared to $2,049,000 or $.66 per
share (fully diluted) for the comparable period in 1995. Net income for the
three months ended September 30, 1996 represented an annualized return on
average assets of .75% compared to .67% for the corresponding period in 1995.
Income before taxes of $3.8 million for the current period represents a
$358,000 or 10.3% increase compared to income before taxes for the prior year
period. This increase essentially resulted from an increase in net interest
income which was partially mitigated by higher provisions for credit losses,
increased non-interest expense and a decline in non-interest income for the
three months ended September 30, 1996 compared to the prior year period.
INTEREST INCOME. Interest and fee income from loans and interest from
investment securities increased $822,000 or 3.7% during the three months ended
September 30, 1996 compared to the corresponding period in 1995. The increase
in interest income reflects the Company's strategy of placing greater emphasis
on variable rate loan products as opposed to investment securities. The volume
of average loans outstanding increased by $46.8 million while the volume of
average investment securities and Fed Funds declined by $26.5 million during
the quarter ended September 30, 1996 compared to the quarter ended
September 30, 1995.
-25-
The average yield on interest-earning assets increased 14 basis points
(100 basis points equals one percent) from 7.39% during the third quarter of
1995 to 7.53% during the current quarter. Total interest-earning assets
increased $20.3 million to $1,215.0 million in the third quarter 1996 compared
to $1,194.7 million in the third quarter 1995. The yield on loans increased
slightly during this period from 7.89% to 7.90%. The combination of slightly
higher yields and greater average loans outstanding produced $929,000 in
additional interest income in the third quarter of 1996 compared to the same
period in 1995. The yield on taxable securities increased by 38 basis points
from 6.17% to 6.55% between the same periods, while the average balance
outstanding decreased by $15.4 million. The combined effect of the increase in
yield and decrease in average outstanding balance resulted in a $59,000
increase in interest income in the investment securities portfolio between the
two periods. A decline in Fed Funds of $11.1 million and a decline in yield of
75 basis points resulted in a reduction of interest income of $159,000 for
those categories in the 1996 period compared to the 1995 period.
INTEREST EXPENSE. Interest expense decreased by $734,000 or 5.4% during
the three months ended September 30, 1996 compared to the corresponding period
in 1995. The cost of deposits decreased 35 basis points between the third
quarters of 1995 and 1996, falling from 4.76% to 4.41%. 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. At September 30, 1995 the rate paid for No Maturity
CD's was 6.25%. At September 30, 1996 the rate paid on No Maturity CD's had
been lowered 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 $172.9 million
at September 30, 1995 to $80.8 million at September 30, 1996. While No Maturity
CD's declined by $92.1 million during the twelve months prior to September 30,
1996, a significant portion of those funds were reinvested in term certificates
of deposit.
Average deposits outstanding, including interest credited, decreased by
$22.3 million between the three months ended September 30, 1996 and
September 30, 1995. The cost of deposits fell during the comparison periods
by $1.1 million. Borrowed funds, on average, increased in the third quarter
1996 relative to the third quarter 1995 to offset the deposit outflow
experienced between the periods. Average borrowed funds increased by $26.1
million to $130.4 million at an average cost of 5.67% for the three months
ended September 30, 1996 compared to $104.3 million at an average cost of 5.60%
for the September 30, 1995 period. The increase in average borrowings
outstanding and higher costs between the two periods resulted in an increase
in interest expense of $388,000 for the 1996 period compared to the prior year
period.
NET INTEREST INCOME. Net interest income of $10.1 million for the quarter
ended September 30, 1996 represented a $1.6 million or 18.2% 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 of interest-bearing
liabilities resulted in a substantial widening of the net interest rate margin
between the comparison periods from 2.87% for the third quarter 1995 to 3.33%
for the third quarter 1996. The net interest rate spread increased by 42 basis
points between the two periods rising from 2.55% to 2.97%.
-26-
The following table summarizes the Bank's net interest income (including
dividends) and net yield on average interest-earning assets. Non-accruing
loans, for the purpose of this analysis, are included in average loans
outstanding during the periods indicated. For the purpose of these
computations, daily average amounts were used to compute average balances.
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1996 1995
---------------------------- ------------------------------------
(AMOUNTS IN THOUSANDS)
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- -------- ------------ ----------- --------
INTEREST-EARNING ASSETS
Loans $ 888,371 $17,535 7.90% $ 841,579 $16,606 7.89%
Taxable securities 316,390 5,181 6.55 331,803 5,122 6.17
Federal funds 405 5 4.94 11,522 164 5.69
FHLBB stock 9,793 160 6.54 9,793 167 6.82
---------- -------- ----------- ----------
TOTAL INTEREST-EARNING $1,214,959 22,881 7.53 $1,194,697 22,059 7.39
---------- -------- -------- ------------ ----------- --------
---------- ------------
INTEREST-BEARING
Deposits $ 988,257 10,903 4.41 $1,010,515 12,025 4.76
Borrowed funds 130,375 1,849 5.67 104,296 1,461 5.60
---------- -------- ----------- ----------
TOTAL INTEREST-BEARING LIABILITIES $1,118,632 12,752 4.56 $1,114,811 13,486 4.84
---------- -------- -------- ------------ ----------- --------
---------- ------------
NET INTEREST INCOME $10,129 $ 8,573
-------- -----------
-------- -----------
NET INTEREST RATE SPREAD 2.97% 2.55%
-------- --------
-------- --------
NET YIELD ON AVERAGE INTEREST-EARNING ASSETS 3.33% 2.87%
-------- --------
-------- --------
RATE/VOLUME ANALYSIS. The following table sets forth the changes in interest
earned and interest paid resulting from changes in volume and changes in rates.
Changes in interest earned or paid due to both rate and volume have been
allocated in proportion to the relationship of the absolute dollar amounts of
the changes in each. There were no material out of period items or adjustments
included in interest income or interest expense during the periods indicated.
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
1996 COMPARED TO 1995
-------------------------------------------
VOLUME RATE NET
----------- --------------- -----------
(AMOUNTS IN THOUSANDS)
INTEREST EARNED ON:
Loans $924 $ 5 $ 929
Taxable securities (244) 303 59
Federal funds (140) (19) (159)
FHLBB stock --- (7) (7)
----------- ----------------- -----------
INTEREST INCOME 540 282 822
----------- ----------------- -----------
INTEREST PAID ON:
Deposits (260) (862) (1,122)
Borrowed funds 370 18 388
----------- ----------------- -----------
INTEREST EXPENSE 110 (844) (734)
----------- ----------------- -----------
NET INTEREST INCOME $430 $1,126 $1,556
----------- ----------------- -----------
----------- ----------------- -----------
-27-
PROVISION FOR CREDIT LOSSES. The Bank provided $1.3 million for credit
losses for the third quarter of 1996 compared to $625,000 for the
thirdquarter 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 end of the third quarter of 1996, the Company's allowance for credit
losses totaled $7.4 million, representing 46.5% of non-performing loans
(non-performing loans includes loans past due 90 days or more and
non-accruing loans). The allowance for credit losses includes $830,000
allocated to the loans acquired in the Burritt transaction (see notes to
Consolidated financial statements).
NON-INTEREST INCOME. Non-interest income decreased $100,000 or 10.6% from
$944,000 during the third quarter of 1995 to $844,000 during the third quarter
of 1996. A reduction in net realized security gains between the two periods of
$155,000 primarily accounted for the decline in non-interest income. Net
realized securities gains totaled $157,000 during the third quarter of 1996,
compared to $312,000 for the 1995 period. Service charges and other income,
comprised principally of loan service and deposit related fees, increased by
$56,000 or 8.9% from $633,000 for the third quarter of 1995 to $689,000 for the
current quarter.
NON-INTEREST EXPENSE. Non-interest expense increased $473,000 or 8.7% from
$5.4 million during the third quarter of 1995 to $5.9 million during the
corresponding period in 1996. Salaries and employee benefits, the largest
component of the Company's cost of operations, totaled $3.0 million, increasing
$431,000 or 17.0% in the 1996 period compared to the third 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 $318,000 for the current quarter
compared to $247,000 for the year earlier period.
For the current quarter, foreclosed asset expense totaled $207,000 compared
to $427,000 for the comparable year earlier period. Included in this expense is
the provision for estimated losses on foreclosed assets, which amounted to
$100,000 in the current quarter compared to $300,000 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, decreased by 16 basis points from (1.46%)
during the quarter ended September 30, 1995 to (1.62%) during the current 1996
period. Non-interest income, as a percentage of average assets (annualized),
decreased from .31% to .27% for the quarters ended September 30, 1995 and 1996.
Non-interest expense, as a percentage of average assets (annualized), increased
12 basis points from 1.77% during the quarter ended September 30, 1995 to 1.89%
during the current quarter.
NET NON-INTEREST INCOME/EXPENSE ANALYSIS
AS A PERCENTAGE OF AVERAGE ASSETS
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------
1996 1995
----------- ------------
NON-INTEREST INCOME .27 .31
----------- ------------
NON-INTEREST EXPENSE
Foreclosed asset .07 .14
FDIC insurance premium --- .01
Other 1.82 1.62
----------- ------------
TOTAL NON-INTEREST EXPENSE 1.89 1.77
----------- ------------
NET NON-INTEREST MARGIN (1.62) (1.46)
----------- ------------
----------- ------------
-28-
PROVISION FOR INCOME TAXES. The provision for income taxes during the
current quarter totaled $1.5 million reflecting a 38.7% effective income tax
rate, compared to $1.4 million or an effective income tax rate of 41.1% for the
comparable 1995 period.
COMPARISON OF RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
GENERAL. Net income for the nine months ended September 30, 1996 totaled
$6,927,000 or $2.16 per share (fully diluted) compared to $5,289,000 or $1.71
per share (fully diluted) for the comparable period in 1995. Net income for the
nine months ended September 30, 1996 represented an annualized return on average
assets of .74% compared to .59% for the corresponding period in 1995.
Income before taxes of $11.4 million for the current period represents a
$2.5 million or 28.3% increase compared to income before taxes for the prior
nine month period. This increase essentially resulted from a $2.8 million
increase in net interest income, a decline in non-interest expense of
$526,000 million, and an increase in non-interest income of $285,000 for the
current period compared to the year earlier period. These positive trends
were partially offset however by an increase in the provision for credit
losses of $1.1 million in the first nine months of 1996 compared to the same
period in 1995.
INTEREST INCOME. Interest and fee income from loans and interest from
investment securities increased $3.7 million or 5.8% during the nine months
ended September 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 nine months ended September 30, 1996 compared to the nine
months ended September 30, 1995.
The average yield on interest-earning assets increased 18 basis points (100
basis points equals one percent) from 7.28% during the first nine months of 1995
to 7.46% during the current period. The yield on the loan portfolio increased
by 24 basis points between the comparison periods rising from 7.63% for the
first nine months of 1995 to 7.87% 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 $39.1 million to $1,209.7 million in the nine
months ended September 30, 1996 compared to $1,170.6 million in the nine months
ended September 30, 1995. Average loans outstanding increased $51.7 million
between the two periods. The combination of higher yields and greater average
loans outstanding produced $4.6 million in additional loan interest income in
the first nine months of 1996 compared to the same period in 1995. In contrast,
the yield on taxable securities declined by 9 basis points from 6.41% to 6.32%
between the same periods and the average balance outstanding decreased by $6.3
million, the net effect of which resulted in a $493,000 decline in interest
income from the securities portfolio between the two periods. Total interest
income rose $3.7million between the nine months ended September 30, 1995 and
September 30, 1996 from $63.9 million to $67.6 million, respectively.
INTEREST EXPENSE. Interest expense increased $899,000 or 2.4% to $38.7
million during the nine months ended September 30, 1996 compared to $37.8
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 $19.1 million or
1.7% to $1,117.7 million for the nine months ended September 30, 1996 compared
to $1,098.7 million for the nine months ended September 30, 1995. The growth in
interest-bearing liabilities was attributable to a $4.5 million increase in
deposits and a $14.5 million increase in borrowed funds. The cost of deposits
increased 1 basis point from 4.49% for the period ended September 30, 1995 to
4.50% for the period ended September 30, 1996. The cost of borrowings increased
by 9 basis points between the same periods from 5.63% to 5.72%.
NET INTEREST INCOME. Net interest income of $29.0 million for the nine
months ended September 30, 1996 represented a $2.8 million or 10.8% increase
over the comparable prior year period. The net interest rate spread increased
16 basis points, from 2.69% for the nine months ended September 30, 1995 to
2.85% for the comparable 1996 period. The rate of growth of interest-earning
assets was double that of interest-bearing liabilities, allowing the net yield
on interest-earning assets to increase 21 basis points from 2.98% for the nine
month period ended September 30, 1995 to 3.19% for the September 30, 1996
period.
-29-
The following table summarizes the Bank's net interest income (including
dividends) and net yield on average interest-earning assets. Non-accruing
loans, for the purpose of this analysis, are included in average loans
outstanding during the periods indicated. For the purpose of these
computations, daily average amounts were used to compute average balances.
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------
1996 1995
-------------------------------- ----------------------------------
(AMOUNTS IN THOUSANDS)
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- ---------- ---------- ---------- ---------- ----------
INTEREST-EARNING ASSETS
Loans $ 889,215 $ 52,463 7.87% 837,501 $ 47,911 7.63%
Taxable securities 307,120 14,569 6.32 313,392 15,062 6.41
Federal funds 3,553 137 5.14 10,383 447 5.74
FHLBB stock 9,793 469 6.39 9,351 499 7.12
---------- ---------- ---------- ----------
TOTAL INTEREST-EARNING ASSETS $1,209.681 67,638 7.46 $1,170,627 63,919 7.28
---------- ---------- ---------- ---------- ---------- ----------
---------- ----------
INTEREST-BEARING LIABILITIES
Deposits $1,011,977 34,149 4.50 $1,007,441 33,933 4.49
Borrowed funds 105,767 4,535 5.72 91,228 3,852 5.63
---------- ---------- ---------- ----------
TOTAL INTEREST-BEARING LIABILITIES $1,117,744 38,684 4.61 $1,098,669 37,785 4.59
---------- ---------- ---------- ---------- ---------- ----------
---------- ----------
NET INTEREST INCOME $ 28,954 $ 26,134
---------- ----------
---------- ----------
NET INTEREST RATE SPREAD 2.85% 2.69%
---------- ----------
---------- ----------
NET YIELD ON AVERAGE INTEREST-EARNING ASSETS 3.19% 12.98%
---------- ----------
---------- ----------
RATE/VOLUME ANALYSIS. The following table sets forth the changes in
interest earned and interest paid resulting from changes in volume and changes
in rates. Changes in interest earned or paid due to both rate and volume have
been allocated in proportion to the relationship of the absolute dollar amounts
of the changes in each. There were no material out of period items or
adjustments included in interest income or interest expense during the periods
indicated.
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------
1996 COMPARED TO 1995
--------------------------------------------
VOLUME RATE NET
------------ ------------ ------------
(AMOUNTS IN THOUSANDS)
INTEREST EARNED ON:
Loans $3,020 $1,532 $4,552
Taxable securities (299) (194) (493)
Federal funds (268) (42) (310)
FHLBB stock 23 (53) (30)
------------ ------------ ------------
INTEREST INCOME 2,476 1,243 3,719
------------ ------------ ------------
INTEREST PAID ON:
Deposits 153 63 216
Borrowed funds 623 60 683
------------ ------------ ------------
INTEREST EXPENSE 776 123 899
------------ ------------ ------------
NET INTEREST INCOME $1,700 $1,120 $2,820
------------ ------------ ------------
------------ ------------ ------------
-30-
PROVISION FOR CREDIT LOSSES. The Bank provided $3.0 million for credit
losses for the first nine months of 1996 compared to $1.8 million for the
first nine 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 September 30, 1996, the Company's allowance for credit losses totaled
$7.4 million, representing 46.5% of non-performing loans (non-performing
loans includes loans past due 90 days or more and non-accruing loans). The
allowance for credit losses includes $830,000 allocated to the loans acquired
in the Burritt transaction (see notes to Consolidated financial statements).
NON-INTEREST INCOME. Non-interest income increased $285,000 or 12.1% from
$2.3 million during the first nine months of 1995 to $2.6 million during the
first nine months of 1996. During the first nine months of 1996, net realized
securities gains totaled $692,000 compared to a net realized loss of $1.0
million for the 1995 period. Service charges and other income, comprised
principally of loan service and deposit related fees, increased $298,000 or
15.8% from $1.9 million for the first nine months of 1995 to $2.2 million for
the current period.
NON-INTEREST EXPENSE. Non-interest expense decreased $526,000 or 3.0% from
$17.8 million during the nine months ended September 30, 1995 to $17.3 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 nine 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 nine months ended September 30, 1996 dropped to
$1,750.
Salaries and employee benefits, the largest component of the Company's cost
of operations, totaled $8.4 million, increasing $571,000 or 7.3% in the 1996
period compared to the first nine months of 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 $1.1 million for the current period compared to $582,000
for the year earlier period.
For the current period, foreclosed asset expense totaled $1.1 million
compared to $1.4 million for the comparable year earlier period. Included in
this expense is the provision for estimated losses on foreclosed assets, which
amounted to $525,000 for the nine months ended September 30, 1996 compared to
$1.2 million 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 14 basis points from
(1.71%) during the nine months ended September 30, 1995 to (1.57%) during the
current 1996 period. Non-interest income, as a percentage of average assets
(annualized), increased from .26% to .28% for the nine months ended September
30, 1995 and 1996, respectively. Non-interest expense, as a percentage of
average assets (annualized), decreased 12 basis points from 1.97% during the
nine months ended September 30, 1995 to 1.85% during the current period.
NET NON-INTEREST INCOME/EXPENSE ANALYSIS
AS A PERCENTAGE OF AVERAGE ASSETS
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
1996 1995
---------- ----------
NON-INTEREST INCOME .28 .26
---------- ----------
NON-INTEREST EXPENSE
Foreclosed asset .12 .15
FDIC insurance premium --- .15
Other 1.73 1.67
---------- ----------
TOTAL NON-INTEREST EXPENSE 1.85 1.97
---------- ----------
NET NON-INTEREST MARGIN (1.57) (1.71)
---------- ----------
---------- ----------
-31-
PROVISION FOR INCOME TAXES. The provision for income taxes during the nine
months ended September 30, 1996 totaled $4.4 million reflecting a 39.1%
effective income tax rate, compared to $3.6 million or an effective income tax
rate of 40.4% for the comparable 1995 period.
FINANCIAL CONDITION
The Company's assets totaled $1,259.4 million at September 30, 1996,
representing a $4.9 million or .4% 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 $731.6 million, representing 58.2% of total assets at September
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
declined to $675.3 million or 76.3% of the Bank's total loan portfolio at
September 30, 1996 compared to $691.6 million, representing 78.4% of the
total loan portfolio, at year end 1995. The Bank also had $712,000 in
residential loans classified as held for sale at September 30, 1996 compared
to $2.0 million at December 31, 1995. Mortgage loans closed during the first
nine months of 1996 totaled $57.4 million compared to $30.0 million closed
during the first nine 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 $67.4 million of these
loans during the first nine months of 1996 compared to $63.8 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.
Multi-family housing loans totaled $13.0 million or 1.5% of the total
loan portfolio at September 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 $37.1 million or 4.2% of the total loan portfolio at September
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 $6.2
million or 0.7% of total loans at September 30, 1996 compared to $3.5 million
or .4% of total loans at year end 1995. Unadvanced construction commitments
approximated $1.6 million at September 30, 1996 and $2.1 million at December
31, 1995.
The Company's investment in consumer loans totaled $129.8 million,
representing 14.7% of total loans at September 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 $164.6
million, with $88.0 million in use at September 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.
During 1995, the Company's automobile loan portfolio increased by $15.6
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 $1.1 million of
this portfolio, net of recoveries during the third quarter of 1996. At
September 30, 1996, $182,000 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 $23.2 million at September 30, 1996, reflecting a $4.2 million or
22.1% increase from the $19.0 million invested at year end 1995. At
September 30, 1996, $6.7 million of this portfolio was invested in loans for
the development of real estate and $16.5 million was invested in loans for
various business needs. Unadvanced real estate development commitments
totaled approximately $6.0 million at September 30, 1996 and $1.6 million at
December 31, 1995.
-32-
NON-PERFORMING ASSETS. At September 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
$20.4 million, representing 1.6% of total assets, compared to $17.5 million
of non-performing assets, or 1.4% of total assets, at year end 1995. At
September 30, 1996, foreclosed assets totaled $4.5 million, representing .4%
of total assets, compared to $3.7 million or .3% of total assets at year end
1995.
The following table sets forth non-accrual loans and loans past due
for 90 days or more, including loans in foreclosure ("non-performing loans"),
and the allowance for credit losses at the dates indicated:
September 30, 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 $ 10,453 1.5% $ 7,251 1.0%
Commercial 1,412 3.8 1,495 4.8
Multi-family 820 6.3 2,354 21.1
--------- ---------
TOTAL MORTGAGE 12,685 1.7 $4,294 33.9% 11,100 1.5 $4,183 37.7%
--------- ---------
CONSUMER
HELOC 396 0.5 978 1.2
All other 1,451 3.5 480 1.0
--------- ---------
TOTAL CONSUMER 1,847 1.4 1,963 106.3 1,458 1.2 1,751 120.1
--------- ---------
COMMERCIAL
Real estate
development 306 4.6 314 8.7
All other 1,026 6.2 896 5.8
--------- ---------
TOTAL
COMMERCIAL 1,332 5.7 1,112 83.5 1,210 6.4 972 80.3
--------- -------- --------- --------
TOTAL $15,864 1.8 $7,369 46.5 $13,768 1.6 $6,906 50.2
--------- -------- --------- --------
--------- -------- --------- --------
-33-
The following table summarizes the Bank's non-performing loans and
foreclosed assets ("non-performing assets") and restructured loans:
SEPTEMBER 30, DECEMBER 31,
------------------- -------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
NON-ACCRUAL LOANS:
Mortgage $12,232 $11,653 $10,658 $11,000 $12,302 $18,387 $18,984
Consumer 1,847 1,414 1,421 1,280 1,789 2,082 1,616
Commercial 1,332 1,122 1,210 1,576 3,215 3,901 8,108
------- ------- ------- ------- ------- ------- -------
TOTAL 15,411 14,189 13,289 13,856 17,306 24,370 28,708
------- ------- ------- ------- ------- ------- -------
ACCRUING LOANS
PAST DUE 90 DAYS:
Mortgage 453 228 442 1,186 2,317 3,006 4,096
Consumer --- 86 37 --- 249 1 151
------- ------- ------- ------- ------- ------- -------
TOTAL 453 314 479 1,186 2,566 3,007 4,247
------- ------- ------- ------- ------- ------- -------
TOTAL NON-
PERFORMING LOANS 15,864 14,503 13,768 15,042 19,872 27,377 32,955
------- ------- ------- ------- ------- ------- -------
FORECLOSED ASSETS 4,517 5,355 3,942 6,195 9,379 10,456 7,305
Valuation
allowance (2) (277) (230) (439) (1,040) (438) (412)
------- ------- ------- ------- ------- ------- -------
TOTAL, NET 4,515 5,078 3,712 5,756 8,339 10,018 6,893
------- ------- ------- ------- ------- ------- -------
TOTAL NON-
PERFORMING ASSETS $20,379 $19,581 $17,480 $20,798 $28,211 $37,395 $39,848
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
RESTRUCTURED LOANS $ 5,037 $ 3,998 $ 3,999 $ 3,826 $ 1,965 $ 8,262 $ 6,985
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
As detailed in the previous table, the level of non-performing loans
increased by $2.1 million from $13.8 million at year end 1995 to $15.9
million at September 30, 1996. At September 30, 1996, the Bank had $4.5
million in foreclosed real estate assets, consisting of 37 properties,
compared to $3.7 million, consisting of 27 properties at year end 1995.
During the first nine months of 1996, the Bank reclassified $4.3 million in
real estate loans to foreclosed assets. In addition, at September 30, 1996
the Bank had $182,000 in automobile loans, consisting of 48 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 nine months of 1996, the Bank
provided $525,000 to this allowance compared to $1.2 million for the comparable
1995 period. During the current period, the Bank charged $753,000 in specific
write-downs against this allowance compared to $1.4 million during the
comparable year earlier period. At September 30, 1996, the allowance for
estimated losses on foreclosed assets totaled $2,000 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 $8.5 million at
-34-
September 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
The following table summarizes the Bank's accruing loans past due 60 days:
SEPTEMBER 30, DECEMBER 31,
--------------------- -------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ----- ----
(AMOUNTS IN THOUSANDS)
LOANS PAST DUE
60 DAYS:
Mortgage $6,909 $5,391 $8,111 $5,014 $7,369 $8,829 $9,072
Consumer 1,588 506 994 1,015 651 815 525
Commercial 85 79 203 62 --- 95 353
------ ------ ------ ------ ------ ------ ------
TOTAL $8,582 $5,976 $9,308 $6,091 $8,020 $9,739 $9,950
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
The following table summarizes the Bank's accruing loans past due 60
days: The foundation of the Bank's program to reduce the level of
non-performing assets is the loan collection and workout process. In
addition to the personnel assigned to the collection/workout area, the Bank
has an officer responsible for the management and sale of foreclosed assets.
This crucial function of the Bank is supported by a standing committee of the
Board of Directors, comprised of individuals experienced in the areas of real
estate sales and development, which was established to assist and give advice
on the management and disposition of troubled assets. To the extent that
the Bank ultimately takes title to troubled assets, the Bank has established
several programs to facilitate the timely disposition of foreclosed assets.
The foundation of these programs is to establish fair and realistic value for
foreclosed assets, taking into consideration the potential opportunity cost
associated with lengthy marketing time. The Bank augments this pricing
policy through preferred Bank financing, including special first-time
home-buyer programs. To further expand sales efforts and reduce marketing
time, the Bank also maintains consistent marketing programs and premium
realtor commissions. The employment of these programs has enabled the Bank
to sell and close on 30 properties for an aggregate consideration of $2.5
million in first nine months of 1996. During the comparable 1995 period, the
Bank sold and closed on 48 properties for an aggregate consideration of $2.8
million. In order to maintain the quality of the loan portfolio, as well
as to provide for potential losses that are inherent in the lending process,
the Bank controls its lending activities through adherence to loan policies
adopted by the Board of Directors and stringent underwriting standards. To
provide for possible losses within the loan portfolio, the Company maintains
an allowance for credit losses. The allowance for credit losses is
maintained through provisions charged to 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
$3.0 million to the allowance for credit losses during the nine months ended
September 30, 1996 compared to $1.8 million for the comparable 1995 period.
During the nine months ended September 30, 1996, the Bank wrote off $2.5
million (net of recoveries). At September 30, 1996 the allowance for credit
losses totaled $7.4 million, which includes $830,000 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
46.5% of non-performing loans at September 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 September 30, 1996, in addition to
non-performing assets, the Bank had $5.0 million in loans which have been
restructured.
INVESTMENT SECURITIES. The Bank's securities portfolio was $328.2 million
or 26.1% of total assets at September 30, 1996, up 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 September
30, 1996, the Bank had securities totaling $71.3 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 September 30, 1996 totaled
$255.1 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 September 30, 1996, the Bank had unrealized losses, net of tax
effect, of $.3 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 $1.8
million at September 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 September 30, 1996, the trading portfolio had
net unrealized holding gains of $73,000, compared to $23,000 at December 31,
1995.
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 nine months of 1996, deposits decreased by $28.2 million or
2.7%, after interest credited of $34.2 million, from $1,058.1 million, funding
84.3% of total assets at year end 1995, to $1,030.0 million, funding 81.8% of
total assets at September 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 $80.8 million at September
30, 1996. While No Maturity CD's declined by $95.8 million during the first
nine months of 1996, a significant portion of those funds were reinvested in
term certificates of deposit. Term certificates of deposit increased by $74.5
million from $579.8 million at December 31, 1995 to $654.3 million at September
30, 1996.
The Bank also utilizes the FHLBB as an alternative source of funds. At
September 30, 1996, FHLBB advances totaled $128.2 million, funding 10.2% 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.
-36-
Amortization, prepayments and the sale of loans into the secondary market
supplied the Bank with an additional $188.7 million in investable funds during
the first nine 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 $15.7 million in loans during the first nine
months of 1996. The Bank has retained servicing on all loans that have been
sold and was servicing $148.4 million of mortgage loans for others at September
30, 1996. At September 30, 1996 the Bank had $712,000 in loans classified as
held-for-sale 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 September 30, 1996 the Bank had FHLBB borrowings of
$128.2 million.
As of September 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 $257.4 million. The Company's short-term
liquid assets represented 22.3% 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 September 30, 1996 increased to
$86.5 million from $80.8 million at December 31, 1995. The $5.7 million or
7.0% increase in Stockholders' Equity was primarily attributable to net income
of $6.9 million for the nine months ended September 30, 1996, partially offset
by a change in the unrealized loss on securities available-for-sale, net of tax
effect, of $770,000. The Company paid $546,000 in dividends to stockholders in
the first nine months of 1996.
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
September 30, 1996, the core deposit intangible totaled $2.3 million. This
amount, in addition to approximately $175,000 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 11.3% at September 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 11.2% at September 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 September 30, 1996, the
Company had a ratio of tier 1 capital to total assets of 6.7% and the Bank
had a ratio of tier 1 capital to total assets of 6.7%.
-37-
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
September 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.
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SEPTEMBER 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: $196,262 $36,351 $37,866 $19,331 $13,353 $15,932 $1,572 $320,667
--------- --------- --------- --------- --------- --------- --------- --------
Loans:
Fixed-rate mortgages 5,619 5,851 25,143 25,023 57,632 48,893 25,508 193,669
Adjustable-rate mortgages 265,641 216,569 17,335 21,419 1,616 3,123 -- 525,703
Consumer loans 100,035 7,876 9,341 3,628 4,804 2,298 -- 127,982
Commercial loans 21,628 14 41 123 66 16 -- 21,888
--------- --------- --------- --------- --------- --------- --------- --------
Total loans 392,923 230,310 51,860 50,193 64,118 54,330 25,508 869,242
--------- --------- --------- --------- --------- --------- --------- --------
TOTAL INTEREST-SENSITIVE ASSETS $589,185 $266,661 $89,726 $69,524 $77,471 $70,262 $27,080 $1,189,909
--------- --------- --------- --------- --------- --------- --------- --------
--------- --------- --------- --------- --------- --------- --------- --------
LIABILITIES:
Regular & club savings $182,406 $ -- $ -- $ -- $ -- $ -- $ -- $182,406
Certificates of deposit 335,720 188,517 78,710 51,395 -- -- -- 654,342
Money market accounts 109,620 -- -- -- -- -- -- 109,620
NOW accounts 42,940 -- -- -- -- -- -- 42,940
FHLBB advances 114,275 8,290 2,500 3,120 -- -- -- 128,185
--------- --------- --------- --------- --------- --------- --------- --------
TOTAL INTEREST-SENSITIVE LIABILITIES $784,961 $196,807 $81,210 $54,515 $ -- $ -- $ -- $1,117,493
--------- --------- --------- --------- --------- --------- --------- --------
--------- --------- --------- --------- --------- --------- --------- --------
GAP (repricing difference) ($195,776 ) $69,854 $8,516 $15,009 $77,471 $70,262 $27,080
Cumulative GAP ($195,776 )($125,922 )($117,406 )($102,397 ) ($24,926 ) $45,336 $72,416
Cumulative GAP/total assets (15.5 %) (10.0%) (9.3%) (8.1%) (2.0%) 3.6% 5.7%
Ratio of interest-sensitive assets
to interest-sensitive liabilities 75.1% 135.5% 110.5% 127.5% 106.5%
Cumulative ratio of interest-sensitive
assets to interest-sensitive liabilities 87.2% 89.0% 90.8% 97.8% 104.1% 106.5%
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Not Applicable
ITEM 2 CHANGES IN SECURITIES
Not Applicable
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5 OTHER INFORMATION
Not Applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Index
EXHIBIT PAGE OF THIS
NUMBER REPORT
2.1 Agreement and Plan of Merger *
2.2 Option Agreement *
27 Financial Data Schedule 42
* Incorporated by reference from the Company's Form 8-K dated October 11, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DS Bancor, Inc.
---------------------------------
Registrant
Date: November 7, 1996 By: /S/ Harry P. DiAdamo, Jr.
---------------------------------
Harry P. DiAdamo Jr.
President & CEO
Date: November 7, 1996 By: /S/ Alfred T. Santoro
---------------------------------
Alfred T. Santoro
Vice President, Treasurer and CFO
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