-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JFBBqKDM4lIeFJy7Pb4XVCDEH+WDbdbXE5A2nv8L9UfL6PnJNY4G/YZ+43himFQE 2qcTkGs4GnwlfCJROwG49A== 0000319489-96-000016.txt : 19970722 0000319489-96-000016.hdr.sgml : 19970722 ACCESSION NUMBER: 0000319489-96-000016 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961220 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVEST GROUP INC CENTRAL INDEX KEY: 0000319489 STANDARD INDUSTRIAL CLASSIFICATION: 6211 IRS NUMBER: 060950444 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08408 FILM NUMBER: 96683640 BUSINESS ADDRESS: STREET 1: ONE COMMERCIAL PLZ STREET 2: 280 TRUMBULL ST CITY: HARTFORD STATE: CT ZIP: 06103 BUSINESS PHONE: 2035251421 MAIL ADDRESS: STREET 1: 90 STATE HOUSE SQUARE STREET 2: 280 TRUMBULL STREET CITY: HARTFORD STATE: CT ZIP: 06103 10-K 1 United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the fiscal year 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 Commission File Number 1-8408 THE ADVEST GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 06-0950444 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 90 State House Square, - Hartford, Connecticut 06103 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (860) 509-1000 Securities registered pursuant to Section 12(b) of the Act: Yes Name of each exchange on Title of each class which registered Common Stock, $.01 Par Value New York Stock Exchange, Inc. 9% Convertible Subordinated Debentures New York Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: None Indicate by an (X) 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 by an (X) if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the Registrant was $72,359,499 as of December 2, 1996. On December 2, 1996 the Registrant has outstanding 8,411,496 shares of common stock of $.01 par value, which is the Registrant's only class of common stock. Parts I, II and IV incorporate information by reference from the Registrant's 1996 Annual Report to Shareholders. Part III incorporates information by reference from the Registrant's definitive proxy statement for the annual meeting to be held on January 30, 1997. Total of sequentialy numbered pages 59 Exhibit index sequetial page number page 28 -1- Part I Item 1. Business General Development of Business (1) The Advest Group, Inc. ("AGI"), a Delaware corporation, is a financial services holding company engaged, with its operating subsidiaries (collectively the "Company"), in securities brokerage, trading, investment banking, residential mortgage, consumer lending, asset management, trust and related financial services. It is organized under the laws of Delaware and commenced operations on January 1, 1977. AGI is successor to a partnership which resulted from mergers of five New York Stock Exchange, Inc. ("NYSE") member firms organized between 1898 and 1919. The Company's broker-dealer subsidiary, Advest, Inc. ("Advest"), was organized to succeed the business of the partnership, effective January 1, 1977. Since that date, a number of other operating subsidiaries in the brokerage and financial services industries have been established or acquired. In addition to Advest, operating subsidiaries include Advest Bank (the "Bank"), a Connecticut-chartered capital stock savings bank; Boston Security Counsellors, Inc. ("BSC"), an investment management company; and Billings & Company, Inc. ("Billings"), a real estate services company. Material acquisitions and dispositions byof the Company during the past five years follow. In November 1992, the Company sold substantially all the assets, the business and name of Shore & Reich, Ltd. ("S&R"), its subsidiary specializing in pension plan administration, to an unrelated third party. Consideration included an initial cash payment of $600,000 and future payments over a five year period based on revenues of the business sold. In January 1994, Lyons, Zomback & Ostrowski, Inc., a financial consulting company specializing in the banking industry and a subsidiary of AGI, was merged into the corporate finance division of Advest as the Financial Institutions Group (the "FIG"). The FIG unit serves as an advisor to small and medium-sized community banks. During fiscal 1995, the Company sold the investment advisory business related to its proprietary mutual funds in three separate transactions. In the first quarter, a pre-tax gain of $.8 million was realized from the sale of the business related to the Scottish Widows International Fund to an unrelated third party. During the third quarter, the businesses related to the six taxable and three non-taxable funds, respectively, in the Advantage Family of Funds ("Funds") were sold to two other unrelated third parties for total consideration of $11.2 million. Net of expenses, the Company realized a pre-tax gain of $9.3 million from the two transactions. The total gain from all sales was $10.1 million and is reported separately on the Consolidated Statement of Earnings. Additional consideration of $.6 million was received in fiscal 1996 under the terms of one of the sales agreements. (2) Advest is engaged in a broad range of activities in the securities brokerage, investment banking and asset management businesses. Specific services include retail brokerage, institutional sales, origination of and participation in underwritings and distribution of corporate and municipal securities, market making and trading activities in corporate securities, government and municipal bonds, research, custody and money management. Advest has been classified by the Securities and Exchange Commission ("SEC") and the Securities Industry Association as a "large regional" brokerage firm. "Regional" is a term commonly used in the securities industry to indicate that a firm's headquarters are located outside New York City. Advest has retail clients in all fifty states with the largest concentration in the -2- Northeast and Midwest regions and also services institutional accounts throughout the country. During fiscal 1996, Advest opened 2 new sales offices. At September 30, 1996, Advest had sales locations, including satellite offices, and account executives in 16 states and the District of Columbia as follows: Number of Number of Account State Locations Executives -------------------------------------------------------------- Connecticut 8 77 District of Columbia 1 10 Florida 7 59 Illinois 2 9 Kentucky 3 15 Maine 6 23 Maryland 1 5 Massachusetts 7 53 Missouri 2 11 New Hampshire 3 7 New Jersey 4 23 New York 16 124 Ohio 13 59 Pennsylvania 12 54 Rhode Island 1 9 Vermont 1 2 Virginia 4 10 -- --- 91 550 == === Advest is a member of all major securities exchanges in the United States, the National Association of Securities Dealers ("NASD") and the Securities Investor Protection Corporation ("SIPC"). In addition, Advest is registered with the Commodity Futures Trading Commission ("CFTC") as a commodity trading advisor and a futures commission merchant and clears all option transactions through an independent third party broker. The Bank is a Connecticut-chartered capital stock savings bank which opened for business in 1984. The Bank's headquarters and sole retail branch are located at 90 and 10 State House Square, respectively, Hartford, Connecticut 06103. The Bank also has representative offices in Springfield, Massachusetts and Columbus, Ohio for trust and mortgage origination, respectively. Both representative offices share office space with Advest retail offices. The Bank's principal business activities consist of soliciting and servicing fiduciary and retirement plan trust business and conducting a broad range of mortgage banking services, primarily to clients of Advest. The Bank is also engaged in the businesses of attracting deposits and investing such deposits, together with funds from capital and other borrowings, in various types of loans, primarily residential, and investments. In recent years the latter activities have decreased in volume, and, correspondingly, the total assets of the Bank have declined. The Bank's loan portfolio includes single and multi- family residential mortgages, consumer, commercial mortgages and commercial and construction loans. The Bank has expanded its residential mortgage lending production in recent years, and places excess volume not retained in portfolio with investors, principally federal agencies and major private mortgage conduits. Investments include government and agency obligations, mortgage- backed securities and money market instruments. The Bank does not currently have a material source of deposits other than those obtained through Advest. Deposits in the Bank are -3- insured by the Bank Insurance Fund of the FDIC, subject to applicable limits. In fiscal 1991, the Office of Thrift Supervision ("OTS") approved requests by AGI and the Bank for the Bank to be deemed a "savings association" by virtue of its meeting the test for a qualified thrift lender and for AGI, as the sole shareholder of a "savings association", to be treated as a unitary thrift holding company. In order to retain its status as a "savings association" the Bank must continue to satisfy the "qualified thrift lender" test. This test generally requires that an institution maintain a minimum of 65% of its assets in residential real estate and related investments. At September 30, 1996, 83.7% of the Bank's portfolio consisted of such assets. (3) The Company's principal executive offices are located at 90 State House Square, Hartford, Connecticut, 06103 (telephone number (860) 509-1000). At September 30, 1996, the Company employed 1,612 persons. Financial Information about Industry Segments The information required by this item is disclosed on pages 40 and 41 of the 1996 Annual Report to Shareholders in Note 16 of Notes to Consolidated Financial Statements. Such information is hereby incorporated by reference. Narrative Description of Business (1) Revenues The principal sources of revenue for the last five years are disclosed on page 17 of the 1996 Annual Report to Shareholders under the caption "Five Year Financial Summary". A discussion of the components of services provided and related compensation follows. Commissions Listed Advest acts as an agent for its customers in the purchase and sale of securities on the major securities exchanges. Commissions generated by these customers represent a large portion of the Company's revenue. Mutual Funds Advest executes purchases and redemptions of shares for its clients in many diverse mutual funds. Prior to the fiscal 1995 sale of the investment advisory business related to its proprietary mutual funds, Advest served as sole distributor for The Advantage Family of Mutual Funds and the Advantage Municipal Bond Fund and acted as a distributor of the Scottish Widows International Fund. Nasdaq In executing customers' orders in the Nasdaq market, Advest generally acts as agent with another firm which is a market maker in the securities being purchased or sold. The market price executed represents the best inter-dealer market price available. Insurance Advest acts as agent for several life insurance companies and sells life insurance and tax-advantaged annuities to its brokerage clients. A principal objective of Advest's insurance department is to assist account executives in protecting the assets of high net worth individuals and businesses. The department provides customized advice and recommends appropriate products to meet unique individual, professional or business needs. Options Advest also effects for its customers the purchase and sale of put and call options traded on all major stock exchanges. Other Other commissions include commissions from commodity trading, international stocks and bonds, certificates of deposit and income from correspondent brokers. In addition, Advest markets private placement and registered offerings of limited partnerships investing in various ventures, primarily real estate. Certain of these limited partnerships are originated by Advest or Billings who, consequently, receive management and other fees. -4- Principal Transactions Revenue from principal transactions includes realized and unrealized gains and losses on trading positions of Advest and related sales credits as well as realized gains on available for sale securities of the Bank. The Company does not actively participate in the high yield securities market. Advest also hedges its corporate and municipal bond inventories by entering into derivative transactions when certain inventory levels are reached. Derivative positions are generally not material and are marked-to-market daily. Advest actively engages in trading as principal in various phases of the over-the-counter securities business and acts as principal to facilitate the execution of customers' orders. Advest buys, sells and maintains an inventory of a security in order to "make a market" in that security. As of September 30, 1996, Advest made dealer markets in the common stock or other equity securities of approximately 158 corporations. Advest also actively engages in trading municipal bonds and unit trust instruments. Investment Banking Advest manages and participates as an underwriter of corporate, municipal and government securities, mutual funds and private placement offerings. The Syndicate Department is responsible for Advest's participation in underwritings managed by Advest and other firms. The Corporate Finance and Public Finance Departments are responsible for offerings managed or co-managed by Advest. Underwriting involves both economic and regulatory risks. An underwriter may incur losses if it is unable to resell the securities it is committed to purchase or if it is forced to liquidate its commitments at less than the agreed purchase price. In addition, under the Securities Act of 1933, other laws and court decisions with respect to underwriters' liability and limitation on indemnification of underwriters by issuers, an underwriter is subject to substantial potential liability for material misstatements or omissions in prospectuses and other communications with respect to underwritten offerings. Further, underwriting commitments constitute a charge against net capital and Advest's underwriting commitments may be limited by the requirement that it must at all times be in compliance with the net capital Rule 15c3-1 of the SEC. Advest also provides merger and acquisition advisory services, appraisals and related services. Billings develops private placement offerings of limited partnerships in real estate and other industries. As a general rule, the Company does not engage in bridge financing activities. Asset Management and Administration BSC provides advisory services to a diverse clientele and, until the sale of the investment advisory business related to the Advantage Family of Mutual Funds and the Scottish Widows International Fund in fiscal 1995, acted as their investment advisor. As of September 30, 1996, BSC had approximately $470 million of private account assets under management. Advest provides money management services to its brokerage customers through its Investment Management Group ("IM"). IM provides various services to brokerage clients including client profiling, asset allocation, manager selection, due diligence and performance measurement. Recommended portfolio managers include managers in the proprietary Advest Managed Portfolio Services as well as managers not affiliated with the Company. Revenue is generated from fees and/or commissions. At September 30, 1996, IM had approximately $1.9 billion of assets under management. Advest Transfer Services, Inc., a subsidiary of AGI, provided transfer agency services to the former proprietary mutual funds of the Company through November 1996. As of December -5- 1996, an independent third party transfer agent assumed transfer agency services for the funds. Advest provides dividend reinvestment for more than 1,400 equities and 1,300 mutual and closed-end funds. The Advest Reserve Cash Account "ARCA" enables brokerage clients to participate in an integrated financial services program. ARCA clients have access to their assets through unlimited checkwriting and a VISA debit card issued by a major third party bank as well as on-request loans collateralized by margined securities. Direct deposit is available to ARCA accounts who can select among several automatic investment options for idle cash balances, including an FDIC-insured money market account with the Bank and five money market mutual funds. Other services offered to all clients include retirement plan servicing, securities custody and asset safekeeping. The Bank, through its Trust Division, provides fiduciary, trustee and custody services to individuals, corporate retirement plans, financial institutions and other entities. The Bank primarily acquires trust and custody accounts through Advest's retail sales force. Advest Bank Net Interest Income Net interest income is the excess of the interest income and loan fee income over interest expense. The Bank derives interest income from loans extended for the purposes of residential, commercial and consumer credit. Funds not used in lending are invested primarily in money market instruments and short and adjustable rate mortgage-backed securities. The Bank's loans and investments are funded by interest bearing deposits, by debt (primarily advances from the Federal Home Loan Bank of Boston), and by the Bank's equity capital. The Bank's interest and loan fee income has historically exceeded the interest expense of funding and has produced positive net interest income. The Bank is subject to interest rate risk to the degree that the Bank's interest-bearing liabilities reprice or mature more rapidly, and in greater volume, as is the case currently, than its interest-earning assets (see Distribution of assets, liabilities and shareholder's equity, interest rates and interest differentials as disclosed on page 10 of this filing and in Note 15 of Notes to Consolidated Financial Statements on pages 39 and 40 in the 1996 Annual Report to Shareholders. Such information is hereby incorporated by reference). Interest Income and Customer Financing Customers' transactions in securities are effected on either a cash or margin basis. In a margin account, the customer pays less than the full cost of a security purchased and the broker-dealer makes a loan for the balance of the purchase price which is secured by the securities purchased, or other securities owned by the investor. The amount of the loan is subject to the margin regulations (Regulation T) of the Board of Governors of the Federal Reserve System, NYSE margin requirements, and the firm's internal policies which in some instances are more stringent than Regulation T or NYSE requirements. Currently, in most transactions, Regulation T requires that the amount loaned to a customer for a particular purchase not exceed 50% of the purchase price of a security, so that initially the customer's equity in the purchase exceeds the NYSE's rules. A member firm is required to have the customer deposit cash or additional securities so that the loan to the customer for which marginable equity securities are pledged as collateral is no greater than 75% of the value of the securities in the account. Interest is charged on the amount borrowed to finance customers' margin transactions. The rate of interest charged customers is based primarily on the brokers' call rate (the charge on bank loans to brokers secured by firm and customers' securities), to which an additional amount is added up to 2.75%. The amount of this interest surcharge is dependent on the average net margin balance and the dollar amount of commissions charged on account transactions during the month. -6- Customer credit balances, retained earnings, cash received from stock loan activities, and short-term borrowings, are the primary source for financing customer margin accounts. Other Income Other income includes execution fees, exchange and other marketing credits, transfer and service fees as well as investment gains and losses. Research Through the combined resources of its in-house research staff and correspondent research provided by three leading outside research firms, Advest provides its brokerage clients with a full range of research services. These include corporate data, financial analysis, identification of emerging trends and objective recommendations. In-house analysts specialize in health care, regional banking, insurance and technology. Correspondent research provides information and recommendations on approximately 3,000 domestic and international equities in over 60 industries in 30 countries. (2) Competition All aspects of the business of the Company are highly competitive. Advest competes with numerous regional and national broker-dealers and other entities, many of which have greater financial resources than the Company. Because of the variety of financial services offered by the Company and the various types of entities that provide such services (including other brokers, banks, insurance companies and retail merchandise outlets), it is not possible to estimate the number of companies that compete with the Company for investor assets. Advest competes with other firms on the basis of transaction prices, quality of service, product availability and locations. With respect to price, service and product, the Company believes it is competitively well-positioned; it is impossible to predict, however, the effect of the broader distribution locales offered by competing entities or the lower costs which may be offered by certain discount brokers. In addition, there is competition for investment professionals among the large number of companies now in the financial services field. The mortgage banking environment that the Bank operates within is highly competitive. The Bank competes with mortgage companies, banks, savings banks, savings and loans, credit unions, finance companies and other financial intermediaries for conventional and home equity residential loans. The market for qualifying conventional loans is defined and dominated by federal agencies such as Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), who effectively act as the market makers and are the dominant investors. This market is also highly sensitive to the level and volatility of interest rates, which effects the volume of business being conducted. The Bank in soliciting trust business encounters significant competition from trust companies, savings banks, savings and loans, insurance companies, broker-dealers, investment firms, mutual funds, and law firms in attracting trust accounts, particularly fiduciary relationships. In attracting deposits, the Bank faces strong competition from numerous savings banks, savings and loan associations, commercial banks, broker-dealers, credit unions, insurance companies, investment firms and mutual funds with offices located primarily in its primary market area. The Bank also faces significant competition for investors' funds from short-term money market funds and other corporate and government securities. The Bank's deposit base is substantially derived from Advest's brokerage clients. A portion of these deposits, primarily certificates of deposits, are acquired on a fee basis and are considered "brokered" under FDIC rules. The Bank does not possess branch operations with which it may attract significant additional retail deposits other than those obtained through Advest. Pursuant to -7- the terms of federal banking regulations concerning brokered deposits, the Bank at September 30, 1996 was deemed to be a "well capitalized" bank, and as such was not subject to restrictions regarding brokered deposits. Prior to September 30, 1996, the Bank was deemed to be an "adequately capitalized bank", and as such was limited as to the maximum interest rates it could offer on its brokered deposit products to rates which did not exceed (1) the rate paid on deposits of similar maturity in the Bank's normal market area for deposits accepted or (2) the "national rate" paid on deposits of comparable maturity for deposits accepted outside the Bank's normal market area. The Bank had $62.7 million of brokered deposits as of September 30, 1996. (3) Regulation The securities industry in the United States is subject to extensive regulation under both Federal and state laws. The SEC is the Federal agency charged with administration of the Federal securities laws. Much of the regulation of broker- dealers has been delegated to self-regulatory authorities, principally the NASD, the CFTC and the securities exchanges. These self-regulatory organizations conduct periodic examinations of member broker-dealers in accordance with the rules they have adopted and amended from time to time, subject to approval by the SEC. Securities firms are also subject to regulation by state securities commissions in those states in which they do business. Broker-dealers are subject to regulations which cover all aspects of the securities business, including sales methods, trading practices among broker- dealers, uses and safekeeping of customers' funds and securities, capital structure of securities firms, recordkeeping and the conduct of directors, officers and employees. Additional legislation, changes in rules promulgated by the SEC and self-regulatory authorities, or changes in the interpretation or enforcement of existing laws and rules, may directly affect the mode of operation and profitability of broker-dealers. The SEC, self-regulatory authorities and state securities commissions may conduct administrative proceedings which can result in censure, fine, suspension or expulsion of a broker-dealer, its officers or employees. Such administrative proceedings, whether or not resulting in adverse findings, can require substantial expenditures. The principal purpose of regulation and discipline of broker- dealers is the protection of customers and the securities markets, rather than protection of creditors and stockholders of broker-dealers. The Company's investment advisory subsidiary, BSC, is also subject to extensive Federal and state regulations by the SEC and state securities commissions. Advest is required by Federal law to belong to the Securities Investor Protection Corporation ("SIPC"). The SIPC fund provides protection for securities held in customer accounts up to $500,000 per customer, with a limitation of $100,000 on claims for cash balances. The Company purchases coverage which provides an additional $24.5 million of coverage per customer for securities held in customers' accounts. As a Connecticut-chartered capital stock savings bank whose deposits are insured by the FDIC, subject to applicable limits, the Bank is subject to extensive regulation and supervision by both the Commissioner of the Department of Banking of the State of Connecticut and the Regional Director of the FDIC. The Bank is also subject to various regulatory requirements of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") applicable to FDIC insured financial institutions. This governmental regulation is primarily intended to protect depositors, rather than shareholders, and concerns, among other matters, capital requirements, safety and soundness, permissible investments, community reinvestment and credit discrimination. AGI, for the purpose of ownership of the Bank, is a Unitary Savings and Loan holding company, and is subject to limited regulation and certain reporting requirements by the Office of Thrift Supervision. The Bank posted pre-tax income of $1.1 million for fiscal 1996 after posting losses in each -8- of the previous six fiscal years. In July 1991, the Bank entered into a Memorandum of Understanding ("MOU") with its regulators to address certain concerns arising out of an examination of the Bank. In February 1993, the Bank entered into a new MOU with its regulators with terms similar to the original MOU. During 1996, the Bank achieved compliance with all requirements of the MOU and, in July 1996, the MOU was lifted. Refer to pages 18 through 25 of the 1996 Annual Report to Shareholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and on page 34 in Note 5 and on page 37 in Note 12 of the Notes to Consolidated Financial Statements for a further description of capital and regulatory considerations concerning the Bank. Such information is hereby incorporated by reference. Certain legislative and regulatory proposals that could affect the Bank and the banking business in general are pending, or may be introduced, before the United States Congress, the Connecticut General Assembly and various governmental agencies. These proposals include measures that may further alter the structure, regulation and competitive relationship of financial institutions and that may subject financial institutions to increased regulation, disclosure and reporting requirements. The Bank in its present status is restricted by state bank regulations from the declaration of dividends. (For further discussion concerning dividend restriction applicable to the Bank refer to page 37 of the 1996 Annual Report to Shareholders in Note 12 of Notes to Consolidated Financial Statements. Such information is hereby incorporated by reference.) It cannot be predicted whether or in what form any future legislation or regulations will be enacted or to what extent the business of the Bank may be affected. Federal banking regulations define five categories of capital adequacy for all insured depository institutions, including categories that would prompt supervisory actions. These categories include "well capitalized" (with total risk based capital of greater than 10% of risk adjusted assets, Tier 1 capital of greater than 6% of risk adjusted assets and leverage capital of greater than 5% of assets), "adequately capitalized" (greater than 8%, 5% and 4% respectively), "undercapitalized" (less than 8%, less than 4% and less than 4%, respectively), "significantly undercapitalized" (less than 6%, 3% and 3%, respectively) and "critically undercapitalized" (tangible capital of less than 2% of total assets.) In addition, an institution may not be categorized as "well capitalized" if it is subject to a regulatory order. Financial institutions classified as one of the three undercapitalized categories are subject to progressively more restrictive limitations on activities and may be subject to orders to increase capital and to cease certain activities and practices. A "critically undercapitalized" institution, among other additional restrictions, may, under certain conditions, be placed in a receivership or a conservatorship. Holding Company guarantees apply if an insured institution is classified "undercapitalized". Such holding company guarantees include guarantee of compliance with banking rules, regulations and laws and the improvement of the bank, including limited capital support. As previously disclosed, Advest Bank, meets the criteria to be classified "well capitalized" bank as of September 30, 1996. (4) Disclosure Requirements for Nonbank Holding Companies Article 9 of Regulation S-X and Industry Guide 3 specify financial statement and certain disclosure requirements for bank holding companies. SEC Staff Accounting Bulletin #No. 69 ("SAB 69") details the view of the SEC staff concerning the applicability of Article 9 and Industry Guide 3 to registrants which are not bank holding companies. The bulletin concludes that a nonbank holding company registrant engaged in similar lending and deposit activities should provide certain disclosures relevant to an understanding of the Registrant's operations. In accordance with SAB 69, the Company, a nonbank holding company, makes the following disclosures regarding the Bank. -9- Distribution of Assets, Liabilities and Shareholder's Equity; Interest Rates and Interest Differentials The following table presents for the periods indicated (I) average assets, liabilities and shareholder's equity, (II) interest income and expense, (III) average yields on interest-earning assets and average rates incurred on interest-bearing liabilities, (IV) the net interest spread and (V) net interest margin on interest- earning assets. Yields and rates are computed on a tax equivalent basis at tax rates of 34% for each of the three years ended September 30, 1996. Average balances are calculated predominately on a daily basis.
1996 1995 1994 --------------------------- --------------------------- --------------------------- Interest Average Interest Average Interest Average Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/ In thousands, except percentages Balance Expense Rates Balance Expense Rates Balance Expense Rates - - ------------------------------------------------------------------ ------------------------------------------------------- Assets Interest-earning assets CD's, time deposits, federal funds and other short-term investments $ 8,132 $ 436 5.36% $ 6,294 $ 366 5.82% $ 23,861 $ 785 3.29% Investment securities: (1) U.S. government and agency obligations 541 32 5.91% 2,107 151 7.17% 2,163 160 7.40% Other 606 40 6.60% 703 47 6.69% 827 41 4.96% Mortgage-backed securities 21,815 1,378 6.32% 35,321 2,044 5.79% 66,312 2,574 3.88% FHLB stock 2,233 145 6.49% 2,129 157 7.37% 2,127 162 7.62% Loans(net of unearned income)(2) 206,832 16,040 7.76% 258,011 19,975 7.74% 247,075 18,987 7.68% --------------------------- --------------------------- --------------------------- Total interest-earning assets 240,159 18,071 7.52% 304,565 22,740 7.47% 342,365 22,709 6.63% --------------------------- --------------------------- --------------------------- Noninterest-earning assets Cash and cash equivalents 874 960 1,472 Property and equipment 683 692 663 Interest receivable 1,593 2,339 1,818 OREO and other assets 5,441 16,421 26,209 Due from affiliates 135 255 115 Prepaid commissions 128 163 178 ---------- ---------- ---------- Total noninterest-earning assets 8,854 20,830 30,455 ---------- ---------- ---------- $249,013 $325,395 $372,820 ========== ========== ---------- Liabilities and shareholder's equity Interest-bearing liabilities Total deposits (3) $215,117 $ 8,974 4.17% $275,962 $11,370 4.12% $325,993 $11,045 3.39% FHLB advances 14,364 1,005 7.00% 23,965 1,605 6.70% 15,991 1,033 6.46% --------------------------- --------------------------- --------------------------- Total interest-bearing liabilities 229,481 9,979 4.35% 299,927 12,975 4.33% 341,984 12,078 3.53% --------------------------- --------------------------- --------------------------- Noninterest-bearing liabilities Accrued interest payable 1,023 1,251 1,201 Other liabilities 3,961 5,067 5,506 Accrued expenses 474 232 969 Due to affiliates 43 71 58 ---------- ---------- ---------- Total noninterest-bearing liabilities 5,501 6,621 7,734 ---------- ---------- ---------- Shareholder's equity 14,031 18,847 23,102 $249,013 $325,395 $372,820 ========== ========== ========== Net interest income (tax equivalent basis) $ 8,092 $ 9,765 $10,631 ========== ========== ========== Net interest spread (tax equivalent basis) 3.18% 3.14% 3.10% ======= ======= ======= Net interest income as a percentage of interest-earning assets (tax equivalent basis) 3.37% 3.21% 3.11% ======= ======= ======= (1) Securities available for sale and trading securities are included in investment securities. (2) Non-accrual loans at year end are included in the total loan portfolio. (3) Includes net cost of interest rate swaps and caps.
-10- Analysis of Changes in Interest Income and Interest Expense The following table presents an analysis of increases and decreases in interest income and expense in terms of changes in volume and interest rates for the periods indicated. Changes not due solely to either a change in volume or a change in rate have been allocated based on the respective percentage changes in average balances and average rates. The table is presented on a tax equivalent basis at tax rates of 34% for fiscal years 1996 and 1995.
1996 vs. 1995 1995 vs. 1994 Increase (decrease) due to change in Increase (decrease) due to change in In thousands Volume Rate Total Volume Rate Total - - -------------------------------------------------------------------------------------------------------------- Interest income CD's, time deposits, federal funds and other short-term investments $ 112 $(42) $ 70 $ (918) $ 499 $(419) Investment securities: US government and agency obligations (120) 1 (119) (4) (5) (9) Other (6) (1) (7) (19) 25 6 Mortgage-backed securities (883) 216 (667) (2,270) 1,740 (530) FHLB stock 50 (62) (12) (5) (5) Loans (net of unearned income) (3,978) 43 (3,935) 695 293 988 --------------------------------- ------------------------- Total interest income (4,825) 155 (4,670) (2,516) 2,547 31 --------------------------------- ------------------------- Interest expense Total deposits (2,634) 238 (2,396) (2,004) 2,329 325 FHLB advances (420) (180) (600) 519 53 572 --------------------------------- ------------------------- Total interest expense (3,054) 58 (2,996) (1,485) 2,382 897 --------------------------------- ------------------------- Change in net interest income $(1,771) $ 97 $(1,674) $(1,031) $ 165 $(866) ================================= ========================= (1) Securities available for sale and trading securities are included in investment securities. (2) Non-accrual loans at year end are included in the total loan portfolio. (3) Includes net cost of interest rate swaps and caps.
Investment Activities The following table summarizes the composition of the securities portfolio (book values) for the three years ended September 30, 1996:
1996 1995 1994 ------------------------------------------------------- In thousands, except percentages Amount % Amount % Amount % - - -------------------------------------------------------------------------------------------------------------- US government and agency obligations $ 599 2% $ 490 2% $ 4,888 9% Mortgage-backed securities 10,635 42% 21,965 83% 48,003 79% Other 500 2% 596 2% 818 1% FHLB stock 2,233 10% 2,233 9% 2,045 3% Securities available for sale (4) 11,157 44% 1,127 4% 4,902 8% ------------------------------------------------------- Total $25,124 100% $26,411 100% $60,656 100% =======================================================
The following table sets forth the maturities of investment securities at September 30, 1996 and the weighted average (tax equivalent) yields on such securities:
Within After one but Five to ten After ten one year within five years years years Total ------------------------------------------------------------------------------------------ In thousands, except percentages Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield - - ----------------------------------------------------------------------------------------------------------------------------- US government and agency obligations - - $599 5.43% - - - - $ 599 5.43% Mortgage-backed securities - - - - - - $10,635 6.39% 10,635 6.39% Other - - 250 7.75% $250 7.75% - - 500 7.75% FHLB stock $2,233 6.40% - - - - - - 2,233 6.40% Securities available for sale (4) 97 - - - - - 11,060 6.33% 11,157 6.27% ------------------------------------------------------------------------------------------ Total $2,330 6.13% $849 6.11% $250 7.75% $21,695 6.36% $25,124 6.34% ========================================================================================== (4) Securities available for sale are detailed in Note 4 of Notes to Consolidated Financial Statements in the 1996 Annual Report to Shareholders.
As of September 30, 1996, the Bank held investments of the following securities issuer which exceeded 10% of shareholder's equity:
Maturity Issuer Name Book value Market value Coupon date - - ------------------------------------------------------------------------------------------------------- The Money Store Home Equity Trust $1,963,413 $1,956,275 4.875% 03/15/2008
-11- Lending Activities The following table summarizes the composition of loan portfolio for the three years ended September 30, 1996:
1996 1995 1994 -------------------- ---------------- -------------------- In thousands, except percentages Amount % Amount % Amount % - - -------------------------------------------------------------------------------------------------------- Commercial and financial $ 2,757 1% $ 3,856 2% $ 7,021 3% Real estate construction 4,946 3% 5,597 2% 2,819 1% Real estate mortgage 176,479 94% 220,613 95% 262,797 95% Installment 1,097 1% 922 - 913 - Lease financing 1,587 1% 1,811 1% 2,199 1% -------------------- ---------------- -------------------- Gross total loans 186,866 100% 232,799 100% 275,749 100% ========== ====== ========== Less: Allowance for loan loss 2,278 2,213 4,645 ---------- ---------- ---------- Net total loans $184,588 $230,586 $271,104 ========== ========== ==========
Commercial loans, primarily to individuals and small to medium sized firms, were made at a variety of repayment terms and are primarily collateralized by equipment, marketable securities or inventory primarily located in Connecticut. Real estate mortgage and construction balances as of September 30, 1996 are comprised of residential, commercial and multifamily mortgages of approximately $144.0 million, $26.1 million and $11.3 million, respectively. Commercial real estate loans are primarily located in the Northeast and include as collateral multifamily, health care, office and industrial property. The Bank is no longer an active loan originator in the commercial real estate market. The Bank's residential loan portfolio is primarily collateralized by mortgages on 1-4 family residential properties located throughout theAfter one United States with concentrations in Connecticut, New York, Massachusetts, Ohio and Florida. Installment loans are made to individuals. The Bank also occasionally purchases residential mortgage loans for its portfolio from other financial institutions and mortgage bankers for its portfolio. Such purchases are primarily loans collateralized by property located in Connecticut. There were no such purchases during fiscal 1996. The following table shows the interest rate sensitivities of loans outstanding as of September 30, 1996 which are due or repriced in the periods indicated. Loans due within one year include demand loans.
After one Within but within After five In thousands one year five years years Total - - -------------------------------------------------------------------------------------------------------- Commercial and financial $ 2,009 $ 663 $ 85 $ 2,757 Real estate construction 3,743 1,203 - 4,946 Real estate mortgage 88,116 32,621 55,741 176,478 Installment 338 441 318 1,097 Lease financing 31 411 1,146 1,588 ----------------------------------------------------------- Total $94,237 $35,339 $57,290 $186,866 ----------------------------------------------------------- Fixed interest rate $14,260 $57,290 Variable interest rate 21,079 - ---------- --------- Total $35,339 $57,290 ========== =========
Nonperforming Assets A summary of nonperforming assets by type follows for the three years ended September 30, 1996: In thousands, except percentages
1996 1995 1994 - - -------------------------------------------------------------------------------------------------------- Non-accrual loans $1,422 $ 290 $ 7,690 Restructured loans - - 638 Other real estate owned, net 984 2,849 13,414 ---------- --------- ---------- Total nonperforming assets $2,406 $3,139 $21,742 ---------- --------- ---------- Nonperforming assets as a percentage of loans and other real estate owned 1.3% 1.3% 7.5% ========== ========= ==========
Generally loans are placed on non-accrual status when interest or principal is past due for ninety days or earlier if circumstances indicate collection is doubtful. The Bank resumes the accrual of interest on such loans if, in the opinion of management, the borrower has demonstrated adequate financial resources and intent to meet the terms and conditions of the loan, and all payments are again current. Interest income forgone on nonperforming loans in fiscal years 1996, 1995, and 1994 amounted to $297,000, $508,000 and $754,000, respectively. During 1996 and 1995, approximately $187,000 and $184,000, respectively, of income was recognized on non-accrual loans. This income was recognized while the loans were performing and was realized by cash payments. It is management's policy to reverse all uncollected interest at the time a loan is placed on non-accrual. -12- Summary of Loan Loss Experience The following table summarizes the Bank's loan loss experience for each of the three years ended September 30, 1996:
In thousands, except percentages 1996 1995 1994 - - ------------------------------------------------------------------------------------------------------------------- Balance at beginning of period $2,213 $4,645 $5,433 -------------------------------------------- Chargeoffs: Real estate mortgage 1,196 7,831 2,640 Installment - - 27 Commercial 81 483 52 Lease financing - 14 97 -------------------------------------------- 1,277 8,328 2,816 -------------------------------------------- Recoveries: Real estate mortgage 210 239 136 Commercial 15 1 16 Lease financing 63 19 22 -------------------------------------------- 288 259 174 -------------------------------------------- Net charge-offs 989 8,069 2,642 Additions charged to operations 1,054 5,637 1,854 -------------------------------------------- Balance at end of period $2,278 $2,213 $4,645 ============================================ Ratio of net charge-offs to average loans outstanding during the period 0.48% 3.13% 1.07% ============================================
The Bank maintains general reserves for potential losses from its loan portfolio in an Allowance for Possible Loan and Lease Losses. (the "ALLL"). The ALLL is maintained at a level considered by management to be adequate. The adequacy of the ALLL is reviewed quarterly by the Bank's management and its Board of Directors, and is determined primarily by management's informed judgment concerning the amount of risk inherent in the portfolio at a point in time. Management's judgment is based on a number of factors including: 1) a detailed risk rating system for commercial loans in which loans are individually reviewed with respect to such criteria as the estimated value of underlying loan collateral and the financial condition of borrowers, 2) recent historical loan loss experience, 3) industry and geographic concentrations, 4) the results of the most recent regulatory examination available, 5) current national and local economic conditions, and 6) other relevant information as may be available. The balance of each risk rating category has a reserve percentage applied for the purpose of estimating each component of the ALLL. A substantial portion of outstanding commercial loan portfolio balances on an annualized basis are reviewed periodically by a third party that is independent from the Bank and the results of such review are factored into the risk rating system. Management also reviews monthly, certain monitored performing and all nonperforming loans individually and makes further reserve allocation adjustments. The Bank's one to four family residential mortgage portfolio reserves are evaluated primarily upon the basis of portfolio historical performance. The Bank also maintains an unallocated and supplemental reserve that reflects management's assessment of local and national economic, business and real estate market trends, and the Bank's procedures, controls and personnel. At September 30, 1996, the bank classified $5.3 million of loans as impaired pursuant to the requirements of SFAS 114, "Accounting by Creditors for Impairment of a Loan". Under SFAS 114 a loan is considered impaired if it is probable that the Company will be unable to collect scheduled payments according to the terms of the loan agreement. Impaired loans include $3.8 million of loans restructured and currently classified performing, and $.8 million of loans in which potential credit problems may lead to future non-accrual status or possible charge-off. All remaining amounts classified impaired are included in non-accrual loans. Impairment reserves as calculated under SFAS 114 resulted in no additional allowance for loan losses. Loans are charged off against the ALLL when management believes that collection is unlikely. Loan charge-offs are identified during the loan review process. The charge-offs recorded for all periods were primarily associated with the real estate mortgage portfolios and resulted from the decline in the value of the properties serving as collateral for the loans. The charge-offs recorded during 1995 were also associated with the discounts necessary to attract buyers of those distressed commercial OREO assets included in the Bank's accelerated asset disposition plan and other bulk asset sales. The following table presents the allocation of the reserve for possible loan and lease losses by loan categories for the three years ended September 30, 1996:
1996 1995 1996 -------------------- ------------------ ------------------ Loans in Loans in Loans in Amount category Amount category Amount category of as a % of of as a % of of as a % of In thousands, except percentages reserve total loans reserve total loans reserve total loans - - ------------------------------------------------------------------------------------------------------------------- Commercial and financial $ 24 1% $ 26 2% $ 83 3% Real estate construction 44 3% 33 2% 37 1% Real estate mortgage 1,555 94% 1,541 95% 4,050 95% Installment 22 1% 18 - 18 - Lease financing 32 1% 66 1% 105 1% Commitments 340 - 219 - 151 - Unallocated 261 - 310 - 201 - -------------------- ------------------ ------------------ Total $2,278 100% $2,213 100% $4,645 100% ==================== ================== ==================
-13- Deposits The Bank offers a variety of deposit accounts designed to attract both short and long term funds. The Bank provides a money market deposit account to Advest's customers as a component of various cash management products available to those customers. The Bank primarily markets brokered Certificates of Deposit (CD's) through Advest. The Bank also markets retail deposit accounts, such as money market accounts, primarily through Advest. At September 30, 1996, deposits obtained through Advest constituted 84% of all deposits at the Bank. Additional deposit information is disclosed in Note 5 of Notes to Consolidated Financial Statements in the 1996 Annual Report to Shareholders. The following table presents the average balances of and average rates paid on deposits for the three years ended September 30, 1996: Average balances are calculated predominately on a daily basis.
1996 1995 1994 ---------------------- ---------------------- ------------------------ Average Average Average Average Average Average In thousands, except percentages balance rate balance rate balance rate - - ----------------------------------------------------------------------------------------------------------------------------- Savings noninterest-bearing $ 98 $ 66 $ 58 Savings 19 2.36% 33 1.99% 243 2.00% Money market 149,347 2.90% 209,407 3.22% 274,715 2.76% Time certificates 65,653 6.24% 66,456 6.41% 50,977 6.17% -------------------------------------------------------------------------------------- Total deposits $215,117 4.17% $275,962 4.12% $325,993 3.39% ======================================================================================
The following table sets forth the maturity distribution of time deposits of $100,000 or more as of September 30, 1996:
In thousands Amount - - ----------------------------------------------------------------------------------- Three months or less $ 2,563 Over three months to six months 4,764 Over six months to twelve months 3,938 Over twelve months 6,329 -------------- $17,594 ==============
Return on Equity and Assets
Years ended September 30, -------------------------------------------------------- 1996 1995 1994 - - ----------------------------------------------------------------------------------------------------------------------------- Return on assets (net income/average total assets) 0.41% * * Return on equity (net income/average equity) 7.21% * * Net interest margin 3.25% 3.00% 2.85% Equity to assets (average equity/average assets) 5.63% 5.79% 6.20% * As a result of net losses in 1995 and 1994, this information is not meaningful.
Short-Term Borrowings
Years ended September 30, -------------------------------------------------------- In thousands, except percentages 1996 1995 1994 - - ----------------------------------------------------------------------------------------------------------------------------- Other short-term borrowings Balance at year end $ 4,750 $ 9,500 $ 9,500 Weighted-average interest rate at year end 6.76% 6.76% 5.58% Average amount outstanding during the year $ 7,827 $ 6,692 $ 5,654 Maximum amount outstanding at any month end $10,500 $17,000 $17,300 Weighted-average interest rate during the year 7.01% 6.41% 5.89%
In the ordinary course of business, short-term borrowings of the Bank consisted primarily of the current portion of fixed-term, fixed-rate advances from the Federal Home Loan Bank. -14- Item 2. Properties The Company conducts all of its operations from leased premises, generally under non-cancelable leases with terms up to 15 years. Item 3. Legal Proceedings The Company has been named as defendant in a number of legal proceedings arising principally from its securities and investment banking business. Some of these actions involve claims by plaintiffs for substantial amounts. While results of litigation cannot be predicted with certainty, in the opinion of management, based on discussion with counsel, the outcome of these matters will not result in a material adverse effect on the financial condition or future results of operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The information required by this item is disclosed on page 35 of the 1996 Annual Report to Shareholders in Note 9 of the Notes to Consolidated Financial Statements and on page 43 under the captions "Quarterly Financial Information" and "Shareholder Information". Such information is hereby incorporated by reference. Item 6. Selected Financial Data The information required by this item is disclosed on page 17 of the 1996 Annual Report to Shareholders under the caption "Five Year Financial Summary". Such information is hereby incorporated by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by this item is disclosed on pages 18 through 25 of the 1996 Annual Report to Shareholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations". Such information is hereby incorporated by reference. Item 8. Financial Statements and Supplementary Data The information required by this item is disclosed in the Consolidated Financial Statements and Notes on pages 26 through 41 and under the caption "Quarterly Financial Information" on page 43 of the 1996 Annual Report to Shareholders. Such information is hereby incorporated by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no disagreements with the Company's independent accountants on any accounting or financial disclosure matters. Part III Item 10. Directors and Executive Officers of the Registrant The information required for "Directors" by this item is included under the caption "Election of Directors" in the Company's Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Company's annual meeting to be held January 30, 1997. -15- Such information is hereby incorporated by reference. The following table sets forth the executive officers of the Company at December 1, 1996. Executive officers of the Company are appointed annually by the Board of Directors to hold office until their successors are appointed and qualify. Executive Officer Name Age Office Since - - --------------------------------------------------------------------------- Allen Weintraub 61 Chairman and Chief Executive Officer 1977 Grant W. Kurtz 54 President 1985 Murray M. Beach 42 Senior Vice President - Corporate Finance, Advest, Inc. 1996 Allen G. Botwinick 53 Executive Vice President, Administration and Operations 1980 George A. Boujoukos 62 Executive Vice President - Capital Markets, Advest, Inc. 1977 Harry H. Branning 45 Executive Vice President - National Sales Manager, Advest, Inc. 1994 Lee G. Kuckro 55 Senior Vice President, Secretary and General Counsel 1978 Martin M. Lilienthal 54 Senior Vice President, Treasurer and Chief Financial Officer 1977 Item 11. Executive Compensation The information required by this item is included under the caption "Remuneration of Directors and Officers" and "Certain Transactions" of the Company's Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Company's annual meeting to be held January 30, 1997. Such information is hereby incorporated by reference. Item 12. Security Ownership Of Certain Beneficial Owners And Management The information required by this item is contained under the caption "Election of Directors" in the Company's Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Company's annual meeting to be held January 30, 1997. Such information is hereby incorporated by reference. Item 13. Certain Relationships and Related Transactions The information required by this item is included under the caption "Certain Transactions" of the Company's Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Company's annual meeting to be held January 30, 1997. Such information is hereby incorporated by reference. -16- Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - - -------------------------------------------------------------------------- Page Reference -------------------------- Annual Report 10-K -------------------------- (a) 1. Financial Statements The Consolidated Financial Statements and The Report of Independent Accountants contained in the 1996 Annual Report to Shareholders are incorporated herein by reference: Consolidated Balance Sheets 27 Consolidated Statements of Earnings 26 Consolidated Statements of Cash Flows 28 Consolidated Statement of Changes in Shareholders' Equity 29 Notes to Consolidated Financial Statements 30-41 Report of Independent Accountants 42 2. Financial Statement Schedules Report of Independent Accountants on all schedules 23 Schedule I - Condensed Financial Information of Registrant 24-26 Schedule II - Valuation and Qualifying Accounts 27 3. Exhibits The following is a list of exhibits to this Report on Form 10-K filed herewith or incorporated by reference herein. Prior Filing(s) to which Reference Exhibit Description is made, if applicable - - ----------------------------------------------------------------------------- 3(a) Restated Certificate of Exhibit 3(a) of Incorporation Incorporation of Registration Registrant's Report on Form 10-Q for the quarter ended March 31, 1989 3(b) By-laws of Registrant, as restated Exhibit 3(b) to Registrant's Report and amended on Form 10-Q for the quarter ended March 31, 1989 and Exhibit 3(a) to Registrant's Report on Form 10-Q for the quarter ended June 30, 1990 4(a) Shareholder Rights Agreement Exhibit to Registrant's Report on dated as of October 31, 1988 Form 8-k dated November 1, 1988 between Registrant and The Connecticut Bank and Trust Company, N.A., as Rights Agent 4(b) Indenture pertaining to Exhibit 4(e) to Registrant's Registrant's 9% Convertible Registration Statement on Form S-1, Subordinated Debentures File No. 2-81977 -17- Prior Filing(s) to which Reference Exhibit Description is made, if applicable - - ----------------------------------------------------------------------------- 10(a) Registrant's 1994 Non-Employee Exhibit A to Registrant's Proxy Director Stock Option Plan Statementdated December 20, 1994 10(b) Registrant's 1986 Stock Exhibit 10 to Registrant's Report on Option Plan, as amended Form 10-Q for the quarter ended March 31, 1987; Exhibit 10(a) to Registrant's Report on Form 10-Q for the quarter ended March 31, 1988 10(c) Registrant's 1993 Stock Option Exhibit A to Registrant's Proxy Plan Statement Plan dated December 21, 1993 10(d) Registrant's 1981 and 1983 Exhibit A to Registrant's Proxy Incentive Stock Option Plans Statements Incentive Stock Option Plans, dated December 15, 1981 and December 21, as amended 1983; Exhibit 10(a) to Registrant's Report on Form 10-Q for the quarter ended March 31, 1988 10(e) Registrant's Deferred Exhibit 10(f) to Registrant's Report Compensation Savings and on Form 10-K for the fiscal year Investment Plan, Amended and ended September 30, 1989, Exhibit Restated as of November 17, 10(j) to Registrant's Report on 1989, as amended Form 10-K for its fiscal year ended September 30, 1990 and Exhibit 10(b) of Registrant's Report onForm 10-Q for the quarter ended December 31, 1992 10(f) Non-Employee Director Equity Exhibit 10(b) to Registrant's Report Plan on Form 10-Q for the quarter ended June 30, 1996 10(g) Key Professionals Equity Plan Exhibit 10(g) to Registrant's Report on Form 10-Q for the quarter ended June 30, 1996 10(h) Forms of Executive Officer Exhibit 10 to Registrant's Report on Restricted Stock and Stock Form 10-Q for the quarter ended Option Agreement for 1995, December 31, 1994 and Exhibit 10(c) 1996 (as supplemented) to Registrant's Report on Form and 1997 10-Q for the quarter ended June 30, 1996 and Exhibit 4.4 to Registrant's Registration Statement on Form S-8, File No. 333-17711; and Exhibit 4.5 to Registrant's Registration Statement on Form S-8, File No. 333- 17711 10(i) The Advest Thrift Plan of Exhibit 10(a) to Registrant's Report Registrant, effective as of on Form 10-Q for the quarter ended December 31, 1992 December 31, 1992, as amended and Exhibit 10(a) to Registrant's Report on Form 10-Q for the quarter ended June 30, 1996 -18- Prior Filing(s) to which Reference Exhibit Description is made, if applicable - - ----------------------------------------------------------------------------- 10(j) Registrant's 1990 Top AE Exhibit 10(i) to Registrant's Report Stock Option Plan, effective on Form 10-K for its fiscal year as of October 26, 1990 ended September 30, 1990 10(k) Registrant's 1991 Top AE Exhibit 10(k) to Registrant's Report Stock Option Plan, effective on Form 10-K for its fiscal year as of November 22, 1991 ended September 30, 1991 10(l) Registrant's 1992 Top AE Exhibit 10(c) to Registrant's Report Stock Option Plan on Form 10-Q for the quarter ended December 31, 1992 10(m) Registrant's Account Executive Exhibit 10(m) to Registrant's Report Nonqualified Defined Benefit on Form 10-K for its fiscal year Plan, as amended ended September 30, 1993, Exhibit 10(p) to Registrant's Report on Form 10-K for its fiscal year ended September 30, 1995 and Exhibit 10(f) to Registrant's Report on Form 10-Q for the quarter ended June 30, 1996 10(n) Registrant's Nonqualified Exhibit 10(n) to Registrant's Report Executive Post-employment on Form 10-K for its fiscal year Income Plan, as amended ended September 30, 1994and Exhibit 10(e) to Registrant's Report on Form 10-Q for the quarter ended June 30, 1996 10(o) Registrant's 1995, 1996 and 1997 Exhibit 4.1 to Registrant's Equity Plans Registration Statement on Form S-8, File No. 33-56275; Exhibit 4 to Registrant's Registration Statement on Form S-8,File No. 333-00797; and Exhibit 4.3 to Registrant's Registration Statement on Form S-8, File No. 333-17711 10(p) Amended and Restated Exhibit 10(h) to Registrant's Employment Agreement with Report on Form 10-Q for the quarter Chief Executive Officer ended June 30, 1996 11 Statement Regarding Filed Herewith Computation of Net Income per Common Share 13 Annual Report to Shareholders Filed Herewith * for fiscal year ended September 30, 1996 -19- Prior Filing(s) to which Reference Exhibit Description is made, if applicable - - ----------------------------------------------------------------------------- 21 Subsidiaries Filed Herewith 23 Consent of Independent Filed Herewith Accountants 27 Financial Data Schedule Selected financial data - for EDGAR electronic filing only to SEC * Pursuant to Item 601(b) (13) of Regulation S-K, except for those portions of the Annual Report expressly incorporated by reference and included in Exhibit 13, the Annual Report is not to be deemed filed as part of this filing on Form 10-K. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of the year ended September 30, 1996. -20- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 ADVEST GROUP, INC. By /s/Martin M. Lilienthal November 21, 1996 Martin M. Lilienthal Senior Vice President and Treasurer (Chief Financial and Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Chief Executive Officer, Chairman of the Board and Director (Principal /s/Allen Weintraub Executive Officer) November 21, 1996 Allen Weintraub Senior Vice President and Treasurer (Chief Financial and Principal Accounting /s/Martin M. Lilienthal Officer) November 21, 1996 Martin M. Lilienthal /s/George A. Boujoukos Director November 21, 1996 George A. Boujoukos /s/Sanford Cloud, Jr. Director November 21, 1996 Sanford Cloud, Jr. /s/Richard G. Dooley Director November 21, 1996 Richard G. Dooley /s/William B. Ellis Director November 21, 1996 William B. Ellis -21- SIGNATURES /s/Robert W. Fiondella Director November 21, 1996 Robert W. Fiondella /s/Grant W. Kurtz President and Director November 21, 1996 Grant W. Kurtz Vice Chairman of the /s/Anthony A. LaCroix Board and Director November 21, 1996 Anthony A. LaCroix /s/Barbara L. Pearce Director November 21, 1996 Barbara L. Pearce /s/John A. Powers Director November 21, 1996 John A. Powers -22- Report of Independent Accountants The Board of Directors and Shareholders of The Advest Group, Inc.: Our report on the consolidated financial statements of The Advest Group, Inc. and Subsidiaries has been incorporated by reference in this Form 10-K from page 42 of the 1996 Annual Report to Shareholders of The Advest Group, Inc. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the index on page 17 of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. /s/Coopers & Lybrand L.L.P. Hartford, Connecticut October 23, 1996 -23- Schedule I Condensed Financial Information of Registrant The Advest Group, Inc. (Parent Company) Condensed Balance Sheets September 30, - - --------------------------------------------------------------- In thousands 1996 1995 - - --------------------------------------------------------------- Assets Cash $ 1,213 $ 670 Investment in subsidiaries, Equity method(a) 94,144 88,766 Receivables from subsidiaries(a) 5,857 3,038 Loans 9,787 10,922 Held to maturity securities 11,226 6,363 Other assets 9,855 10,997 ---------- ---------- Total assets $132,082 $120,756 ======== ======== Liabilities Accounts payable and accrued expenses $ 12,241 $ 9,657 Payable to subsidiaries(a) 4,553 6,375 Borrowings 5,494 5,240 Subordinated liabilities 20,552 20,552 ---------- ---------- Total liabilities 42,840 41,824 Shareholders' equity(b) 89,242 78,932 ---------- ---------- Total liabilities and shareholders' equity $132,082 $120,756 ======== ======== (a)Eliminated in consolidation. (b)For an analysis of shareholders' equity and its components, see Registrant's Consolidated Balance Sheets and Statements of Changes in Shareholders' Equity on pages 27 and 29 of the 1996 Annual Report to Shareholders. -24- Schedule I (Continued) The Advest Group, Inc. (Parent Company) Condensed Statements of Earnings For the years ended September 30, -------------------------------- In thousands 1996 1995 1994 - - -------------------------------------------------------------------- Revenues Gain on sale of investment advisory business, net $ 627 $10,092 $ -- Interest and other income 547 428 284 ---------- ---------- ------ Total revenues 1,174 10,520 284 --------- -------- -------- Expenses Interest 2,447 2,452 2,426 Other 1,259 807 2,723 -------- ---------- ------- Total expenses 3,706 3,259 5,149 --------- --------- ------- Income (loss) before income tax benefit and equity in earnings of subsidiaries (2,532) 7,261 (4,865) Income tax benefit 459 542 2,787 ---------- --------- ------- Income (loss) before equity in earnings of subsidiaries (2,073) 7,803 (2,078) Equity in income (loss) of subsidiaries 13,871 (1,452) 5,131 -------- -------- ------- Net income $11,798 $ 6,351 $3,053 ======= ======== ====== -25- The Advest Group, Inc. Schedule I (Parent Company) (Continued) Condensed Statements of Cash Flows For the years ended September 30, - - ------------------------------------------------------------------------- In thousands 1996 1995 1994 - - ------------------------------------------------------------------------- Operating Activities: Net income $11,798 $ 6,351 $ 3,053 Equity in (loss) income of subsidiaries (13,871) 1,452 (5,131) Adjustments to reconcile net income to net cash provide by operating activities 429 1,580 3,391 Gain on sale of investment advisory business, net (627) (10,092) -- Net (increase) decrease in operating assets (1,335) (20) 24 Net increase (decrease) in operating liabilities 2,652 (2,103) (1,365) ----------------------------- Net cash used for operating activities (954) (2,832) (28) ------------------------------ Financing Activities: Proceeds from long term borrowing 1,250 1,000 -- Repayment of short term borrowings (996) (798) (650) Employee stock transactions 1,076 62 27 Repurchase of subordinated debentures -- (410) (365) Net (decrease) increase in payables to subsidiaries 3,863 3,018 (748) Repurchase of common stock (3,799) (2,309) (3,090) Other 1,101 846 -- ----------------------------- Net cash provided by (used for) financing activities 2,495 1,409 (4,826) ----------------------------- Investing Activities: Proceeds from maturities of held to maturity securities 18,400 12,500 39,000 Proceeds from investment advisory business, net 788 10,141 -- Purchase of held to maturity securities (23,388) (15,309) -- Purchase of available for sale securities (23) -- -- Sales of OREO, net 2,090 -- -- Principal collections on loans 1,135 746 10 Purchases of investment securities -- -- (44,114) Proceeds from sales of investment securities -- -- 8,975 Acquisition of subsidiaries assets -- (4,585) -- Increase in investments in subsidiaries -- (152) (548) Loans originated -- (1,761) (56) Recovery on write-offs -- 161 -- --------------------------------- Net cash (used for) provided by investing activities (998) 1,741 3,267 ----------------------------- Increase (decrease) in cash 543 318 (1,587) Cash at beginning of period 670 352 1,939 ------------------------------ Cash at period end $ 1,213 $ 670 $ 352 ============================ Supplemental Information: Interest paid $ 2,447 $ 2,452 $ 2,426 Income taxes paid $10,067 $ 2,273 $ 1,058 Non-cash transfers (reduction of payable to subsidiaries effected in the form of dividends) $ 8,500 $ 3,007 $ -- -26- Schedule II The Advest Group, Inc. and Subsidiaries Valuation and Qualifying Accounts Additions Charge- Balance at charged to offs Balance beginning cost and and at end In thousands of period expenses recoveries period - - -------------------------------------------------------------------- For the years ended September 30, 1996 Credit losses: Brokerage customers $ 743 $ 160 $ (112) $ 791 Loans 2,334 1,022 (958) 2,398 Asset devaluation: Other real estate owned 718 20 (738) -- Other investments/assets 1,250 56 144 1,450 Valuation reserve on deferred taxes 1,510 161 -- 1,671 --------------------------------------- $ 6,555 $ 1,419 $ (1,664) $ 6,310 ====================================== 1995 Credit losses: Brokerage customers $ 869 $ 473 $ (599) $ 743 Loans 4,900 5,637 (8,203) 2,334 Asset devaluation: Other real estate owned 1,201 4,491 (4,974) 718 Other investments/assets 2,218 (263) (705) 1,250 Valuation reserve on deferred taxes 1,360 150 -- 1,510 ---- -------------------------------- $10,548 $10,488 $(14,481) $ 6,555 ===================================== 1994 Credit losses: Brokerage customers $ 1,305 $ 265 $ (701) $ 869 Loans 5,782 2,499 (3,381) 4,900 Other -- 6 (6) -- Asset devaluation: Other real estate owned 2,201 772 (1,772) 1,201 Other investments/assets 1,383 1,869 (1,034) 2,218 Valuation reserve on deferred taxes 575 785 -- 1,360 ------------------------------------- $11,246 $ 6,196$ (6,894) $10,548 ===================================== -27- Form 10-K Exhibit Index Exhibit Description 11 Statement Regarding Computation of Net Income per Common Share 13 Selected Excerpts from the Annual Report to Shareholders for fiscal year ended September 30, 1996 21 Subsidiaries 23 Consent of Coopers & Lybrand L.L.P. 27 Financial Data Schedule (Selected financial data - for EDGAR electronic filing only to SEC -28- EX-11 2 Exhibit 11 The Advest Group, Inc. and Subsidiaries Computation of Net Income Per Common Share For the years ended September 30, - - ------------------------------------------------------------------- Assuming (Primary) Full dilution* - - ------------------------------------------------------------------- (In thousands, except per share amounts) 1996 1995 1994 1996 1995 - - ------------------------------------------------------------------- Net income $11,798 $6,351 $3,053 $11,798 $6,351 Interest expense on debentures, net -- -- -- 814 1,001 ------------------------------------------- Net income applicable to common stock $11,798 $6,351 $3,053 $12,612 $7,352 ========================================== Average number of common shares outstanding during the period 8,426 8,501 8,776 8,426 8,501 Additional shares assuming: Exercise of stock options 322 234 221 329 270 Conversion of debentures -- -- -- 1,515 1,527 ----------------------------------------- Average number of common shares outstanding 8,748 8,735 8,997 10,270 10,298 ======================================== Net income per share $ 1.35 $ 0.73 $ 0.34 $ 1.23$ 0.71 ========================================== * For the year ended September 30, 1994, net income per share assuming full dilution is the same as primary net income per share. -29- EX-13 3 [page 17 of Annual Report]
Five Year Financial Summary For the years ended September 30, - - ------------------------------------------------------------------------------------------------------------ In thousands, except per share amounts and percentages 1996 1995 1994 1993 1992 - - ------------------------------------------------------------------------------------------------------------ Revenues Commissions: Listed $ 43,390 $ 39,773 $ 36,284 $ 39,199 $ 40,208 Mutual funds 34,210 22,693 22,337 21,448 18,472 Over-the-counter 19,714 12,554 10,374 9,527 9,699 Insurance 7,969 4,487 5,164 3,634 3,260 Options 3,552 3,071 2,570 2,407 3,237 Other 1,280 1,686 2,761 1,620 1,626 ------------------------------------------------------------------------ 110,115 84,264 79,490 77,835 76,502 ------------------------------------------------------------------------ Interest: Loans 16,041 20,005 19,016 19,615 23,094 Margin accounts 25,246 23,761 17,868 14,158 17,990 Investments 3,836 6,132 6,793 6,227 8,738 Securities inventory 1,849 1,470 1,016 1,015 970 Other 8,253 4,714 1,391 1,428 1,985 ------------------------------------------------------------------------ 55,225 56,082 46,084 42,443 52,777 Principal transactions 38,591 41,424 32,297 33,662 40,364 Investment banking 28,166 17,470 25,743 31,102 30,675 Asset management and administration 20,050 16,810 16,399 14,111 15,669 Gain on sale of investment advisory business, net 627 10,092 -- -- -- Other 8,607 6,491 5,216 2,878 3,894 ------------------------------------------------------------------------ Total revenues 261,381 232,633 205,229 202,031 219,881 ------------------------------------------------------------------------ Expenses Compensation and benefits 147,091 121,611 114,800 111,615 110,474 ------------------------------------------------------------------------ Interest: Deposits 8,449 11,002 9,613 11,290 18,018 Brokerage customers 8,769 9,928 6,342 5,383 6,690 Borrowings 4,651 4,704 5,064 5,120 5,110 Other 7,556 4,932 1,565 1,229 1,618 ------------------------------------------------------------------------ 29,425 30,566 22,584 23,022 31,436 Communications 20,030 18,418 18,662 16,627 14,771 Occupancy and equipment 17,567 17,369 15,614 15,637 17,714 Business development 5,613 4,204 4,532 4,033 3,908 Professional 5,543 5,468 6,231 5,248 5,160 Brokerage, clearing and exchange 4,221 3,922 3,693 3,579 3,654 Provision for credit losses and asset devaluation 1,258 10,338 5,411 4,292 26,444 Provision for restructuring -- -- -- -- 1,020 Other 9,565 8,976 8,347 9,907 9,722 ------------------------------------------------------------------------ Total expenses 240,313 220,872 199,874 193,960 224,303 ------------------------------------------------------------------------ Income (loss) before taxes and extraordinary credit 21,068 11,761 5,355 8,071 (4,422) Provision for income taxes 9,270 5,410 2,302 2,903 175 ------------------------------------------------------------------------ Income (loss) before extraordinary credit 11,798 6,351 3,053 5,168 (4,597) Extraordinary credit - utilization of operating loss carryforwards -- -- -- 2,103 -- ------------------------------------------------------------------------ Net income (loss) $ 11,798 $ 6,351 $ 3,053 $ 7,271 ($ 4,597) ======================================================================== - - ------------------------------------------------------------------------------------------------------------ Per share data Primary net income (loss) $ 1.35 $ 0.73 $ 0.34 $ 0.79 $ (0.48) Net income (loss) assuming full dilution $ 1.23 $ 0.71 $ 0.34 $ 0.75 $ (0.48) Book value $ 10.62 $ 9.42 $ 8.62 $ 8.16 $ 7.22 Other data Total assets $ 965,177 $ 830,815 $ 884,855 $ 885,182 $ 796,102 Shareholders' equity $ 89,242 $ 78,932 $ 73,980 $ 73,989 $ 67,656 Subordinated borrowings $ 20,552 $ 20,552 $ 20,997 $ 21,375 $ 21,671 Long-term borrowings $ 19,744 $ 17,240 $ 30,388 $ 15,038 $ 11,688 Return on average equity 14.0% 8.4% 4.1% 10.2% * Average common and common equivalent shares outstanding 8,748 8,735 8,997 9,248 9,598 - - ------------------------------------------------------------------------------------------------------------ * As a result a of net loss in 1992 this item is not meaningful.
-30- [page 18 of Annual Report] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Business Environment The Advest Group, Inc. ("AGI"), together with its subsidiaries (the "Company"), provides diversified financial services including securities brokerage, trading, investment banking, consumer lending, trust and asset management. Advest, Inc. ("Advest"), a regional broker/dealer and the Company's principal subsidiary, provides brokerage, investment banking and asset management services to retail and institutional investors through 80 sales offices in 16 states and Washington, DC. Advest Bank (the "Bank"), an FDIC-insured, Connecticut chartered savings bank, offers residential mortgage lending and trust services primarily through Advest's branch network. Other subsidiaries include Boston Security Counsellors ("BSC"), an investment management company serving private clients and Billings & Co., Inc. ("Billings"), a company specializing in private placement offerings primarily in real estate. All aspects of the Company's business are highly competitive and impacted by regulatory and other factors outside of its control, including general economic and financial conditions, the volume and price levels of securities markets, the demand for investment banking services and interest rate volatility. The Company closely monitors its operating environment to enable it to respond promptly to market cycles. In addition, the Company seeks to lessen earnings volatility by controlling expenses, increasing fee-based business and developing new revenue sources. Nonetheless, operating results of any individual period should not be considered representative of future performance. For the year ended September 30, 1996, the Company reported net income of $11.8 million ($1.35 per share) compared with net income of $6.4 million ($.73 per share) in 1995 and $3.1 million ($.34 per share) in 1994. Record revenue levels were achieved for the second consecutive year and earnings per share was the highest in the Company's history. Advest, Inc. Despite some fourth quarter volatility, the securities markets remained strong throughout fiscal 1996. Bolstered by healthy corporate earnings, a growing economy, low inflation and low interest rates, the Dow Jones Industrial Average topped 5000 in our first quarter, set a new record at 5895 and closed the fiscal year at 5882, a 23% gain from 1995. Technology stocks led the way much of the year and contributed to a string of record highs for the Nasdaq Composite which closed the year at 1227, up 18% from the prior year but short of its record 1249. The S&P 500 closed the year at 687, up 18% year to year and a record high. Equity underwriting levels were high through most of the year benefiting from the robust markets. Advest reported pre-tax income of $22.4 million, an increase of 73% from $12.9 million in fiscal 1995. Total revenues increased 22% to $239.5 million, a record high. Year to year revenue gains were posted for investment banking, up 61%, asset management activities, up 36%, commissions, up 31%, net interest income, up 10%, and other revenues, up 27%. Current year revenue from principal transactions declined 7%, primarily as a result of Nasdaq trading losses. Total expenses increased 19% to $217.1 million, primarily due to increased compensation costs related to market-driven sales compensation and personnel additions in research, investment banking, sales and trading. Advest Bank Advest Bank's 1996 pre-tax earnings were $1.1 million compared with a pre-tax loss of $9.3 million last year. The Bank recorded total loss provisions of $10.1 million for fiscal 1995, including those required by the implementation of the accelerated asset disposition plan as well as the bulk sales consummated in the first half of the year. See discussion below under the caption "Asset Quality - Advest Bank." Current year results represent the Bank's first fiscal year profit since 1989. During 1996, the Bank continued its strategic transition from a portfolio residential and commercial lender to a mortgage banker, originating loans primarily for sale into secondary markets, and a provider of personal trust services. The Bank provides first mortgage and home equity lending in 23 states, primarily through referrals from Advest's retail sales force. During 1996, $90.2 million of residential mortgage and home equity loans were originated. Secondary market mortgage transactions totaled $67.8 million. During 1996, trust assets increased 60% to approximately $300 million. In July 1996, the Banking Commissioner of the State of Connecticut and the Federal Deposit Insurance Corporation (the "FDIC"), the Bank's principal regulators, lifted a Memorandum of Understanding ("MOU") the Bank had operated under since 1991. During the June 1996 quarter, the Bank had previously satisfied all outstanding requirements of the MOU, including reducing troubled assets, raising its capital ratio and maintaining adequate reserves. At September 30, 1996, the Bank's leverage capital, risk-based and Tier 1 capital ratios were 6.56%, 10.44% and 9.19%, respectively, which satisfied all regulatory requirements. Other During fiscal 1995, the Company sold the investment advisory business related to its proprietary mutual funds in three separate transactions. The total gain from all sales was $10.1 million and is reported as a separate line item on the Consolidated Statements of Earnings. Current year revenues include $.6 million in trailer payments received under the terms of one of the sales agreements. In addition, as a result of the sales, Advest's 1996 mutual fund sales credits were favorably impacted because it no longer pays up front commissions to brokers on sales of the former proprietary funds. Conversely, BSC's 1996 operating results were negatively impacted by the sale of the advisory business as discussed below. -31- [page 19 of Annual Report] BSC reported a current year pre-tax loss of $46,500 compared with pre-tax income of $1.1 million in 1995. BSC was the investment advisor for the Company's proprietary mutual funds, prior to their sale in fiscal 1995. The funds accounted for approximately 70% of BSC's revenue. In August 1996, Prescott Crocker, a former portfolio manager for the Company's proprietary funds, was named president of BSC. BSC's current business focus is advising private clients and at September 30, 1996, assets under management were $470 million, reflecting a 31% one year gain. Results of Operations Net income for the years ended September 30, 1996, 1995 and 1994 was $11.8 million, $6.4 million and $3.1 million, respectively. The following table summarizes percentage changes for revenues, expenses and pre-tax income for the three years in the period ended September 30, 1996. - - ------------------------------------------------------------------ % % In thousands, Increase Increase except percentages 1996 (Decrease) 1995 (Decrease) 1994 - - ------------------------------------------------------------------ Revenues Commissions $110,115 31% $ 84,264 6% $ 79,490 Interest 55,225 (2) 56,082 22 46,084 Principal transactions 38,591 (7) 41,424 28 32,297 Investment banking 28,166 61 17,470 (32) 25,743 Asset management and administration 20,050 19 16,810 3 16,399 Gain on sale of investment advisory business, net 627 (94) 10,092 -- -- Other 8,607 33 6,491 24 5,216 ---------------------------------------- 261,381 12 232,633 13 205,229 Interest expense 29,425 (4) 30,566 35 22,584 ------------------------------------------ Net revenues 231,956 15 202,067 11 182,645 ------------------------------------------ Non-interest expenses 210,888 11 190,306 7 177,290 ------------------------------------------ Pre-tax income $ 21,068 79% $ 11,761 120% $ 5,355 ========================================== Net revenues were $232.0 million in the current year, a 15% increase from $202.1 million last year. Excluding the impact from the 1995 sale of the Company's mutual fund advisory business, net revenues increased 20% year to year. Non-interest expenses increased 11% to $210.9 as a $26.7 million (23%) increase in compensation costs at Advest was partly offset by a $9.1 million (88%) decline in current year loss provisions. Fiscal 1995 loss provisions included substantial charges related to the accelerated asset disposition plan of the Bank. For fiscal 1995, net revenues were $202.1 million compared with $182.6 million in 1994, an increase of 11%. Increases were posted in all revenue categories, except investment banking, with significant gains in revenue from principal transactions and net interest. Revenues also included $10.1 million in gains from the sale of the investment advisory business related to the Company's proprietary mutual funds. Non-interest expenses increased 7% primarily due to higher sales-driven compensation, incentives and employee insurance, increased equipment costs associated with technology upgrades and loss provisions at the Bank related to the accelerated asset disposition plan. Commissions Current year agency commission revenues surpassed the $100 million level for the first time, reflective of the upward momentum of the equity markets through out the year. Commissions increased $25.9 million (31%) to $110.1 million. Year to year revenue gains were posted in each quarter and record levels were attained from mutual funds, including distribution and deferred sales charges, up $11.5 million (51%), over-the-counter issues, up $7.2 million (57%) and insurance products, primarily variable annuities, up $3.5 million (78%). Commissions on listed securities increased $3.6 million (9%). Commissions revenue rose $4.8 million (6%) to $84.3 million in 1995. Significant revenue gains in the second half of the fiscal year, including a 45% increase in the fourth quarter, offset a 17% decline through the first six months. Commissions on over-the-counter issues increased $2.2 million (21%) and listed securities increased $4.0 million (10%). Mutual fund sales, increased $.4 million (2%) in 1995 as a result of a $2.0 million (42%) fourth quarter gain. Sales of commodities and insurance products declined $.9 million (54%) and $.7 million (13%), respectively. -32- [page 20 of annual report] Principal Transactions Revenue from principal transactions includes realized and unrealized gains and losses on Advest's trading accounts and related sales credits. Advest enters into derivative transactions to hedge certain trading positions, primarily municipal and corporate bonds. Derivatives are marked to market daily with unrealized gains and losses reflected in revenue from principal transactions. (Further discussion of derivatives is included under the caption "Derivative Financial Instruments" and in Notes 1 and 15 to the Consolidated Financial Statements.) Advest holds only nominal inventory positions of high yield securities. Gains and losses on the Bank's trading and available for sale securities are reflected in revenue from principal transactions. Current year revenue from principal transactions declined $2.8 million (7%) to $38.6 million from the record level set in the prior year. Equity commissions increased $3.9 million (31%) reflecting strong investor demand for small cap stocks during the year. This increase was substantially offset by a $3.3 million swing in over-the-counter trading results from a $1.4 million profit in 1995 to a current year loss of $1.9 million. Commissions on debt securities declined $2.7 million (12%) primarily reflecting interest rate uncertainty and strong equity markets. A $3.0 million decrease was posted from commissions on government and municipal issues which were also impacted by tax reform concerns. During the second quarter of 1996, Advest established a corporate bond trading desk specializing in investment grade corporate bonds. Related commissions increased $.4 million from 1995. Fiscal 1995 revenues were $41.4 million, a $9.1 million (28%) increase over 1994. Revenue gains were posted across the board. Commissions on equities gained $2.9 million (29%) and related trading profits rose $.9 million (155%), reflecting the market rally in the second half of the year. Sales credits on debt securities increased $2.0 million (9%), led by commissions on municipal bonds which increased $3.0 million, due to strong sales in the first half of the year. In the second half, municipal sales slowed significantly due to investor concerns about tax changes, specifically the possibility of a flat tax. Sales credits increased $1.1 million for government zero coupon securities. Commissions on mortgage-backed obligations declined $2.0 million. Trading profits on municipal, government and corporate bonds increased $2.0 million, $.5 million and $.4 million, respectively. Investment Banking To generate investment banking revenue, Advest manages and participates in underwritings of corporate and municipal securities and closed-end funds. Advest also provides merger and acquisition services and other consulting and valuation activities. In general, the Company does not participate in bridge financing activities, however, during 1995, Advest provided such financing in one underwriting deal as discussed below. Advest's Corporate Finance Department, including the Financial Institutions Group, concentrates its efforts on raising capital for mid-size companies, primarily in the banking, insurance, high tech and health care industries. Public Finance services health care and educational institutions as well as state and local issuers. Investment banking revenues increased $10.7 million (61%) in the current year. On the equity side, Corporate Finance raised more than $365 million for clients from underwriting and private placement activities. Underwriting fees, including private placements, increased $3.2 million (555%) and related commissions and trading profits increased $2.6 million (48%) and $.4 million (355%), respectively. Syndicate trading profits increased $.7 million (81%). Merger and acquisition services were provided in transactions valued at more than $330 million and related fees rose $2.5 million (66%). Consulting and valuation fees declined $.9 million (49%). On the debt side, Advest continued to gain market share in a contracting new issue environment during 1996 and, during the past two years, has expanded its institutional sales efforts with the recruitment of several experienced professionals. Public finance underwriting fees more than doubled to $1.1 million and municipal syndicate trading profits were $.4 million compared with a negligible profit in the prior year. Sales credits on municipal issues gained $.5 million (46%). During 1996, Advest recognized gains of $1.1 million on the exercise of warrants, a 239% increase from the prior year. Fiscal 1995 investment banking revenues declined $8.3 million (32%) to $17.5 million from 1994. Revenue from merger and acquisition services increased $3.1 million (437%) but was more than offset by declines in most other categories. Underwriting commissions declined $4.2 million (39%), reflecting a substantial decline in the number of new equity and mutual and closed-end fund offerings. Syndicate trading profits declined $1.2 million each for funds and equities. Corporate finance underwriting fees declined $1.5 million (73%) and public finance and syndicate underwriting fees declined $.5 million (54%) and $.4 million (85%), respectively, reflecting both the lower volume of new issues and lower fees. Revenue from consulting and valuation services declined $1.1 million (36%) in 1995. Revenue from the exercise of stock warrants was $1.0 million higher in fiscal 1994. On August 3, 1995, Advest provided bridge financing in the amount of $.5 million to a company for which Advest was underwriting a secondary stock offering. The loan was repaid on August 31, 1995. Asset Management and Administration Advest's Investment Management Department provides various services for its managed account base including client profiling, asset allocation, manager selection and -33- [page 21 of annual report] performance measurement. The Bank provides personal trust services primarily through Advest's retail sales force. BSC provides advisory services to a diverse clientele and was investment advisor to the Company's proprietary mutual funds, until their sale in fiscal 1995. The Company acts as transfer agent and provides dividend disbursing and reinvestment for its formerly proprietary mutual funds as well as dividend reinvestment for more than 1,400 equities and 1,300 mutual and closed-end funds. Other services include retirement plan administration, securities custody and safekeeping. Current year revenues increased $3.2 million (19%), reflecting a record level for the second consecutive year. Advest's revenue increased $4.8 million (36%). Investment Management opened more than 1,000 new accounts with total assets of $568 million, representing a 23% year to year increase in new business generation. At September 30, 1996, assets serviced by Investment Management were $1.9 billion, an increase of 21% from the prior year. BSC's revenue declined $1.9 million (61%). The 1995 sale of the Company's proprietary mutual fund advisory business accounted for a $2.1 million decline in revenue as BSC had served as sole investment advisor for the funds. Revenue from BSC's private client business increased $.2 million (15%) in 1996. The Bank's revenues increased $.2 million (41%) primarily due to growth in trust business. Fiscal 1995 asset management revenues were $16.8 million, a $.4 million (3%) increase over 1994. Advest's revenues increased $1.3 million (11%) to $13.3 million. Advest's managed account base increased 49% to $1.6 billion during fiscal 1995 accounting for a $1.1 million increase in money management fees. Increased money market service fees accounted for the balance of the 1995 gain. BSC's revenue was $3.2 million, a $1.0 million (24%) decrease from 1994. Fourth quarter revenue declined $.8 million (73%), reflecting the third quarter sales of the Company's proprietary mutual funds. At September 30, 1995, private accounts under BSC's management were $358 million, a 222% increase from the prior year. Other Income Other income increased $2.1 million (33%) during the current year. Advest's revenue increased $1.7 million primarily due to higher fee income and a $.9 million first quarter gain on the sale of an equity investment. Prior year revenue included a $.5 million gain from the sale of an exchange seat. The Bank's income increased $.3 million primarily due to a $.4 million increase in gains on secondary markets mortgage transactions. Other income increased $1.3 million (24%) to $6.5 million in fiscal 1995. Advest revenues increased $1.2 million (25%), primarily due to a $.5 million gain on the sale of an exchange seat and higher execution and service fee income. Net Interest Income Net interest income is the excess of interest income and loan fee income over interest expense and is derived primarily by the Bank and Advest. The Bank derives most of its interest income from residential mortgage and home equity loans and from investments. The Bank's loans and investments are primarily funded by interest-bearing deposits, advances from the Federal Home Loan Bank of Boston ("FHLBB") and by the Bank's equity capital. The Bank also enters into derivative transactions, including interest rate swap and interest rate cap contracts, as part of its interest rate risk management. The net payments or receipts under these contracts are accounted for as an adjustment to interest expense. (Further discussion of derivatives appears under the caption "Derivative Financial Instruments" and in Note 15.) Advest derives interest income from financing brokerage customers margin transactions, entering into reverse repurchase agreements and stock borrowing transactions as well as from its securities inventory. Advest pays interest primarily on brokerage customer credits held for reinvestment, on its stock lending activities and short and long-term borrowings. Net interest income increased $.3 million (1%) to $25.8 million. Advest's net interest increased $1.7 million (10%) primarily due to significantly higher average margin balances in the current year. Interest spreads declined slightly primarily due to lower average interest rates in 1996, a sizable decline in average free credit balances in brokerage accounts and increased borrowing costs related to higher levels of trading inventories, specifically corporate bonds. Increased stock lending/borrowing activities favorably impacted net interest income in the current year. The Bank's net interest income declined $1.7 million (17%) during 1996. The decline is attributable to a $48.3 million (18%) decline in the Bank's asset base, particularly an ongoing decline in the Bank's commercial loan portfolio. The Bank's ratio of earning assets to total bank assets was 96.7% in the current year compared with 97.2% in 1995. Fiscal 1995 net interest income was $25.5 million, a $2.0 million (9%) increase from the prior year. Advest's net interest was $18.0 million, a 20% increase, primarily due to higher income from margin accounts. Higher average interest rates during 1995 resulted in increased spreads between interest charged on margin accounts and the cost of funds. Gains from higher rates were partly offset by a decline in average margin debit balances during fiscal 1995. Net revenue also increased from short-term investments and stock lending activities, as well as trading accounts, principally municipal bonds. The Bank's net interest income declined $.9 million (8%) during 1995. The decline was attributable to an $84.2 million (24%) decline in assets under management, partly offset by improved interest margin on average assets. The Bank's earning asset base improved -34- [page 22 of annual report] to 97.2% in 1995 from 93.1% in 1994, largely as a consequence of the accelerated asset disposition plan which reduced NPAs substantially. (See discussion under the caption "Asset Quality - Advest Bank".) Non-Interest Expenses Current year compensation costs increased $25.5 million (21%). Advest's compensation increased $26.7 million (23%) primarily as a result of increased sales compensation and related incentives and higher firm payroll associated with the recruitment of several experienced professionals in research, investment banking, institutional sales and trading. BSC's payroll declined $.6 million (49%) as a result of personnel reductions related to the sale of the Company's proprietary mutual fund advisory business in fiscal 1995. Communication costs increased $1.6 million (9%) primarily due to higher volume- driven costs for Advest's third party back office data processing provider and increased software and supplies costs related to ongoing technology upgrades. Business development costs increased $1.4 million (34%) primarily due to significant increases in the number of investment executives qualifying, as a result of sales production and contests, to attend Advest's National Sales and Education Conference and other Company-sponsored events. Provisions for credit losses and asset devaluation declined $9.1 million in the current year due to substantial charges recorded in fiscal 1995 primarily related to the accelerated asset disposition plan implemented by the Bank. Other expenses increased $.6 million (7%) primarily due to higher settlement costs at Advest which were partly offset by a decline in FDIC deposit insurance premiums at the Bank. Fiscal 1995's compensation costs increased $6.8 million (6%) with all of the increase coming in the fourth quarter. Advest's compensation increased $7.3 million (7%) primarily due to increased sales-driven salesmen's compensation and related incentives. BSC's compensation costs declined $.4 million (22%) due to staff reductions related to the third quarter sale of the Company's mutual fund advisory business. The Bank's compensation costs increased $.3 million primarily due to personnel additions in its mortgage lending and trust departments. Occupancy and equipment costs increased $1.8 million (11%). During the latter part of fiscal 1994 and throughout 1995, Advest upgraded the data processing network throughout its branch office network and most operations departments. New workstations and software enhancements were installed and connected to a firm-wide local area network. Increased depreciation and maintenance costs associated with the upgrade account for most of the increase in occupancy and equipment costs with the balance primarily due to higher office rent expense. The provision for credit losses and asset devaluation increased $4.9 million (91%) to $10.3 million. The Bank's loss provisions were $10.1 million, a $7.5 million (286%) increase, and primarily related to writedowns associated with the accelerated asset disposition plan and bulk sales. Provisions at AGI and Billings declined $2.0 million and $.7 million, respectively, primarily related to reserves recorded during fiscal 1994 to settle a limited partnership class action suit. Other expenses increased $.6 million (8%) to $9.0 million primarily due to increased settlement, syndicate, computer software and transfer fee expenses at Advest. Professional fees declined $.8 million (12%) primarily due to lower legal and/or consulting expenses at most subsidiaries and AGI. Income Taxes The effective income tax rates were 44%, 46% and 43%, respectively, for 1996, 1995 and 1994. The effective tax rate declined to 44% in the current year due to reduced state tax obligations, particularly in Connecticut and Pennsylvania. The 1995 rate primarily reflects the impact of higher levels of income apportioned to states with higher average tax rates. At September 30, 1996, the Company had net deferred tax assets, net of a $1.7 million valuation allowance, of $2.1 million. The Company expects to realize all deferred tax assets, except for certain state net operating loss carryforwards for which it has established the above valuation allowance. For further information on the Company's income taxes refer to Notes 1 and 13 to the Consolidated Financial Statements. Derivative Financial Instruments Advest Bank The Bank enters into transactions involving derivative securities, including interest rate swap and interest rate cap contracts as part of the Bank's management of interest rate risk. (See Note 15.) Swap and cap contracts are used to hedge the cost of funds so that a more stable net interest income will be earned by the Bank. The net payments or receipts under these contracts are accounted for as an adjustment to interest expense. The amounts exchanged are determined by reference to the notional amounts and other terms of the contracts. The Bank is exposed to credit-related losses in the event of non- performance by counterparties but does not expect any parties to fail to meet their obligations. The Bank currently has outstanding contracts only with the FHLBB, which is the counterparty in $20.0 million and $5.0 million of the Bank's swap and cap contracts, respectively. The notional amounts of contracts entered into by the Bank and their potential credit exposure are disclosed in Note 15. The notional amounts of derivatives do not represent amounts exchanged by the parties and thus are not a measure of the Bank's exposure through the use of swap and cap contracts. Therefore, they are not recognized as assets or liabilities on the balance sheet. The Bank's credit exposure is limited to the net difference between the calculated pay and receive amounts on each transaction which is generally netted and paid quarterly. -35- [page 23 of annual report] Advest, Inc. Advest periodically hedges a portion of its trading inventory, primarily municipal and corporate bonds, when the market risk based on inventory levels, exceeds an acceptable limit, as defined in its hedging policy. Hedge instruments used to date are short-duration exchange-traded futures and options. Hedging is limited to the underlying trading portfolio's interest rate risk, based on pre-determined inventory levels, and is not speculative in and of itself. Hedge positions and the underlying inventory are marked-to-market daily. Positions are reviewed daily and, monthly, the hedging strategy is re- evaluated based on anticipated inventory levels and composition, and necessary transactions are executed to achieve the target hedged position. The fair value of a derivative contract is the amount Advest would have to pay a third party to assume its obligation under the contract or the amount Advest would receive for its benefits under the contract in the reverse situation. At both September 30, 1996 and 1995, Advest had no open hedge positions. See Note 15. Asset Quality Advest Bank The Bank is primarily a secured lender, with real estate being the predominant form of collateral. Current lending activities focus on originating loans secured by owner occupied one to four family residential property. During 1996, $43.1 million of fixed rate and adjustable loans were originated and secondary market sales and loan securitizations totaled $67.8 million. In addition, $47.1 million of home equity lines of credit were originated and retained in portfolio and advances on home equity lines of credit increased by a net $16.1 million for the year. Residential (including home equity line of credit loan advances) and commercial loan portfolios decreased $26.4 million and $20.1 million, respectively, in 1996, and increased $11.2 million and decreased $53.8 million, respectively, in 1995. At September 30, 1996, the Bank's loan portfolio was comprised of $144.0 million of single family residential mortgages and $42.9 million of commercial and other loans, representing 77% and 23% of total loans, respectively. During fiscal 1995, the Bank evaluated alternatives to expedite the disposition of its nonperforming assets ("NPAs"). During the first half of fiscal 1995, the Bank sold $14.5 million of NPAs and commercial real estate loans in bulk sale transactions at discounts to carrying value and recorded charges of $2.8 million. During the third quarter, the Bank implemented an accelerated asset disposition plan with the objectives of allowing Bank management to focus on its residential mortgage banking and trust businesses and expediting conditions under which a Memorandum of Understanding ("MOU") the Bank was subject to would be lifted or modified. In accordance with the plan, the Bank recorded loss provisions of $6.0 million in the third quarter of 1995 to write down assets targeted for accelerated disposition. Supplementary provisions of $.5 million were booked in the fourth quarter. Substantial discounts to carrying value were required in order to attract buyers of distressed assets. During the current year, the Bank achieved compliance with all regulatory requirements including those of the MOU and, in July 1996, the Bank's regulators lifted the MOU. At September 30, 1996 and 1995, the Bank's NPAs were $2.4 million and $3.1 million, respectively, both reflecting 1% of total bank assets. At September 30, 1996 and 1995, respectively, earning assets were 96.7% and 97.2% of total bank assets. Loan delinquency was 1.84%, .87% and 3.84% of total loans at September 30, 1996, 1995 and 1994, respectively. Had interest been accrued at contractual rates on non-accrual and re-negotiated loans, interest income would have increased by approximately $.3 million, $.5 million and $.8 million in 1996, 1995 and 1994, respectively. AGI adopted SFAS 114 "Accounting by Creditors For Impairment of a Loan," effective October 1, 1995. The statement requires that impaired loans, defined to be loans where it is probable that the collection of payments will not be in accordance with contractual terms, be measured at the present value of the expected cash flows discounted at the loan's effective interest rate, or at the observable or estimated fair value of the collateral, if the loan is collateral dependent, when assessing the need for a loss reserve. Bank loans classified impaired as of September 30, 1996 totaled $5.3 million. Included in Bank impaired loans are $3.8 million of restructured loans that have been returned to accruing status under the terms of their restructuring, and $.8 million of loans in which potential credit problems may lead to future non-accrual status or possible charge-off. All remaining amounts classified impaired are included in non-accrual loans (See Note 2). The adoption of the statement did not result in any additional allowance for loan losses. Advest Group, Inc. At September 30, 1995, the Bank transferred $4.6 million of NPAs to AGI in accordance with the accelerated asset disposition plan previously discussed. The assets were transferred at their expected sales prices which reflected discounts from fair value. During 1996, $3.2 million of these assets were liquidated. It is expected that most of the remaining $1.4 million will be sold or repaid during fiscal 1997. AGI also holds a $9.0 million first mortgage on a property owned by a real estate limited partnership for which Billings Management Company, a subsidiary of Billings, serves as general partner. The loan was restructured during 1995 as part of a class action settlement on behalf of the limited partners. The first payment under the mortgage is not due until January 2000 therefore, the loan is technically performing. The property has been at full occupancy with a waiting list for nearly -36- [page 24 of annual report] three years, however, given its significant future financial commitments, management has decided to treat the mortgage as a nonperforming loan and, accordingly, no interest income is being accrued. Liquidity and Capital Resources The Company's total assets were $965.2 million at September 30, 1996, reflecting a 16% increase from the prior year. The Bank's assets declined $48.3 million (18%) to $221.5 million reflecting the Bank's strategic transition to a mortgage banker whereby substantial levels of new loan originations are sold into secondary markets instead of being retained in portfolio. Conversely, Advest's assets increased $181.4 million (34%) to $713.0 million. The increase is primarily due to higher receivables related to stock loan/borrow activities, increased trading account balances, primarily corporate bonds, and higher margin debits. With the primary exception of loans held in portfolio by the Bank which comprise 20% of total assets, the Company's assets are highly liquid in nature. Liquid assets which include cash and cash equivalents, receivables from brokerage customers, interest-earning deposits, securities purchased under agreements to resell, securities borrowed, receivables from brokers and dealers, available for sale and trading securities comprised 72% of total assets at September 30, 1996 compared with 61% for the prior year. Shareholders' equity increased $10.3 million (13%) to $89.2 million primarily as a result of a $11.8 million increase in retained earnings from current year operating results. Treasury stock increased $2.6 million (22%), due to repurchases of the Company's common stock partly offset by sales of treasury shares to various employee equity plans and the exercise of stock options. At September 30, 1996, 2,513,077 shares of the Company's common stock had been purchased since the inception of the stock buyback program in August 1990, at an average price of $5.89 per share. SFAS 115, which was adopted in fiscal 1995 (See Note 4), resulted in a $.2 million reduction to shareholders' equity primarily related to the Bank's available for sale securities. AGI's principal source of funding is the earnings distributions from its subsidiaries which, except as discussed below, is unrestricted. Advest, Inc. In addition to funds generated from operations, sources used by Advest to finance assets include credit balances in brokerage accounts which decreased $17.4 million (6%), short-term borrowings which increased $33.8 million (Advest had no short-term debt at September 30, 1995), deposits for securities loaned which increased $100.4 million (88%), securities sold short which increased $42.6 million (879%) and long-term borrowings which were unchanged from 1995. Prior to the current year, Advest's short-term borrowings primarily resulted from timing differences related to trade settlements and were usually repaid within a day or two. A significant increase in Advest's corporate bond trading inventories (related to trading activities initiated by Advest in the second fiscal quarter) together with the securities industry conversion to same day funds settlement in February 1996 have resulted in substantial and recurring short-term borrowings by Advest. Advest has arrangements with certain financial institutions whereby it can borrow amounts on a collateralized basis, principally to support securities settlements and underwriting activities. Advest has substantial levels of customer and firm securities which can be used for such purposes. In July 1996, Advest's lead lending bank doubled Advest's secured, uncommitted line of credit to $90 million. Advest had requested the increase primarily to finance its increased inventory levels. Management believes that operating cash flow together with available credit lines will provide sufficient resources to meet all present and reasonably foreseeable capital needs. The Securities and Exchange Commission ("SEC") requires Advest to maintain liquid net capital to meet its obligations to customers. At September 30, 1996, Advest had excess net capital of approximately $35.5 million. See also Note 12. Advest Bank At September 30, 1996, the Bank's liquid assets included cash, federal funds and available for sale securities of $16.4 million. In addition, the Bank is a member of the FHLBB and, accordingly, has access to advances from the FHLBB to the extent the Bank possesses eligible collateral. At September 30, 1996, the Bank had uncommitted, eligible collateral of $90.0 million. Without giving effect to any operating results from subsequent periods, management believes that the Bank has sufficient capital to comply with the regulatory requirements. Under state bank regulatory restrictions, the Bank is currently prohibited from declaring dividends. The Federal Deposit Insurance Corporation ("FDIC") requires banks to maintain a minimum leverage capital ratio of between 4% and 5%. At September 30, 1996, the Bank's leverage capital ratio was 6.56%. The Bank is also subject to the FDIC's risk-based capital regulations which require the Bank to maintain a total risk-based capital ratio of 8%, including at least 4% Tier 1 capital. At September 30, 1996, the Bank's total risk-based and Tier 1 capital ratios were 10.44% (with capital of $16.6 million) and 9.19% (with capital of $14.6 million), respectively, which met all regulatory requirements. Pursuant to the FDIC Improvement Act ("FDICIA"), the Bank is subject to rules limiting brokered deposits and interest rates. Under FDICIA, the Bank meets the conditions to be deemed a "well capitalized" bank which means it may accept brokered deposits with no restrictions. At September 30, 1996, the Bank had $62.7 million of brokered deposits. -37- [page 25 of annual report] Cash Flows Cash and cash equivalents increased $4.2 million in the current year compared with a negligible increase in 1995 and a decline of $12.0 million in 1994. The current year increase was attributed to increases in cash of $2.7 million, $.9 million and $.5 million at Advest, the Bank and AGI, respectively. Advest generated $25.2 million from financing activities, primarily short-term borrowings, but used $7.7 million for investing, primarily deferred compensation payments and capital expenditures. Advest used $14.9 million in operating cash primarily to finance increased margin debits and trading inventories. The Bank generated $47.5 million from investing activities, primarily loan collections and sales of available for sale securities, and used $47.0 million for financing activities, primarily a decrease in deposits. The break even results for 1995 resulted from $1.0 million and $.3 million increases at the Bank and AGI, respectively, which were offset by a $1.3 million decline at Advest. The Bank's increase was primarily attributed to net funds generated by the accelerated asset disposition plan and improved cash flow from operations. Advest generated strong cash flow primarily from operations and a $6.25 million long-term borrowing in 1995. However, the broker/dealer made significant 1995 capital investments in computer hardware and software to support its sales force. In addition, Advest incurred high costs associated with the recruitment of investment professionals. The 1994 decline was primarily due to a net $40.1 million increase in loan originations (new loans less principal collections), a $52.4 million increase in margin debits, a $54.8 million decline in bank deposits and a $17.6 million decline in payables to brokerage customers. These uses of cash were partly offset by increased short and long-term borrowings and proceeds from sales and maturities of investments not reinvested. During the current year, the Company used $20.4 million of operating cash primarily to finance a $43.8 million increase in margin debits, a $17.4 million decline in brokerage customer credits and a $9.8 million increase in trading inventories net of short sales. Operating cash was provided primarily by net income plus noncash items of $19.1 million and a $31.0 million decline in segregated cash required by Rule 15c3-3. Financing activities used $14.2 million of cash primarily related to a $44.5 million decline in deposits of the Bank which was partly offset by a net increase of $23.3 million in short-term borrowings. Investing activities generated $38.8 million of cash, including $25.2 million decrease in available for sale securities, $49.3 million in proceeds from loan sales which were offset by the use of $30.7 million for net loan originations. During fiscal 1995, the Company generated $28.9 million of operating cash primarily from $6.4 million of net income adjusted for non-cash revenue and expense items. Margin debits declined $13.1 million and 15c3-3 requirements for segregated customer funds declined $18.0 million generating cash. Brokerage customer credits declined $10.5 million and Advest increased its trading positions $11.1 million decreasing operating cash. Financing activities used $93.6 million primarily due to a $56.2 million decline in customer deposits at the Bank. Advest's short-term borrowings declined $22.5 million and its long- term debt increased $6.25 million. The Bank paid down its short and long-term borrowings by $9.5 million and $10.0 million, respectively. Investing activities produced positive cash flow of $64.7 million primarily as a result of $49.5 million in proceeds from the sales of performing and NPAs of the Bank and $29.6 million from securities sales by the Bank. The Company generated $10.1 million of cash from the sales of its proprietary mutual fund investment advisory business. Uses of investing cash included $4.2 million for Advest's capital expenditures and for the Bank a net $4.4 million increase in loans originated compared with principal collections on loans. In 1994, the Company used $16.0 million of operating cash primarily due to the increased margin debits and decreased brokerage customer payables noted above which were partly offset by a $56.9 million decrease in segregated cash and securities required under SEC Rule 15c3-3. Financing activities used net cash of $11.9 million as the previously noted significant decline in bank deposits was partly offset by a net $25.9 million increase in short-term borrowings and a $20.5 million increase in long-term borrowings. Investing activities generated $16.0 million in net cash due to net proceeds from the sale and maturity of investments exceeding net new loans originated. Recently Issued Accounting Pronouncements The Financial Accounting Standards Board ("FASB") has issued SFAS 121, "Accounting for the Impairment Of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and SFAS 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". The Company will adopt these pronouncements in its 1997 fiscal year as required, and does not expect their implementation to have a material impact on the Company's financial condition or results of operations. The FASB issued SFAS 123 "Accounting For Stock-based Compensation." SFAS 123 permits companies to measure stock compensation costs using either the intrinsic value-based method or the fair value-based method. When adopted in 1997, Advest intends to continue using the intrinsic value-based method and will provide the expanded disclosures required by SFAS 123. -38- [page 26 of Annual Report]
The Advest Group, Inc. Consolidated Statements of Earnings Fiscal years ended September 30, --------------- --------------- --------------- In thousands, except per share amounts 1996 1995 1994 - - -------------------------------------------------------------------- --------------- --------------- Revenues Commissions $ 110,115 $ 84,264 $ 79,490 Interest 55,225 56,082 46,084 Principal transactions 38,591 41,424 32,297 Investment banking 28,166 17,470 25,743 Asset management and administration 20,050 16,810 16,399 Gain on sale of investment advisory business, net 627 10,092 - Other 8,607 6,491 5,216 --------------- --------------- --------------- Total revenues 261,381 232,633 205,229 --------------- --------------- --------------- Expenses Compensation 147,091 121,611 114,800 Interest 29,425 30,566 22,584 Communications 20,030 18,418 18,662 Occupancy and equipment 17,567 17,369 15,614 Business development 5,613 4,204 4,532 Professional 5,543 5,468 6,231 Brokerage, clearing and exchange 4,221 3,922 3,693 Provision for credit losses and asset devaluation 1,258 10,338 5,411 Other 9,565 8,976 8,347 --------------- --------------- --------------- Total expenses 240,313 220,872 199,874 --------------- --------------- --------------- Income before taxes 21,068 11,761 5,355 Provision for income taxes 9,270 5,410 2,302 --------------- --------------- --------------- Net income $ 11,798 $ 6,351 $ 3,053 =============== =============== =============== Net income per common and common equivalent shares: Primary $ 1.35 $ 0.73 $ 0.34 Assuming full dilution $ 1.23 $ 0.71 $ 0.34 Average common and common equivalent shares outstanding: Primary 8,748 8,735 8,997 Assuming full dilution 10,270 10,298 8,997 See Notes to Consolidated Financial Statements.
-39- [page 27 of Annual Report]
The Advest Group, Inc. Consolidated Balance Sheets September 30, ------------------------------ In thousands, except share and per share amounts 1996 1995 - - - - - - - - - - - - - - - - - - - - - - - ------------------------------ Assets Cash and short-term investments Cash and cash equivalents $ 11,461 $ 7,294 Cash and securities segregated under federal and other regulations 265 31,259 ------------------------------ 11,726 38,553 ------------------------------ Receivables Brokerage customers, net 352,434 308,714 Securities borrowed 219,919 110,681 Loans, net 195,288 242,575 Brokers and dealers 5,394 2,391 Other 11,212 11,179 ------------------------------ 784,247 675,540 ------------------------------ Securities Trading, at market value 93,937 41,500 Held to maturity (market values of $22,876 and $31,473) 22,959 31,469 Available for sale, at market value 15,127 3,360 ------------------------------ 132,023 76,329 ------------------------------ Other assets Equipment and leasehold improvements, net 14,187 12,115 Other 22,994 28,278 ------------------------------ 37,181 40,393 ------------------------------ $ 965,177 $ 830,815 ============================== Liabilities & shareholders' equity Liabilities Brokerage customers $ 282,618 $ 300,011 Securities loaned 213,996 113,632 Deposits 191,186 235,656 Securities sold, not yet purchased, at market value 47,438 4,847 Short-term borrowings 39,301 10,251 Compensation and benefits 21,517 16,529 Checks payable 16,976 6,751 Brokers and dealers 7,634 9,744 Other 14,973 16,670 ------------------------------ 835,639 714,091 Long-term borrowings 19,744 17,240 Subordinated borrowings 20,552 20,552 ------------------------------ 875,935 751,883 ------------------------------ Commitements and contingent liabilities (see Notes 1, 12 and 14) Shareholders' equity Common stock, par value $.01, authorized 25,000,000 shares, issued 10,710,289 and 10,584,488 shares 107 106 Paid-in capital 68,842 67,467 Retained earnings 34,754 22,956 Unamortized restricted stock compensation (56) 0 Net unrealized gain (loss) on securities available for sale, net of taxes (223) 2 Treasury stock, at cost, 2,306,948 and 2,202,519 shares (14,182) (11,599) ------------------------------ 89,242 78,932 ------------------------------ $ 965,177 $ 830,815 ============================== See Notes to Consolidated Financial Statements.
-40- [page 28 of Annual Report]
Fiscal years ended September 30, ------------------------------------------ In thousands 1996 1995 1994 - - --------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $11,798 $ 6,351 $ 3,053 Adjustments to reconcile net income to net cash activities provided by operating activities: Depreciation and amortization 8,221 8,905 7,067 Provision for credit losses and asset devaluation 1,258 10,338 5,411 Gain on investment advisory business, net (627) (10,092) 0 Other (1,508) 1,512 2,156 (Increase) decrease in operating assets: Receivables from brokerage customers (43,823) 13,079 (52,432) Securities borrowed (109,238) (44,930) (36,623) Trading securities (52,437) (6,633) (9,094) Cash and securities segregated under federal and other regulations 30,994 18,046 56,868 Other (2,086) 1,252 2,594 Increase (decrease) in operating liabilities: Brokerage customers (17,393) (10,526) (17,613) Securities loaned 100,364 34,173 40,458 Securities sold, not yet purchased, at market value 42,591 2,660 (443) Brokers and dealers (2,110) 3,721 (3,573) Checks payable 10,225 (49) (8,207) Other 3,362 1,063 (5,646) ------------------------------------------ Net cash (used for) provided by operating activities (20,409) 28,870 (16,024) ------------------------------------------ FINANCING ACTIVITIES Net decrease in deposits (44,470) (56,229) (54,827) Proceeds from short-term borrowings 0 0 10,000 Repayment of short-term borrowings (10,496) (10,298) (6,650) Short-term brokerage borrowings, net 33,800 (22,501) 22,500 Proceeds from long-term borrowings 8,250 7,250 20,500 Repayment of long-term borrowings 0 (10,000) 0 Other (1,318) (1,811) (3,428) ------------------------------------------ Net cash used for financing activities (14,234) (93,589) (11,905) ------------------------------------------ INVESTING ACTIVITIES Proceeds from (payments for): Sales of available for sale securities 26,290 23,075 0 Maturities of available for sale securities 1,969 2,544 0 Maturities of held to maturity securities 22,252 18,466 0 Purchase of available for sale securities (3,033) (1,215) 0 Purchase of held to maturity securities (23,986) (16,439) 0 Purchase of investment securities and short-term investments 0 0 (95,847) Maturities of investments 0 0 131,734 Sales of investments 0 0 23,028 Sale of investment advisory business, net 788 10,141 0 Loans sold 49,257 36,129 0 Sales of OREO, net 3,959 6,021 11,379 Principal collections on loans 21,777 60,432 53,704 Loans originated (52,439) (67,674) (93,774) Other (8,024) (6,745) (14,249) ------------------------------------------ Net cash provided by investing activities 38,810 64,735 15,975 ------------------------------------------ Increase (decrease) in cash and cash equivalents 4,167 16 (11,954) Cash and cash equivalents at beginning of period 7,294 7,278 19,232 ------------------------------------------ Cash and cash equivalents at period end $11,461 $ 7,294 $ 7,278 ========================================== - - --------------------------------------------------------------------------------------------------------------- Interest paid $29,580 $30,560 $22,853 Income taxes paid $10,067 $ 2,273 $ 1,058 Non-cash activities: Securities available for sale (from) to investment securities $ 0 ($20,891) $27,910 Securities available for sale from held to maturity $ 9,962 $ 0 $ 0 Securitization of mortgages $27,307 $26,315 $ 0 - - --------------------------------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements.
-41- [page 29 of Annual Report]
The Advest Group, Inc. Consolidated Statements of Changes in Shareholders' Equity Net unreal- lized gain (loss) on In thousands, Unamortized securities except restricted available, share and $.01 par value Common stock Paid stock Treasury stock for Share- per share ----------------------------- in Retained compen- ---------------------------- sale holders' amounts Shares Amount capital earnings sation Shares Amount net equity of taxes - - --------------------------------------------------------------------------------------------------------- ----------------------- Balance as of September 30, 1993 10,563,422 $105 $67,378 $13,552 (1,498,805) ($7,046) $73,989 Net Income 3,053 3,053 Exercise of stock opt 6,800 1 27 28 Repuchase of common stock (488,552) (3,090) (3,090) - - --------------------------------------------------------------------------------------------------------- ----------------------- Balance as of September 30, 1994 10,570,222 106 67,405 16,605 (1,987,357) (10,136) 73,980 Adjustment to beginning balance for adoption SFAS 115 (57) (57) Net income 6,351 6,351 Exercise of stock opt 14,266 62 62 Repurchase of common stock (344,554) (2,309) (2,309) Sale of treasury stock to equity plan 129,392 846 846 Change in unrealized gain(loss) net of taxes 59 59 - - --------------------------------------------------------------------------------------------------------- ----------------------- Balance as of September 30, 1995 10,584,488 106 67,467 22,956 0 (2,202,519) (11,599) 2 78,932 Net income 11,798 11,798 Exercise of stock opt 125,801 1 571 138,270 504 1,076 Repurchase of common stock (398,900) (3,799) (3,799) Sale of treasury stock to equity plan 782 150,499 677 1,459 Change in unrealized gain(loss) net of taxes (225) (225) Stock issued under restricted stock plans, less amortization of $1 22 (56) 5,702 35 1 - - --------------------------------------------------------------------------------------------------------- ----------------------- Balance as of September 30, 1996 10,710,289 $107 $68,842 $34,754 ($56) (2,306,948) ($14,182) ($223) $89,242 ========================================================================================================= ======================= See Notes to Consolidated Financial Statements.
-42- [page 30 of annual report] Notes to Consolidated Financial Statements Note 1: Summary of Significant Accounting Policies Basis of presentation The consolidated financial statements include the accounts of The Advest Group, Inc. and all subsidiaries (collectively the "Company"). The Company provides diversified financial services including securities brokerage, trading, investment banking, consumer lending, trust and asset management. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. All material intercompany accounts and transactions are eliminated. Certain 1995 and 1994 amounts have been reclassified in the accompanying consolidated financial statements to provide comparability with the current year presentation. Cash equivalents are defined as short-term, highly liquid investments with an original maturity of three months or less including amounts due from banks, federal funds sold and overnight time deposits. Federal funds sold were $3,200,000 and $3,660,000 at September 30, 1996 and 1995, respectively. Cash and securities segregated under federal and other regulations Investments held in special reserve accounts for the exclusive benefit of customers, in accordance with Rule 15c3-3, are primarily securities purchased under agreements to resell which are financing transactions collateralized by US Government and Agency obligations and are carried at the amounts at which the securities will be subsequently resold. The collateral, which is held by a third party custodian bank, is valued daily and additional collateral is obtained when appropriate. At September 30, 1995, securities purchased under agreements to resell were $31,000,000. There were no positions at September 30, 1996. In addition, certain interest-bearing cash deposits are held in special reserve accounts for the exclusive benefit of customers. Loans Loans are carried at their unpaid principal balances, and related interest is recognized as income when earned but only to the extent considered collectible. Generally loans are placed on a nonaccrual status when interest or principal is unpaid for ninety days or earlier if circumstances indicate collection is doubtful. The Company resumes the accrual of interest on a delinquent loan if, in the opinion of management, the borrower has demonstrated adequate financial resources and intent to meet the terms and conditions of the loan, and all payments are current. If a loan has been restructured during a period in which it was delinquent, or had sufficiently met the definition of a restructured troubled loan in any other regard, a loan would not be restored to accruing status until 1) adequate collateral coverage had been provided and 2) an appropriate period (minimum six months) has elapsed during which the restructured loan has performed according to the terms and conditions of the restructuring. Loan origination fees and direct costs related to origination are deferred and amortized into interest income over the contractual life of the loan, using the level yield method. When a loan is prepaid or sold, any remaining unamortized fees and costs are credited or charged to income at that time. Effective October 1, 1995, the Company prospectively adopted Statement of Financial Accounting Standards ("SFAS") 122, "Accounting for Mortgage Servicing Rights." The adoption of SFAS 122 has not had a material impact on the Company's financial position or results of operations. Loans, usually mortgages, held for sale are carried at the lower of cost or market, as determined by outstanding commitments from investors or current investor yield requirements calculated on the aggregate loan basis, stratified based on their predominate risk characteristics, including loan type, amortization type (fixed or adjustable), and note rate. Gains and losses resulting from changes in carrying values are included in other income. Allowance for loan losses Management's determination of the adequacy of the allowance, established through charges against income, is based upon continuing evaluation of the risk characteristics of the loan portfolio, current economic and real estate market conditions, reviews of specific loans, estimates of current value of underlying collateral, changes in loan portfolio composition, the results of the most recent regulatory examination and other relevant factors. Loans are charged against the allowance when management believes that collection is unlikely. Any subsequent recoveries are credited to the allowance. The Company's reserves are general reserves and are available to absorb losses to the total loan portfolio as well as off-balance sheet commitments, such as commitments to extend credit, guarantee and standby letters of credit. As required, in October 1995, the Company adopted SFAS 114 "Accounting by Creditors for Impairment of a Loan", as amended by SFAS 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." The adoption of SFAS 114, as amended by SFAS 118, did not result in any additions to the provision for loan and credit losses solely because of adoption, and there was no change in the methods of recognizing interest income on impaired loans. -43- [page 31 of annual report] Receivables from and payables to brokerage customers Receivables from and payables to brokerage customers arise from cash and margin transactions executed by Advest on their behalf. In virtually all instances, receivables are collateralized by securities with market values in excess of the amounts due. The collateral is not reflected in the accompanying financial statements. A reserve for doubtful accounts is established based upon reviews of individual credit risks, as well as prevailing and anticipated economic conditions. At September 30, 1996 and 1995, the reserve was $791,000 and $743,000, respectively. Included in payables to brokerage customers are free credit balances of $259,910,000 and $278,450,000 at September 30, 1996 and 1995, respectively. Advest pays interest on credit balances when the customer has indicated that the funds are for reinvestment purposes. Securities loaned and securities borrowed Advest loans, to other brokers and dealers, securities owned by its customers and others for which it receives cash deposits or other securities as collateral. Advest also acts in an agency capacity whereby it borrows securities from one broker-dealer and lends to another. Securities borrowed and securities loaned are recorded at the amount of cash collateral advanced or received, respectively. The initial collateral advanced or received has a market value equal to the market value of the underlying securities. The values of such securities at September 30, 1996 and 1995 approximate amounts owed. Trading positions Advest's trading securities and securities sold, not yet purchased are valued at market with unrealized gains and losses reflected in current period revenues from principal transactions and investment banking. Trading securities are generally held for resale within a relatively short time period. Securities sold, not yet purchased represent an obligation of Advest to deliver specific equity and debt securities at predetermined prices. Advest is obligated to acquire the securities at prevailing market prices in the future to satisfy this obligation. Investment securities Securities available for sale are carried at fair value with unrealized holding gains or losses credited or charged directly to shareholders' equity. Realized gains and losses are recorded on trade date by the specific identification method and are included in revenue from principal transactions. Securities, which the Company has the positive intent and ability to hold until maturity, are carried at amortized cost and classified as held to maturity investments. Available for sale and held to maturity securities are reduced to fair value, through charges to income, for declines in value that are considered to be other than temporary. Equipment and leasehold improvements Depreciation of equipment for financial accounting purposes, is calculated primarily using the straight-line method and is based upon the estimated useful lives of the assets ranging from three to ten years. Leasehold improvements are amortized over the shorter of the terms of the respective leases or the estimated useful lives of the improvements. At September 30, 1996 and 1995, accumulated depreciation and amortization were $33,314,000 and $31,942,000, respectively. Intangible assets The excess cost over the fair value of net assets of acquired companies is recorded as goodwill and is amortized on a straight-line basis over periods between 15 and 40 years. At September 30, 1996 and 1995, the amount of goodwill reported in other assets is $6,124,000 and $6,374,000, respectively. Revenues from securities transactions and investment banking Advest records securities transactions on a settlement date basis, which does not materially differ from a trade date basis. Revenues and related expenses for transactions executed but not settled are accrued on a trade date basis. Securities transactions of the Bank are recorded on a trade date basis. Investment banking revenues are recorded, net of expenses, on the settlement date for management fees and sales concessions, and on the dates the underwriting syndications are closed for underwriting fees. Provision for credit losses and asset devaluation The provision for credit losses and asset devaluation reflects reserve accruals and writedowns for loans, other real estate owned ("OREO") and certain other investments and receivables. Income taxes Deferred income taxes are recognized for the future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end based on enacted tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to an amount which is more likely than not realizable. Income tax expense is the sum of the taxes currently payable and the change during the period in deferred tax assets and liabilities. Net income per common and common equivalent share Primary income per share is calculated by dividing net income by the average shares of common stock and common stock equivalents outstanding during the period. Common stock equivalents are dilutive stock options which are assumed exercised for calculation -44- [page 32 of annual report] purposes. Fully diluted calculations assume full conversion of the Company's outstanding subordinated debentures into common stock and elimination of the related interest expense, net of taxes. Derivative financial instruments Advest enters into derivative transactions to hedge certain trading positions, primarily municipal and corporate bonds. Derivatives to hedge trading inventory positions are marked to market daily with unrealized gains and losses reflected in revenue from principal transactions. Market values for exchange-traded derivatives, principally futures, are based on quoted market prices. Payments or receipts under derivative financial instruments used to manage interest rate risks arising from the Bank's financial assets and financial liabilities are recognized as an adjustment to interest income or expense. Other accounting pronouncements The Financial Accounting Standards Board ("FASB") has issued SFAS 121, "Accounting for the Impairment Of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and SFAS 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". The Company will adopt these pronouncements in its 1997 fiscal year, as required, and does not expect their implementation to have a material impact on the Company's financial condition or results of operations. The FASB issued SFAS 123, "Accounting For Stock-based Compensation." SFAS 123 permits companies to measure stock compensation costs using either the intrinsic value-based method or the fair value-based method. When adopted in 1997, Advest intends to continue using the intrinsic value-based method and will provide the expanded disclosures required by SFAS 123. Note 2: Loans At September 30, 1996 and 1995, loans consisted of: ------------------------------------------------ In thousands 1996 1995 ------------------------------------------------ Advest Bank: Mortgages Commercial $ 26,128 $ 43,908 Multi-family residential 11,285 12,256 1 - 4 family residential conventional 85,321 127,789 Home equity credit 58,691 42,257 Commercial 2,757 3,856 Consumer 1,097 922 Installment note and lease loan financing 1,587 1,811 Advest Group, Inc.: Mortgages Commercial 9,000 9,031 1 - 4 family residential 555 1,460 Other 232 431 Other 1,033 1,188 ------------------- $197,686 $244,909 =================== The Company maintains an allowance for possible future loan losses. For the three years in the period ended September 30, 1996, activity in the allowance for loan losses was as follows: -------------------------------------------------- In thousands 1996 1995 1994 -------------------------------------------------- Balance at the beginning of the year $2,334 $4,900 $5,782 Provisions 1,022 5,637 2,499 Charge-offs (1,249) (8,462) (3,555) Recoveries 291 259 174 ----------------------------- Balance at the end of the year $2,398 $2,334 $4,900 =========================== Nonperforming assets include nonaccruing loans, loans ninety days past due and accruing interest, loans renegotiated on other than prevailing market terms and OREO. OREO is included in other assets in the consolidated balance sheets. All other nonperforming assets are classified as loans. It is management's policy to reverse all uncollected interest at the time a loan is placed on non- accrual. Interest forgone on nonaccrual and restructured loans of the Bank were $297,000, $509,000 and $754,000 for the years ended September 30, 1996, 1995 and 1994, respectively. As of September 30, 1996, no additional funds were committed to clients whose loans have been restructured or were nonperforming. At September 30, 1996 and 1995, nonperforming assets were comprised of: ------------------------------------------------ In thousands 1996 1995 ------------------------------------------------ Advest Group, Inc.: Non-accrual loans $ 9,555 $10,666 OREO 800 2,950 Advest Bank: Non-accrual loans 1,422 290 OREO, net 984 2,849 Other 750 750 -------------------- $13,511 $17,505 ===================== Nonperforming assets as a percentage of loans and OREO 6.8% 7.0% ===================== Nonperforming assets as a percentage of total assets 1.4% 2.1% ===================== At September 30, 1996, the Bank classified $5.3 million of loans as impaired pursuant to the requirements of SFAS 114, "Accounting by Creditors for Impairment of a Loan". Under SFAS 114, a loan is considered impaired if it is probable that the Company will be unable to collect scheduled payments according to the terms of the loan agreement. Impaired loans include $3.8 million of loans restructured and currently classified as performing, $.7 million of loans currently classified as non-accrual and $.8 million of loans in which potential credit problems may lead to future non-accrual status or possible charge-off. The non-accrual impaired loans are a component of nonperforming assets. Impairment reserves as calculated under SFAS 114 resulted in no additional allowance for loan losses. -45- [page 33 of annual report] Note 3: Trading Positions At September 30, 1996 and 1995, Advest's trading positions consisted of: ------------------------------------------------------------- Securities sold, Trading securities not yet purchased -------------------------------------- In thousands 1996 1995 1996 1995 ------------------------------------------------------------- Corporate obligations $53,114 $ 3,474 $44,825 $ 586 State and municipal obligations 25,796 26,052 183 210 US government and agency obligations 10,612 6,252 697 535 Stocks and warrants 4,415 5,722 1,733 3,516 ------------------------------------- $93,937 $41,500 $47,438 $4,847 ===================================== Note 4: Investment Securities The Company realigned its available for sale and held to maturity portfolios in December 1995, in accordance with the provisions of a special report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," issued by the FASB staff. The realignment resulted in the transfer of $9,962,000 of held to maturity securities to available for sale portfolio in December 1995. Effective October 1, 1994, the Company prospectively adopted SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities" and revised its securities accounting policy. Consequently, available for sale securities increased by $20,891,000. As of September 30, 1996, the amortized cost and fair values of debt securities, by contractual maturity, were: Available for Sale Held to Maturity -------------------------------------- Amortized Fair Amortized Fair In thousands cost value cost value ------------------------------------------------------------- Due in one year or less $ -- $ -- $11,225 $11,220 Due after one year through five years -- -- 849 845 Due after five years through ten years -- -- 250 250 Due after ten years 11,060 10,710 10,635 10,561 ------------------------------------- $11,060 $10,710 $22,959 $22,876 ===================================== For the three years ended September 30, 1996, 1995 and 1994, respectively, proceeds from the sale of securities available for sale were $26,290,000, $23,075,000 and $14,003,000 and gross gains reported were $115,000, $152,000 and $60,000, respectively. Gross losses were $255,000 and $59,000 for 1995 and 1994, respectively, and there were no gross losses reported for 1996. The amortized cost and fair values of the Company's available for sale securities at September 30, 1996 and 1995 were: ------------------------------------------------------------- Amortized Gross unrealized Fair ---------------- In thousands cost gains losses value ------------------------------------------------------------- 1996 FHLB stock $ 2,233 $ -- $ -- $ 2,233 Mortgage-backed securities of federal agencies 8,998 7 (350) 8,655 Other mortgage-backed securities 99 -- -- 99 Other 4,132 15 (7) 4,140 ------------------------------------- $15,462 $ 22 $(357) $15,127 ===================================== 1995 FHLB stock $2,233 $ -- $ -- $2,233 Mortgage-backed securities of federal agencies 861 2 -- 863 Other mortgage-backed securities 264 -- -- 264 ------------------------------------- $3,358 $ 2 $ -- $3,360 ===================================== There were no sales of held to maturity securities during the three years in the period ended September 30, 1996. The amortized cost and fair values of the Company's held to maturity securities at September 30, 1996 and 1995 were: ------------------------------------------------------------- Gross unrealized Amortized -------------------- Fair In thousands cost gains losses value ------------------------------------------------------------- 1996 Mortgage-backed securities $10,635 $11 $(85) $10,561 US government and agency obligations 11,824 -- (9) 11,815 Other 500 -- -- 500 ------------------------------------- $22,959 $11 $(94) $22,876 ===================================== 1995 Mortgage-backed securities $21,965 $107 $(105) $21,967 US government and agency obligations 6,854 2 -- 6,856 Other 2,650 -- -- 2,650 ------------------------------------- $31,469 $109 $(105) $31,473 ===================================== -46- [page 34 of annual report] Note 5: Deposits Pursuant to the FDIC Improvement Act ("FDICIA"), the Bank is subject to rules limiting brokered deposits and related interest rates. Under these rules, banks that are deemed "well capitalized" may accept brokered deposits without restriction, and banks deemed "adequately capitalized" may do so with a waiver from the FDIC. An "undercapitalized" bank is not eligible for a waiver and may not accept brokered deposits. The Bank meets the conditions of such rules to be deemed a "well capitalized" bank. At September 30, 1996 and 1995, client deposits at the Bank consisted of: ------------------------------------------------ In thousands 1996 1995 ------------------------------------------------ Money market $127,840 $167,778 Certificates of deposit 63,271 67,790 Savings 75 88 -------------------- $191,186 $235,656 ==================== Note 6: Short-term Borrowings In the ordinary course of business, primarily to facilitate securities settlements and finance trading inventories, Advest obtains bank loans which are collateralized by its own securities inventory and customers' margin securities. The loans are payable on demand and bear interest based on the federal funds rate. At September 30, 1996, Advest had $33,801,000 in firm loans outstanding. There were no outstanding loans at September 30, 1995. The weighted average interest rate on bank loans outstanding at September 30, 1996 was 5.71% and the weighted average interest rates during fiscal 1996 and 1995 were 5.86% and 6.14%, respectively. Short-term borrowings of the Bank consisted primarily of the current portion of advances from the Federal Home Loan Bank ("FHLB"). At September 30, 1996, borrowings totaled $4,750,000 at rates from 6.30% to 8.60%. At September 30, 1995, borrowings totaled $9,500,000 at rates from 5.24% to 9.11%. The Bank has unused short term credit lines of approximately $7,900,000 with the FHLB at September 30, 1996. The Bank's borrowings with the FHLB are collateralized by its holdings of FHLB stock as well as otherwise unencumbered mortgage loans and investment securities. Based on available qualified collateral balances of approximately $146 million, the Bank had total borrowing capacity with the FHLB of approximately $111 million at September 30, 1996. The advances are subject to prepayment penalties, which are intended to make the FHLB indifferent to the prepayment and are approximately equivalent to settlement of the obligations at their current fair value. AGI's short-term borrowings at both September 30, 1996 and 1995 were $750,000. The borrowings represent the current portion of a promissory note due a third party lender. Refer to Note 7 for additional information. Note 7: Long-term Borrowings Long-term borrowings of the Bank were $8,750,000 and $6,500,000 as of September 30, 1996 and 1995, respectively, and represent the non-current portion of FHLB advances. The borrowings are collateralized in the same manner as short-term borrowings. As of September 30, 1996, the interest rates and maturities of outstanding borrowings were: ------------------------------------------------------- In thousands Interest rates Amount ------------------------------------------------------- Year ending September 30, 1998 6.40% - 7.17% $5,750 Year ending September 30, 2000 6.68% 1,500 Year ending September 30, 2001 6.73% 1,500 --------- $ 8,750 ========= During fiscal 1995, Advest borrowed $6,250,000 under a non-recourse note, collateralized exclusively by furniture and computer equipment. Under the terms of the note, the principal is due October 1, 1998, unless extended at Advest's option, with interest payments due monthly beginning April 1, 1995. The note bears interest at the variable rate of the LIBOR rate plus 2.5% per annum. The interest rate on the long-term note outstanding at September 30, 1996 and 1995 was 7.96% and 8.37%, respectively. The purpose of the loan was to increase Advest's regulatory net capital. As required by the non-recourse note, AGI signed a letter of credit with a third party bank guaranteeing 20% of Advest's debt. The letter of credit is fully collateralized by government securities. At September 30, 1996 and 1995, long-term borrowings of AGI were $4,744,000 and $4,490,000, respectively and represent a loan from a third party lender on a first mortgage held by AGI. The debt bears interest at 1.25% over prime with interest and principal payments due monthly, and is due July 1, 1997 unless extended at AGI's discretion to July 1, 1999. AGI borrowed an additional $1,000,000 under the same terms during fiscal 1995. The debt is collateralized by the first mortgage on real estate managed by a subsidiary. The mortgage -47- [page 35 of annual report] is currently classified as nonperforming and is due December 31, 2005. Note 8: Subordinated Borrowings At September 30, 1996 and 1995, the Company had $20,552,000 of 9% convertible subordinated debentures outstanding with interest payable semiannually. The debentures are convertible at any time prior to maturity into common stock of The Advest Group, Inc. at $13.57 per share. The debentures are redeemable currently at 101.2% of the principal amount plus accrued interest and at declining prices hereafter. The debentures are subordinated to the claims of general creditors and are due on March 15, 2008. Annual sinking fund requirements of 5% of the aggregate principal amount of the debentures or at least 70% of the debentures prior to maturity are currently due. At its option, the Company may make sinking fund payments in cash or in debentures or by a credit for debentures previously converted or redeemed. To date, all sinking fund requirements have been satisfied by the Company's election to use previously redeemed securities. The Company has purchased and retired $6,948,000 of the initial offering amount and, consequently, has currently satisfied the entire sinking fund requirement through fiscal 1998. During the year ended September 30, 1995, the Company purchased and retired debentures with a total par value of $445,000. There were no debentures purchased by the Company during fiscal 1996. Note 9: Common Stock In 1996, the Board of Directors increased the number of shares authorized to repurchase the Company's common stock to 3,000,000 shares. During the years ended September 30, 1996 and 1995, 398,900 and 344,554 shares, respectively, were acquired for a total of 2,513,077 shares repurchased since the start of the repurchase program in August 1990. The payment of dividends on the Company's common stock is subject to (1) the availability of funds from Advest, which may be restricted under the net capital rule of the SEC and the New York Stock Exchange ("NYSE"), and from the Bank, which is subject to minimum bank regulatory requirements, and (2) the restriction of the Company's Indenture with respect to its 9% Convertible Subordinated Debentures due 2008 and (3) the restriction of the Company's Loan and Security Agreement dated as of July 2, 1992 with Fleet Bank, N.A. Such restrictions have never curtailed the Company's dividend payments, however, the Company has not declared a dividend since December 1990. In 1988, the Board of Directors of the Company adopted a shareholder rights plan. The plan provides for the distribution of one common stock purchase right for each outstanding share of common stock of the Company. Each right entitles the holder, following the occurrence of certain events, to purchase one share of common stock at a purchase price of $30 per share subject to adjustment. The rights will not be exercisable or transferable apart from the common stock except under certain circumstances in which either a person or group of affiliated persons acquires, or commences a tender offer to acquire, 20% or more of the Company's common stock or a person or group of affiliated persons acquires 15% of the Company's common stock and is determined by the Board of Directors to be an "Adverse Person." Rights held by such an acquiring person or persons may thereafter become void. Under certain circumstances, a right may become a right to purchase common stock or assets of the Company or common stock of an acquiring company at a substantial discount. Under certain circumstances, the Company may redeem the rights at $.01 per right. The rights will expire in October 1998 unless earlier redeemed or exchanged by the Company. The Company has 2,000,000 shares, $.01 par value, preferred stock which was authorized by shareholders in 1988. The board of directors has full discretion with respect to designating and establishing the terms of each class or series of preferred stock prior to its issuance. No preferred stock has been issued to date. Note 10: Stock Option Plans 1993 Stock Option Plan The Company's 1993 Stock Option Plan (the "1993 Plan"), established during fiscal 1994, provides for grants of incentive stock options or nonqualified stock options for up to 500,000 shares of the Company's common stock. At September 30, 1996, options for 348,817 shares had been granted under the 1993 Plan, of which 342,217 options were outstanding. Option grants under the 1993 Plan are made at the discretion of the Stock Option and Compensation Committee of the Board of Directors and become exercisable at such times (but not within six months of grant) and expire at such time (but not later than 10 years after grant), as that committee determines. 1994 Non-Employee Director Stock Option Plan The Company's 1994 Non-Employee Director Stock Option Plan (the "1994 Plan"), established during fiscal 1995, provides for annual grants of 2,500 incentive stock options (increased from 1,500 per director effective October 1, 1996) to each director not employed by the Company up to an aggregate of 60,000 options for all directors. At September 30, 1996, options for 19,500 shares had been granted and were outstanding under the 1994 Plan. Options granted under the 1994 Plan become exercisable in equal thirds 30, 42 and 54 months after grant and expire 60 months after the grant. Prior Stock Option Plans At September 30, 1996, the Company had outstanding an aggregate of 293,465 -48- [page 36 of annual report] options issued to employees under stock option plans maintained by the Company in prior years under which no further grants are authorized. These include 5,139, 125,149 and 36,677 nonqualified stock options granted to top account executives under performance-based plans offered in calendar 1990, 1991 and 1992, respectively. These account executive options become exercisable five years after grant and expire one year thereafter. These also include 126,500 five-year options granted to executive officers and key employees other than account executives on three occasions between October 1991 and February 1993. Advest Equity Plans During calendar 1996 and 1995 the Company offered the Advest Equity Plan (the "Equity Plan") to certain eligible employees. The Equity Plan is a salary deferral investment program and is described in more detail in Note 11. For deferrals during 1995, 169,690 nonqualified stock options were granted. These options become exercisable on January 1, 2001 and expire December 31, 2002. For deferrals during 1996 through June 30, 1996, 78,304 options were granted and additional options will be granted based on deferrals from June 30, 1996 through December 31, 1996. These are nonqualified stock options which will become exercisable on January 1, 2002 and expire December 31, 2003. Exercise Price of Options All options granted by the Company to date, or which may be granted under the 1993 Plan, the 1994 Plan and the Equity Plan for calendar 1995, have or will have exercise prices not less than 100% of the fair market value of the Company's common stock on the date of grant. Transaction Summary Transactions under the Company's stock option plans are summarized below: --------------------------------------------------------- Number of Option price shares per share --------------------------------------------------------- Options outstanding at September 30, 1993 (223,768 exercisable) 762,396 $ 2.00- $ 8.13 Granted 30,000 5.13 Forfeited (79,829) 2.00- 8.13 Exercised (6,800) 4.00 --------- Options outstanding at September 30, 1994 (179,301 exercisable) 705,767 2.00- 7.00 Granted 156,500 5.63- 6.00 Forfeited (50,358) 2.00- 7.00 Exercised (13,266) 4.00- 6.25 --------- Options outstanding at September 30, 1995 (190,501 exercisable) 798,643 2.00- 6.25 Granted 431,818 8.50- 10.25 Forfeited (1,244) 5.13- 5.88 Exercised (327,148) 2.00- 8.50 --------- Options outstanding at September 30, 1996 (116,537 exercisable) 902,069 $ 2.00- $10.25 ========= Note 11: Employee Compensation and Benefit Plans Advest Thrift Plan The Company maintains the Advest Thrift Plan (the "Thrift Plan") which is a qualified employee stock ownership plan ("ESOP") and 401(k) plan covering all employees who have completed one year of service. The Thrift Plan is the successor to the December 31, 1992, merger of the Employee Stock Ownership Plan, Incentive Savings Plan and Employees' Retirement Plan. The Company matches 100% of participants' contributions to their Thrift Plan accounts up to 2% of compensation. In addition, the Company has made or will make discretionary contributions to participants' Thrift Plan accounts equal to 2.5%, 2.0% and 1.5% of their compensation for calendar 1996, 1995 and 1994, respectively. Contribution expense for fiscal 1996, 1995 and 1994 was $3,610,731, $2,624,281 and $2,552,180, respectively. No ESOP contributions have been made by the Company since 1993. Defined Benefit Plans The Company's Account Executive Nonqualified Defined Benefit Plan (the "AE Defined Benefit Plan"), effective October 1, 1992, offers certain high- performing account executives retirement benefits based upon a formula reflecting their years of service, the gross commissions they generate and Company contributions to their Thrift Plan 401(k) accounts. The Company's Executive Nonqualified Post-Employment Income Plan (the "Executive Defined Benefit Plan"), effective October 1, 1993, provides certain senior executives with income for 10 years after retirement equal to a percentage of their final average earnings based upon a formula reflecting years of service, assumed social security benefits and Company contributions to certain other benefit plans on the executive's behalf. Although the AE Defined Benefit Plan and the Executive Defined Benefit Plan are considered to be "unfunded," assets have been set aside in revocable trusts for each to fund future payments. These trusts are available to general creditors of the Company in the event of liquidation. The fair value of these trusts, which are included in trading securities, at September 30, 1996 was $6,054,000, which was more than the projected benefit obligation by $662,000. The following table sets forth the status of the AE Defined Benefit Plan and Executive Defined Benefit Plan as well as amounts recognized in the Company's consolidated financial statements at September 30, 1996 and 1995: -49- [page 37 of annual report] ------------------------------------------------ In thousands 1996 1995 ------------------------------------------------ Actuarial present value of benefit obligations: Vested $ -- $ -- Non-vested 3,952 2,673 ------------------ Accumulated benefit obligation 3,952 2,673 Effect of projected future compensation levels 1,440 1,179 ------------------ Projected benefit obligation 5,392 3,852 Unrecognized net loss (111) (369) Unrecognized prior service cost(529) (341) ------------------ Accrued pension liability $4,752 $3,142 =================== Pension expense for the plans for the three years ended September 30, 1996 included in the following components: --------------------------------------------------- In thousands 1996 1995 1994 --------------------------------------------------- Service cost $1,257 $ 878 $1,042 Interest cost 288 175 92 Net amortization and deferral 65 6 34 --------------------------- Net benefit costs $1,610 $1,059 $1,168 =========================== The following table provides the assumptions used in determining the projected benefit obligation for the plans for the three years ended September 30, 1996: - - ----------------------------------------------------------------- 1996 1995 1994 - - ----------------------------------------------------------------- Weighted average discount rate 7.5% 7.0% 8.5% Rate of increase in future compensation levels 5.0 5.0 5.0 Expected long-term rate of return on plan assets 7.0 6.5 7.5 - - ----------------------------------------------------------------- Equity Plans For calendar 1996 and 1995 the Company offered the Advest Equity Plan (the "Advest Equity Plan") to certain top performing account executives and designated key employees. The Advest Equity Plan allows those employees to defer a portion of their compensation and invest it on a pretax basis in units consisting of one share of the Company's common stock and one option to purchase an additional share of common stock. The share portion of the unit is issued monthly from treasury stock and will be restricted for three years after the year of deferral. The option portion is described under Note 10. Both the restricted stock and options will be subject to forfeiture under certain circumstances. For calendar 1996 and 1995, the Company offered a substantially similar plan to executive officers, although under this executive officer plan restricted stock is purchased on the open market and options are granted under the 1993 Stock Option Plan. In addition, beginning with fiscal 1996, the Company offered certain key professionals the opportunity to defer a portion of their compensation over certain levels and invest it in restricted stock at a discounted price of 75% of market. Also, beginning with calendar 1996, 50% of the annual retainer of each director of the Company (or a greater portion, at their election) will be invested in restricted stock at 100% of market. Management Incentive Plan The Company has a Management Incentive Plan (the "MIP") which provides for incentive compensation to salaried employees. Compensation presently is based on the Company's pre-tax income. During fiscal 1996, 1995 and 1994, MIP compensation was $2,482,000, $1,330,000 and $0, respectively. For fiscal 1996, any MIP award to an executive officer in excess of 150% of the amount of the MIP award for that executive for the prior fiscal year was invested in restricted shares of the Company's Common Stock. Note 12: Capital and Regulatory Requirements Advest is subject to the net capital rule adopted and administered by the NYSE and the SEC. Advest has elected to compute its net capital under the alternative method of the rule which requires the maintenance of minimum net capital equal to 2% of aggregate debit balances arising from customer transactions, as defined. The NYSE also may require a member firm to reduce its business if net capital is less than 4% of aggregate debit balances and may prohibit a member firm from expanding its business and declaring cash dividends if net capital is less than 5% of aggregate debit balances. As of September 30, 1996, Advest's regulatory net capital of $43,112,000 was 11% of aggregate debit balances and exceeds required net capital by $35,508,000. Under state bank regulatory restrictions, the Bank is required to maintain a minimum level of capital and to limit annual dividends to the total of the current and prior two years retained net income. As a result of these restrictions, the Bank with an accumulated deficit at September 30, 1996 is prohibited from declaring dividends. At September 30, 1996, the Bank's leverage capital, risk-based and Tier 1 capital ratios were 6.56%, 10.44% and 9.19%, respectively, which met all regulatory requirements. At September 30, 1995, the Bank's leverage capital, risk-based and Tier 1 capital ratios were 5.03%, 8.61% and 7.40%, respectively. These ratios met regulatory requirements, however, the September 30, 1995 leverage capital ratio did not meet the requirements of the Memorandum of Understanding ("MOU") while it was in effect. The MOU was lifted in July 1996. Refer to discussion in Management's Discussion and Analysis under the caption "Liquidity and Capital Resources - Advest Bank." Note 13: Income Taxes The provision for income taxes for the three years ended September 30, 1996 consisted of the following: -50- [page 38 of annual report] -------------------------------------------------- In thousands 1996 1995 1994 -------------------------------------------------- Current: Federal $5,893 $1,695 $ -- State and local 3,270 1,985 1,015 ---------------------------- 9,163 3,680 1,015 ---------------------------- Deferred: Federal 181 1,747 1,280 State and local (74) (17) 7 ---------------------------- 107 1,730 1,287 ---------------------------- Provision for income taxes $9,270 $5,410 $2,302 ============================ At September 30, 1996 and 1995, deferred tax assets and liabilities were comprised of: ------------------------------------------------ In thousands 1996 1995 ------------------------------------------------ Deferred tax assets: Provision for credit losses and asset devaluation $2,753 $3,853 Employee benefits 4,446 3,810 Lease commitments 434 -- FAS115 losses 112 -- Other 86 4 ------------------ Total deferred tax assets $7,831 $7,667 ------------------ Deferred tax liabilities: Tax loan loss reserve in excess of base year $ 614 $ 433 Depreciation 1,367 620 Investment income 449 1,002 Partnership basis difference 2,305 3,082 Other 961 400 ------------------ Total deferred tax liabilities$5,696 $5,537 ------------------ Net deferred tax asset $2,135 $2,130 ================== The Company will only recognize a deferred tax asset when, based on available evidence, realization is more likely than not. Accordingly, at September 30, 1996 and 1995, the Company has recorded no valuation allowance against federal deferred tax assets based on reversals of existing taxable amounts and anticipated future earnings. A valuation reserve has been established to cover state net operating loss carryforwards which were not expected to be realized due to short carryforward time periods. At September 30, 1996 and 1995, the valuation reserve was $1,671,000 and $1,510,000, respectively, reflecting existing state net operating loss carryforwards. At September 30, 1996, state net operating loss carryforwards were approximately $14.9 million which expire in various years between 1998 and 2000. A reconciliation of the difference between the statutory federal income tax rate and the effective income tax rate follows for the three years ended September 30, 1996 follows: ------------------------------------------------------- Percent of pre-tax income 1996 1995 1994 ------------------------------------------------------- Statutory income tax rate 35.0% 34.0% 34.0% State and local income taxes, net of federal tax effect 9.8 11.1 12.6 Tax-exempt interest income (1.6) (1.9) (4.6) Intangible assets 0.4 0.7 1.6 Dividend income -- -- (0.3) Other 0.4 2.1 (0.3) --------------------------- Effective income tax rate 44.0% 46.0% 43.0% ========================== On August 21, 1996, The Small Business Job Protection Act was signed into law which repeals the tax bad debt deduction method currently available to the Bank. The Bank will be required to change its tax bad debt method to the specific charge-off method effective for fiscal year ending September 30, 1997. It is anticipated that the change in method will result in taxable income of approximately $1,428,000 representing the excess of the Bank's tax bad debt reserve at September 30, 1996 over the reserve that arose in tax years beginning before December 31, 1987 (base year amount). Generally, the income will be recognized for tax purposes ratably over a six year period. A deferred tax liability has been established for the effect of this new legislation. As of September 30, 1996, the Bank's bad debt reserve for federal tax purposes was approximately $3,583,000 of which $2,155,000 represents the base year amount. A deferred tax liability has not been recognized for the base year amount. A tax liability could be incurred if certain excess distributions were made with respect to the Bank's stock. It is not anticipated that such excess distributions would occur. Note 14: Commitments and Contingent Liabilities Leases The Company conducts all of its operations from leased premises, and leases data processing and communications equipment under noncancelable operating leases primarily varying from one to ten years, with certain renewal options for similar terms. Minimum rentals based upon the original terms (excluding taxes, insurance and maintenance expenses which also are obligations) are (in thousands): ---------------------------------------------------- Data processing Fiscal year ended Office & communications September 30, facilities equipment Total ----------------------------------------------------- 1997 $ 6,436 $1,138 $ 7,574 1998 5,873 761 6,634 1999 4,886 222 5,108 2000 4,355 -- 4,355 2001 4,060 -- 4,060 2002 and thereafter 10,617 -- 10,617 --------------------------------- $36,227 $2,121 $38,348 ================================= Rental expense under these leases was $8,928,000, $9,458,000 and $9,938,000 for the years ended September 30, 1996, 1995 and 1994, respectively. -51- [page 39 of annual report] Loan guarantees and letters of credit Billings Management Company ("BIM"), a subsidiary of Billings, acts as general partner in various real estate limited partnerships. At September 30, 1996 and 1995, AGI was a guarantor of borrowings by one of the partnerships in the amount $503,000 and $750,000, respectively. The borrowings are uncollateralized. At September 30, 1996, AGI was contingently liable under a bank letter of credit in the amount of $1,250,000. The letter of credit was required under the terms of a non-recourse note entered into between Advest and a third party lender and covers 20% of the note amount. It is fully collateralized by government securities. Refer to Note 7. At both September 30, 1996 and 1995, Advest was contingently liable under bank letter of credit agreements in the amount of $1,255,000, which are collateralized by securities held in customer accounts. At September 30, 1996 and 1995, the Bank was contingently liable under standby letters of credit and commitments to extend credit to its customers in the amount of $68,405,000 and $45,177,000, respectively. The value of collateral required to be held for letter of credit commitments as of September 30, 1996 ranges from 186% to 466% of individual commitments with a weighted average of 274%. Litigation The Company has been named as defendant in a number of legal proceedings arising principally from its securities and investment banking business. Some of these actions involve claims by plaintiffs for substantial amounts. While results of litigation cannot be predicted with certainty, in the opinion of management, based on discussion with counsel, the outcome of these matters will not result in a material adverse effect on the financial condition of the Company. Note 15: Financial Instruments With Off-Balance-Sheet and Concentrations of Credit Risk In the normal course of business, Advest's securities activities involve execution, settlement and financing of various securities transactions for customers. These activities may expose Advest to risk in the event customers, other brokers and dealers, banks, depositories or clearing organizations are unable to fulfill contractual obligations. In accordance with industry practice, Advest records securities transactions executed on behalf of its customers on settlement date which is generally three business days after trade date. Through May 31, 1995 the settlement cycle was five business days. The risk of loss on these transactions is identical to settled transactions and relates to the customer or brokers and dealers inability to meet the terms of their contracts. Advest generally conducts business with brokers and dealers located in the New York metropolitan area that are members of the major securities exchanges. Advest's clients are predominantly retail investors located throughout the United States but primarily in the Northeast and Florida. For transactions in which Advest extends credit to customers, it seeks to control the risk associated with these activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. Advest monitors required margin levels daily and, pursuant to such guidelines, requests customers to deposit additional collateral, or liquidate securities positions when necessary. Advest's collateralized financing activities require it to pledge customer securities as collateral for various secured financing sources such as bank loans and securities loaned. In the event the counterparty is unable to meet its contractual obligations, Advest may be exposed to off-balance-sheet risk of acquiring securities at prevailing market prices. The Company monitors the credit standing of counterparties with whom it conducts business. Risk is further controlled by monitoring the market value of securities pledged on a daily basis and by requiring adjustment of collateral levels as needed. Advest has sold securities that it does not currently own and will therefore be obligated to purchase such securities at a future date. These obligations are recorded in the financial statements at the September 30, 1996 and 1995 market values of the related securities. Advest will incur a loss if the market value of the securities increases subsequent to September 30, 1996. Advest seeks to control interest rate risk associated with its trading positions, primarily its municipal and corporate bond inventories, by entering into derivative transactions, principally short-term futures contracts. The average fair value of futures contracts during the years ended September 30, 1996 and 1995, were $598,303 and $675,380, respectively. A net trading gain of $20,000 and a negligible gain were realized in 1996 and 1994, respectively, and a net trading loss of $.1 million was realized in fiscal 1995. At September 30, 1996 and 1995 there were no open hedge positions. The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments involve, to varying degrees, elements of credit and interest rate risk. The Bank's exposure to credit loss in the event of non- performance by the other party to the financial instrument is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments as it does for existing loans and management believes that the Bank controls the risk of these financial instruments through credit approvals, limits and monitoring procedures. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments could expire without being drawn upon, the total commitment amounts do not necessarily -52- [page 40 of annual report] represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Bank, upon extension of credit is based on credit evaluation of its customer. Collateral held varies but may include income- producing commercial properties, accounts receivable, inventory and property, plant and equipment. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of customers to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in standing loan facilities to customers. The Bank holds real estate and marketable securities as collateral supporting those commitments for which collateral is deemed necessary. The Bank enters into interest rate swap and cap contracts as part of its interest rate risk management strategy. Such instruments are held for purposes other than trading. These swaps and caps are intended to maintain a targeted level of net interest margin between the return on the Bank's interest earning assets and the cost of funds. Interest rate swaps involve the exchange of fixed and floating rate interest payments based on an underlying notional amount. The notional values do not represent direct credit exposures. The Bank's credit exposure is limited to the net difference between the calculated pay and receive amounts on each transaction which is generally netted and paid quarterly. Interest rate cap contracts provide that in exchange for the payment of an initial premium, the Bank will receive payments from the counterparty in the event that interest rates rise above a predetermined level (the "strike rate"). Entering into interest rate swap and cap agreements involves the risk of dealing with counterparties and their ability to meet the terms of the contracts. The Bank enters into swap and cap contracts with counterparties that are either highly rated by recognized rating agencies or are federal agencies. The Bank minimizes the credit risk by performing credit reviews on the swap counterparties and minimizes the interest rate risk by its asset and liability management policies. The following table illustrates the Bank's outstanding swap and cap contracts at September 30, 1996: - - -------------------------------------------------------------------- Maturities ---------------- Balance Balance In thousands 1997 1998 1999 9/30/96 9/30/95 - - -------------------------------------------------------------------- Fixed pay interest rate swaps: Notional value $10,000 $5,000 $5,000 $20,000 $27,500 Weighted average receive rate 5.551% 5.582% 5.539% 5.556% 6.009% Weighted average pay rate 6.350% 8.790% 7.090% 7.145% 7.747% Interest rate caps: Notional value $ 5,000 $-- $-- $ 5,000 $5,000 Strike rate 5.500% -- -- -- -- Unamortized premium $ 51 $-- $-- $ 51 $ 110 Total notional value $15,000 $5,000 $5,000 $25,000 $32,500 - - ------------------------------------------------------------------- In the absence of these interest rate swaps, net interest income would have been higher by approximately $441,000 in 1996, $472,000 in 1995 and $1,361,000 in 1994. In the absence of these cap contracts, net interest income would have been higher by approximately $57,000 in 1996 and $64,000 in 1994, and lower by approximately $128,000 in 1995. Note 16: Segment Reporting The Company operates principally in the financial services and banking industries. Operations in the financial services industry include agency transactions, principal transactions, investment banking, asset management and consulting. The banking operations include residential mortgage lending, trust services and investment of funds generated from borrowings and customer deposits. Financial information by industry segments for the three years ended September 30, 1996 are summarized as follows: -53- [page 41 of annual report] --------------------------------------------------------------- Financial In thousands services Banking Other Consolidated --------------------------------------------------------------- 1996 Total revenues $240,509 $ 19,324 $ 1,548 $261,381 Operating income (loss) 22,604 1,074 (2,610) 21,068 Identifiable assets 712,176 219,245 33,756 965,177 Capital expenditures 5,573 344 14 5,931 Depreciation and amortization 7,694 332 195 8,221 1995 Total revenues $207,573 $ 23,464 $ 1,596 $232,633 Operating income (loss) 23,175 (9,301) (2,113) 11,761 Identifiable assets 530,997 269,500 30,318 830,815 Capital expenditures 4,182 193 2 4,377 Depreciation and amortization 8,391 313 201 8,905 1994 Total revenues $181,389 $ 23,185 $ 655 $205,229 Operating income (loss) 12,874 (1,480) (6,039) 5,355 Identifiable assets 508,001 353,150 23,704 884,855 Capital expenditures 7,001 313 -- 7,314 Depreciation and amortization 6,582 290 195 7,067 ------------------------------------------------------------- Note 17: Related Parties As of September 30, 1996 and 1995, loans to related parties made by the Bank totaled approximately $5,776,000 and $5,578,000, respectively. There were approximately $2,320,000 of new loans and $1,078,000 of repayments during 1996. Related parties include directors and executive officers of the Company, and their respective affiliates in which they have a 10% or more interest. Such loans were made in the ordinary course of business. As of September 30, 1996, all loans to related parties were performing. Note 18: Fair Value of Financial Instruments Fair values generally represent estimates of amounts at which a financial instrument could be exchanged between willing parties in a current transaction other than in forced liquidation. Where current exchange prices are not available, other valuation techniques are used, such as discounting the expected future cash flows. Fair value estimates are subjective and depend on a number of significant assumptions based on management's judgment regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. In addition, a wide range of valuation techniques are permitted, making comparisons difficult, even between similar entities. The fair value of other financial assets and liabilities (consisting primarily of receivable from and payable to brokers and dealers, customers, securities borrowed and loaned) are considered to approximate the carrying value due to the short-term nature of the financial instruments. For residential one to four family real estate mortgages, fair value is estimated using quoted market prices for similar loans, adjusted for differences in loan characteristics. For multi-family mortgages, commercial real estate loans, lease loan financings and commercial and consumer loans, fair value is estimated by discounting the expected future cash flows using the current rates at which similar loans would be originated to borrowers with similar credit ratings for comparable remaining maturities. Fair values for fixed-rate certificates of deposit are estimated by discounting future cash flows using interest rates currently offered on time deposits with similar remaining maturities. The fair value of advances from the FHLB, including the current portion, are estimated using rates which approximate those currently being offered by the FHLB for advances with similar remaining maturities. The fair value of interest rate swap and cap agreements are obtained from quoted market prices and dealer quotes. These values represent the estimated amount that the Company would receive or pay to terminate the agreements at the reporting date, taking into account current interest rates and the current credit worthiness of the counterparties. The fair values of the Company's financial instruments at September 30, 1996 and 1995 are: - - --------------------------------------------------------------- 1996 1995 ------------------------------------- Carrying Fair Carrying Fair In thousands amount value amount value - - --------------------------------------------------------------- Financial assets: Loans, net $195,288 $196,135 $242,575 $243,319 Investment securities 38,086 38,003 34,829 34,833 Financial liabilities: Deposits 191,186 191,554 235,656 236,461 Short-term borrowings 39,301 39,326 10,251 10,313 Long-term borrowings 19,744 19,873 17,240 17,387 Subordinated debentures 20,552 21,374 20,552 20,655 Notional Fair Notional Fair In thousands amount value amount value ------------------------------------------------------------- Unrecognized financial instruments: Fixed pay interest rate swaps $ 20,000 $(317) $ 27,500 $(759) Interest rate caps 5,000 16 5,000 61 Commitments to extend credit (67,935) 31 (42,763) 32 Standby letters of credit (2,975) (11) (4,919) (9) - - ----------------------------------------------------------------- -54- [page 42 of annual report] REPORT OF INDEPENDENT ACCOUNTANTS We have audited the accompanying consolidated balance sheets of The Advest Group, Inc. and Subsidiaries as of September 30, 1996 and 1995, and the related consolidated statements of earnings, changes in shareholders' equity and cash flows for each of the three years in the period ended September 30, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express and opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Advest Group, Inc. and Subsidiaries as of September 30, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. As discussed in Note 4 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", as of October 1, 1994. Coopers & Lybrand L.L.P. Hartford, Connecticut October 23, 1996 -55- [page 43 of Annual Report]
Quarterly Financial Information (unaudited) - - ------------------------------------------------------------------------------- ------------------------------------ In millions, except 1996 by fiscal quarters 1995 by fiscal quarters ------------------------------------ ------------------------------------ per share data 1st 2nd 3rd 4th 1st 2nd 3rd 4th - - ------------------------------------------------------------------------------- ------------------------------------ Cash dividends per common share $- $- $- $- $- $- $- $- Stock price range: High $9-3/4 $10-1/8 $11 $10-5/8 $5-1/2 $6-3/8 $8 $9-3/8 Low $8-1/2 $8-5/8 $9-5/8 $9-1/4 $5 $5 $5-1/2 $7-3/8 Close $8-1/2 $9-5/8 $10-1/4 $9-3/4 $5-1/8 $5-3/4 $7-7/8 $9-1/8 Revenues $65.0 $65.9 $68.6 $61.8 $51.0 $53.6 $66.9 $61.2 Income before taxes $5.8 $6.3 $5.6 $3.4 $1.5 $0.3 $6.2 $3.7 Net income $3.1 $3.5 $3.1 $2.1 $0.9 $0.2 $3.3 $2.0 Net income per common share $.36 $.40 $.35 $.24 $.10 $.02 $.38 $.23
Shareholder Information Annual Meeting The annual meeting of stockholders will be held at the Old State House, Hartford, CT on January 30, 1997 at 10:30 AM. Proxy statements and proxies are mailed to stockholders of record as of December 11, 1996. As of September 30, 1996 there were 872 common stockholders of record. Additional Information - Form 10K One copy of the Company's annual report on Form 10K to the Securities and Exchange Commission will be provided at no charge upon written request to Corporate Marketing, The Advest Group, Inc. The Advest Group, Inc. is listed on the New York Stock Exchange under the symbol ADV. Registrar and Transfer Agent Fleet National Bank Corporate Trust Operations Mail Stop: CT/OP/T06B PO Box 5080 Hartford, CT 06102-5080 -56- EX-21 4 Exhibit 21 The Advest Group, Inc. List of Subsidiaries Jurisdiction Present Name Where Incorporated Ownership - - ------------------------------------------------------------------------------- - - - Advest, Inc. Delaware 100% Advest Insurance Agency, Inc. Massachusetts 100% Balanced Capital Services, Inc. Connecticut 100% Vercoe Insurance Agency, Inc. Ohio 100% Advest Bank Connecticut 100% Admass Corp. Massachusetts 100% Admyst Corp. Connecticut 100% Advest Mortgage Corp (formerly Advantage Service Corp.) Connecticut 100% Advest Credit Corporation Connecticut 100% A.B. Realty Corp. Connecticut 100% Laurel Woods Development Corp. Connecticut 100% Salem Corp. of CT Connecticut 100% Advest Capital, Inc. Connecticut 100% Advest Transfer Services, Inc. Delaware 100% Bank Street Management Company Connecticut 100% Billings & Company, Inc. Connecticut 100% Billings Management Co. Connecticut 100% Boston Security Counsellors, Inc. Massachusetts 100% Central Row Corp. Connecticut 100% SRNY, Ltd. (formerly Shore & Reich, Ltd.) Connecticut 100% Coordinated Planning, Ltd. New York 100% -57- EX-23 5 Exhibit 23 Consent of Independent Accountants The Board of Directors and Shareholders of The Advest Group, Inc.: We consent to the incorporation by reference in the registration statements of The Advest Group, Inc. and Subsidiaries on Form S-8 (File No. 2-92868) concerning its 1983 Incentive Stock Option Plan, Form S-8 (File No. 33-17674) concerning its 1986 Incentive Stock Option Plan, Form S-8 (File No. 33-72042) concerning its Advest Thrift Plan and Form S-8 (File No. 33-56275) concerning its 1995 Equity Plan, Form S-8 (File No. 333-00797) concerning its Executive Officier 1996 Restricted Stock and Stock Option Agreement and Form S-8 (File No. 333-17711) concerning its Key Professionals Equity Plan, 1996 Executive Equity Plan, 1997 Executive Equity Plan and 1997 Equity Plan,of our reports dated October 23, 1996, on our audits of the consolidated financial statements and financial statement schedules of The Advest Group, Inc. and Subsidiaries as of September 30, 1996 and 1995 and for the years ended September 30, 1996, 1995 and 1994, which reports are incorporated by reference and included, respectively, in this Annual Report on Form 10-K. /s/COOPERS & LYBRAND L.L.P. Hartford, Connecticut December 20, 1996 -58- EX-27 6
BD 1000 12-MOS SEP-30-1996 SEP-30-1996 11,705 564,328 21 219,919 132,023 14,187 965,177 39,301 230,769 0 213,996 47,438 40,296 107 0 0 89,242 965,177 9022 13962 25863 5745 5323 7439 35430 3370 0 0 0 2064 .24 .22
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