U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the quarter ended September 30, 1995
----------------------------
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period from ____________ to ____________
Commission File Number 2-50084
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THE SAFETY FUND CORPORATION
---------------------------
(Exact name of small business issuer as specified in its charter)
Massachusetts 04-2532311
------------------------------------ ----------------------------------
(State or other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization)
470 Main Street, Fitchburg, Massachusetts 01420
-----------------------------------------------
(Address of principal executive offices)
Issuer's telephone number (508) 343-6406
--------------
Former name, former address and former fiscal year, if changed since last
report: Not Applicable
---------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No_______
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At October 27, 1995, the Registrant had 1,075,467 shares of its common stock
outstanding.
PART I - FINANCIAL INFORMATION
Item I - Financial Statements
The financial information required for Part I follows.
- 2 -
THE SAFETY FUND CORPORATION
Consolidated Balance Sheets
================================================================================
September 30, December 31,
1995 1994
-------------------------------
Assets
Cash and due from banks $ 14,926,108 $ 15,223,830
Federal funds sold 12,000,000 3,300,000
Investment securities available for sale
(amortized cost 48,421,052 54,537,725
of $48,092,052 in 1995 and $56,788,854 in
1994)
Investment securities held to maturity (market
value 52,207,998 45,598,639
of $53,183,582 in 1995 and $43,213,908 in
1994)
Loans 156,268,278 141,458,341
Less allowance for possible loan losses (7,381,150) (6,417,407)
-------------------------------
Net loans 148,887,128 135,040,934
-------------------------------
Premises and equipment, net 10,335,903 10,842,035
Accrued interest receivable 2,872,746 2,194,161
Other real estate owned, net 204,400 533,470
Deferred income tax asset, net 1,663,209 2,376,167
Other assets 1,537,255 1,413,796
-------------------------------
Total assets $293,055,799 $271,060,757
===============================
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Interest bearing $187,811,624 $169,893,349
Noninterest bearing 64,743,253 65,581,158
-------------------------------
Total deposits 252,554,877 235,474,507
Securities sold under repurchase agreements 15,321,115 15,637,436
Treasury tax and loan notes 4,241,118 2,342,166
Other liabilities 994,192 954,004
-------------------------------
Total liabilities 273,111,302 254,408,113
-------------------------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $10 par value;
100,000 shares authorized, none issued
Common stock, $5 par value;
3,200,000 shares authorized
1,104,747 issued and outstanding 5,523,735 5,523,735
Surplus 10,326,436 10,326,436
Retained earnings 4,214,509 2,964,004
Net unrealized loss on investment securities
available for sale (120,183) (2,161,531)
-------------------------------
Total stockholders' equity 19,944,497 16,652,644
-------------------------------
Total liabilities and stockholders' equity $293,055,799 $271,060,757
===============================
- 3 -
THE SAFETY FUND CORPORATION
Consolidated Statements of Operations
================================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
Interest income: 1995 1994 1995 1994
------------------------------------------------------
Interest on loans $3,643,107 $2,881,776 $10,723,204 $ 8,716,549
Interest and dividends on investment securities:
Available for sale 789,612 780,170 2,415,522 2,881,283
Held to maturity 920,002 550,116 2,573,321 699,637
Interest on federal funds sold 99,299 73,498 184,123 145,830
------------------------------------------------------
Total interest income 5,452,020 4,285,560 15,896,170 12,443,299
------------------------------------------------------
Interest expense:
Interest on deposits 1,845,679 1,202,342 5,210,391 3,534,400
Interest on borrowed funds 152,277 84,590 452,228 214,892
------------------------------------------------------
Total interest expense 1,997,956 1,286,932 5,662,619 3,749,292
------------------------------------------------------
Net interest income 3,454,064 2,998,628 10,233,551 8,694,007
Provision for possible loan losses (250,000) (525,000) (1,225,000) (1,674,605)
------------------------------------------------------
Net interest income after provision
for possible loan losses 3,204,064 2,473,628 9,008,551 7,019,402
------------------------------------------------------
Noninterest income:
Trust fees 554,403 512,255 1,638,182 1,634,398
Service fees 280,782 266,838 834,014 784,674
Gains (losses) on loans sold, net - 2,565 709 (294,556)
Gains on sales of investment securities
available for sale, net - - 781 75,062
Other 173,668 311,220 493,931 599,217
------------------------------------------------------
Total noninterest income 1,008,853 1,092,878 2,967,617 2,798,795
------------------------------------------------------
Noninterest expense:
Salaries and wages 1,584,745 1,393,632 4,552,972 4,351,344
Employee benefits 364,055 522,782 1,047,867 1,267,825
Occupancy, net 234,708 192,862 714,239 622,319
Equipment 307,821 264,422 903,807 763,566
Professional fees 226,945 304,126 642,040 810,596
Marketing 176,857 125,025 513,213 372,300
FDIC assessments 4,475 133,433 288,080 405,368
Other real estate owned, net 21,699 67,257 63,797 247,065
Directors' fees 58,400 54,500 176,267 198,767
Other 410,518 360,756 1,328,981 1,050,607
------------------------------------------------------
Total noninterest expense 3,390,223 3,418,795 10,231,263 10,089,757
------------------------------------------------------
Income (loss) before income taxes 822,694 147,711 1,744,905 (271,560)
Income tax expense (benefit) 161,800 - 494,400 (103,600)
------------------------------------------------------
Net income (loss) $ 660,894 $ 147,711 $ 1,250,505 $ (167,960)
======================================================
Net income (loss) per common share $.60 $.14 $1.13 $(.16)
Weighted average shares outstanding 1,104,747 1,075,467 1,104,747 1,075,079
- 4 -
THE SAFETY FUND CORPORATION
Consolidated Statements of Stockholders' Equity
================================================================================
Common Retained
Stock Surplus Earnings Other Total
----------------------------------------------------------------
Balance December 31, 1994 $5,523,735 $l0,326,436 $2,964,004 $(2,161,531) $16,652,644
Net income - - 1,250,505 - 1,250,505
Reduction in unrealized loss on
investment securities available
for sale, net of income taxes - - - 2,041,348 2,041,348
---------- ----------- ---------- ----------- -----------
Balance, September 30, 1995 $5,523,735 $10,326,436 $4,214,509 $ (120,183) $19,944,497
========== =========== ========== =========== ===========
- 5 -
THE SAFETY FUND CORPORATION
Consolidated Statements of Cash Flows
================================================================================
Nine Months Ended September 30,
Cash flows provided (used) by operating 1995 1994
activities: -------------- ---------------
Net income (loss) $ 1,250,505 $ (167,960)
Adjustments to reconcile net income
(loss) to net cash
provided (used) by operating activities:
Proceeds from sales of mortgage loans 78,009 12,099,625
Principal reductions on mortgage loans - 4,998,413
held for sale
Origination of mortgage loans held for (77,300) (5,436,828)
sale
Repurchase of mortgage loans previously (253,609) (3,800,580)
sold
(Gains) losses on loans sold, net (709) 294,556
Depreciation and amortization 891,055 850,516
Gains on sales of investment securities (781) (75,062)
available for sale, net
Amortization (accretion) of bond (80,187) 70,069
premiums and discounts, net
Provision for possible losses on loans 1,256,236 1,775,000
and foreclosed properties
Increase in accrued interest receivable (678,585) (208,566)
(Increase) decrease in other assets, net 298,915 642,037
Increase in other liabilities 40,188 219,479
---------------- ---------------
Net cash provided by operating activities 2,723,737 11,260,699
---------------- ---------------
Cash flows provided (used) by investing
activities:
Proceeds from sales of investment 6,632,345 13,108,090
securities available for sale
Proceeds from maturities of investment 2,000,000 1,407,111
securities available for sale
Proceeds from maturities of investment 8,682,578 -
securities held to maturity
Purchase of investment securities held (15,096,875) (36,446,512)
to maturity
(Increase) decrease in federal funds (8,700,000) 4,400,000
sold
(Increase) decrease in loans outstanding (14,817,585) 4,127,335
Purchases of premises and equipment (384,923) (618,830)
---------------- ---------------
Net cash used by investing activities (21,684,460) (14,022,806)
---------------- ---------------
Cash flows provided (used) by financing
activities:
Increase (decrease) in securities sold (316,321) 2,948,923
under repurchase agreements
Increase (decrease) in treasury tax and 1,898,952 (2,054,230)
loan notes
Increase (decrease) in deposits 17,080,370 2,549,562
Proceeds from exercise of stock options - 65,002
---------------- ---------------
Net cash provided by financing activities 18,663,001 3,509,257
---------------- ---------------
Increase (decrease) in cash and due from banks (297,722) 747,150
Cash and due from banks, beginning of year 15,223,830 12,931,329
---------------- ---------------
Cash and due from banks, end of period $ 14,926,108 $ 13,678,479
================ ===============
Supplemental disclosures of cash flow
information:
Cash paid during nine months for:
Interest $ 5,424,981 $ 3,830,100
Income taxes 886,109 27,846
Non-cash transactions:
Transfers from loans to other real 154,400 836,830
estate owned
Transfer of investment securities
available for sale to
investment securities held to maturity - 5,357,472
- 6 -
THE SAFETY FUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
1. The financial information furnished herein reflects all adjustments
which, in the opinion of management, are necessary for a fair
presentation of the financial position and results of operations for
interim periods. All such adjustments consist of normal recurring
accruals.
2. Results of operations for the nine month period ended September 30, 1995,
are not necessarily indicative of the results to be expected for the
entire year.
3. The accompanying consolidated financial statements should be read in
conjunction with the consolidated financial statements included in the
Form 10-KSB for the year ended December 31, 1994.
4. Financial statements for interim periods, by their very nature, require
estimations which may result in greater imprecision than those associated
with annual audited financial statements.
5. Earnings per share are based upon the weighted average number of shares
outstanding during the period.
6. In accordance with the Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes",
the Company has a net deferred tax asset. Deferred income taxes reflect
the net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. As of September 30, 1995, the
Company had established a valuation allowance of approximately $599,000.
7. The "net unrealized loss on investment securities available for sale"
included in the stockholders' equity section of the Company's balance
sheet as of September 30, 1995, consists of two components:
Net unrealized gain on investment securities available
for sale, net of deferred income taxes of $112,077 $ 216,923
Net unrealized loss related to investment securities
transferred from the available for sale portfolio to the
Company's held to maturity portfolio, net of deferred income
taxes of $173,661 (337,106)
--------
$(120,183)
========
8. As of September 30, 1995, the Company had commitments to extend credit of
approximately $29,836,000.
- 7 -
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
For the quarter ended September 30, 1995, the Safety Fund Corporation earned a
net profit of $660,894 or $.60 per share. This represents a 77.8% increase
over the earnings of $371,629 reported during the second quarter of 1995. For
the nine months of 1995, the Company had a profit of $1,250,505 or $1.13 per
share compared with a net loss of $167,960 or $(.16) per share for the first
nine months of 1994.
The Company has now achieved five consecutive profitable quarters and is
continuing its strategy to take actions toward reducing its problem assets.
The primary factor for the year to date increase in earnings over prior year
was an increase in net interest income. Net interest income increased
$1,539,544 as compared to 1994. The Company also saw improvements in gains
(losses) on loans sold, which increased by $295,265, expenses associated with
other real estate owned which declined by $183,268 and a decrease in the
provision for possible loan losses of $449,605. The improvements in those
areas in 1995 were partially offset by an increase in occupancy and equipment
expense of $232,161 and by a $100,000 expense reflected in other expense
related to the theft of checks being transported to the Company's main office
in the first quarter of 1995. After giving effect to these and other factors,
pre-tax income increased $2,016,465 in the nine months of 1995 compared to the
first nine months of 1994.
The Company's capital position remains in full compliance with regulatory
guidelines.
Nine Months of 1995 (9M'95) Operations Compared to
Nine Months of 1994 (9M'94)
The Company had net income of $1,250,505 ($1.13 per share) in 9M'95 compared
to a net loss of $167,960 ($.16 per share) in 9M'94. The following discussion
summarizes the major components of the increase in earnings.
Income from interest on loans was higher during 9M'95 than 9M'94 by $2,006,655
or 23.0%. During the first nine months of 1995, the Company had higher
average loans outstanding and a lower level of nonaccrual loans as compared to
1994. Average loans increased during the period by $13 million, earning an
average rate of 9.5% as compared to 8.5% during 9M'94. The net growth in the
loan portfolio has been accomplished primarily through the origination of
residential mortgage and home equity line products.
- 8 -
Nine Months of 1995 (9M'95) Operations Compared to
Nine Months of 1994 (9M'94) (Cont'd)
Interest income from investment securities available for sale decreased
$465,761 or 16.2% while interest income from securities held to maturity
increased to $2,573,321 from $699,637 during 1994. The change in the
composition of the Company's investment income is the result of the strategic
decision to increase the investment securities held to maturity portfolio and
not replace investment securities maturing or sold from the available for sale
portfolio. In total, interest income from the investment securities
portfolios increased $1,407,923 or 39.3% during the period due mainly to
higher average outstanding investment levels and also to higher rates earned.
Interest expense on deposits was also higher during 9M'95 than 9M'94 by
$1,675,991 or 47.4%. Average interest bearing deposits increased by $18
million during the period, mostly in certificate of deposit products. The
Company's average rate paid on interest bearing deposits increased from 2.9%
in 9M'94 to 3.8% during 9M'95. Interest expense on borrowed funds also
increased by $237,336 due primarily to higher rates and increased issuance of
securities sold under repurchase agreements during the period.
The provision for possible loan losses decreased during 9M'95 as compared to
9M'94 by $449,605 or 26.8%. The amount provided during the period is the
result of applying the Company's allowance methodology and management's
assessment as to the adequacy of the allowance. That assessment takes into
account specific credit reviews, past loan loss experience, current economic
conditions and trends, the volume, growth, and composition of the loan
portfolio and the Company's nonaccrual loan balances and loans contractually
past due 90 days and still accruing interest.
Gains on loans sold were $709 compared to a net loss of $294,556 during 9M'94.
During 9M'94, the Company sold several under-performing loans, including a
bulk sale at a discount. The 1994 loss included a $300,000 first quarter
write-down relating to certain loans which the Company anticipated selling.
Other income decreased $105,286 or 17.6% during the period. During the third
quarter of 1994, the Company received proceeds from the settlement of a
lawsuit in the amount of $134,215.
Salaries, wages and employee benefits decreased during 9M'95 as compared to
9M'94 by $18,330. During 1994, several senior managers left the Company,
resulting in severance related costs totalling $529,949. Also during 1994,
the Company incurred a noncash pension settlement expense of $167,656 relating
to former employees who took lump-sum pension distributions during the third
quarter of 1994. The 1995 net overall increase, excluding the 1994 severance
related expenses, of $679,275 or 13.8% is due to additional staffing related
to the Company's credit administration and loan resolution departments,
together with additional branch personnel.
- 9 -
Nine Months of 1995 (9M'95) Operations Compared to
Nine Months of 1994 (9M'94) (Cont'd)
Occupancy and equipment expenses increased $232,161 or 16.8% during 9M'95 as
compared to 9M'94. The increase was due primarily to the operation of two
additional branches and also the upgrade of certain computer systems software.
Professional fees decreased during 9M'95 as compared to 9M'94 by $168,556 or
20.8%. The decrease was due primarily to reduced legal, consulting and
appraisal expenses associated with troubled assets.
Marketing expenses increased during the period by $140,913 or 37.8%. The
Company initiated several new marketing campaigns during the period.
FDIC assessments decreased during the period by $117,288 or 28.9%. The
Federal Deposit Insurance Corporation reduced its premium on insured deposits
as of June 1, 1995.
Other real estate owned expense decreased $183,268 or 74.2% due primarily to a
decrease in provisions for losses on other real estate owned and the reduced
operating expenses associated with fewer properties.
Other expense increased during 9M'95 as compared to 9M'94 by $278,374 or
26.5%. During the first quarter of 1995, the Company sustained a theft of
customer checks being transported from a branch office to the Company's main
office. The Company accrued $100,000 which represents the amount not
recoverable through insurance claims. In addition, other expense increased
due to additional training, supplies and postage expense. Also, the Company
incurred increased telephone and automated teller machine charges associated
with increased customers and additional branches throughout the 1995 period.
The Company recorded tax expense of $494,400 during 9M'95 as compared to a
benefit of $103,600 during 9M'94. The Company's effective tax rate of 28.3%
during 9M'95 was less than the statutory rate of 42.3% due to two factors.
First, the Company pays a reduced tax because of the Company's investment in
tax-exempt assets and the use of its Massachusetts security corporation, which
is taxed at a preferential state rate. Secondly, the Company reduced the
valuation allowance on its deferred tax asset by $100,000 during the period.
The benefit of 38.2% recorded during 9M'94 was based on an evaluation of the
Company's tax history and status of temporary differences.
Third Quarter, 1995 (3Q'95) Operations Compared to
Third Quarter, 1994 (3Q'94)
The Company had net income of $660,894 ($.60 per share) in 3Q'95 compared to
income of $147,711 ($.14 per share) in 3Q'94. The following discussion
summarizes the major components of the increase in earnings.
- 10 -
Third Quarter, 1995 (3Q'95) Operations Compared to
Third Quarter, 1994 (3Q'94) (Cont'd)
Income from interest on loans was higher during 3Q'95 than 3Q'94 by $761,331
or 26.4%. During the third quarter of 1995, the Company had higher average
loans outstanding and a lower level of nonaccrual loans as compared to the
1994 period. Average loans increased during the period by $20 million,
earning an average rate of 9.3% as compared to 8.5% during 3Q'94. The net
growth in the loan portfolio has been accomplished primarily through the
origination of residential mortgage and home equity line products.
Interest income from investment securities available for sale increased $9,442
or 1.2% while interest income from securities held to maturity increased to
$369,886 or 67.2%. The change in the composition of the Company's investment
income is the result of the strategic decision to increase the investment
securities held to maturity portfolio and not replace investment securities
maturing or sold from the available for sale portfolio. In total, interest
income from the investment securities portfolios increased $379,328 or 28.5%
during the period due mainly to higher average outstanding investment levels
and also to higher rates earned.
Interest expense on deposits was also higher during 3Q'95 than 3Q'94 by
$643,337 or 53.5%. Average interest bearing deposits increased by $25 million
during the period, mostly in certificate of deposit products. The Company's
average rate paid on interest bearing deposits increased from 3.0% in 3Q'94 to
3.9% during 3Q'95. Interest expense on borrowed funds also increased by
$67,687 due primarily to higher rates and increased issuance of securities
sold under repurchase agreements during the period.
The provision for possible loan losses decreased during 3Q'95 as compared to
3Q'94 by $275,000 or 52.4%. The amount provided during the period is the
result of applying the Company's allowance methodology and management's
assessment as to the adequacy of the allowance. That assessment takes into
account specific credit reviews, past loan loss experience, current economic
conditions and trends, the volume, growth, and composition of the loan
portfolio and the Company's nonaccrual loan balances and loans contractually
past due 90 days and still accruing interest.
Other income decreased $137,552 or 44.2% during the period. During the third
quarter of 1994, the Company received proceeds from the settlement of a
lawsuit in the amount of $134,215.
Salaries, wages and employee benefits increased during 3Q'95 as compared to
3Q'94 by $32,386. During 3Q'94, the Company incurred a noncash pension
settlement expense of $167,656 relating to former employees who took lump-sum
pension distributions during the third quarter of 1994. The 3Q'95 net overall
increase, excluding the 1994 pension related expenses, of $200,042 or 11.4% is
due to additional staffing related to the Company's credit administration and
loan resolution departments, together with additional branch personnel.
- 11 -
Third Quarter, 1995 (3Q'95) Operations Compared to
Third Quarter, 1994 (3Q'94) (Cont'd)
Occupancy and equipment expenses increased $85,245 or 18.6% during 3Q'95 as
compared to 3Q'94. The increase was due primarily to the operation of an
additional branch and also the upgrade of certain computer systems software.
Professional fees decreased during 3Q'95 as compared to 3Q'94 by $77,181 or
25.4%. The decrease was due primarily to reduced legal, consulting and
appraisal expenses associated with troubled assets.
Marketing expense increased $51,832 or 41.5% during 3Q'95 as compared to
3Q'94. The Company initiated several new marketing campaigns during the
period.
FDIC assessments decreased during the period by $128,958 or 96.6%. The
Federal Deposit Insurance Corporation reduced its premium on insured deposits
as of June 1, 1995.
Other real estate owned expense decreased $45,558 or 67.7% due primarily to a
decrease in provisions for losses on other real estate owned and the reduced
operating expenses associated with fewer properties.
Other expense increased during 3Q'95 as compared to 3Q'94 by $49,762 or 13.8%
due to additional training, supplies and postage expense. Also, the Company
incurred increased telephone and automated teller machine charges associated
with increased customers and additional branches throughout 3Q'95.
The Company recorded tax expense of $161,800 during 3Q'95 as compared to no
expense or benefit during 3Q'94. The Company's effective tax rate of 19.7%
during 3Q'95 was less than the statutory rate of 42.3% due to two factors.
First, The Company pays a reduced tax because of the Company's investment in
tax-exempt assets and the use of its Massachusetts security corporation, which
is taxed at a preferential state rate. Secondly, the Company reduced the
valuation allowance on its deferred tax asset by $100,000 during the quarter.
The recognition of no benefit or expense during 3Q'94 was based on an
evaluation of the Company's tax history and status of temporary differences.
Asset quality
Nonaccrual loans, troubled debt restructurings, other real estate owned and
loans contractually past due 90 days and still accruing interest decreased
from $5,225,048 at December 31, 1994 to $3,654,801 at September 30, 1995. The
decrease in nonaccrual loans was due primarily to the return to accrual status
of certain loans and also as the result of chargeoffs or liquidations.
Information with respect to nonaccrual and past due loans, other real estate
owned and troubled debt restructurings at September 30, 1995 and December 31,
1994 follows:
- 12 -
Asset quality (Cont'd)
September 30, December 31,
1995 1994
-----------------------------
Nonaccrual loans $2,757,369 $3,606,869
Troubled debt restructurings accruing interest 674,059 979,687
Loans contractually past due 90 days and still 18,973 105,022
accruing interest
Other real estate owned, net 204,400 533,470
-----------------------------
$3,654,801 $5,225,048
=============================
Allowance for possible losses
Activity in the allowance for possible losses for the first nine months of
1995 was as follows:
Other Real
Loans Estate Owned Total
-----------------------------------------
Balance, December 31, 1994 $6,417,407 $ 42,000 $6,459,407
Provision charged to earnings 1,225,000 31,236 1,256,236
Charge-offs (685,322) (73,236) (758,558)
Recoveries 424,065 - 424,065
-----------------------------------------
Balance, September 30, 1995 $7,381,150 $ - $7,381,150
=========================================
Recoveries of $424,065 were primarily from commercial loan relationships which
had been charged-off prior to 1995.
Regulatory matters and capital resources
Following the 1992 examination by the Comptroller of the Currency, the Bank
entered into an informal Memorandum of Understanding. The Memorandum related
to certain aspects of the Bank's operations, including asset quality
monitoring and other administrative matters. During the third quarter of
1995, the Company was subject to a regular safety and soundness examination by
the Office of the Comptroller of the Currency. The Company has been notified
that as a result of that examination, the OCC removed the Memorandum of
Understanding.
The Federal Reserve Board has established risk-based standards for measuring
capital adequacy for U.S. banking organizations. In general, the standards
require banks and bank holding companies to maintain capital based on "risk-
adjusted" assets so that categories of assets with potentially higher credit
risk will require more capital backing than assets with lower credit risk. In
addition, banks and bank holding companies are required to maintain capital to
support, on a risk-adjusted basis, certain off-balance sheet activities such
as loan commitments and contingencies.
- 13 -
Regulatory matters and capital resources (Cont'd)
The Federal Reserve Board standards classify capital into two tiers, referred
to as Tier 1 and Tier 2. Tier 1 capital consists of common stockholders'
equity and preferred stock. Tier 2 capital consists of other types of equity
instruments and the allowance for loan and lease losses. All banks are
required to meet a minimum ratio of 8% of qualifying total capital to risk-
adjusted total assets with at least 4% being Tier 1 capital.
For most banks, including the Company's subsidiary bank, the minimum Tier 1
leverage ratio is to be 3% plus an additional cushion of at least 100 to 300
basis points depending upon risk profiles and other factors. The Office of
the Comptroller of the Currency has requested that the Bank endeavor to
maintain a leverage ratio of at least 6% and the Board of Directors has
adopted a resolution to that effect. As shown in the following table, the
regulatory leverage ratios exceed the minimum required at September 30, 1995.
The table below sets forth certain regulatory capital ratios for both the
Company and the Bank as of September 30, 1995:
Company Bank
-------- ------
Tier 1 Risk-Based Capital Ratio 12.76% 12.09%
Total Risk-Based Capital Ratio 14.05% 13.39%
Leverage Ratio 7.11% 6.69%
The approval of the Comptroller of the Currency is required for a national
bank to pay cash dividends if the total of all dividends declared in any
calendar year exceeds the Bank's net profit (as defined) for that year
combined with its retained net profits for the preceding two calendar years.
In October, the Company's Board of Directors declared a stock split in the
form of a stock dividend equivalent to one-half of one share for every share
outstanding for shareholders of record on October 23, 1995. The stock
dividend is payable on November 20, 1995.
Liquidity and Interest Rate Sensitivity Management
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest sensitive
earning assets and interest bearing liabilities. Liquidity management
involves the ability to meet the cash flow requirements of customers who may
be either depositors wanting to withdraw funds or borrowers needing assurance
that sufficient funds will be available to meet their credit needs. Interest
rate sensitivity management seeks to avoid fluctuating net interest margins
and to enhance consistent growth of net interest income through periods of
changing interest rates.
As a holding company, the Company's primary sources of liquidity are dividends
from the Bank and interest earned on repurchase agreements with the Bank. The
Company uses its liquidity to pay cash dividends to shareholders, fund
operating expenses and pay income taxes.
- 14 -
Liquidity and Interest Rate Sensitivity Management (Cont'd)
Marketable investment securities, particularly those of shorter maturities,
are a principal source of liquidity. Available for sale securities maturing
or likely to be called in two years or less amounted to approximately $16.0
million at September 30, 1995, representing 33.1% of the available for sale
portfolio. There were no held to maturity securities maturing or likely to be
called in two years or less. Assets such as federal funds sold and maturing
loans are also sources of liquidity.
During the second quarter of 1994, the Company transferred securities with a
fair value of $5,357,472 from its available for sale portfolio to its held to
maturity portfolio. The transfer was the result of a strategic decision, in
conjunction with the engagement of a new investment advisor, to hold a larger
percentage of the Company's securities to maturity. At the time of transfer,
the securities had an unrealized loss of $599,596. Such amount, after related
tax benefit of $203,863, is reflected as a decrease of stockholders' equity.
This unrealized loss is being amortized over the life of the securities
transferred, which is approximately nine years.
Historically, the overall liquidity of the Company has been enhanced by a high
level of core deposits. Maintaining an ability to acquire large denomination
time deposits and money fund accounts is a key to assuring liquidity. This
involves maintenance of an appropriate maturity distribution of purchased
funds as well as diversification of sources through various money markets.
Commercial and consumer loans increased by $14,809,937 or 10.5% during the
first nine months of 1995 compared to a decrease of $15,717,781 or 10.7% for
the first nine months of last year. Total deposits increased by $17,080,370
or 7.3% during the first nine months as compared to an increase of $2,549,562
or 1.2% for the same period last year. Management believes the liquidity of
the Bank is sufficient to meet future needs. The Bank does not accept
brokered deposits.
Interest rate sensitivity varies with different types of interest-earning
assets and interest-bearing liabilities. Overnight federal funds on which
rates change daily and loans which are indexed to a base rate differ
considerably from longer-term investment securities and fixed-rate loans.
Similarly, time deposits are much more interest sensitive than deposits such
as savings accounts. The shorter term interest rate sensitivities are key to
measuring the interest sensitivity gap, which is the difference between the
total of interest sensitive earning assets and interest bearing liabilities.
Generally, a financial institution with an excess of interest sensitive assets
would have a higher net interest income in times of increasing market interest
rates and lower net interest income in times of decreasing market interest
rates.
The table on the following page shows the interest sensitivity gaps for five
different time intervals as of September 30, 1995, based upon the Company's
earliest repricing opportunity according to contractual terms. Loan balances
do not take into account normal principal amortization or prepayments. During
the first 365 days, there is an excess of interest bearing liabilities over
interest earning assets.
- 15 -
Liquidity and Interest Rate Sensitivity Management (Cont'd)
Interest Rate Sensitivity Gaps as of September 30, 1995
(in millions):
2-90 91-365 1-2 Over 2
Immediate Days Days Years Years Total
------------ ------- -------- ------- ------- ------
Interest earning assets:
Federal funds sold $ 12.0 $ - $ - $ - $ - $ 12.0
Investment securities available for sale - - 6.1 9.9 32.4 48.4
Investment securities held to maturity - - - - 52.2 52.2
Loans 83.1 - 0.4 1.3 71.5 156.3
----------- ------- ------ ------ ------ -------
Total interest earning assets 95.1 - 6.5 11.2 156.1 268.9
----------- ------- ------ ------ ------ -------
Interest bearing liabilities:
Deposits:
Savings, N.O.W. and money market (100.9) (2.0) - - - (102.9)
Time - (21.3) (41.9) (15.6) (6.1) (84.9)
Securities sold under repurchase (13.3) (2.0) - - - (15.3)
agreements
Treasury tax and loan notes - (4.2) - - - (4.2)
----------- ------- ------ ------ ------ -------
Total interest bearing liabilities (114.2) (29.5) (41.9) (15.6) (6.1) (207.3)
----------- ------- ------ ------ ------ -------
Interest sensitivity gap $ (19.1) $(29.5) $ (35.4) $ (4.4) $150.0 $ 61.6
=========== ======= ====== ====== ====== =======
One of the objectives of the Company's asset-liability management strategy is
to effectively manage the sensitivity gap.
In 1994, the Company entered into an interest rate swap to manage exposure to
interest rate risk. At September 30, 1995, the Company had outstanding a
$5,000,000 interest rate swap agreement whereby, for a three year period
ending December, 1997, the Company receives a fixed payment of 7.95% on the
amount of the agreement in exchange for a variable rate payment indexed to the
three month London Interbank Offered Rate (LIBOR) on the same agreement
amount. The variable rate payment on September 30, 1995 was 5.87%. In the
first nine months of 1995, the Company earned $66,464 net, which is included
in interest income.
During the first quarter of 1995, the Company entered into an interest rate
floor agreement to manage exposure to interest rate risk. At September 30,
1995, the Company had outstanding a $10,000,000 interest rate floor agreement
whereby, for a five year period, ending February, 2000, the Company receives
an interest payment if the three month London Interbank Offered Rate (LIBOR)
declines below 6.25%. This payment would be based upon the rate difference
between current LIBOR and 6.25% accrued on the notional value of $10,000,000.
The transaction fee paid of $88,000 is currently being amortized over the life
of the contract. Interest earned during 1995 has totalled $7,986 on this
agreement.
- 16 -
Part II - OTHER INFORMATION
Items 1-5 Not Applicable
Item 6 Exhibits and reports on Form 8-K:
(a) EXHIBITS
Page
----
3.1) Articles of Organization
a. Articles of organization amended as of January 13, 1986. *
b. Amendment dated April 27, 1987.......................... *
c. Amendment dated April 25, 1988.......................... *
3.2) By-Laws........................................................... ***
10.2) The Safety Fund Corporation 1984 Incentive Stock Option Plan
for Key Employees, as amended..................................... **
10.3) The Safety Fund Corporation 1994 Incentive and nonqualified
Stock Option Plan for Key Employees............................... ***
10.4) Memorandum of Understanding by and between Safety Fund
National Bank and the office of the Comptroller of the Currency
dated April 16, 1992.............................................. *
10.5) Severance Agreement between Martin D. McNamara and
Safety Fund National Bank dated February 1, 1994.................. *
10.6) Employment Agreement between The Safety Fund Corporation
and Christopher W. Bramley dated as of February 1, 1994........... ***
10.7) Employment and Change of Control Agreement between The Safety
Fund Corporation and Stephen R. Shirley dated June 1, 1994........ ***
10.8) Employment and Change of Control Agreement between The Safety
Fund Corporation and James C. Garvey dated August 4, 1994......... ***
10.9) Incentive Plan for Senior Officers................................ ***
- 17 -
(a) EXHIBITS (Continued)
Page
----
27.1) Financial data schedule........................................ 21
28) Proxy Statement for the Annual Meeting of Shareholders
of The Safety Fund Corporation dated April 24, 1995............ ****
- --------------------------------------------------------------------------------
* Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1993
** Incorporated by reference from the Exhibit 10.4 to Registration
Statement No. 33-19325.
*** Incorporated by reference from the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1994
**** Incorporated by reference from the Company's Form 10-QSB for
the quarter ended June 30, 1995
(b) No Form 8-K was filed during the current quarter ended September 30, 1995.
- 18 -
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.
THE SAFETY FUND CORPORATION
---------------------------
(Registrant)
Date: November 8, 1995 /s/ Christopher W. Bramley
-------------------- -------------------------------------
Christopher W. Bramley
President and Chief Executive Officer
Date: November 8, 1995 /s/ Martin F. Connors, Jr.
-------------------- -------------------------------------
Martin F. Connors, Jr., Treasurer
Principal Financial and Accounting Officer
(Signature)
- 19 -
THE SAFETY FUND CORPORATION
INDEX TO EXHIBITS
Description Page
- --------------------------------------------------------------------------------
27.1) Financial data schedule................................. 21
- 20 -