10-K405
1
10-K405
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-16193
DS BANCOR, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-1162884
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
33 Elizabeth Street, Derby, Connecticut
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(Address of principal executive offices)
06418 (203) 736-1000
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(Zip Code) (Registrant's telephone #)
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark 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. [ ]
Based upon the market price of the registrant's common stock as of March 23,
1995, the aggregate market value of the voting stock held by non-affiliates of
the registrant is $55,026,694 *
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Common Stock, par value $1.00 per share
Outstanding at March 23, 1995: 2,882,324 shares
DOCUMENTS INCORPORATED BY REFERENCE:
Parts I and II:
Portions of the Annual Report to Stockholders for the year ended December 31,
1994.
Part III:
Portions of the definitive proxy statement for the Annual Meeting of
Stockholders to be held April 26, 1995.
* Solely for purposes of this calculation, all executive officers and
directors of the registrant are considered affiliates. Excludes all other
shareholders beneficially owning more than 5% of the registrant's common
stock.
Item 1. BUSINESS
GENERAL
On August 31, 1987, DS Bancor, Inc. (the "Company" or "DS Bancor") became the
holding company for Derby Savings Bank ("Derby Savings" or the "Bank"). The
Company was formed in 1986 at the direction of the Board of Directors of the
Bank for the purpose of becoming the Bank's holding company, and the Company
engaged in no business until it became the holding company for the Bank in
August 1987. At that time, each of the outstanding shares of Derby Savings
common stock was automatically converted and exchanged into one share of the
Company's common stock. The Company's principal assets consist of all of the
outstanding shares of Derby Savings. The Company's business consists mainly of
the business of Derby Savings. Derby Savings is a Connecticut-chartered stock
savings bank operating through 22 full-service banking offices in western New
Haven and eastern Fairfield counties and Hartford County. The Bank obtained its
Connecticut charter as a mutual savings bank in 1846. On December 4, 1985, the
Bank converted to a stock savings bank, selling 2,217,856 shares of common
stock, and receiving net proceeds of approximately $28.8 million. Deposits at
Derby Savings are federally insured by the Bank Insurance Fund ("BIF"), which is
administered by the Federal Deposit Insurance Corporation (the "FDIC"). The
Bank is subject to comprehensive regulation, examination and supervision by the
FDIC and the Banking Commissioner of the State of Connecticut (the
"Commissioner"). The Company, as a bank holding company, is subject to
regulation and examination by the Board of Governors of the Federal Reserve
System (the "FRB").
Derby Savings is primarily engaged in the business of attracting deposits from
and providing loans to the residents and businesses located within the Bank's
market area. The Bank's customer base includes long-time customers mainly
employed in manufacturing and service industries as well as newer customers
employed by high technology industries in the northern and western parts of the
Bank's market area. At December 31, 1994, the Bank had deposits of $1.03
billion, funding 84.1% of the Bank's $1.22 billion in assets. The Bank offers a
variety of deposit products to meet the various investment objectives of its
depositors, including regular savings, certificates of deposit, money market
accounts, individual retirement accounts and keogh accounts. In addition to
deposits, which serve as the Bank's primary source of funds, the Bank augments
its lending and investment activities through borrowings from the Federal Home
Loan Bank of Boston ("the FHLBB"), which serves as a credit facility for its
members. At December 31, 1994, the Bank had borrowings from this source of
$111.1 million, funding 9.1% of assets.
The lending activities of the Bank are primarily focused upon meeting the credit
needs of the consumer segment of the Bank's market area. The Bank's consumer
orientation has evolved into essentially two primary products which are secured
by residential real estate and represent the core business of the Bank. At
December 31, 1994, $683.6 million, representing 55.9% of the Company's assets,
were invested in loans secured by first liens on one-to-four family residences.
Complementing the Bank's financing of residential real estate is the home equity
line of credit (the "HELOC") which is also secured by residential real estate
and utilized by consumers to finance various purchases and expenditures. The
flexibility of this means of consumer finance is reflected in the demand for
this product which has enabled the Bank to allocate $70.2 million or 5.7% of its
assets to this product. In addition to these primary products, the Bank also
provides financing for other consumer needs, multi-family housing, as well as
1.
financing for commercial real estate, construction and local businesses. The
Bank's investment in these product lines in the aggregate totaled $87.9 million,
representing 7.2% of the Company's assets at December 31, 1994. The Company's
corporate headquarters are located at 33 Elizabeth Street, Derby, Connecticut
06418 (telephone: 203-736-1000).
RESULTS OF OPERATIONS. Net income for totaled $5,710,000 or $1.95 per share
(fully diluted) compared to $6,474,000 or $2.25 per share (fully diluted) for
the prior year. Net income for 1993 includes $1,548,000 or $.54 per share
(fully diluted) resulting from the adoption of Financial Accounting Standards
Board Statement 109. This amount represents the cumulative effect of a change
in accounting for income taxes effective January 1, 1993. Net income for the
year ended December 31, 1993 before the cumulative effect of the change in
accounting principle totaled $4,926,000 or $1.71 per share (fully diluted). The
Company declared a 5% stock dividend on February 15, 1995. The per share
amounts for the current and prior periods have been retroactively adjusted to
give effect to this stock dividend.
Net interest income for 1994 increased $4.0 million or 12.9% from $30.5 million
for 1993 to $34.5 million for 1994. The increase in net interest income of the
Company resulted from an improvement in the net yield on interest-earning
assets. For 1994, the net yield on interest-earning assets increased to 2.94%,
from 2.68% for 1993.
Stockholders' equity totaled $67.1 million or $23.30 per share at December 31,
1994 and represented 5.5% of total assets. In accordance with Financial
Accounting Standards Board Statement No. 115, stockholders' equity at December
31, 1994 included a $5.6 million unrealized loss, net of tax effect, on
securities classified as available for sale (see "Consolidated Financial
Statements contained in the 1994 Annual Report to Stockholders"). For 1994, net
income represented a return on average assets and a return on average
stockholders' equity of .47% and 8.34%, respectively, compared to .54% and
10.30% respectively, for 1993.
During 1994, the Company made further progress in reducing the level of
non-performing assets, which includes non-performing loans and foreclosed and
in-substance foreclosed assets. At December 31, 1994, non-performing assets
totaled $20.8 million or 1.7% of total assets, reflecting a $7.4 million or 26%
decline from $28.2 million or 2.4% of total assets at year end 1993. However,
the volume and flow of non-performing assets continued to dampen the performance
of the Company throughout the year through for losses and the expenses attendant
to the management and disposition of these assets.
During 1994, the Bank charged off loans, net of recoveries, totaling $2.5
million against the allowances for credit losses. For 1994, the provision for
credit losses totaled $2.3 million compared to $2.5 million for 1993. At
December 31, 1994, the allowances for credit losses totaled $6.8 million
representing 64.9% of non-performing loans.
For 1994, the Bank provided $2.2 million to the allowance for estimated losses
on foreclosed assets compared to $4.3 million for 1993. The allowance for
estimated losses on foreclosed assets totaled $439,000 at December 31, 1994,
after foreclosed asset charge-offs of $2.8 million during the year.
2.
BURRITT TRANSACTION. On December 4, 1992, Derby Savings entered into an Insured
Deposit Purchase and Assumption Agreement ("P & A") with the FDIC, pursuant to
which Derby purchased certain assets and assumed the insured deposits and
certain other liabilities of Burritt Interfinancial Bancorporation, New Britain,
Connecticut in an FDIC-assisted transaction. In the transaction, the Bank
assumed approximately $460 million of insured deposits and approximately $5.5
million of other liabilities of Burritt.
The assets of Burritt acquired included cash, various securities and certain
other assets totaling approximately $54.0 million and two loan pools of one-to-
four family mortgage loans and consumer loans, with book values of approximately
$139.7 million and $29.6 million, respectively. The loans acquired in this
transaction were purchased at a $10.4 million discount, which was initially
allocated to the specific allowance for credit losses. Specific allocations of
the acquired allowance for credit losses, to reflect the fair value of loans
acquired, have been made as management of the Bank identified probable losses.
During 1993, the Bank completed a valuation analysis of the loans acquired in
connection with the Burritt transaction. As a result of this analysis, the
Company allocated $6.0 million of the Burritt allowance for credit losses as a
purchased loan discount (Note 3). This amount is being accreted to interest
income over the remaining terms of the acquired loans.
The FDIC paid $240.4 million in cash to Derby in settlement of the difference
between the amount of deposits and liabilities assumed and the assets acquired
by Derby, less the $6.2 million premium paid by Derby in the transaction.
As a result of the Burritt transaction, Derby added 11 banking offices located
in the greater New Britain area.
MEMORANDUM OF UNDERSTANDING. During 1992, the Board of Directors of Derby
Savings entered into a Memorandum of Understanding (the "Memorandum") with the
FDIC and the Connecticut Commissioner of Banks. The Memorandum called for the
Board of Directors of the Bank to develop a written plan to reduce the level of
assets classified "substandard" and to establish target levels for the reduction
of adversely classified assets to 75% of total equity capital and reserves by
December 31, 1992 and to 50% of total equity capital and reserves within a
reasonable time thereafter. The Memorandum also called for the level of
delinquent loans to be reduced to no more than 5% of gross loans by December 31,
1993. At December 31, 1994, delinquent loans totaled $32.0 million or 3.8% of
total loans. Additionally, the Memorandum limits the payment of cash dividends
by the Bank to DS Bancor to the Company's debt service and non-salary expenses.
In connection with the Burritt transaction, the FDIC modified the terms of the
Memorandum which pertained to the maintenance of capital ratios. The Memorandum
initially required that the Bank maintain a ratio of tier 1 capital to total
assets of at least 5.5% and if the ratio fell below 7%, the Bank was required to
notify the FDIC and the Connecticut Commissioner. The modification required
Derby to have tier 1 capital in excess of 5% of total assets by December 31,
1993 and tier 1 capital at or above 5.75% of total assets by December 31, 1994.
However, management of the Bank has requested and the FDIC has approved an
extension of the December 31, 1994 target date to June 30, 1995. The Bank's
tier 1 capital ratio at December 31, 1994 was 5.5%. The Bank expects to achieve
the June 30, 1995 capital target of 5.75% through maintaining asset size at
current levels and earnings retention.
3.
BRANCH OFFICES. During the second quarter of 1994, the Bank relocated the
operations of the former New Britain main office of Burritt. Since the
acquisition of Burritt in December 1992, the Bank had been renting the former
main office of Burritt from the FDIC. The move to the new facility has allowed
the Bank to expand the level of services provided to include drive-up and
automated teller machine ("ATM") facilities.
In January 1994, the Bank closed one of its five branch offices located in New
Britain, which was acquired in the Burritt transaction. The customers of this
office can be serviced by any one of the Bank's other offices in New Britain or
the surrounding communities. (See Item 2 -- Properties.)
DERBY FINANCIAL SERVICES. In order to broaden the scope of available financial
services to the communities served by the Company, the Bank, through it's
subsidiary, Derby Financial Services ("DFS"), began offering brokerage services
in 1993. The former Burritt had been providing this type of service to the
greater New Britain area for several years. The products offered through DFS
include various equity securities, bonds and mutual funds.
MARKET AREA
The Bank currently operates twenty-two banking offices located in western New
Haven, eastern Fairfield and Hartford counties. The Bank has ATM's at 16 of its
offices. The Bank primarily generates deposits and originates loans in these
geographic areas.
The Company is headquartered in Derby, which is located in close proximity to
New Haven, Bridgeport and Danbury. This area is served by an excellent highway
system, which allows both east/west (Interstates 95 and 84 and the Merritt
Parkway) and north/south (Route 8) travel both within the state and access to
New York City, Hartford and Boston. Long distance travel is facilitated by
service at three airports. The ports of New Haven and Bridgeport are active
entry points to the Northeast.
The Route 8 corridor has experienced an influx of high technology and service
companies. Such companies include Southern New England Telephone, Tetley Tea,
Philips Medical Systems and Black & Decker. This influx has contributed to a
shift in the employment mix away from traditional industries, including
machinery, metal working and chemical processing. Additionally, the area is
known for its educational and medical facilities, such as Yale University.
LENDING ACTIVITIES
GENERAL. Derby Savings, like most other savings institutions, traditionally
concentrates its lending activities on the origination of loans secured by first
mortgage liens for the construction, purchase or refinancing of residential real
property. Also during the past several years, the Bank has enhanced its
consumer lending through the origination of HELOC's. While residential first
mortgage loans and HELOC's are the primary focus of Derby Savings' lending
activities, the Bank also originates other consumer loans, commercial real
estate mortgages and commercial business loans. At December 31, 1994, the
Bank's loan portfolio totaled $841.7 million and represented 68.8 % of total
assets.
4.
ONE-TO-FOUR FAMILY UNITS. At December 31, 1994, Derby Savings' total mortgage
loan portfolio was $721.0 million, of which $55.2 million is identified as held
for sale, compared to $660.6 million, with no loans identified as held-for-sale
at December 31, 1993. At December 31, 1994, Derby Savings Bank held in its
portfolio $683.6 million of first mortgage loans secured by one-to-four family
residential units which represented 94.8% of its total mortgage loan portfolio.
Of this amount, $6.9 million or 1.0 % were non-performing loans. These include
loans which are non-accruing or past due 90 days.
During 1994, Derby Savings offered adjustable-rate residential mortgage loans
having one-year and three-year adjustment periods, each for a maximum term of 30
years. The interest rate on the one-year adjustable-rate loans is 3.00% above
the One-Year Treasury Index. The payment and interest rate adjust annually with
a maximum interest rate adjustment of 2% per adjustment and 6.00% above the
original interest rate over the term of the loan. Derby Savings Bank also
offers a convertible mortgage program which allows the borrower to convert their
one year adjustable rate mortgage to a fixed rate mortgage between the 13th and
60th payment. Interest rates on the three-year adjustable-rate loans are fixed
for the first three years and either adjust every three years thereafter or
adjust annually thereafter on the same basis as the one-year adjustable-rate
loans. The Bank offers adjustable-rate loans to finance non-owner occupied
residences at a somewhat higher margin above the One-Year Treasury Index.
The Bank offers special mortgage programs to assist first time home-buyers
purchasing one and two family homes, or condominium units, including a five year
fixed rate mortgage priced below the regular 30 year fixed rate product. There
are no points, and the Bank will accept applications up to 40 years in term and
financing of up to 90%. Additionally, the Bank offers a 30-year fixed rate
program with financing of up to 95%.
Derby Savings does not originate residential mortgage loans which exceeded 95%
of the value of the security for the loan. In the event that the amount of a
mortgage loan exceeds 80% of the value of the real estate and improvements, the
Bank requires that the loan be insured against default by private mortgage
insurance, which effectively reduces the loss exposure to a 75% loan-to-value
ratio.
The Bank originates fixed-rate mortgage loans which, from time to time, are sold
in the secondary market in order to achieve the desired balance between
interest-sensitive assets and liabilities and to be able to continue to meet the
credit needs of the local community. The Bank pools such mortgages to
facilitate their sale to investors, primarily the Federal Home Loan Mortgage
Corporation (the "FHLMC") under its forward commitment programs and, to a lesser
extent, the Federal National Mortgage Association (the "FNMA"). The Bank
retains the servicing rights on loans sold in the secondary market.
Most of the mortgage loans originated by Derby Savings include a "due-on-sale"
clause, giving the Bank the right to declare a loan immediately due and payable
in the event, among other things, that the borrower sells or transfers title of
the real property subject to the mortgage. Due-on-sale clauses contained in
residential real estate mortgages have been ruled enforceable in Connecticut by
the state's highest court. Federal legislation also provides for the
enforceability of due-on-sale clauses.
5.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LOANS. At December 31, 1994, loans
secured by multi-family residences totaled $8.0 million or 1.1% of the Bank's
mortgage loan portfolio. At December 31, 1994, $1.8 million or 22.1% of loans
secured by multi-family residences were non-performing. Loans to finance
commercial real estate totaled $27.0 million and represented 3.7% of the Bank's
mortgage loan portfolio at year end 1994. There were $.2 million or .7% of
commercial real estate loans that were non-performing at year end 1994. The
interest rate on multi-family and commercial real estate loans generally ranges
from 3.75% to 4.0% above the One-Year Treasury Index and adjusts every year with
annual adjustment limits ranging from 2% to 3% and total adjustments over the
life of the loan generally limited from 5% to 7.5% above the initial interest
rate. Multi-family and commercial real estate loans generally amortize over
terms of 15 to 25 years, but may be called or modified by the Bank after ten
years. Derby Savings generally limits multi-family and commercial real estate
loans to 75% of the value of the property securing the loan.
CONSTRUCTION LOANS. In the area of real estate development and construction
lending, which is primarily for residential and condominium construction, the
Bank, at December 31, 1994, had commitments to lend $4.2 million, of which $2.4
million was outstanding at year end 1994, representing .3% of the mortgage loan
portfolio. In comparison, at year end 1993, $3.3 million was committed to
construction projects, of which $2.8 million was advanced, which represented .4%
of the mortgage loan portfolio. At December 31, 1994, there were no
construction and development loans that were non-performing.
The allowance for credit losses specifically allocated to the mortgage loan
portfolio totaled $4.5 million at December 31, 1994, which represented 50.7% of
the non-performing mortgage loans. This allowance includes $1.3 million
allocated to the loans acquired in the Burritt transaction.
CONSUMER LOANS. Connecticut savings banks are currently authorized by statute
to invest in secured and unsecured consumer loans without limitation as to
dollar amount. Savings banks are also authorized to issue credit cards and lend
money to individuals in connection with related lines of credit and to make
student loans under the Connecticut Guaranteed Student Loan program (the
"CGSL"). At December 31, 1994, the Bank had $98.0 million or 11.6% of its total
loan portfolio invested in consumer loans.
To enable home owners to utilize some of the equity in the value of their homes,
Derby Savings offers basically two types of second mortgage loans. Under the
home equity loan program, loans amortizing up to 20 years are made at rates
designed to be competitive in the market place. At December 31, 1994 and 1993,
the Bank had $19.3 million and $18.9 million, respectively in home equity loans.
Under the Home Equity Line of Credit ("HELOC") program, loans are made for an
original term of twenty years at either fixed rates or an interest rate
adjusting monthly at 1.5% to 2.5%, above a commercial bank prime rate as
published under key rates in the New York Times ("Derby Savings Prime").
During 1994, the Bank originated HELOC's at Derby Savings Prime for the first
six months, and thereafter at 1.5% to 2.5% over prime. These loans typically
require payment of interest only for ten years at which point the note requires
amortization to maturity. The amortizing second mortgage loan and the home
equity line of credit loan are made up to 75% and 90% respectively of the
appraised value of the home including prior encumbrances. Home Equity Lines of
Credit outstanding totaled $130.5 million with $70.2 million in use at year end
6.
1994 compared to $124.8 million with $68.4 million in use at year end 1993.
These loans represented 71.6% of the consumer loan portfolio and 8.3% of total
loans at December 31, 1994.
The Bank offers both marine loans and automobile loans to its customers. Marine
loans are made up to 75% of the sale price on new boats and 75% of the appraised
value of used boats and are personally guaranteed by the principals of any
corporate borrowers. The rates on these loans are generally fixed for a maximum
of fifteen years. The Bank, at December 31, 1994, had $1.4 million in marine
loans. Automobile loans on new vehicles are made up to 90% of the sales price,
while used vehicles are limited to 80%. Loans are generally made up to five
years at fixed rates on new vehicles.
Under the Connecticut Guaranteed Student Loan (CGSL) program, the Bank is
authorized to loan annually up to $4,000 to qualifying parents. At December 31,
1994, the Bank had $146,000 in parent loans. The interest rate on these loans
is partially subsidized and the principal and interest are fully guaranteed by
the federal government. Additionally the Bank also accepts loan applications
for student loans. These applications are forwarded to CGSL for processing.
At December 31, 1994, $1.1 million or 1.1% of the consumer loan portfolio was
non-performing. Of this amount, $635,000 or 57.8% are HELOC loans. The
allowance for credit losses specifically allocated to consumer loans totaled
$1.3 million at December 31, 1994, which represented 115.3% of the non-
performing consumer loans. This allowance includes $497,000 allocated to loans
acquired in the Burritt transaction.
COMMERCIAL LENDING. The Bank has developed a commercial loan portfolio which
totaled $22.7 million or 2.7% of the total loan portfolio at December 31, 1994.
The Bank targets businesses with $1 million to $5 million in annual revenues.
The Bank's commercial lending personnel, including a credit analyst, have
considerable experience in commercial lending.
Derby Savings also offers traditional line of credit loans to businesses which
are secured by inventories and receivables. At December 31, 1994, $13.3 million
was committed to such lines of credit, $5.1 million of which was being used.
These lines of credit, which individually range from $10,000 to $4.0 million,
had an average amount outstanding of $106,000 at December 31, 1994. The
interest rate on these loans varies monthly at a margin above Derby Savings
Prime. Each loan on the credit line must be repaid within 11 months of its
origination.
The commercial loan portfolio at December 31, 1994, in part, consisted of loans
to local real estate developers and builders. Land improvement loans are made
up to 75% of the value of the land. When construction loans are made to an
experienced developer who already has a signed purchase contract with a buyer,
and a 10% deposit, the loan is classified as a commercial loan rather than a
construction loan. Such loans are made up to 100% of construction cost,
exclusive of the developer's equity in the land. All such loans are short-term
with an interest rate floating at a margin above Derby Savings Prime.
At December 31, 1994, $3.3 million or 14.5% of the Company's investment in
commercial loans was for the development of real estate, with the remaining
portfolio comprised of loans for various business needs.
7.
At year end 1994, $527,000, representing 2.3% of the commercial loan portfolio,
was non-performing. The allowance for credit losses allocated to commercial
loans totaled $1.0 million at December 31, 1994, which represented 197.7% of the
non-performing commercial loans.
LOAN MATURITIES. The following table sets forth certain information at December
31, 1994 regarding maturities and repricing in the Bank's loan portfolio. Loans
are net of deferred loan fees and of non-accruing loans.
One Year One through Over
or Less Five Years Five Years
-------- ----------- ----------
(Amounts in thousands)
Permanent mortgage loans $493,611 $ 82,293 $135,119
Construction loans 2,272 --- ---
Commercial loans 21,904 177 53
Consumer loans 85,376 7,515 4,054
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Total loans receivable $603,163 $ 89,985 $139,226
======== ======== ========
The following table sets forth, as of December 31, 1994, the principal dollar
amount of performing loans due after one year, net of deferred fees which have
pre-determined interest rates and floating or adjustable interest rates.
Due After December 31, 1995
--------------------------------------
Predetermined Floating or
Rates Adjustable Rates
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(Amounts in thousands)
Permanent mortgage loans $181,206 $ 36,094
Construction loans 112 ---
Commercial loans 230 ---
Consumer loans 10,970 599
-------- --------
Total loans receivable $192,518 $ 36,693
======== ========
LOAN ORIGINATIONS. Loan originations are developed by the Bank's mortgage,
consumer and commercial loan departments from a number of sources including
realtor, builder and customer referrals. Bank personnel routinely call on
various real estate firms and attend regular monthly meetings of the local real
estate board. Commercial loan originations are primarily developed by direct
solicitation of both present and new customers by commercial loan officers.
Consumer loan services are solicited by direct mail to existing depositors and
mortgage loan customers. Advertising is also used to promote various consumer
loans.
Applications for all types of loans are taken at all of the Bank's offices. The
Bank's commercial banking and loan representatives go to borrowers' homes or
businesses to assist with the preparation of loan applications. All mortgage
and commercial loan application underwriting is centralized.
The Bank's staff underwriters have individual lending authority with limits
ranging up to $250,000; the senior lending officer has a $500,000 limit. The
management loan committee, which is composed of the Bank's president, executive
vice president, senior lending officer, chief financial officer and the senior
officer of each lending department, can approve loans of up to $1.5 million.
8.
Loans in excess of $1.5 million require approval by the Board of Directors.
Loans to one entity, which aggregate $4.0 million, may be approved by the
management loan committee.
All property securing real estate loans made by Derby Savings is appraised by
staff appraisers or an independent appraiser selected by the Bank. For all real
estate loans, Derby Savings requires the borrower to obtain title, fire and
extended casualty insurance and, where appropriate, flood insurance.
The Bank encounters certain environmental risks in its lending activities.
Under federal and state environmental laws, lenders may become liable for the
costs of cleaning up hazardous materials found on security properties. Certain
states may also impose liens with higher priorities than first mortgages on
properties to recover funds used in such efforts. Although the foregoing
environmental risks are more usually associated with industrial and commercial
loans, environmental risks may be substantial for residential lenders, like
Derby Savings, since environmental contamination may render the security
property unsuitable for residential use. In addition, the value of residential
properties may become substantially diminished by contamination of nearby
properties. In accordance with the guidelines of FNMA and FHLMC, appraisals for
single-family homes on which the Bank lends include comment on environmental
influences and conditions. The Bank attempts to control its exposure to
environmental risks with respect to loans secured by larger properties by
requiring an environmental survey and/or audit. No assurance can be given,
however, that the value of properties securing loans in Derby Savings' portfolio
will not be adversely affected by the presence of hazardous materials or that
future changes in federal or state laws will not increase the Bank's exposure to
liability for environmental cleanup.
Derby Savings issues commitments to prospective borrowers to make loans subject
to various conditions. Loan commitments are generally issued to finance
residential properties, commercial loans and for construction loans secured by
commercial and multi-family residential properties. With respect to fixed rate
single-family residential mortgage loans, it is the policy of the Bank either to
issue 30-day commitments to lend at the prevailing rate of interest at the time
of commitment, or to lock in the interest rate after the time of application.
In order to lock in the interest rate, the applicant must pay an origination fee
of one half of one percent of the loan amount. This fee is deducted from the
mortgage origination fee due at closing. On adjustable rate mortgages, it is
the policy of the Bank to hold the prevailing interest rate at the time of
application and to issue a 60 day commitment when the loan is approved, or to
lock in the interest rate after the time of application, for 60 days. In order
to lock in the interest rate for 60 days, the applicant must pay an origination
fee of one half of one percent of the loan amount. This fee is deducted from
the mortgage origination fee due at closing. The proportion of the total volume
of commitments derived from any particular category of loan varies from time to
time and depends upon market conditions. At December 31, 1994, Derby Savings
had $10.8 million of loan origination commitments outstanding.
9.
LOAN COMPOSITION. The following table summarizes the types of loans held by the
Bank at the dates indicated and the percentage of loans in each category to net
loans:
At December 31,
----------------------------------------------------
Types of Loans: 1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Amount Amount Amount Amount Amount
% % % % %
----------------------------------------------------
(Amounts in thousands)
MORTGAGES
One-to-Four Family $683,557 $621,561 $553,453 $366,047 $391,019
81.9 79.8 78.2 72.0 71.1
Multi-Family 8,007 8,544 7,278 7,508 7,639
1.0 1.1 1.0 1.5 1.4
Commercial 27,043 27,747 29,848 29,596 29,543
3.2 3.6 4.2 5.8 5.4
Construction 2,364 2,753 2,782 2,825 4,597
.3 .3 .4 .5 .8
-------- -------- -------- -------- --------
Total 720,971 660,605 593,361 405,976 432,798
86.4 84.8 83.8 79.8 78.7
CONSUMER LOANS
HELOC 70,177 68,386 71,428 60,158 62,629
8.4 8.8 10.1 11.8 11.3
Other Consumer 27,866 27,134 34,239 14,206 16,367
3.3 3.5 4.8 2.8 3.0
-------- -------- -------- -------- --------
Total 98,043 95,520 105,667 74,364 78,996
11.7 12.3 14.9 14.6 14.3
COMMERCIAL LOANS 22,660 30,141 22,931 31,994 40,769
2.7 3.8 3.2 6.3 7.4
-------- -------- -------- -------- --------
Total Loans 841,674 786,266 721,959 512,334 552,563
100.8 100.9 101.9 100.7 100.4
Less Allowances For
Credit Losses 6,803 6,979 13,937 3,674 2,313
.8 .9 1.9 .7 .4
-------- -------- -------- -------- --------
Loans Receivable,Net $834,871 $779,287 $708,022 $508,660 $550,250
======== ======== ======== ======== ========
PURCHASE AND SALE OF LOANS AND LOAN SERVICING. The Bank, from time to time,
sells loans in the secondary mortgage market while retaining servicing rights.
The loans that are sold are predominantly fixed rate mortgage loans. The
Company sold $12.1 million in fixed rate mortgage loans in 1994, compared to
$30.0 million in 1993, in order to achieve the desired balance between interest-
sensitive assets and liabilities and to provide additional funds to meet the
credit needs of the local community. Loan servicing on loans sold is performed
by the Bank, which retains a portion (normally 3/8 of 1%, exclusive of any
excess servicing fees) of the interest paid by the borrower in consideration for
the servicing of the loan.
10.
In order to supplement local mortgage loan originations, the Bank has purchased
single family adjustable rate mortgage loans. These purchases totaled $21.9
million during 1994 and $8.8 million during 1993. At year end 1994,
approximately 73% of the mortgage portfolio was invested in adjustable rate
loans, compared to 70% in 1993.
The following table sets forth information as to Derby Savings' loan servicing
portfolio at the dates shown.
At December 31,
------------------------------------------------------
1994 1993 1992
---------------- ---------------- ------------------
(Amounts in thousands)
Loans owned by
the Bank $796,138 86.0% $743,197 83.2% $ 615,638 58.0%
Loans Serviced
For Others 129,345 14.0 149,868 16.8 445,184 42.0
-------- ----- -------- ----- ---------- -----
Total Loans Serviced $925,483 100.0 $893,065 100.0 $1,060,822 100.0
======== ===== ======== ===== ========== =====
LOAN ACTIVITIES. During 1994, the Bank originated $164.9 million in mortgage
loans and $91.2 million in other loans, compared to $188.6 million in mortgage
loans and $78.5 million in other loans during 1993.
The table below shows real estate mortgage loan origination, sale and repayment
activities of Derby Savings for the periods indicated.
At December 31,
----------------------------
1994 1993 1992
-------- -------- --------
(Amounts in thousands)
Loans originated:
Construction loans originated $ 1,981 $ 1,580 $ 1,757
Purchase/refinance 162,875 187,056 138,909
-------- -------- --------
Total loans originated 164,856 188,636 140,666
Loans purchased 21,938 8,663 152,090
-------- -------- --------
Total loans originated and purchased 186,794 197,299 292,756
Loans sold:
Participations --- 111 927
Whole loans 12,139 29,875 24,904
-------- -------- --------
Total loans sold 12,139 29,986 25,831
Loan principal reductions 118,301 94,156 79,337
-------- -------- --------
Total loans sold and principal reductions 130,440 124,142 105,168
-------- -------- --------
Increase (decrease) in real estate
mortgage loans (before net items) $ 56,354 $ 73,157 $187,588
======== ======== ========
11.
The following table shows non-real estate loan originations and purchases and
principal reductions of the Bank for the periods indicated.
At December 31,
----------------------------
1994 1993 1992
-------- -------- --------
(Amounts in thousands)
Loans originated and purchased:
Personal $ 637 $ 331 $ 1,150
Home improvement 243 88 18,775
Home equity credit line 43,784 43,236 40,666
Auto 1,879 58 3,164
Education 111 545 498
Collateral 2,194 2,246 3,186
Marine --- 13 571
Leeway --- -- --
Commercial 42,324 32,002 12,653
-------- -------- --------
Total loans originated and purchased 91,169 78,519 80,663
-------- -------- --------
Loan principal reductions:
Personal 583 1,326 448
Home improvement 342 2,647 2,594
Home equity credit line 41,224 47,192 29,396
Auto 1,116 1,704 206
Education 389 491 461
Collateral 2,200 2,203 2,043
Marine 646 1,247 904
Leeway 61 -- 74
Commercial 49,866 24,389 22,529
-------- -------- --------
Total principal reductions 96,427 81,199 58,655
-------- -------- --------
Increase (decrease) in loans
(before net items) $ (5,258) $(2,680) $ 22,008
======== ======== ========
FEE INCOME FROM LENDING ACTIVITIES. Fee income from lending activities is
primarily generated from origination fees on one-to-four family mortgage loans.
These fees range from 1% to 3% of the total loan amount and vary depending on
the mortgage program. Origination fee income is also generated from home
improvement loans, commercial loans, multi-family loans and other
non-residential loans.
As required by the Statement of Financial Accounting Standards No. 91 ("SFAS
91"), "Accounting for Non-refundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases," the Bank defers certain
direct costs and loan fees resulting from the origination of loans, which will
be amortized as an adjustment of yield over the contractual term of the related
loans.
In addition to origination fees, Derby Savings charges annual fees for HELOC
loans, and fees for loan modifications, late payments, changes of property
ownership and for related miscellaneous services.
USURY LIMITATIONS. Federal legislation preempted all state usury laws
concerning residential first mortgage loans unless the state legislature acted
to override the pre-emption by April 1, 1983. The Connecticut legislature did
not act to override the federal pre-emption. Connecticut law currently imposes
no ceiling on interest rates on loans made by the Bank.
12.
COLLECTION PROCEDURES AND ALLOWANCE FOR CREDIT LOSSES. When a borrower fails to
make a required payment by the 20th day after the payment is due, Derby Savings
attempts to cause the delinquency to be cured by corresponding with the
borrower. If the delinquency continues, the Bank corresponds further with the
borrower and, through telephone calls and letters, attempts to determine the
reason for and cure the delinquency. If the delinquency cannot be cured, the
Bank institutes appropriate legal action.
When Derby Savings acquires real estate through foreclosure or by deed in lieu
of foreclosure ("foreclosed assets"), the real estate is placed on the Bank's
books at the lower of the carrying value of the loan or the fair value of the
real estate based upon a current appraisal. Any reduction below the value
previously recorded on the books is charged against the allowance for estimated
losses on foreclosed assets.
The allowance for credit losses has been established through provisions for
credit losses and is a valuation allowance which is reflected as a deduction
from loans. The allowance represents amounts which, in management's judgement,
will be adequate to absorb possible losses on loans that may become
uncollectible, based on such factors as changes in the nature and volume of the
loan portfolio, current economic conditions that may affect the borrowers'
ability to pay, overall portfolio quality, the average of the Bank's credit
losses less recoveries for the current and preceding five years, and review of
specific problem loans. At December 31, 1994, the allowance for credit losses
totaled $6.8 million, which represented 64.9% of the $10.5 million of
non-performing loans.
Included in loans outstanding at December 31, 1994 and 1993 were $10.5 million
and $12.1 million, respectively, in non-performing loans. Included in these
amounts were $8.9 million in mortgage loans, $1.1 million in consumer loans and
$527,000 in commercial loans at December 31, 1994 and $9.0 million in mortgage
loans, $1.7 million in consumer loans and $1.4 million in commercial loans at
December 31, 1993. At December 31, 1994 and 1993, non-accrual interest on these
loans totaled approximately $640,000 and $810,000, respectively.
13.
Transactions in the allowance for credit losses for each of the five years in
the period ended December 31, 1994 were as follows.
At And For The Years Ended December 31,
-------------------------------------------------
1994 1993 1992 1991 1990
------- ------- ------- ------ ------
(Amounts in thousands)
Balance at beginning
of period $ 6,979 $13,937 $ 3,674 $2,313 $1,507
Charge-offs:
Mortgage loans (1,848) (2,857) (941) (1,325) (1,641)
Consumer loans (573) (860) (211) (267) (447)
Commercial loans (195) (114) (660) (1,606) (570)
------- ------- ------- ------ ------
(2,616) (3,831) (1,812) (3,198) (2,658)
------- ------- ------- ------ ------
Recoveries:
Mortgage loans 63 329 76 45 ---
Consumer loans 46 21 41 43 34
Commercial loans 6 11 229 71 ---
------- ------- ------- ------ ------
115 361 346 159 34
------- ------- ------- ------ ------
Net charge-offs 2,511 3,470 1,466 3,039 2,624
Provision for credit losses 2,325 2,475 1,375 4,400 3,430
Acquired allowance --- (5,963) 10,354 --- ---
------- ------- ------- ------ ------
Balance at end of period $ 6,803 $ 6,979 $13,937 $3,674 $2,313
======== ======== ======== ======= =======
Ratio of net charge-offs to
average loans outstanding .31% .47% .27% .57% .48%
During 1993, the Bank completed the valuation analysis of the loans acquired in
the Burritt transaction. As a result of this analysis, the Bank allocated $6.0
million of the Burritt allowance for credit losses as a purchased loan discount.
This amount is being accreted to interest income over the remaining terms of the
acquired loans.
14.
NON-PERFORMING AND RESTRUCTURED LOANS. The following table summarizes the
Bank's non-performing and restructured loans. For a discussion of
non-performing loans see "Management's Discussion and Analysis - Financial
Condition" contained in the 1994 Annual Report to Stockholders pages 6 - 11,
which are incorporated herein by reference.
At December 31,
--------------------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
(Amounts in thousands)
Non-accrual loans:
Mortgage $7,675 $6,657 $9,631 $6,904 $6,097
Construction --- --- 125 125 427
Consumer 1,098 1,446 1,197 1,000 1,741
Commercial 527 1,399 293 3,412 3,437
Accruing loans past
due 90 days:
Mortgage 1,186 2,317 3,006 4,096 4,660
Construction --- --- --- --- 70
Consumer --- 249 1 151 230
Commercial --- --- --- --- ---
The following table summarizes the allocation of the Bank's allowance for credit
losses and the percentage of loans in each category to total loans.
Allocation of Allowance for Credit losses:
--------------------------------------------------
At December 31,
--------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Amount Amount Amount Amount Amount
% % % % %
------- ------- ------- ------- -------
(Amounts in thousands)
Balance at end of period
applicable to:
Mortgage loans $ 4,495 $ 4,605 $11,166 $ 2,180 $ 1,130
85.7 84.0 82.2 79.2 78.3
Consumer loans 1,266 1,193 1,987 704 568
11.6 12.2 14.6 14.5 14.3
Commercial loans 1,042 1,181 784 790 615
2.7 3.8 3.2 6.3 7.4
------- ------- ------- ------- -------
Total $ 6,803 $ 6,979 $13,937 $ 3,674 $ 2,313
100.0 100.0 100.0 100.0 100.0
======= ======= ======= ======= =======
15.
Comparative information with respect to non-accrual loans is as follows:
At December 31,
----------------
1994 1993
---- ----
(Amounts in thousands)
Interest income that would have been recorded
under original terms: $640 $810
Interest income recorded during the period: $487 $960
It is the Bank's general policy that no additional interest income is accrued
with respect to loans on which a default of interest has existed for a period in
excess of 90 days, at which time previously accrued interest is reversed.
Foreclosed and in-substance foreclosed assets consisted of the following:
At December 31,
----------------
1994 1993
---- ----
(Amounts in thousands)
Foreclosed assets $ 6,195 $ 9,379
In-substance foreclosed assets 4,556 7,804
------- -------
Subtotal 10,751 17,183
Valuation allowance (439) (1,040)
------- -------
Net carrying amount $10,312 $16,143
========= ========
At December 31, 1994 and 1993, there were 37 and 44 properties, respectively,
included in foreclosed assets and 26 and 50 properties, respectively, in
in-substance foreclosed assets. See "Management's Discussion and Analysis -
Financial Condition" contained in the 1994 Annual Report to Stockholders pages
9 - 10, which is incorporated herein by reference.
SECURITIES PORTFOLIO (See "Management's Discussion and Analysis" contained
in the 1994 Annual Report to Stockholders).
Savings banks chartered in Connecticut have authority to make a wide range of
securities deemed to be prudent by a bank's board of directors. Subject to
various restrictions, including limitations on the aggregate dollar amount which
may be invested in each category as a percentage of total assets, the Bank may
own commercial paper, corporate bonds, certain mutual fund shares, debt and
equity obligations issued by credit worthy entities, whether traded on public
securities exchanges or placed privately for investment purposes, bonds of
government agencies and interests in real estate located in or outside of
Connecticut without limitations as to use. Recent federal legislation limits
the Bank's ability to exercise certain of the foregoing investment powers. See
"Regulation--Impact of the FDICIA on State Powers." The Bank's securities
portfolio totaled $322.1 million or 26.3% of total assets at December 31, 1994.
Of such amount, $292.0 million, or 90.7% of the securities portfolio consisted
of U.S. government and agency bonds and mortgage-backed securities.
Derby Savings increases or decreases its liquid investments depending upon,
among other things, the availability of funds and loan demand. Historically,
the Bank has maintained its liquid assets at levels believed adequate to meet
requirements of normal business activities.
16.
The securities portfolio remained essentially unchanged from $322.6 million or
27.0% of total assets at year end 1993 to $322.1 million, representing 26.4% of
total assets at year end 1994. In addition to mortgage-backed securities, the
Company's securities portfolio is comprised of investment grade corporate bonds
and marketable equity securities.
At December 31, 1994, securities, including Federal funds sold, maturing or
repricing within 12 months represented 25.3% of the Bank's interest-sensitive
assets maturing or repricing during 1995.
At December 31, 1994, the Bank had common stock securities totaling $1.6 million
with a fair value of $1.5 million managed by an outside investment firm under
the Bank's general direction for maximum return. Additionally, the Bank
maintains a trading portfolio comprised of common stocks. At year end 1994,
there were $770,000 of common stocks in this portfolio.
The following table sets forth the composition and carrying amount of the Bank's
securities portfolio and other money market securities, including securities
available for sale, at the dates indicated:
At December 31,
-----------------------------------
1994 1993 1992
-------- -------- --------
(Amounts in thousands)
Bonds and money market securities:
Federal funds $ 4,500 $ 30,500 $126,925
U.S. Government and agency bonds 22,419 2,000 25,629
Mortgage-backed-securities 269,543 243,848 163,481
Other bonds and notes 27,927 66,352 73,263
Money market preferred stock --- 9,000 7,000
Marketable equity securities 2,256 1,399 2,142
-------- -------- --------
Total $326,645 $353,099 $398,440
======== ======== ========
The following table sets forth certain information at December 31, 1994
regarding maturities and yields in the Bank's securities portfolio:
One Five Over
One Year Through Through Ten
or Less Five Years Ten Years Years Total
-------- -------- -------- -------- --------
(Amounts in Thousands)
US Government & $ --- $ 2,000 $ 15,600 $ 4,819 $ 22,419
Agencies --- 4.34 7.08 7.00 6.82
Mortgage-Backed 1 28,456 62,908 178,179 269,544
Securities 7.25 5.97 6.11 6.78 6.54
Other Notes & Bonds 12,391 15,536 --- --- 27,927
5.02 5.56 --- --- 5.32
-------- -------- -------- -------- ---------
Total $ 12,392 $ 45,992 $ 78,508 $182,998 $319,890
5.02 5.76 6.30 6.79 6.45
======== ======== ======== ======== ========
The stated yields on mortgage backed securities in the preceding table may vary,
based on changes in the level of prepayments experienced over the remaining term
of the securities.
17.
The securities constituting the Bank's investments in other bonds and notes are
all publicly traded. All of these securities are rated in one of the top four
rating categories by a nationally recognized rating firm.
The Bank adopted Financial Accounting Standards Board Statement No. 115 as of
December 31, 1993. This statement requires, in part, that certain securities
that are classified as available-for-sale be recorded at fair value, with
unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity. As a result, at December 31, 1994, the Bank recorded an
unrealized loss, net of tax effect, of $5.6 million which is included in
stockholders' equity. (See 1994 Annual Report to Stockholders).
The following table summarizes the Bank's security investments by portfolio
type:
Trading Account
December 31, 1994
----------------------------------
(Amounts in thousands)
Net
Amortized unrealized Market
cost losses value
--------- -------- ---------
Marketable Equities $ 918 $ 148 $ 770
========= ======== =========
Available-For-Sale
December 31, 1994
----------------------------------
(Amounts in thousands)
Net
Amortized unrealized Market
cost losses value
--------- --------- ---------
U.S. Government and agency bonds $ 21,095 $ 676 $ 20,419
Mortgage-backed securities $ 174,667 $ 7,825 $ 166,842
Other bonds and notes 28,903 976 27,927
--------- --------- ---------
Total bonds 224,665 9,477 215,188
Marketable equities 1,556 70 1,486
Total securities $ 226,221 $ 9,547 $ 216,674
========= ========= =========
Held-to-Maturity
December 31, 1994
----------------------------------
(Amounts in thousands)
Net
Amortized unrealized Market
cost losses value
--------- --------- ---------
U.S. Government and agency bonds $ 2,000 $ 60 $ 1,940
Mortgage-backed securities 102,702 7,714 94,988
--------- -------- ---------
Total securities $ 104,702 $ 7,774 $ 96,928
========= ======== =========
See Note 2 to the Consolidated Financial Statements in the Company's Annual
Report to Stockholders for the year ended December 31, 1994 for information
concerning the fair values and other information regarding the Bank's securities
portfolio, incorporated herein by reference.
18.
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of Derby Savings' funds for use in its
lending and investment activities. In addition, the Bank derives funds from
interest and principal payments on loans and other investments and from FHLBB
advances and other borrowings (See "Management's Discussion and Analysis -
Financial Condition" contained in the 1994 Annual Report to Stockholders,
incorporated herein by reference). Loan repayments are a relatively stable
source of funds, while deposit inflows and outflows are significantly influenced
by prevailing interest rates, money market conditions and competitive factors.
Borrowings may be used on a short-term basis to compensate for reductions in
normal sources of funds or on a longer term basis to support expanded lending
and investment activities. During the past several years, the use of FHLBB
advances has played a significant part in the overall funding of the Bank's
growth.
DEPOSIT ACTIVITIES. Derby Savings has developed a variety of deposit products
ranging in maturity from demand-type accounts to certificates with maturities of
up to five years. The Bank's deposits are primarily derived from the areas
where its offices are located. Derby Savings does not solicit deposits outside
of Connecticut.
In addition to traditional certificates of deposit, the Bank offers two types of
money market deposit accounts. At December 31, 1994, one of the money market
accounts paid 2.25% for balances of $10,000 or more. The other money market
account, which has been marketed under the name of the No Maturity CD, pays a
minimum rate of interest equal to 2.5 percentage points below the Bank's prime
rate on balances of $25,000 or more. During 1993, Derby Savings Bank ceased
offering this account type. At December 31, 1994, $161.7 million of the Bank's
deposits, or 15.7% of total deposits were held in the No Maturity CD, which paid
interest at the rate of 6.0% per annum at year end.
The Bank seeks to price its deposits in order to meet its need for liquidity to
fund loans and make other investments. The Bank reviews and establishes its
rates weekly.
Derby Savings promotes the establishment of IRA and Keogh accounts because
management believes the Bank's relationship with such depositors tends to be
stable. Additionally, the Bank seeks to act as trustee, administrator or, in
conjunction with an investment advisor, the manager of corporate pension funds
and actively solicits this business from smaller businesses in its market area.
At December 31, 1994, $132.0 million of the Bank's deposits, or 12.8% of total
deposits, were held in retirement accounts.
19.
The following table sets forth the average dollar amounts of deposits of the
Bank by type and the weighted average rates paid for the periods indicated:
For the Years Ended December 31,
---------------------------------------------------------
1994 1993 1992
------------------ ------------------ -----------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Type Amount Rate Amount Rate Amount Rate
---- ------- -------- ------- -------- ------- --------
(Amounts in Thousands)
Non-interest
bearing:
Demand Deposit $ 30,179 --- $ 26,409 --- $ 12,495 ---
======== ======= ======== ======= ======== =======
Interest bearing
deposits:
Demand Deposits $ 47,794 1.95% $ 45,678 2.43% $ 12,849 3.24%
Savings Deposits 231,318 2.01 237,846 2.58 130,570 3.61
Money Market
Deposits 203,867 3.91 186,983 3.19 122,611 3.72
Time
Deposits 513,471 4.37 515,368 4.73 289,848 5.45
-------- -------- --------
Total interest
bearing Deposits $996,450 3.61% $985,875 3.81% $555,878 4.59%
======== ======= ======== ======= ======== =======
The following table sets forth the deposit flows for Derby Savings during the
periods indicated.
At December 31,
------------------------------------------------
1994 1993 1992
---------- ---------- ---------
(Amounts in thousands)
Deposits $1,741,505 $1,803,245 $ 984,316
Withdrawals 1,755,921 1,829,414 996,507
---------- ---------- ---------
Net Cash Inflow (outflow) (14,416) (26,169) (12,191)
Deposits Acquired --- --- 459,550
Interest Credited 35,941 37,459 25,392
---------- ---------- ---------
Net increase in deposits $ 21,525 $ 11,290 $ 472,751
========== ========== =========
The following table presents, by various interest-rate categories, the amounts
of certificate accounts as of the dates indicated.
At December 31,
-----------------------------------------------
1994 1993 1992
-------- -------- --------
(Amounts in thousands)
2.01- 4.00% $189,891 $289,841 $180,098
4.01- 6.00% 282,210 148,873 229,605
6.01- 8.00% 55,655 54,509 107,058
8.01-10.00% 1,112 8,824 22,266
10.01-12.00% 50 143 132
-------- -------- --------
$528,918 $502,190 $539,159
======== ======== ========
20.
The following table presents the maturities of the Bank's certificates of
deposit in amounts of $100,000 or more at December 31, 1994 by time remaining to
maturity.
At December 31, 1994
--------------------
(Amounts in thousands)
Matures:
Less than 6 months $ 11,501
Over 6 through 12 months 6,923
Over 12 months 13,745
---------
Total $ 32,169
=========
BORROWINGS. The FHLB System functions in a reserve credit capacity for savings
institutions and certain other financial institutions. As a member of the FHLB
System, Derby Savings is required to own capital stock in the FHLBB and is
authorized to apply for advances on the security of such stock and other
qualified collateral, which includes certain of its home mortgages and other
assets (principally securities which are obligations of, or guaranteed by, the
United States), provided certain credit worthiness standards have been met. See
"Regulation - Federal Home Loan Bank System". Under its current credit
policies, the FHLBB limits advances to a member's qualified collateral. At year
end 1994 the Bank had a borrowing capacity with the FHLBB of approximately $770
million, of which $111.1 million was outstanding. FHLBB advances are used for
several separate programs. First, FHLBB advances are used to match fund five to
ten year fixed-rate commercial real estate mortgage loans at a spread of at
least 200 basis points. At December 31, 1994, advances primarily for this
purpose totaled $11.2 million. Second, the Bank uses these advances to match
fund both one year adjustable-rate mortgages and Home Equity Lines of Credit
through floating rate advances. In addition to cash management, these advances
have been used to fund purchases of various mortgage-backed securities.
At December 31, 1994 and 1993, respectively, the Company had total borrowings
outstanding of $111.1 million and $106.4 million, respectively.
In 1990, the Board of Directors authorized and the Company established a $3.0
million line of credit to partially fund the repurchase of the Company's common
stock in 1989 and 1990. This line of credit was paid off in June 1994.
21.
The following table summarizes the Company's borrowings:
At And For The Years Ended December 31,
---------------------------------------
1994 1993 1992
-------- -------- --------
(Amounts in thousands)
Repurchase agreements $ --- $ --- $ 158
Notes payable--Bank --- 1,450 1,933
FHLBB advances 111,145 104,991 120,771
-------- -------- --------
Total $111,145 $106,441 $122,862
======== ======== ========
Weighted average interest rate on
FHLBB advances 5.52% 5.47% 6.13%
Weighted average interest rate on total
borrowings during the period 5.53% 5.48% 6.15%
Highest month-end balance of total
borrowings $142,451 $144,340 $134,586
Average balance of total borrowings $123,190 $113,376 $103,886
See Note 7 to Consolidated Financial Statements in the 1994 Annual Report to
Stockholders for further information regarding the Company's borrowings.
See Management's Discussion and Analysis and Selected Financial and Other Data
in the 1994 Annual Report to Stockholders for the average balance sheet, rate
volume analysis, interest rate sensitivity analysis and selected financial
ratios which are herein incorporated by reference.
EMPLOYEES
At December 31, 1994, Derby Savings had 312 employees, of whom 75 were part-time
and none of whom were represented by a collective bargaining group. Employee
benefits include the Bank's pension plan, life, health and dental insurance, and
long-term disability insurance which are supplied by the Bank for all employees.
Management considers its relations with its employees to be excellent.
COMPETITION
Derby Savings experiences substantial competition in attracting and retaining
deposits and in making mortgage and other loans. The primary factors in
competing for deposits are interest rates, the quality and range of financial
services offered, convenience of office locations and office hours. Competition
for deposits comes primarily from other savings institutions and commercial
banks and money market funds. Additional competition for deposits comes from
various types of corporate and government borrowers and credit unions.
The primary factors in competing for loans are interest rates, loan origination
fees and the quality and range of lending services offered. Competition for
origination of first mortgage loans comes primarily from other savings
institutions, mortgage banking firms, commercial banks, insurance companies and
real estate investment trusts.
22.
Connecticut enacted legislation, effective March 19, 1990, which permits
interstate stock acquisitions between Connecticut depository institutions (i.e.,
commercial banks, savings banks, and savings and loan associations) and
depository institutions in other states that have adopted reciprocal
legislation, subject to the approval of the Connecticut Banking Commissioner.
This legislation also permits out-of-state bank holding companies or savings and
loan holding companies in states which have adopted reciprocal legislation to
acquire the stock of Connecticut holding companies or depository institutions.
Such activity was previously limited to stock acquisitions among depository
institutions or holding companies located in New England states with reciprocal
laws. On or after February 1, 1992, a bank holding company or savings and loan
holding company in a state which has adopted reciprocal legislation may charter
and operate a de novo Connecticut depository institution or holding company upon
the approval of the Connecticut Commissioner. Connecticut law also authorizes
bank holding companies from any state to establish non-bank offices (including
loan production offices) in Connecticut on a limited basis. Such legislation
may increase the number and/or size of the financial institutions competing with
the Company in its market area.
The Financial Institutions Recovery Reform and Enforcement Act ("FIRREA"),
expressly authorizes the FRB to approve acquisitions of savings associations by
bank holding companies. Additionally, FIRREA would permit the acquired savings
association to be converted to a bank or merged with a bank subsidiary of the
acquiring bank holding company, under certain circumstances. These provisions
of FIRREA may also increase competition from other financial institutions within
Derby Savings' market areas.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"IBBEA") authorized the acquisition of banks in any state by bank holding
companies, subject to compliance with federal and state antitrust laws, the
Community Reinvestment Act ("CRA") and specific deposit concentration limits.
The IBBEA removes most state barriers to interstate acquisitions of banks and
ultimately will permit multi-state banking operations to merge into a single
bank. Enactment of the IBBEA may result in increase competition and financial
institution acquisition from out of state financial institutions and their
holding companies.
REGULATION
FEDERAL BANK HOLDING COMPANY REGULATION
The Company is a registered bank holding company under the Bank Holding Company
Act of 1956, as amended (the "BHCA"), and is subject to FRB regulations,
examination, supervision and reporting requirements. Among other things, the
Company is required to file with the FRB annual reports and such additional
information regarding the business and operations of the Company and its
subsidiaries as the FRB may require pursuant to the BHCA. The FRB may conduct
examinations of the Company and its subsidiaries. Under the BHCA and
regulations adopted by the FRB, the Company and its subsidiaries are prohibited
from requiring certain tie-in arrangements in connection with any extension of
credit, lease, or sale of property or furnishing of services.
Under the BHCA, FRB approval is required for any action which causes a bank or
other company to become a bank holding company for any action which causes a
bank to become a subsidiary of a bank holding company. Under the BHCA, a bank
holding
23.
company such as the Company, must obtain FRB approval before (i) it acquires
direct or indirect ownership or control of any voting shares of any bank if,
after such acquisition, it will own or control directly or indirectly more than
5% of the voting stock of such bank unless it already owns a majority of the
voting stock of such bank; (ii) it or any of its subsidiaries, other than a
bank, acquires all or substantially all of the assets of a bank; or (iii) it
merges or consolidates with another bank holding company. Any application by a
bank holding company or its subsidiaries to acquire any voting shares of, or
interest in, or all or substantially all of the assets of any bank located
outside of the state in which the operations of the bank holding company's
banking subsidiaries are principally conducted, may not be approved by the FRB
unless the laws of the state in which the bank to be acquired is located
expressly authorize such an acquisition. Additionally, the Change in Bank
Control Act generally requires persons who at any time intend to acquire control
of a bank holding company, acting directly or indirectly or through or in
concert with one or more persons, to give 60 days prior written notice to the
FRB. "Control" exists when the acquiring party has voting control of at least
25% of the bank holding company's voting securities, or the power directly or
indirectly to direct the management or policies of such company.
Under the FRB's regulations, a rebuttable presumption of acquisition of control
arises with respect to an acquisition where, after the transaction, the
acquiring party has ownership, control or the power to vote at least 10% (but
less than 25%) of any class of the holding company's voting securities if (i)
the holding company has securities registered under Section 12 of the Securities
Exchange Act of 1934 or (ii) immediately after the transaction no other person
will own a greater proportion of that class of voting securities. The FRB may
disapprove proposed acquisitions of control on certain specified grounds.
A bank holding company is prohibited, except in certain statutorily prescribed
instances, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company, and from engaging directly or indirectly in activities other than
banking, managing or controlling banks, or furnishing services to its
subsidiaries. A bank holding company may, however, subject to the approval of
the FRB, engage in, or acquire shares of companies engaged in, activities which
are deemed by the FRB to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. In making any such
determination, the FRB is required to consider whether the performance of such
activities by the holding company or an affiliate can reasonably be expected to
produce benefits to the public, such as greater convenience, increased
competition, or gains in efficiency, that outweigh possible adverse affects,
such as undue concentration of resources, decreased or unfair competition,
conflicts of interest, or unsound banking practices.
The principal activities that the FRB has determined by regulation to be so
closely related to banking as to be a proper incident thereto include, among
other things: (1) making, acquiring or servicing loans; (2) performing certain
data processing services; (3) providing certain securities brokerage services;
(4) acting as a fiduciary or an investment or financial advisor; (5) leasing
personal or real property; (6) performing appraisals of real estate and tangible
and intangible personal property; (7) making investments in corporations or
projects designed primarily to promote community welfare; and (8) owning or
operating a savings association, if the savings association's activities are
limited to those permissible for a bank holding company. In addition, a bank
24.
holding company may also file an application with the FRB for approval to engage
in other activities that the holding company reasonably believes are so closely
related to banking as to be a proper incident thereto.
Bank holding companies with consolidated assets of $150 million or more such as
the Company, are required under FRB regulations to maintain minimum levels of
leverage-based capital. Bank holding companies that have a composite rating of 1
under the uniform CAMEL rating system are required to maintain a minimum ratio
of 3% tier 1 capital to total assets. All other bank holding companies are
required to maintain tier 1 capital levels ranging from 4% to 5% of total
assets. Higher capital ratios may be required by the FRB if warranted by
particular circumstances or risk profiles of the bank holding company. For
purposes of the leverage-based standard, tier 1 capital includes common equity,
minority interests in equity accounts of consolidated subsidiaries and
qualifying noncumulative perpetual preferred stock less goodwill. The FRB may
exclude certain other intangibles and investments in subsidiaries as
appropriate. At December 31, 1994, the Company had a ratio of tier 1 capital to
total assets of 5.6%.
The FRB has also adopted a risk-based capital measure to assist in the
assessment of the capital adequacy of bank holding companies. The FRB's risk-
based capital guidelines require bank holding companies to maintain a minimum
ratio of capital to total risk-weighted assets of 8%.
The risk-based capital guidelines include a definition of capital and a
framework for calculating risk-weighted assets by assigning assets and off-
balance-sheet items to broad risk categories. Qualifying total capital consists
of two types of capital components: "core capital elements" (comprising tier 1
capital) and "supplementary capital elements" (comprising tier 2 capital). Core
capital elements consist of common stock, surplus, undivided profits, capital
reserves, foreign currency translation adjustments, perpetual preferred stock
within certain limits, and minority interests in consolidated subsidiaries,
minus goodwill. At least 50% of a bank holding company's qualifying capital
must consist of tier 1 capital.
Supplementary capital elements consist of allowances for loan and lease losses
(up to a maximum of 1.25% of risk-weighted assets), perpetual preferred stock
and related surplus, hybrid capital instruments, perpetual debt, mandatory
convertible debt securities, term subordinated debt, and intermediate term
preferred stock including related surplus. The maximum amount of tier 2 capital
that may be included in an organization's qualifying total capital is limited to
100 percent of tier 1 capital (net of goodwill). At December 31, 1994, the
Company had a ratio of total capital to total risk-weighted assets of 11.4%.
In accordance with the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), the FRB has proposed to modify its risk-based capital adequacy
guidelines to take account of interest-rate risk, concentration of credit risk
and the risks of non-traditional activities. The interest-rate risk proposal
would attempt to estimate the effect that changes in market interest rates might
have on the net economic value of an institution. An institution with interest-
rate risk exposure in excess of an as yet to be determined threshold level would
be required to have additional capital equal to the dollar amount of the
estimated change in its net economic value that is in excess of the threshold
level. The FDIC has proposed similar changes to its risk-based capital
guidelines that would apply to the Bank. Management does not anticipate that
the
25.
proposals will have a material effect on the ability of the Company or the Bank
to meet applicable risk-based capital standards. The federal banking agencies
have proposed to treat concentration of credit risk and the risks of
nontraditional activities as additional factors in assessing whether to impose
higher capital requirements for individual bank holding companies and banks.
FDICIA also requires the federal bank regulatory agencies to prescribe safety
and soundness regulations relating to (i) internal controls, information systems
and internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate exposure; (v) asset growth; (vi) compensation and benefit
standards for officers, directors, employees and principal shareholders. The
FRB and FDIC have issued proposed safety and soundness regulations that would
apply to the Company and the Bank, respectively. The proposed safety and
soundness regulations contain general guidelines relating to the foregoing
operational, managerial and compensation issues that holding companies and
insured depository institutions are to follow to ensure that they are operating
in a safe and sound manner.
In addition, FDICIA requires the federal bank regulatory agencies to adopt
regulations specifying: (i) a maximum ratio of classified assets to capital;
(ii) minimum earnings sufficient to absorb losses without impairing capital; and
(iii) to the extent feasible, a minimum ratio of fair value to book value for
publicly traded shares of institutions and holding companies. The proposed
safety and soundness regulations would establish a maximum ratio of classified
assets to total capital (which for this purpose would include any allowances for
credit losses that would otherwise be excluded from total capital under the
risk-based capital guidelines) of 1.0%. For purposes of the proposed
regulation, classified assets include assets classified as substandard, doubtful
and loss (but only to the extent that losses have not been recognized).
The proposed safety and soundness regulations also require that an institution
continue to meet minimum capital standards assuming that any losses experienced
over the past four quarters were to continue over the next four quarters. If an
institution has an aggregate net loss over the past four quarters, the
institution's capital ratios would be recalculated under the assumption that
those losses will continue over the next four quarters. The federal banking
agencies have determined that establishing a minimum fair value to book value
ratio is not a feasible means to address the safety and soundness concerns
identified by Congress in adopting FDICIA and do not propose to take any further
action with respect to such a ratio.
Any depositary institution or holding company that fails to comply with the
requirements of the proposed safety and soundness regulations would be required
to submit a compliance plan within 30 days after a request from the appropriate
federal banking agency (the FRB, in the case of the Company, and the FDIC, in
the case of the Bank) to submit such a plan. In the event that a depository
institution or holding company fails to submit or implement an acceptable
compliance plan, the appropriate federal banking agency must order the
depository institution or holding Company to correct the deficiency and may: (i)
restrict asset growth; (ii) require the depository institution or holding
company to increase its ratio of tangible equity to assets; (iii) restrict the
rates of interest that the depository institution or holding company may pay; or
(iv) take any other action that would better achieve prompt corrective action.
26.
CONNECTICUT BANK HOLDING COMPANY REGULATION
The Company is subject to registration and filing requirements, as well as
general supervision by the Connecticut Commissioner, under the Connecticut Bank
Holding Company and Bank Acquisition Act ("CBHCA").
In the event that a Company seeks to acquire a Connecticut capital stock bank or
savings and loan association, the acquirer must file with the Connecticut
Commissioner a plan of acquisition approved by its board of directors and the
holders of two-thirds of the common stock of the bank or association to be
acquired. The plan of acquisition must be approved by the Connecticut
Commissioner before it becomes effective.
Under the CBHCA, an acquirer is required to file with the Connecticut
Commissioner an acquisition statement prior to acquiring or offering to acquire
the stock of a Connecticut bank or savings and loan association or a holding
company thereof if the acquisition would result in the acquirer being the
beneficial owner of 10% or more of any class of the voting securities of such
bank or savings and loan association. The acquirer may proceed with the tender
offer or acquisition only if the acquisition statement has not been disapproved
by the Connecticut Commissioner within a statutorily prescribed period. Under
the CBHCA, the Connecticut Commissioner may seek to enjoin an unlawful offer or
acquisition.
The payment of dividends by Derby Savings to the Company is subject to the
discretion of the Board of Directors of Derby Savings and depends upon a variety
of factors, including Derby Savings' operating results and financial conditions,
regulatory limitations and tax considerations. The amount which a Connecticut-
chartered capital stock savings bank, such as Derby Savings, may pay out in
dividends in any calendar year may not exceed the total of its net profits of
that year combined with its retained net profits of the preceding two years,
unless the Connecticut Commissioner approves the dividend. Additionally, Derby
Savings may not pay cash dividends on its stock if its net worth would thereby
be reduced below the amount required for the liquidation account established in
connection with Derby Savings' conversion from mutual to stock form in December
1985, or as may be required by the Connecticut Commissioner or the FDIC. In
May, 1991, during the second quarter of 1991, the Bank was informed by the
regional office of the FDIC that it will be permitted to pay dividends to the
Company in an amount limited to the holding company's non-salary expenses and
debt service payments. In April 1992, the Bank entered into a Memorandum of
Understanding with the FDIC and the Connecticut Commissioner of Banks, which
included a similar limitation on the payment of cash dividends. Since the Bank
is the sole source of funds for cash dividend payments by the Company to its
stockholders, the Memorandum restriction has resulted in the Company being
unable to pay cash dividends to stockholders.
The Company is registered as a holding company under the CBHCA and is subject to
general supervision and examination by the Connecticut Commissioner, including
the requirement that it file such reports as the Connecticut Commissioner may
require. The CBHCA provides that submission to the Connecticut Commissioner of
reports prepared for federal authorities will satisfy the reporting requirement
for bank holding companies. Under the CBHCA, the Connecticut Commissioner has
the power to issue rules and regulations necessary for the administration of the
CBHCA but to date no such regulations have been issued.
27.
CONNECTICUT SAVINGS BANK REGULATION
As a state-chartered savings bank, Derby Savings is subject to the applicable
provisions of Connecticut law and the regulations adopted thereunder by the
Commissioner. The Commissioner administers Connecticut banking laws, which
contain comprehensive provisions for the regulation of savings banks. Derby
Savings is subject to periodic examination by and reporting requirements of the
Commissioner.
Savings banks in Connecticut are empowered by statute, subject to certain
limitations, to take savings and time deposits, to accept checking accounts, to
pay interest on such deposits and accounts, to make loans on residential and
other real estate, to make consumer and commercial loans, to invest, with
certain limitations, in equity securities and debt obligations of banks and
corporations, to issue credit cards, to establish an insurance department to
issue life insurance and grant annuities and to offer various other banking
services to their customers. In addition, Connecticut savings banks may accept
demand deposits in connection with any commercial, corporate or business loan
relationship upon such terms and conditions as such savings bank may from time
to time require. Savings banks may exercise trust powers and make limited
commercial, corporate and business loans.
Under the Connecticut banking statutes, Connecticut savings banks may invest up
to 6% of its total assets in the equity securities of banks, bank holding
companies and certain corporations, subject to certain limitations, including
the requirement that the equity securities of any such bank, bank holding
company or corporation shall not exceed 10% of the total equity securities of
such bank, bank holding company or corporation. This limitation does not apply
to the acquisition of the stock of a Connecticut institution approved by the
Connecticut Commissioner of Banking. A Connecticut savings bank may also invest
(subject to certain limitations) up to 10% of its total assets in the debt
obligations of banks and bank holding companies, and up to 6% of its total
assets in the stock of certain investment companies, within the definition of
the Investment Company Act of 1940, owned by banks or by a savings bank life
insurance company.
In addition to otherwise authorized securities, a Connecticut savings bank may
invest (subject to certain limitations) up to 20% of its total assets in
securities that are the debt obligations or equity securities of corporations
incorporated and doing a major portion of their business in the United States,
and up to 8% of its total assets in any securities, except securities of state
banks and trust companies, national banking associations having their principal
offices in Connecticut, or bank holding companies, and except certain
commercial, corporate and business loans. Securities under this unrestricted
authority must be prudent in the opinion of the Bank given the circumstances
surrounding the investment. Recent federal legislation limits the Bank's
ability to exercise certain of the foregoing investment powers. (See "Impact of
the FDICIA on State Powers").
IMPACT OF THE FDICIA ON STATE POWERS
Pursuant to FDICIA, Derby Savings, as an insured state bank, may not engage as
principal in any activity that is not permissible for a national bank, unless
the FDIC has determined that the activity would pose no significant risk to the
BIF and the state bank is in compliance with applicable capital standards.
Activities of subsidiaries of insured state banks are similarly restricted to
28.
those activities permissible for subsidiaries of national banks, unless the FDIC
has determined that the activity would pose no significant risk to the BIF and
the state bank is in compliance with applicable capital standards. The FDICIA
also provides that, except for subsidiaries of which the insured state bank is a
majority owner and except for certain investments in qualified housing projects,
an insured state bank may not, directly or indirectly, acquire or retain any
equity investment of a type that is not permissible for a national bank.
Insured state banks are required to divest any equity investment the retention
of which is not permissible as quickly as can be prudently done, but in no event
later than the end of the five year period ending on December 19, 1996.
Notwithstanding the foregoing, an insured state bank may, to the extent
permitted by the FDIC, acquire and retain ownership of common or preferred stock
listed on a national securities exchange, provided that the insured state bank
made or maintained an investment in such securities during the period beginning
on September 30, 1990 and ending on November 26, 1991 and provided further that
the aggregate amount of the investment does not exceed 100% of the bank's
capital. In accordance with the provisions of the FDICIA, during each year in
the three year period beginning on the date of enactment, each insured state
bank is required to reduce by not less than one-third of its shares (as of the
date of enactment) its ownership of securities in excess of the amount equal to
100% of the capital of such bank. This exception would cease to apply with
respect to any insured state bank upon any change in control of such bank or any
conversion of the charter of such bank. Under the FDICIA, determinations under
these provisions by the FDIC must be made by regulation or order.
The foregoing provisions do not apply to savings bank life insurance activities
of certain state banks, including those state banks. like Derby Savings, that
are chartered in Connecticut. The FDICIA, however, grants the FDIC the
authority to restrict savings bank life insurance activities if the FDIC
determines that the activities pose a significant risk to the insured bank or to
the insurance fund of which such bank is a member.
At December 31, 1994, the Bank had common stock investments totaling $2.5
million with a fair value of $2.3 million. In accordance with the FDIC
regulation implementing the equity investment restrictions under FDICIA, the
Bank filed a notice and request for approval to retain its investment in common
stock and for permission to continue to invest in listed and/or registered
shares. In March 1993, the FDIC granted such approval, subject to the following
conditions: (i) the maximum investment in listed and/or registered shares shall
not exceed 100% of the Bank's Tier 1 capital as measured in the Bank's most
recent consolidated report of condition; (ii) the Bank follows reasonable
procedures limiting concentrations in listed and/or registered shares; and (iii)
the FDIC retains the right to alter, suspend or withdraw this approval.
INSURANCE OF ACCOUNTS
Derby Savings' deposit accounts are insured by the FDIC up to a maximum of
$100,000 per insured depositor. The FDIC issues regulations, requires the
filing of reports, and generally supervises the operations of its insured banks.
The FDIC periodically conducts examinations of insured banks and, based upon its
evaluation, may revalue assets of an insured bank and require establishment of
specific reserves in amounts equal to the difference between such revaluation
and the book value of the assets. The approval of the FDIC is required prior to
any
29.
merger or consolidation or the establishment or relocation of an office
facility. This supervision and regulation is intended primarily for the
protection of depositors. Any insured bank which does not operate in accordance
with or conform to FDIC regulations, policies and directives may be sanctioned
for noncompliance. Under the Federal Deposit Insurance Act, Derby Savings is
required to pay annual insurance premiums and is prohibited from paying
dividends on its capital stock if it is in default in the payment of a premium
assessed by the FDIC.
The FDIC has adopted a revised premium schedule for insurance of deposit
accounts for banks and savings institutions, including the Bank. Such premium
schedule is based upon the institution's capital level and supervisory rating
and became effective January 1, 1993. The deposit insurance assessment rate is
subject to adjustment on semi-annual basis. In February 1995, the FDIC proposed
to reduce the current deposit insurance assessment rate range of .23% to .31% of
insured deposits to a range of .04% to .31% once the reserve ratio for BIF
reaches 1.25% of total insured deposits. Under the proposal, "well-capitalized"
banks, such as the Bank, would pay insurance premiums within a range of .04% to
.21% of insured deposits, compared to the current assessment rate range for such
institutions of .23% to .29%. The proposal also would permit the FDIC to adjust
the assessment rate schedule by up to .05% for all risk classifications.
Pursuant to FDICIA, effective December 31, 1993, insured banks will be examined
no less frequently than every 12 months (as opposed to no less frequently than
every 18 months previously.) Derby Savings is subject to assessments by the
FDIC to cover the costs of such examinations.
The FDIC has adopted regulations which define and establish minimum requirements
for capital adequacy, including a minimum leverage capital requirement and a
minimum risk-based capital requirement. Under the leverage capital requirement
adopted by the FDIC, state non-member banks must maintain "core" or "Tier 1"
capital of at least 3% of total assets. For all but the most highly rated
banks, the minimum leverage requirement will be 4% to 5% of total assets. At
December 31, 1994, Derby Savings had a ratio of Tier 1 or core capital to total
assets of 5.5%. For purposes of the leverage ratio, Tier 1 or core capital is
defined in a manner consistent with the risk-based capital requirement. The
FDIC's risk-based guidelines require state non-member banks to achieve a ratio
of total capital to total risk-weighted assets of 8% and a ratio of core capital
to total risk-weighted assets of 4%. At December 31, 1994, Derby Savings' ratio
of total capital to total risk-weighted assets was approximately 11.2% and its
ratio of Tier 1 capital to risk-weighted assets was approximately 10.2%.
Under the FDIC's regulations, a bank's total capital base consists of two types
of capital elements, "core capital elements" (Tier 1) and "supplementary capital
elements" (Tier 2). Core capital or Tier 1 elements consist of common stock,
surplus, undivided profits, capital reserves, foreign currency translation
adjustments, noncumulative perpetual preferred stock, minority interests in
consolidated subsidiaries, minus intangible assets (other than mortgage
servicing rights) and net-unrealized losses on marketable equity securities. At
least 50% of the bank's qualifying total capital must consist of Tier 1 capital.
Supplementary or Tier 2 capital consists of allowances for loan and lease losses
(up to a maximum of 1.25% of risk-weighted assets), cumulative perpetual
preferred stock, long-term preferred stock, perpetual preferred stock with
adjustable dividends (whether cumulative or noncumulative), mandatory
convertible debt securities, and term subordinated debt or intermediate-term
preferred stock.
30.
The maximum amount of Tier 2 elements that may be counted in determining total
capital may not, in the aggregate, exceed 50% of Tier 1 capital. For purposes
of the risk-based capital requirement, a bank's risk-weighted asset base is
determined by assigning each of the bank's assets and the credit equivalent
amount of off-balance sheet items to one of four separate risk categories.
Under FDICIA, the FDIC is required to amend its risk-based capital standards to
ensure that those standards provide adequately for interest-rate risk,
concentration of credit risk, and nontraditional activities. The FDIC has
proposed amending its risk-based capital guidelines in a manner similar to that
proposed by the FRB. See "Regulation - Holding Company Regulation - Federal
Bank Holding Company Regulation."
Banks with capital ratios below the minimum do not have adequate capital and
will be subject to appropriate administrative actions, including the issuance by
the FDIC of a capital directive requiring that the bank restore its capital to
the minimum required level within a specified period of time and the denial or
conditioning of certain applications, including merger and branch applications.
Additionally, failure to achieve or maintain the minimum capital requirements
may be the basis for an action by the FDIC to terminate deposit insurance.
Capital requirements higher than the generally applicable minimum requirements
may be established for a particular bank if the FDIC determines that the Bank's
capital was or may become inadequate in view of its particular circumstances.
Individual minimum capital requirements may be appropriate where a bank is
receiving special supervisory attention, has a high degree of exposure to
interest rate risk, or poses other safety or soundness concerns.
Any insured depository institution which falls below the minimum capital
standards must submit a capital restoration plan. Effective December 19, 1992,
any company that has control of an undercapitalized institution, in connection
with the submission of a capital restoration plan, is required to guarantee that
the institution will comply with the plan and provide appropriate assurances of
performance. The aggregate liability of any such controlling company under such
guaranty is limited to the lesser of (i) 5% of the institution's assets at the
time it became undercapitalized; or (ii) the amount necessary to bring the
institution into capital compliance at the time it failed to comply with its
capital plan. If Derby Savings were to become undercapitalized, the Company
would be required to guarantee performance of the capital plan submitted under
the FDICIA as a condition of FDIC approval.
Undercapitalized institutions are precluded from increasing their assets,
acquiring other institutions, establishing additional branches, or engaging in
new lines of business without an approved capital plan and a determination by
the FDIC that such actions are consistent with the plan. Institutions that are
significantly undercapitalized or critically undercapitalized are subject to
additional restrictions and may be required to (i) raise additional capital;
(ii) limit asset growth; (iii) limit the amount of interest paid on deposits to
the prevailing rate of interest in the region where the bank is located; (iv)
divest or liquidate any subsidiary which the FDIC determines poses a significant
risk; (v) order a new election of members of the board of directors; (vi)
require the dismissal of a director or senior executive officer; or (vii) take
such other action that the FDIC determines is appropriate. The FDIC is required
to appoint a conservator or receiver for a critically undercapitalized bank no
later than nine months after the bank becomes critically undercapitalized,
subject to a
31.
limited exception for banks which are in compliance with an approved capital
plan and which the FDIC certifies are not likely to fail.
Under the prompt corrective action regulation adopted by the FDIC, which became
effective on December 19, 1992, a savings bank is considered: (1) "well
capitalized" if the savings bank has a risk based capital ratio of 10% or
greater, a tier one or core capital to risk-weighted assets ratio of 6% or
greater, and a leverage ratio to adjusted total assets of 5% of greater
(provided the savings bank is not subject to an order, written agreement,
capital directive or prompt corrective action to meet and maintain a specified
capital level for any capital measure); (ii)"adequately capitalized" if the
institution has a risk-based capital ratio of 8% or greater, a tier 1 or core
capital to risk weighted assets ratio of 4% or greater, and a leverage ratio to
adjusted total assets of 4% or greater (3% or greater if the institution is
rated composite 1 in its most recent report of examination);
(iii)"undercapitalized" if the institution has a risk based capital ration
that is less than 8%, a tier 1 or core capital to risk weighted assets
ratio that is less than 4% (3% if the institution is rated composite 1 in its
most recent report of examination); (iv)"significantly undercapitalized" if the
institution has a risk-based capital ratio that is less than 6%, a tier one or
core capital to risk weighted assets ratio that is less than 3%, or a leverage
ratio to adjusted total assets ratio that is less than 3%; and (v) "critically
undercapitalized" if the institution has a ratio of tangible equity to total
assets that is less than 2%. The regulation also permits the FDIC to determine
that a savings bank should be placed in a lower category based on other
information such as a savings institution's examination report, after written
notice. At December 31, 1994, the Bank met the "well capitalized" criteria
based on its capital ratios at that date. At December 31, 1994, the Bank had a
ratio of total capital to risk-weighted assets of 11.2%, and a ratio of tier 1
capital to risk weighted assets of 10.2%. The Bank's ratio of tier one capital
to total assets at December 31, 1994 was 5.5%.
FDIC insurance of deposits may be terminated by the FDIC, after notice and
hearing, upon a finding by the FDIC that the insured bank has engaged in unsafe
or unsound practices, or is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule or order of, or
condition imposed by the FDIC. The FDIC may temporarily suspend an insured
bank's insurance without a hearing if the insured bank has no tangible capital
under the FDIC's capital adequacy regulations or guidelines. The management of
Derby Savings does not know of any practice, condition, or violation that might
lead to termination or suspension of Derby Savings' deposit insurance.
Under Sections 23A and 23B of the Federal Reserve Act, as incorporated by the
Federal Deposit Insurance Act, transactions between FDIC-insured banks, such as
Derby Savings, and their "affiliates" (which term includes, with respect to
Derby Savings, the Company) are subject to restrictions which, among other
things, limit the amount of certain transactions with affiliates, prescribe
collateralization requirements for loans by a bank to its affiliates and
generally require that transactions with an affiliate be on terms and
conditions, including credit standards, that are substantially the same, or at
least as favorable to the bank as those prevailing at the time for comparable
transactions with or involving unaffiliated parties or, in the absence of
comparable transactions, on terms and under circumstances, including credit
standards, that in good faith would be offered or would apply to unaffiliated
parties. The same restrictions apply to transactions between subsidiaries of a
bank and the bank's affiliates. Further, neither a bank nor any of its
subsidiaries or affiliates
32.
may publish any advertisement or enter into any agreement stating or suggesting
that the bank is in any way responsible for the obligation of its affiliates.
FEDERAL HOME LOAN BANK SYSTEM.
Derby Savings is a member of the FHLBB, which is one of 12 regional Federal Home
Loan Banks, each subject to Federal Housing Finance Board ("FHFB") supervision
and regulation. The FHLBB provides a central credit facility for member
institutions. As a member of the FHLBB, Derby Savings is required to own shares
of capital stock in that bank in an amount equal to the greater of (i) one
percent of assets secured by residential housing; (ii) .3% of total assets; or
(iii) 1/20 of outstanding advances. Derby Savings is in compliance with this
requirement with an investment in FHLBB stock at December 31, 1994 of $8.9
million.
At December 31, 1994, FHLBB advances to the Bank were $111.1 million. The
maximum amount which the FHLBB will advance for purposes other than meeting
deposit withdrawals fluctuates from time to time in accordance with changes in
policies of the FHFB and the FHLBB, and the maximum amount generally is reduced
by borrowings from any other source.
As required by FIRREA, the FHFB has promulgated regulations that establish
standards of community service or support as a basis for FHLB members to
maintain continued access to long-term advances. Pursuant to the regulations,
each FHLB member will provide a Community Support Statement ("CSS") to its FHLB
for review on a schedule established by the FHFB. The CSS is to include
information regarding the member's Community Reinvestment Act Evaluation,
evidence of assistance to first-time home buyers, documentation of any
judgements based on violations of the Fair Housing and Equal Credit Opportunity
Acts, and evidence of community support. The FHFB will review certain of the
statements and will require a Community Support Action Plan ("CSAP") if it
disapproves the CSS. If the member has failed to submit a CSS, submits a CSAP
that is not approved, or fails to substantially meet its CSAP within one year,
the FHFB may restrict the member's access to long-term advances.
FEDERAL RESERVE SYSTEM
The FRB adopted regulations that require savings institutions to maintain
non-earning reserves against their net transaction accounts (primarily NOW and
regular checking accounts less certain permitted deductions), non-personal time
deposits (those which are transferable or held by a depositor other than a
natural person) with an original maturity or notice period of less than 18
months, and Eurocurrency liabilities. At December 31, 1994, Derby Savings was
in compliance with the FRB's reserve requirement.
Savings institutions have authority to borrow from the Federal Reserve Bank
"discount window", but FRB regulations require institutions to exhaust all FHLB
sources before borrowing from the Federal Reserve Bank. The FDICIA prevents
Federal Reserve Banks from providing a discount window advance to an
"undercapitalized" institution for more than 60 days in any 120-day period,
except in limited circumstances.
33.
TAXATION
FEDERAL
For federal income tax purposes, the Company and Derby Savings file a
consolidated calendar tax year income tax return and report their income and
expenses using the accrual method of accounting. Prior to its 1987 tax year
Derby Savings used the cash method of accounting but it was required by the Tax
Reform Act of 1986 (the "Tax Act") to switch to the accrual method of
accounting. The adjustment to its income resulting from this change must be
recognized ratably over a period not to exceed four years.
Savings institutions are generally taxed in the same manner as other
corporations. Unlike other corporations, however, qualifying savings
institutions such as Derby Savings, that meet certain definition tests relating
to the nature of their supervision, income, assets and business operations, are
allowed to establish a reserve for bad debts and are permitted to deduct
additions to that reserve for losses on "qualifying real property loans" using
one of two alternative methods.
"Qualifying real property loans" are, in general, loans secured by interests
in improved real property. For each tax year, a qualifying institution may
compute the addition to its bad debt reserve for qualifying real property loans
using the more favorable of the following methods: (i) a method based on the
institution's actual loss experience (the "experience method") or (ii) a
method based on a specified percentage of an institution's taxable income (the
"percentage of taxable income method"). The addition to the reserve for losses
on non-qualifying loans must be computed under the experience method.
Derby Savings has generally computed its annual deduction for additions to its
allowance for losses on qualifying real property loans using the percentage of
taxable income method. Under the percentage of taxable income method, a
qualifying institution may deduct up to a maximum of 8% of its taxable income
after certain adjustments, subject to the limitations discussed below. The net
effect of the percentage of taxable income method deduction is that the maximum
effective federal income tax rate on income computed without regard to actual
bad debts and certain other factors for qualifying institutions using the
percentage of taxable income method is 31.28% (and at least 32.2% of taxable
income above $10 million for tax years after 1992), assuming a tax rate of 34%.
For 1994, the Bank computed its addition to the reserve for qualifying real
property loans under the experience method. Under the experience method, a
savings institution is permitted to deduct an amount based on average yearly
credit losses over the current and previous five years.
The amount of the bad debt deduction that a savings institution may claim with
respect to additions to its reserve for bad debts is subject to certain
limitations. First, the deduction may be eliminated entirely (regardless of the
method of computation) and the existing reserve will be recaptured into taxable
income and the institution will be permitted a deduction only for specific
charge-offs unless at least 60% of the savings institution's assets fall within
certain designated categories. Second, the bad debt deduction attributable to
"qualifying real property loans" cannot exceed the greater of (i) the amount
deductible under the experience method or (ii) the amount which, when added to
the bad debt deduction for non-qualifying loans, equals the amount by which 12%
of the sum of the total deposits or withdrawable accounts at the end of the
taxable year exceeds the sum of the surplus, undivided profits, and reserves at
34.
the beginning of the taxable year. Third, the amount of the bad debt deduction
attributable to qualifying real property loans computed using the percentage of
taxable income method is permitted only to the extent that the institution's
reserve for losses on qualifying real property loans at the close of the taxable
year taking into account the addition to the reserve for that taxable year does
not exceed 6% of such loans outstanding at such time. Fourth, the amount of the
bad debt deduction under the percentage of taxable income method is reduced, but
not below zero, by the amount of the addition to reserves for losses on non-
qualifying loans for the taxable year. Finally, a savings institution that
computes its bad debt deduction using the percentage of taxable income method
and files its federal income tax return as part of a consolidated group, as
Derby Savings does, is required to reduce proportionately its bad debt deduction
for losses attributable to activities of non-savings institution members of the
consolidated group that are "functionally related" to the savings institution
member. (The savings institution member is permitted, however, to
proportionately increase its bad debt deduction in subsequent years to recover
any such reduction to the extent the non-savings institution members realize
income in future years from their "functionally related" activities.)
As of December 31, 1994, Derby Savings' bad debt reserve for tax purposes
totaled approximately $5.8 million. To the extent that (i) Derby Savings'
reserve for losses on qualifying real property loans using the percentage of
taxable income method exceeds the amount that would have been allowed under the
experience method and (ii) Derby Savings makes distributions to its stockholders
that are considered to result in withdrawals from its excess bad debt reserve,
then the amounts considered to be withdrawn will be included in Derby Savings'
taxable income. The amount considered to be withdrawn by a distribution will be
the amount of the distribution plus the amount necessary to pay the federal
income tax, with respect to the withdrawal. Dividends paid out of Derby
Savings' current or accumulated earnings and profits as calculated for federal
income tax purposes will not be considered to result in withdrawals from Derby
Savings' bad debt reserves. Distributions in excess of Derby Savings' current
and accumulated earnings and profits, distributions in redemption of stock, and
distributions in partial or complete liquidation of Derby Savings will generally
be considered to result in withdrawals from Derby Savings' bad debt reserves.
At December 31, 1994, Derby Savings had approximately $39.2 million in earnings
and profits for tax purposes that would be available for distribution to the
Company, it's sole stockholder, subject to various restrictions imposed by the
Commissioner, without the imposition of this additional tax. The Company does
not intend to cause Derby Savings to make any distribution that would be
considered to be made out of its bad debt reserve.
Depending on the composition of its items of income and expense, a corporation
may be subject to alternative minimum tax. For tax years beginning after 1986,
a corporation must pay an alternative minimum tax equal to the amount (if any)
by which 20% of alternative minimum taxable income ("AMTI"), as reduced by an
exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular
taxable income increased or decreased by certain adjustments and increased by
certain tax preferences, including depreciation deductions in excess of that
allowable for alternative minimum tax purposes, tax-exempt interest on most
private activity bonds issued after August 7, 1986 (reduced by any related
interest expense disallowed for regular tax purposes), the amount of the bad
debt reserve deduction claimed in excess of the deduction based on the
experience method and, for tax years after 1989, 75% of the excess of adjusted
current earnings over AMTI. AMTI may be reduced only up to 90% by net operating
loss
35.
carryovers, but the payment of alternative minimum tax will give rise to a
minimum tax credit which will be available with an indefinite carry-forward
period, to reduce the federal income taxes of the institution in future years
(but not below the level of alternative minimum tax arising in each of the
carry-forward years).
The Internal Revenue Service ("IRS") is currently conducting an examination of
the Company's federal income tax returns for 1990.
STATE
State income taxation for the Company and Derby Savings is in accordance with
the corporate income tax laws of Connecticut, which require a tax to be paid
equal to the largest of amounts computed under three formulas. The first is a
minimum tax of $250. The second is a tax based on the average level of deposits
and other borrowed money on which interest is paid. The third is a tax based on
11.5% (scheduled to decrease in increments, to 10% by 1998), of the year's
taxable income which, with certain exceptions, is equal to taxable income for
federal purposes. The Connecticut General Assembly passed a deficit reduction
package, signed by the Governor on March 23, 1989, which, in part, increased the
Connecticut Corporation Business Tax. The Corporation Business Tax rate has
been increased through the imposition of a 20% surcharge for taxable years
beginning on or after January 1, 1989. This has had the effect of increasing
the effective Connecticut Corporation Business Tax rate from 11.5% at 13.8%.
The 20% surcharge has been reduced to 10% in 1992 and eliminated in 1993,
resulting in effective Connecticut Corporation Business Tax rates of 12.65% for
1992 and 11.5% for 1993. In addition, operating losses in any year may be
carried forward to reduce taxable income over the succeeding five years.
INCOME TAX ACCOUNTING STANDARD. In February 1992, the FASB issued Statement of
Financial Accounting Standards No. 109 ("SFAS 109") "Accounting For Income
Taxes", which superseded SFAS 96, as amended, which established financial
accounting and reporting standards for the effects of income taxes. The
Statement requires the use of the liability method in determining the tax effect
of temporary differences in the recognition of items of income and expense
reported in the consolidated financial statements and those reported for income
tax purposes.
The Company adopted this statement for the year ended December 31, 1993, and the
cumulative effect of the change in accounting principal is reflected in net
income for 1993.
36.
EXECUTIVE OFFICERS OF REGISTRANT
The following table sets forth information with respect to the persons who have
been designated executive officers of the Company.
Age at Officer
December 31, 1994 Since Positions Held with Company
----------------- ------- ---------------------------
Harry P. DiAdamo Jr. 51 1987 President, Chief Executive
Officer and Director
John F. Costigan 64 1987 Executive Vice President,
Secretary and Director
Alfred T. Santoro 45 1987 Vice President, Treasurer
and Chief Financial Officer
Thomas H. Wells 62 --- Senior Vice President and
Chief Lending Officer of
Derby Savings Bank
Harry P. DiAdamo Jr., President and Chief Executive Officer of the Company and
the Bank, has been a Director of Derby Savings since 1980 and served as Chairman
of the Board from March 1984 to March 1985. He became President, Treasurer and
Chief Executive Officer of the Bank in October 1984. Mr DiAdamo is also a
member of the Executive Committee of the Company. He is serving his second two
year term on the Board of the Federal Home Loan Bank of Boston, and is chairman
of its audit committee. Mr DiAdamo is a member of the Mortgage Finance
Committee of America's Community Bankers and the Executive and Legislative
Committees of the Connecticut Bankers Association as well as a director of the
Griffin Health Services and the New Haven Symphony Orchestra and president of
the Shelton Educational Fund. He previously served as president of the board of
Notre Dame High School in West Haven and chairman of the Valley United Way
Campaign. Mr. DiAdamo is also a member of the New Britain Downtown Council.
John F. Costigan, Executive Vice President and Secretary of the Company and the
Bank, joined the staff of Derby Savings in 1961 and has been a Director of the
Bank since 1975. He has served in various capacities of increasing
responsibility and since October 1984 has been the Bank's Executive Vice
President and Chief Operating Officer. Mr. Costigan serves on the Nominating
Committee of the Company. He is president of Friend A. Russ Fund, Inc. of
Shelton, an educational and charitable organization, and the secretary and past
chairman of the Tele-Media of Western Connecticut Advisory Council, located in
Seymour, Connecticut. He serves on the Finance Committee of St. Mary's Parish
in Derby, and is past trustee and past vice chairman of Griffin Health Services
Corporation, and past trustee and past chairman of Griffin Hospital, a community
hospital located in Derby. In 1994 he received the Charles H. Flynn
Humanitarian Award for volunteer service that has raised the quality of life in
some areas of the community.
Alfred T. Santoro, Vice President, Treasurer and Chief Financial Officer of the
Company, joined Derby Savings in September 1985 as Vice President, Finance, and
was elected Chief Financial Officer in April 1987, and Executive Vice President
in January, 1994. Mr Santoro holds an M.B.A. in finance from the University of
New Haven, is a member and past president of the Connecticut Chapter of the
37.
Financial Managers Society, and is a member of the Board of Trustees and the
Finance Committee of the New Britain YWCA.
Thomas H. Wells, Senior Vice President and Chief Lending Officer of Derby
Savings Bank, joined the staff of Derby Savings Bank in April 1974 bringing with
him 11 years of mortgage banking experience. He became Vice President in
January 1975 and in March 1985 was named Senior Vice President, Loans. As Chief
Lending Officer, Mr. Wells is responsible for all aspects of lending (mortgage,
consumer and commercial), as well as the Bank's CRA, real estate management and
collection areas. A Director of the Connecticut Appraisal Education Foundation,
Inc. and member of its Investment Committee, he is also a member of the
Appraisal Institute, holds the SRPA and SRA designations, and is an licensed
appraiser in the state of Connecticut. Mr. Wells also serves on the Banks'
Committee of Neighborhood Housing Services in New Britain, as Chairman of the
Finance Committee at Seymour Congregational Church, and is a member of the
American Legion. His past affiliations include teaching residential appraisal
and real estate finance for Fairfield University, past President of Connecticut
Chapter #38 of the Society of Real Estate Appraisers, past Chairman of the
Seymour Planning and Zoning Commission and Chairman of the commercial division
of the Valley United Way campaign.
38.
Item 2. PROPERTIES
At December 31, 1994, Derby Savings had 22 banking offices located in New Haven,
Fairfield and Hartford Counties. ATM's are currently in operation in 16 of the
Bank's offices. The Bank is currently a member of Infinet, Inc. and Cirrus, a
shared national ATM network.
Original Current Percent
Office Office of Total
New Haven County: Opened Opened Deposits Owned or Leased Note
----------------- ------ ------ -------- --------------- ----
Derby 1846 1976 14.44% Owned --
Derby (HQ) 1985 1985 --- Owned --
Orange Derby 1969 1985 6.92 Land leased, bldg. owned 1
Orange 1987 1987 4.99 Leased 2
Seymour 1981 1981 4.38 Owned --
Southbury 1988 1988 1.26 Leased 3
Fairfield County:
-----------------
Shelton 1964 1975 5.01 Owned --
Huntington 1970 1973 7.74 Owned --
Stratford 1989 1989 5.66 Leased 4
Trumbull 1990 1990 4.84 Leased 5
Fairfield 1993 1993 1.86 Leased 6
Hartford County:
----------------
Avon 1987 1992 1.83 Leased 7
East Hartford 1992 1992 1.50 Leased 8
Glastonbury 1992 1992 2.82 Owned --
New Britain:
Main Street 1992 1992 9.12 Leased 9
South Main Street 1992 1992 3.89 Owned --
Newington Avenue 1992 1992 4.87 Leased 10
West Main Street 1992 1992 3.38 Leased 11
Newington 1992 1992 3.22 Leased 12
Plainville 1992 1992 2.03 Leased 13
Rocky Hill 1992 1992 4.13 Leased 14
West Hartford 1992 1992 5.23 Leased 15
W. Hartford Central 1992 1992 .88 Leased 16
------
100.00%
Notes:
------
1. Lease expires August 2004. Subject to three five-year renewal options
followed by one seven-and-a-half year renewal option.
2. Lease expires July 1997. Subject to one ten-year renewal option.
3. Lease expires November 1996. Subject to three five-year renewal options.
4. Lease expires August 1995. Subject to two three-year renewal options.
5. Lease expires June 1996. Subject to one three-year renewal option.
6. Lease expires April 1996. Subject to two five-year renewal options.
7. Lease expires September, 1997. Subject to one five-year renewal option.
8. Leased expires September 1999. Subject to two five year renewal options.
9. Leased expires April 1999. Subject to one five year renewal option.
10. Lease expires February 1998. Subject to three three-year renewal options.
11. Lease expires February, 1998. Subject to three five-year renewal options.
12. Lease expires December 2000. Subject to one ten-year renewal option.
13. Lease expires June 1998. Subject to three five-year renewal options.
14. Lease expires November 1998. Subject to two five-year renewal options.
15. Leased on a month-to-month basis.
16. Lease expires June 1997. Subject to one five-year renewal option.
39.
The aggregate net book value of properties owned and used for offices at
December 31, 1994 was $4.3 million and the aggregate net book value of
lease-hold improvements on properties used for branch offices was $549,000.
The data processing for Derby Savings is supplied by an unaffiliated data
processing company. The primary internal data processing equipment at Derby
Savings consists of teller terminals, ATM's and other automated equipment with a
net book value of $2.2 million at December 31, 1994.
Item 3. LEGAL PROCEEDINGS
The Company is involved as a plaintiff or defendant in various legal actions
incidental to its business, all of which in the aggregate are believed by
management not to be material to the financial condition or operations of the
Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended December 31, 1994, no matters were
submitted to a vote of security holders through the solicitation of proxies or
otherwise.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information as to the principal market on which the stock is traded, the
Company's and the Bank's dividend policy, and the high and low closing sales
prices for the stock are included on page 27 of the 1994 Annual Report to
Stockholders and incorporated herein by reference. There were approximately 921
holders of record of the stock as of December 31, 1994.
Item 6. SELECTED FINANCIAL DATA
Selected financial data for the five years ended December 31, 1994, consisting
of data captioned "Selected Financial and Other Data" on page 2 of the 1994
Annual Report to Stockholders, is incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's Discussion and Analysis on pages 4 through 27 of the 1994 Annual
Report to Stockholders is incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated statements of position of DS Bancor, Inc. and Subsidiary as of
December 31, 1994 and 1993, the related consolidated statements of earnings and
stockholders' equity and the consolidated statements of cash flows for each of
the three years in the period ended December 31, 1994 together with the related
notes and the report of Friedberg, Smith & Co., P.C., independent certified
public accountants, all contained on pages 28 - 61 in the Company's 1994 Annual
Report to Stockholders, are incorporated herein by reference.
40.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information regarding the directors of the Company is omitted from this report
as the Company intends to file a definitive proxy statement not later than 120
days after the end of the fiscal year and the information to be included therein
is incorporated herein by reference. Information regarding the executive
officers of the Company is set forth in Part I above under the caption
"Executive Officers of the Registrant."
Item 11. EXECUTIVE COMPENSATION
Information regarding remuneration of executive officers and directors of the
Company is omitted from this report as the Company intends to file a definitive
proxy statement not later than 120 days after the end of the fiscal year and the
information to be included therein (excluding the report on executive
compensation and the Comparative Performance Information) is incorporated herein
by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is omitted from this report as the Company intends to file a
definitive proxy statement not later than 120 days after the end of the fiscal
year and the information to be included therein is incorporated herein by
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is omitted
from this report as the Company intends to file a definitive proxy statement not
later than 120 days after the end of the fiscal year and the information to be
included therein is incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1). The following financial statements of the Company included in the
Annual Report to Stockholders for the year ended December 31, 1994 are
incorporated herein by reference in Item 8. The remaining information
in said Annual Report is not deemed to be filed as part of this
report, except as expressly provided herein.
(i) Consolidated Statements of Position as of December 31, 1994
and 1993.
(ii) Consolidated Statements of Earnings for years ended December
31, 1994, 1993 and 1992.
(iii) Consolidated Statements of Stockholders' Equity for years
ended December 31, 1994, 1993 and 1992.
41.
(iv) Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1993 and 1992.
(vi) Notes to Financial Statements.
(vii) Auditor's Opinion.
(a)(2). All financial statement schedules for which provision is made in
applicable accounting regulations are inapplicable and have therefore
been omitted.
(b) EXHIBITS AND REPORTS ON FORM 8. There were no Form 8 filings during
the quarter ended December 31, 1994.
(c) The following exhibits are either filed as part of this Report or are
incorporated herein by reference.
EXHIBIT 3.1(a). Restated Certificate of Incorporation (incorporated
herein by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-4 (Registration No. 33-3699), filed March 3,
1986).
EXHIBIT 3.1(b). Amendment to restated Certificate of Incorporation.
(incorporated herein by reference to the exhibit contained in the
Company's annual report on Form 10-K for the year ended December 31,
1989).
EXHIBIT 3.2. Bylaws (incorporated herein by reference to the Exhibit
to the Company's Current Report on Form 8-K filed on February 8,
1988).
EXHIBIT 10.1(a). Employment Agreement with Harry P. DiAdamo Jr.
(incorporated herein by reference to Exhibit 10.1(a) to the Company's
Registration Statement on Form S-4 (Registration No. 33-3699) filed on
March 3, 1986).
EXHIBIT 10.1(b). Employment Agreement with John F. Costigan
(incorporated herein by reference to Exhibit 10.2(b) to the Company's
Registration Statement on Form S-4 (Registration No. 33-3699) filed on
March 3, 1986).
EXHIBIT 10.1(c). Severance Agreement with Alfred T. Santoro
(incorporated herein by reference to the exhibit contained in the
Company's annual report on Form 10-K for the year ended December 31,
1989).
EXHIBIT 10.1(d). Amendment to employment agreement with Harry P.
DiAdamo (incorporated herein by reference to the exhibit contained in
the Company's annual report on Form 10-K for the year ended December
31, 1989).
EXHIBIT 10.1(e). Amendment to employment agreement with John F.
Costigan (incorporated herein by reference to the exhibit contained in
the Company's annual report on Form 10-K for the year ended December
31, 1989).
EXHIBIT 10.1(f). Amendment to severance agreement with Alfred T.
Santoro (incorporated herein by reference to the exhibit contained in
42.
the Company's annual report on Form 10-K for the year ended December
31, 1989).
EXHIBIT 10.1(g). Severance agreement with Thomas H. Wells, as
amended.
EXHIBIT 10.2. Stock Option Plan, as amended (incorporated herein by
reference to the exhibit contained in the Company's annual report on
Form 10-K for the year ended December 31, 1987).
EXHIBIT 10.3. 1994 Stock Option Plan (incorporated herein by
reference to Exhibit 4 contained in the Company's Form S-8
Registration Statement (Registration No. 33-53803) filed on March 25,
1994).
EXHIBIT 10.4(a). Form of Deferred Compensation Agreement with
Management Directors (incorporated herein by reference to the exhibit
contained in the Company's annual report on Form 10-K for the year
ended December 31, 1987).
EXHIBIT 10.4(b). Form of Deferred Compensation Agreement with
Non-Management Directors (incorporated herein by reference to the
exhibit contained in the Company's annual report on Form 10-K for the
year ended December 31, 1987).
EXHIBIT 10.4(c). Insured Deposit Purchase and Assumption agreement
pursuant to which Derby purchased certain assets and assumed the
insured deposits and certain other liabilities of Burritt
Interfinancial Bancorporation, New Britain, CT (incorporated herein by
reference to the exhibit contained in the Company's Form 8-K dated
December 4, 1992).
EXHIBIT 13. Annual Report to Stockholders for the year ended December
31, 1994.
EXHIBIT 21. Subsidiaries of the Company. (Incorporated by reference
to the exhibit contained in the Company's annual report on Form 10-K
for the year ended December 31, 1990.)
EXHIBIT 23(a). Consent of Friedberg, Smith & Co., P.C. (Registrant
No.33-3699).
EXHIBIT 23(b). Consent of Friedberg, Smith & Co., P.C. (Registrant
No.33-71206).
EXHIBIT 23(c). Consent of Friedberg, Smith & Co., P.C. (Registrant
No.33-53803).
EXHIBIT 27. Financial Data Schedule.
(d) None.
43.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DS BANCOR, INC.
Date: March 30, 1995 By: /S/ Harry P. DiAdamo Jr.
---------------------- ------------------------------------
Harry P. DiAdamo Jr.
President and Chief Executive 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:
/S/ Harry P. DiAdamo Jr. Date: March 30, 1995
------------------------------------------------- ---------------
Harry P. DiAdamo Jr.
Director, President and Chief Executive Officer
(Principal executive officer)
Chief Financial Officer:
/S/ Alfred T. Santoro Date: March 30, 1995
------------------------------------------------- ---------------
Alfred T. Santoro
Vice President, Treasurer and Chief Financial Officer
(Principal financial and accounting officer)
44.
Directors:
/S/ Michael F. Daddona Jr. Date: March 30, 1995
------------------------------------------------- ---------------
Michael F. Daddona Jr.
Chairman of the Board
/S/ Harry P. DiAdamo Jr. Date: March 30, 1995
------------------------------------------------- ---------------
Harry P. DiAdamo Jr.
Director, President and Chief Executive Officer
/S/ John F. Costigan Date: March 30, 1995
------------------------------------------------- ---------------
John F. Costigan
Director, Executive Vice President and Secretary
/S/ Achille A. Apicella Date: March 30, 1995
------------------------------------------------- ---------------
Achille A. Apicella
Director
/S/ Walter R. Archer Jr. Date: March 30, 1995
------------------------------------------------- ---------------
Walter R. Archer Jr.
Director
/S/ John J. Brennan Date: March 30, 1995
------------------------------------------------- ---------------
John J. Brennan
Director
/S/ Angelo E. Dirienzo Date: March 30, 1995
------------------------------------------------- ---------------
Angelo E. Dirienzo
Director
/S/ Laura J. Donahue Date: March 30, 1995
------------------------------------------------- ---------------
Laura J. Donahue
Director
/S/ Christopher H.B. Mills Date: March 30, 1995
------------------------------------------------- ---------------
Christopher H.B. Mills
Director
/S/ John M. Rak Date: March 30, 1995
------------------------------------------------- ---------------
John M. Rak
Director
/S/ John P. Sponheimer Date: March 30, 1995
------------------------------------------------- ---------------
John P. Sponheimer
Director
45.
INDEX TO EXHIBITS
Page (by
Exhibit Sequential
Number Identity of Exhibit Numbering)
------- ------------------- ----------
3.1(a) Certificate of Incorporation (incorporated by *
reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-4 filed March 3, 1986).
3.1(b) Amendment to restated Certificate of Incorporation. *
(incorporated herein by reference to the exhibit contained
in the Company's annual report on Form 10-K for the year
ended December 31, 1989).
3.2 Bylaws (incorporated herein by reference to the exhibit *
to the Company's Current Report on Form 8-K filed on
February 8, 1988).
10.1(a) Employment Agreement with Harry P. DiAdamo, Jr. (incorporated *
herein by reference to Exhibit 10.1(a) to the Company's
Registration Statement on Form S-4 filed on March 3, 1986).
10.1(b) Employment Agreement with John F. Costigan (incorporated *
herein by reference to Exhibit 10.1(b) to the Company's
Registration Statement on Form S-4 filed on March 3, 1986).
10.1(c) Severance Payment Agreement with Alfred T. Santoro *
(incorporated herein by reference to Exhibit 10.1(c) to the
Company's annual report on Form 10K for the year ended
December 31, 1989).
10.1(d) Amendment to employment agreement with Harry P. DiAdamo *
(incorporated herein by reference to the exhibit contained
in the Company's annual report on Form 10-K for the year
ended December 31, 1989).
10.1(e) Amendment to employment agreement with John F. Costigan *
(incorporated herein by reference to the exhibit contained
in the Company's annual report on Form 10-K for the year
ended December 31, 1989).
10.1(f) Amendment to severance agreement with Alfred T. Santoro *
(incorporated herein by reference to the exhibit contained
in the Company's annual report on Form 10-K for the year
ended December 31, 1989).
10.1(g) Severance agreement with Thomas H. Wells, as amended. 48
10.2 Stock Option Plan (incorporated herein by reference to *
to Exhibit 10.3 to the Company's Registration Statement
on Form S-4 filed March 3, 1986).
46.
10.3 1994 Stock Option Plan (incorporated herein by reference to *
Exhibit 4 contained in the Company's Form S-8 Registration
Statement (Registration No. 33-53803) filed on March 25, 1994).
10.4(a) Form of Deferred Compensation Agreement with Management *
Directors (incorporated herein by reference to the exhibit
contained in the Company's annual report on Form 10-K for
the year ended December 31, 1987).
10.4(b) Form of Deferred Compensation Agreement with Non-Management *
Directors (incorporated herein by reference to the exhibit
contained in the Company's annual report on Form 10-K for the
year ended December 31, 1987).
10.4(c) Insured Deposit Purchase and Assumption agreement pursuant to *
which Derby purchased certain assets and assumed the
insured deposits and certain other liabilities of Burritt
Interfinancial Bancorporation, New Britain, CT (incorporated
herein by reference to the exhibit contained in the Company's
Form 8-K dated December 4, 1992).
13 Annual Report to Stockholders for the year ended
December 31, 1994.
21 Subsidiaries of the Company (incorporated by reference to the *
exhibit contained in the Company's annual report on Form 10-K
for the year ended December 31, 1990).
23(a) Consent of Friedberg, Smith & Co., P.C. (Registrant 51
No. 33-3699).
23(b) Consent of Friedberg, Smith & Co., P.C. (Registrant 52
No. 33-71206).
23(c) Consent of Friedberg, Smith & Co., P.C. (Registrant 53
No. 33-53803).
27 Financial Data Schedule. 54
* Previously filed.
47.
EX-10.1(G)
2
EXHIBIT 10.1(G)
EXHIBIT 10.1(g)
SEVERANCE PAYMENT AGREEMENT
THIS AGREEMENT, dated December 21, 1989, between DERBY SAVINGS BANK
(the "Bank"), a Connecticut corporation having its office and principal place of
business in the City of Derby, County of New Haven, State of Connecticut, and
THOMAS H. WELLS, of the Town of Seymour, County of New Haven, State of
Connecticut (the "Employee").
WHEREAS, the Employee is currently serving as Senior Vice President -
Loans of the Bank;
WHEREAS, the Board of Directors of the Bank believes that it is in the
best interests of the Bank to encourage the Employee's continued employment with
and dedication to the Bank in the face of potentially distracting circumstances
arising from the possibility of a change in control of the Bank or its holding
company, DS Bancor, Inc. ("Bancor");
WHEREAS, the Board of Directors of the Bank has approved and
authorized the entry into this Agreement with the Employee; and
WHEREAS, the parties desire to enter into this Agreement setting forth
the terms and conditions for the payment of special compensation to the Employee
in the event of a termination of the Employee's employment in connection with or
as a result of a change in control of the Bank or Bancor.
NOW, THEREFORE, it is AGREED as follows:
1. TERM. The initial term of its Agreement shall be for a one (1)
year period from the date hereof. This Agreement shall be automatically renewed
for one additional year on each anniversary date of this Agreement, unless the
Bank gives contrary written notice to the Employee prior to such anniversary
date. References herein to the term of this Agreement shall include the initial
term and any additional years for which this Agreement is renewed.
2. TERMINATION OF EMPLOYMENT IN CONNECTION WITH A CHANGE IN CONTROL.
(a) If during the term of this Agreement there is a change in control
of the Bank or Bancor, the Employee shall be entitled to receive as a severance
payment from the Bank for services previously rendered to the Bank a lump sum
cash payment as provided for herein (subject to Section 2(c) below) in the event
the Employee's employment is terminated, voluntarily or involuntarily, in
connection with or within two years after a change in control of the Bank or
Bancor, unless such termination occurs by virtue of a normal retirement,
permanent and total disability (as defined in Section 22(e) of the Internal
Revenue Code of 1986, as amended) or death. Subject to Section 2(c) below, the
amount of this payment shall be equal to three times the Employee's average
annual compensation which was payable by the Bank and was includible in the
Employee's gross income for federal income tax purposes with respect to the five
most recent taxable years of the Bank ending prior to such change in control of
the Bank or Bancor (or such portion of such period during which the Employee was
a full-time employee of the Bank), less one dollar. Payment under this Section
2(a) shall be in lieu of any amount which may be otherwise owed to the Employee
48.
EXHIBIT 10.1(g) (CONTINUED)
as damages for such termination. Payment under this Section 2(a) shall not be
reduced by any compensation which the Employee may receive from other employment
with another employer after termination of the Employee's employment with the
Bank. No payment hereunder shall affect the Employee's entitlement to any
vested retirement benefits or other compensation payments.
(b) A "change in control", for the purposes of this Agreement, shall
be deemed to have taken place if: (i) any person becomes the beneficial owner
of 20 percent or more of the total number of voting shares of Bancor; (ii) any
person becomes the beneficial owner of 10 percent or more (but less than 20
percent) of the total number of voting shares of Bancor; provided that, if the
Board of Governors of the Federal Reserve System ("FRB") has approved a rebuttal
agreement filed by such person, or such person has filed a certification with
the FRB, a change in control will not be deemed to have occurred unless the
Board of Directors of Bancor has made a determination that such beneficial
ownership constitutes or will constitute control of Bancor; (iii) any person
(other than the persons named as proxies solicited on behalf of the Board of
Directors of Bancor) holds revocable or irrevocable proxies, as to the election
or removal of two or more directors of Bancor, for 20 percent or more of the
total number of voting shares of Bancor; (iv) any person has received the
approval of the FRB under Section 3 of the Bank Holding Company Act of 1956, as
amended (the "Holding Company Act"), or regulations issued thereunder, to
acquire control of Bancor or the Bank; (v) any person has received approval of
the FRB under the Change in Bank Control Act of 1978 (the "Control Act"), or
regulations issued thereunder, to acquire control of Bancor; (vi) any person has
commenced a tender offer or exchange offer, or entered into an agreement or
received an option, to acquire beneficial ownership of 20 percent or more of the
total number of voting shares of Bancor, whether or not the requisite approval
for such acquisition has been received under the Holding Company Act, the
Control Act, or the respective regulations issued thereunder; or (vii) as the
result of, or in connection with, any cash tender or exchange offer, merger, or
other business combination, sale of assets or contested election, or any
combination of the foregoing transactions, the persons who were directors of
Bancor before such transaction shall cease to constitute at least two-thirds of
the Board of Directors of Bancor or any successor institution. For purposes of
this Section 2(b), a "person" includes an individual, corporation, partnership,
trust or group acting in concert. A person for these purposes shall be deemed
to be a beneficial owner as that term is used in Rule 13d-3 under the Securities
Exchange Act of 1934.
For purposes of this Agreement, a "change in Control" of the Bank
shall be deemed to have taken place if Bancor's beneficial ownership of the
total number of voting shares of the Bank is reduced to less than 50 percent.
(c) Notwithstanding any other provisions of this Agreement or of any
other agreement, contract, or understanding heretofore or hereafter entered into
between the Employee and the Bank, except an agreement, contract, or
understanding hereafter entered into that expressly modifies or excludes
application of this Section 2(c) (the "Other Agreements"), and notwithstanding
any formal or informal plan or other arrangement heretofore or hereafter adopted
by the Bank for the direct or indirect provision of compensation to the Employee
(including groups or classes of participants or beneficiaries of which the
Employee is a member), whether or not such compensation is deferred, is in cash,
or is in the form of a benefit to or for the Employee (a "Benefit Plan"), the
49.
EXHIBIT 10.1(g) (CONTINUED)
Employee shall not have any right to receive any payment or other benefit under
this Agreement, any Other Agreement, or any Benefit Plan if such payment or
benefit, taking into account all other payments or benefits to or for the
Employee under this Agreement, all Other Agreements, and all Benefit Plans would
cause any payment to the Employee under this Agreement to be considered a
"parachute payment" within the meaning of Section 280G(b)(2) of the Internal
Revenue Code of 1986, as amended, (a "Parachute Payment"). In the event that
the receipt of any such payment or benefit under this Agreement, any Other
Agreement, or any Benefit Plan would cause the Employee to be considered to have
received a Parachute Payment under this Agreement, then the Employee shall have
the right, in the Employee's sole discretion, to designate those payments or
benefits under this Agreement, or Other Agreements, and/or any Benefit Plans,
which should be reduced or eliminated so as to avoid having the payment to the
Employee under this Agreement be deemed to be a Parachute Payment.
3. NO ASSIGNMENTS. This Agreement is personal to each of the parties
hereto. No party may assign or delegate any rights or obligations hereunder
without first obtaining the written consent of the other party hereto. However,
in the event of the death of the Employee, all rights to receive payments
hereunder shall become rights of the Employee's estate.
4. AMENDMENTS OR ADDITIONS; ACTION BY BOARD OF DIRECTORS. No
amendments or additions to this Agreement shall be binding unless in writing and
signed by both parties hereto. The prior approval by a two-thirds affirmative
vote of the full Board of Directors of the Bank shall be required in order for
the Bank to authorize any amendments or additions to this Agreement.
5. SECTION HEADINGS. The section headings used in this Agreement are
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
6. GOVERNING LAW. This Agreement shall be governed by the laws of
the United States to the extent applicable and otherwise by the laws of the
State of Connecticut.
DERBY SAVINGS BANK
ATTEST: /S/ John F. Costigan BY: /S/ Harry P. DiAdamo Jr.
----------------------- --------------------------
John F. Costigan Harry P. DiAdamo Jr.
Secretary President
EMPLOYEE:
BY: /S/ Thomas H. Wells
----------------------
Thomas H. Wells
50.
EX-13
3
EXHIBIT 13
--------------------------------------------------------------------------------
---------------------
--------------------------------------------------------------------------------
FELLOW SHAREHOLDERS:
WE ARE EXTREMELY PLEASED TO REPORT THAT, FOR THE YEAR ENDED DECEMBER 31,
1994, THE COMPANY'S NET INCOME TOTALED $5.8 MILLION OR $1.95 PER SHARE.
NET INCOME FOR 1993 TOTALED $6.5 MILLION OR $2.25 PER SHARE, WHICH
INCLUDED $1.5 MILLION OR $.54 PER SHARE ATTRIBUTABLE TO THE CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING FOR INCOME TAXES EFFECTIVE JANUARY 1, 1993.
EXCLUDING THE EFFECT OF THIS ACCOUNTING CHANGE, NET INCOME FOR 1994 REPRESENTS A
$784,000 OR 15.9% INCREASE ABOVE 1993 INCOME BEFORE THE CUMULATIVE EFFECT OF THE
CHANGE IN ACCOUNTING PRINCIPLE.
A MAJOR CONTRIBUTOR TO THE COMPANY'S IMPROVEMENT IN EARNINGS IN 1994 WAS A
SIGNIFICANT INCREASE IN NET INTEREST INCOME. NET INTEREST INCOME TOTALED $34.5
MILLION IN 1994 COMPARED TO $30.5 MILLION IN THE PRIOR YEAR. FURTHER
CONTRIBUTING TO THE COMPANY'S EARNINGS PERFORMANCE DURING 1994 WAS A $1.5
MILLION REDUCTION IN OPERATING EXPENSES. THE COMPANY'S OVERALL EXPENSE RATIO OF
2.09% OF AVERAGE ASSETS CONTINUES TO RANK AMONG THE LOWEST IN THE STATE.
DURING 1994, THE COMPANY MADE SIGNIFICANT PROGRESS IN REDUCING THE LEVEL OF
NON-PERFORMING ASSETS. ADDITIONALLY, THE VOLUME OF LOANS PAST DUE SIXTY DAYS
TRENDED DOWNWARD. INCREASING ASSET QUALITY, THROUGH THE CONTINUED REDUCTION OF
NON-PERFORMING ASSETS, REMAINS A PRIMARY OBJECTIVE OF THE COMPANY'S PRINCIPAL
SUBSIDIARY, DERBY SAVINGS BANK. DURING 1994, NON-PERFORMING ASSETS DECLINED TO
$20.8 MILLION, REPRESENTING 1.7% OF THE COMPANY'S ASSETS AT YEAR-END 1994, FROM
$28.2 MILLION OR 2.4% OF TOTAL ASSETS AT YEAR-END 1993.
DURING 1994, THERE WAS A MARKED DECLINE IN REAL ESTATE SALES AND REFINANCING
ACTIVITY WHICH WE EXPECT WILL CONTINUE THROUGH 1995. WE VIEW THIS AS AN
OPPORTUNITY TO DIRECT THE RESOURCES OF THE COMPANY TOWARD MEETING THE GROWING
NEEDS OF THE CONSUMER LOAN MARKET. IN THIS REGARD, DURING THE LATTER HALF OF
1994, THE COMPANY INTRODUCED A NUMBER OF ENHANCEMENTS TO ITS CONSUMER LOAN
PRODUCT LINE. AMONG THESE ARE NEWLY DESIGNED SECURED AND UNSECURED LINES OF
CREDIT, AS WELL AS LOAN PRODUCTS TO FINANCE OTHER CONSUMER EXPENDITURES. IN
ADDITION, THE COMPANY WILL CONTINUE TO PROVIDE COMMERCIAL FINANCING. IN FACT, WE
INTRODUCED A NEW ACCOUNTS RECEIVABLE FINANCING PRODUCT DURING THE FIRST QUARTER
OF 1995.
THE COMPANY ANTICIPATES REACHING A REGULATORY CAPITAL LEVEL OF 5.75% BY MID-1995
IN SATISFACTION OF REGULATORY REQUIREMENTS, AND THEN RESUMING A POSTURE OF
BALANCED GROWTH THROUGH PRODUCT DEVELOPMENT AND MARKETING. ADDITIONALLY, WE
INTEND TO CONTINUE TO EXPAND OUR MARKET PENETRATION AND COVERAGE BY LOOKING AT
ACQUISITION OPPORTUNITIES. THE COMPANY HAS CONTINUED TO INVEST IN BOTH HUMAN
RESOURCES AND TECHNOLOGY WHICH WE BELIEVE WILL SERVE AS THE FOUNDATION FOR
FUTURE GROWTH.
A STATE-CHARTERED ORGANIZATION THAT HAS WITHSTOOD THE TEST OF TIME, DERBY WILL
BE CELEBRATING ITS 150TH ANNIVERSARY IN 1996. WE ARE PROUD OF OUR HISTORY AND WE
FEEL THAT THROUGH THE YEARS THE COMPANY HAS GROWN AND EVOLVED INTO AN INTEGRAL
PART OF THE CONNECTICUT ECONOMY. IN THIS REGARD, THE COMPANY HAS TAKEN MANY
STEPS WHICH UNDERSCORE OUR COMMITMENT AND INVESTMENT IN THE COMMUNITY. WE
CONTINUE TO SPONSOR PROGRAMS TO ASSIST FIRST-TIME HOMEBUYERS AND LOW AND
MODERATE INCOME RENTERS IN PURCHASING THEIR FIRST HOMES AND TO PARTICIPATE WITH
AGENCIES WORKING TO MEET INNER-CITY HOUSING NEEDS.
IN 1995, THE COMPANY REMAINS FOCUSED ON ITS STRATEGIC PLAN FOR EARNINGS AND
GROWTH, WHICH WE BELIEVE WILL MAXIMIZE SHAREHOLDER VALUE OVER THE LONG-TERM, AND
IS POISED TO ACCEPT THE CHALLENGES OF THE NEXT DECADE. WE THANK YOU FOR THE
CONFIDENCE YOU'VE SHOWN IN THE PAST AND LOOK FORWARD TO YOUR CONTINUED SUPPORT.
ON BEHALF OF THE BOARD OF DIRECTORS,
MICHAEL F. DADDONA JR. HARRY P. DIADAMO JR.
CHAIRMAN PRESIDENT & CEO
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1
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[COLLAGE OF NEWSPAPER CLIPPINGS, IMPO 2.]
--------------------------------------------------------------------------------
SELECTED FINANCIAL AND OTHER DATA
--------------------------------------------------------------------------------
DS BANCOR, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
AT AND FOR THE YEARS ENDED DECEMBER 31,
1994 1993 1992 1991 1990
-------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
Interest income $ 77,282 $ 74,335 $ 54,144 $ 57,796 $ 59,669
Interest expense 42,818 43,816 31,885 39,469 42,935
--------- --------- --------- --------- ---------
Net interest income 34,464 30,519 22,259 18,327 16,734
Provision for credit losses 2,325 2,475 1,375 4,400 3,430
--------- --------- --------- --------- ---------
Net interest income after provision for credit
losses 32,139 28,044 20,884 13,927 13,304
Non-interest income 3,101 7,343 3,071 1,695 2,758
Non-interest expense 25,610 27,113 15,897 13,166 10,206
--------- --------- --------- --------- ---------
Income before income taxes and cumulative effect
of a change in accounting principle 9,630 8,274 8,058 2,456 5,856
Provision for income taxes 3,920 3,348 3,217 1,645 2,798
--------- --------- --------- --------- ---------
Income before cumulative effect of a change in
accounting principle 5,710 4,926 4,841 811 3,058
Cumulative effect of a change in method of
accounting for income taxes -- 1,548 -- -- --
--------- --------- --------- --------- ---------
NET INCOME $ 5,710 $ 6,474 $ 4,841 $ 811 $ 3,058
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
-------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE--PRIMARY (A):
Income before cumulative effect of a change in
accounting principle $1.95 $1.74 $1.74 $0.29 $1.06
Cumulative effect of a change in method of
accounting for income taxes -- $0.55 -- -- --
Net Income $1.95 $2.28 $1.74 $0.29 $1.06
-------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE--FULLY DILUTED (A):
Income before cumulative effect of a change in
accounting principle $1.95 $1.71 $1.74 $0.29 $1.06
Cumulative effect of a change in method of
accounting for income taxes -- $0.54 -- -- --
Net Income $1.95 $2.25 $1.74 $0.29 $1.06
-------------------------------------------------------------------------------------------------------
PER SHARE (A):
Book value $23.30 $23.83 $21.01 $19.06 $18.50
Dividend -- -- -- $0.20 $0.89
-------------------------------------------------------------------------------------------------------
MARKET PRICES OF COMMON STOCK:
High $33.75 $22.75 $18.50 $14.00 $20.25
Low $21.00 $14.25 $ 8.00 $ 6.00 $ 7.00
At December 31, $22.25 $22.50 $18.25 $ 8.50 $12.50
-------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION AND OTHER DATA:
Total assets $1,222,690 $1,194,121 $1,190,707 $669,545 $638,859
Loan portfolio, net 834,871 779,287 708,022 508,660 550,250
Securities 322,146 322,599 271,515 101,212 40,456
Deposits 1,027,746 1,006,221 994,931 522,180 471,654
Federal Home Loan Bank of Boston advances 111,145 104,991 120,771 83,136 104,326
Other borrowings -- 1,450 2,091 2,936 3,315
Stockholders' equity 67,137 66,440 58,585 53,104 51,512
Leverage ratio 5.63% 5.11% 4.51% 7.93% 8.06%
Tier 1 capital to risk-weighted assets 10.38% 8.87% 7.87% 10.66% 11.08%
Total capital to risk-weighted assets 11.41% 9.89% 9.12% 11.40% 11.58%
Non-performing loans 10,486 12,068 14,253 15,688 16,662
Foreclosed & in-substance foreclosed assets 10,312 16,143 23,142 24,160 17,629
--------- --------- --------- --------- ---------
TOTAL NON-PERFORMING ASSETS 20,798 28,211 37,395 39,848 34,291
Allowance for credit losses 6,803(b) 6,979(b) 13,937(b) 3,674 2,313
Allowance as a percentage of non-performing
loans 64.9% 57.8% 97.8% 23.4% 13.9%
Number of banking offices 22 23 22 10 10
-------------------------------------------------------------------------------------------------------
STATISTICAL DATA:
Net interest rate spread 2.76% 2.55% 3.04% 2.68% 2.28%
Net yield on average interest-earning assets 2.94 2.68 3.24 3.02 2.85
Return on average assets 0.47 0.54 0.66 0.13 0.50
Return on average stockholders' equity 8.34 10.30 8.44 1.47 5.46
Average stockholders' equity to average assets 5.58 5.26 7.80 8.54 9.17
Dividend payout ratio (a) -- -- -- 68.97 83.96
(A) ADJUSTED RETROACTIVELY TO REFLECT STOCK DIVIDENDS DECLARED.
(B) INCLUDES $1.8 MILLION, $2.3 MILLION AND $10.4 MILLION, ALLOCATED TO LOANS
ACQUIRED AS PART OF THE BURRITT TRANSACTION, FOR DECEMBER 31, 1994, 1993
AND 1992, RESPECTIVELY.
--------------------------------------------------------------------------------
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3
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MANAGEMENT'S
DISCUSSION AND ANALYSIS
---------------------
--------------------------------------------------------------------------------
GENERAL
DS Bancor, Inc. (the "Company" or "DS Bancor") is the holding company for
Derby Savings Bank ("Derby Savings" or the "Bank"). The Company's principal
asset consists of all of the outstanding shares of Derby Savings Bank.
Deposits at Derby Savings are federally insured by the Bank Insurance Fund
("BIF") administered by the Federal Deposit Insurance Corporation (the "FDIC")
and the Bank is subject to comprehensive regulation, examination and supervision
by the FDIC and the Banking Commissioner of the State of Connecticut. The
Company, as a bank holding company, is subject to regulation by the Board of
Governors of the Federal Reserve System.
BUSINESS. Derby Savings is primarily engaged in the business of attracting
deposits from the general public and originating loans secured by first liens on
residential real estate. At December 31, 1994, the Bank had deposits of $1.03
billion, funding 84.1% of the Company's $1.22 billion in assets. The Bank offers
a variety of deposit products to meet the various investment objectives of its
depositors, including regular savings, certificates of deposit, money market
accounts, individual retirement accounts and keogh accounts.
In addition to deposits, which serve as the Bank's primary source of funds,
the Bank supplements its lending and investment activities through borrowings
from the Federal Home Loan Bank of Boston (the "FHLBB"), which serves as a
credit facility for its members. At December 31, 1994, the Bank had borrowings
from this source of $111.1 million, funding 9.1% of assets.
The Bank has historically concentrated its lending activities in the
consumer segment of the Bank's market area. During the past several years, this
market positioning has been directed towards providing financing for the
purchase and refinance of residential property. At December 31, 1994, $683.6
million, representing 55.9% of the Company's assets, were invested in loans
secured by first liens on one-to-four family residences. In addition, as
secondary business lines, the Bank has provided financing for other consumer
and, to a lesser extent, business needs. The home equity line of credit (the
"HELOC"), which is secured by residential real estate, has been the single most
significant consumer loan product, apart from residential mortgage loans,
offered by the Bank. This is essentially due to the product's ease of credit
access, cost and tax advantages. At December 31, 1994, the Bank had a portfolio
of HELOC's totaling $70.2 million, representing 5.7% of the Company's total
assets. During 1994, the Bank's market areas experienced a stabilization in the
values of residential real estate. This stabilization has encouraged the Bank to
increase loan-to-value ratios on the basis that equity positions, at the very
least, should remain constant. As such, the Bank has introduced a HELOC of up to
90% of the appraised value of the underlying residential real estate. To
complement the line of credit products secured by real estate, and to address
the credit needs of another segment of the consumer market, the Bank has added
an unsecured line of credit. This product, which was made available in late
1994, is available in amounts ranging from $10,000 to $25,000 and is accessed by
check.
Additionally, although to a lesser extent, the Bank provides financing for
consumer purchases and multi-family housing, as well as financing for commercial
real estate, construction and local businesses. At December 31, 1994, the Bank's
aggregate investment in these loans totaled $87.9 million, representing 7.2% of
the Company's total assets.
In 1994, the Company made further progress in reducing the level of
non-performing assets, which include loans past due 90 days or more, non-accrual
loans, and foreclosed and in-substance foreclosed assets. Additionally, the
volume of loans past due sixty days has also trended downward. Increasing asset
quality, through the reduction of non-performing assets, continues to be a
primary objective of the Bank. During 1994, non-performing assets declined to
$20.8 million,
------
4
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representing 1.7% of the Company's assets, from $28.2 million or 2.4% of total
assets at year end 1993. The Company provided $2.3 million to the allowance for
credit losses in 1994 compared to $2.5 million in 1993. At December 31, 1994,
the allowance for credit losses totaled $6.8 million, representing 64.9% of
non-performing loans. (For a further discussion of non-performing assets, see
"Financial Condition").
For the year ended December 31, 1994, net income totaled $5,710,000 or $1.95
per share (fully diluted) compared to $6,474,000 or $2.25 per share (fully
diluted) for 1993. Net income for 1993 includes $1,548,000 or $.54 per share
(fully diluted) resulting from the adoption of Financial Accounting Standards
Board Statement No. 109. This amount represents the cumulative effect of a
change in accounting for income taxes effective January 1, 1993. Net income for
the year ended December 31, 1994 represents a $784,000 or 15.9% increase above
the 1993 income before the cumulative effect of the change in accounting
principle of $4,926,000 or $1.71 per share (fully diluted) (See
"General--Dividends").
Net interest income, the primary component of the Company's earnings,
totaled $34.5 million in 1994 compared to $30.5 million in the prior year. The
growth in net interest income was substantially due to the improvement in the
net yield on interest-earning assets during 1994 compared to 1993. The net yield
on interest-earning assets increased to 2.94% for 1994 from 2.68% for 1993 (see
"Results of Operations").
BRANCH OFFICES. During the past several years, the Bank has pursued a
diversified branching strategy which departs from the design of traditional
banking facilities. The focus of this strategy is to design branch facilities to
meet the demographic needs of the Bank's target market while minimizing the
Bank's cost of operations and maximizing customer service. All of the Bank's
branches offer a full range of deposit and loan products. Seventeen of the
Bank's branches are traditional full-service offices which, among other things,
offer full teller and platform customer service, drive-up window service and
automated teller machines. The design of five of the Bank's branch offices
departs from traditional banking facilities with the absence of conventional
teller stations and drive-up windows. These "Savings Centers" are designed to
emphasize the issuance of certificate of deposit products through the delivery
of superior personalized service in a non-traditional banking environment.
In January 1994, the Bank closed one of its five branch offices located in
New Britain, which was acquired in December 1992, when the Bank acquired certain
assets and assumed the insured deposits and certain other liabilities of Burritt
Interfinancial Bancorporation, New Britain, Connecticut (The "Burritt
transaction" or "Burritt") (see Consolidated Financial Statements--Note 13).
During the second quarter of 1994, the Bank relocated the operations of the
former New Britain main office of Burritt. The new facility, which is in close
proximity to the former office, is significantly smaller and more economical to
operate, while affording the Bank the ability to expand the level of services by
including drive-up and ATM facilities. The Bank currently operates twenty-two
full service banking offices located in western New Haven, eastern Fairfield and
Hartford counties.
MEMORANDUM OF UNDERSTANDING. In the second quarter of 1992, the Board of
Directors of Derby Savings entered into a Memorandum of Understanding (the
"Memorandum") with the FDIC and the Connecticut Commissioner of Banks. The
Memorandum called for the Board of Directors of the Bank to develop a written
plan to reduce the level of assets classified "substandard" and to establish
target levels for the reduction of adversely classified assets to 75% of total
equity capital and reserves by December 31, 1992 and to 50% of total equity
capital and reserves within a reasonable time thereafter. At December 31, 1994,
the level of assets classified "substandard" represented 31.1% of the Bank's
total equity capital and reserves. The Memorandum also calls for the level of
delinquent loans to be reduced to no more than
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5
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5% of gross loans by December 31, 1993. At December 31, 1994, delinquent loans
totaled $32.0 million or 3.8% of total loans. Additionally, the Memorandum
limits the payment of cash dividends by the Bank to DS Bancor to the Company's
debt service and non-salary expenses.
In connection with the Burritt transaction, the FDIC modified the terms of
the Memorandum relating to the maintenance of capital ratios. The Memorandum
initially required that the Bank maintain a leverage ratio of tier 1 capital to
total assets of at least 5.5% and if the ratio fell below 7%, the Bank was
required to notify the FDIC and the Connecticut Commissioner. The modification
requires Derby Savings to have tier 1 capital in excess of 5% of total assets by
December 31, 1993 and tier 1 capital at or above 5.75% of total assets by
December 31, 1994. However, management of the Bank requested and the FDIC
approved an extension of the December 31, 1994 target date to June 30, 1995. The
Bank's leverage ratio at December 31, 1994 was 5.5%. The Bank expects to achieve
the June 30, 1995 capital target ratio of 5.75% through maintaining asset size
at current levels and earnings retention.
DIVIDENDS. As noted in the foregoing section, the Bank is limited in its
ability to pay cash dividends to the Company. Since the Bank is the sole source
of funds for cash dividend payments by the Company to its shareholders, the
FDIC's restriction has resulted in the Company being unable to pay cash
dividends to shareholders. The Company declared a 5% stock dividend on February
15, 1995. The per share amounts for the current and prior periods have been
retroactively adjusted to give effect to this stock dividend.
DERBY FINANCIAL SERVICES. Complementing the financial services offered to
the communities served by the Company, the Bank, through it's wholly owned
subsidiary, Derby Financial Services ("DFS"), began offering brokerage services
in 1993. The products offered through DFS include various equity securities,
bonds and mutual funds.
FINANCIAL CONDITION
-
-
The Company's assets totaled $1.22 billion at December 31, 1994,
representing a $28.6 million or 2.4% increase from year end 1993. The increase
in total assets during 1994 was primarily attributable to a combination of a
high level of mortgage loan refinancing activity during the early part of the
year, as well as the purchase by the Bank of $22.4 million of single-family
adjustable mortgage loans during 1994. Mortgage loans, including $55.2 million
of loans held-for-sale at
[BAR GRAPH]
TOTAL ASSETS
(AMOUNTS IN MILLIONS)
at December 31,
1990 1991 1992 1993 1994
$638.9 $669.5 $1,190.7 $1,194.1 $1,222.7
December 31, 1994 (see "Asset/Liability Management"), increased by $60.4
million, or 9.1%. The growth in mortgage loans was funded, in large part, by a
$21.5 million or 2.1% increase in deposits, a $6.2 million increase in FHLBB
borrowings, and the redeployment of $26.0 million short-term liquid investments.
The assets of the Company are primarily invested in loans to individuals
and, to a lesser extent, the businesses located in the Bank's market area. At
December 31, 1994, approximately $841.7 million, representing 68.8% of the
Company's assets, were comprised of loans, compared to $786.3 million or
65.8% of total assets at December 31, 1993. The predominant focus of the Bank's
lending business has been to provide financing for residential real estate. At
December 31, 1994, $683.6 million or 81.2% of the Bank's loans were for the
financing of one-to-four family residences. As
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residential mortgage loan activity declined in reaction to the steady and
significant increase in interest rates during 1994, increased emphasis was given
to financing the growing needs of the consumer loan market. Major developmental
efforts were undertaken to expand the product offerings in the consumer lending
area during the latter half of 1994 to help mitigate the expected decline in
residential mortgage lending throughout the upcoming year. A newly designed home
equity line of credit and an unsecured line of credit, combined with a
concentrated effort in automobile and boat financing, will constitute the focus
of the Bank's consumer lending efforts in 1995.
The Company continued to make progress throughout 1994 in reducing the level
of non-performing assets, which include loans past due 90 days or more,
non-accrual loans, and foreclosed and in-substance foreclosed assets (see
Consolidated Financial Statements--Note 1). At December 31, 1994, non-performing
assets totaled $20.8 million, representing 1.7% of total assets, reflecting a
$7.4 million or 26.3% decline from the $28.2 million of non-performing assets,
or 2.4% of total assets, at year end 1993. At December 31, 1994, foreclosed and
in-substance foreclosed assets totaled $10.3 million, representing .8% of total
assets, compared to $16.1 million or 1.4% of total assets at year end 1993.
The following table sets forth non-accrual loans and loans past due for 90
days or more, including loans in foreclosure ("non-performing loans"), and the
allowance for credit losses at the dates indicated:
--------------------------------------------------------------------------------
DECEMBER 31,
------------------------------------------------------------------------------------------------------------
1994 1993
---------------------------------------------------- ----------------------------------------------------
ALLOWANCE FOR CREDIT ALLOWANCE FOR CREDIT
NON-PERFORMING LOANS LOSSES NON-PERFORMING LOANS LOSSES
-------------------------- ------------------------ ------------------------- --------------------------
% OF NON- % OF NON-
% OF LOANS PERFORMING % OF LOANS PERFORMING
LOAN TYPE BALANCE OUTSTANDING BALANCE LOANS BALANCE OUTSTANDING BALANCE LOANS
---------------------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
MORTGAGE
1-4 Family $ 6,908 1.0% $ 5,665 0.9%
Commercial 181 0.7 681 2.4
Multi-family 1,772 22.1 2,628 30.8
--------- ---------
TOTAL MORTGAGE 8,861 1.2 $ 4,495 50.7% 8,974 1.3 $ 4,605 51.3%
--------- ---------
CONSUMER
HELOC 635 0.9 945 1.4
All other 463 1.7 750 2.8
--------- ---------
TOTAL CONSUMER 1,098 1.1 1,266 115.3 1,695 1.8 1,193 70.4
--------- ---------
COMMERCIAL
Real estate
development 271 8.3 623 16.3
All other 256 1.3 776 2.9
--------- ---------
TOTAL COMMERCIAL 527 2.3 1,042 197.7 1,399 4.6 1,181 84.4
--------- ----------- --------- -----------
TOTAL $ 10,486 1.2 $ 6,803 64.9 $ 12,068 1.5 $ 6,979 57.8
--------- ----------- --------- -----------
--------- ----------- --------- -----------
--------------------------------------------------------------------------------
The Company's loan portfolio is segregated into three broad categories of
loans: mortgage, consumer and commercial. The Company's investment in mortgage
loans totaled $721.0 million, representing 59.0% of total assets at year end
1994 compared to $660.6 million or 55.3% of total assets at year end 1993. Early
in 1994, the Bank processed a significant volume of mortgage loan closings,
predominantly for the refinance of residential property. The majority of the
refinance activity was for loans previously outstanding with other lenders.
During the second, third and fourth quarters of 1994, requests for mortgage
loans declined as interest rates increased, curtailing mortgage loan
originations to $164.9 million from $188.6 million in 1993.
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As in prior years, the Bank continued to supplement local loan originations
through the purchase of single family adjustable rate mortgage loans. The Bank
purchased $21.9 million of these loans during 1994 and $8.8 million during 1993.
The origination and purchase of adjustable rate loans is an integral part of the
Bank's management of interest rate risk (see "Asset/Liability Management".)
The Bank's investment in mortgages is primarily secured by residential
properties and, to a lesser extent, multi-family housing. This portfolio also
includes financing for commercial real estate and real estate development and
construction. Loans to finance one-to-four family residences totaled $683.6
million or 81.2% of the Bank's total loan portfolio at year end 1994 compared to
$621.6 million, representing 79.1% of the total loan portfolio, at year end
1993. The level of non-performing loans totaled $6.9 million or 1.0% of this
portfolio at year end 1994 compared to $5.7 million or .9% of the portfolio at
year end 1993.
Multi-family housing loans totaled $8.0 million or 1.0% of the total loan
portfolio at year end 1994 compared to $8.5 million or 1.1% of the total loan
portfolio at year end 1993. At December 31, 1994, non-performing loans totaled
$1.8 million or 22.1% of this portfolio. At year end 1993 there were $2.6
million or 30.8% of non-performing loans included in this category. Loans to
finance commercial real estate totaled $27.0 million or 3.2% of the total loan
portfolio at December 31, 1994, of which $.2 million or .7% were non-performing.
At year end 1993, this portfolio totaled $27.7 million, representing 3.5% of
total loans, of which $.7 million or 2.4% were non-performing.
The fourth group of loans included in the Bank's mortgage portfolio were
made to finance real estate construction, primarily residential condominiums and
single family residences. During 1994, this portfolio of loans remained
essentially unchanged at $2.4 million or .3% of total loans compared to $2.8
million or .4% of total loans at year end 1993. At year end 1994, as with year
end 1993, there were no non-performing real estate construction loans.
Unadvanced construction commitments approximated $1.8 million at year end 1994
compared to $.5 million at year end 1993.
-
-
The Company's investment in consumer loans totaled $98.0 million,
representing 11.6% of total loans at year end 1994, compared to $95.5 million or
12.1% of total loans at year end 1993. The consumer loan portfolio is primarily
comprised of home equity lines of credit, which complement the Bank's primary
business of providing financing for single family residences. The home equity
line of credit, which is collateralized by the equity in residential real
property, has become the Bank's second largest investment in loans. Home equity
lines of credit totaled $130.5 million, with $70.2
[BAR GRAPH]
CONSUMER LOAN PORTFOLIO
(AMOUNTS IN MILLIONS)
at December 31,
1990 1991 1992 1993 1994
$16.4 $14.2 $ 34.2 $27.1 $27.8
62.6 60.2 71.4 68.4 70.2
----- ----- ------ ----- -----
$79.0 $74.4 $105.6 $95.5 $98.0
million in use at year end 1994 compared to $124.8 million, with $68.4 million
in use at year end 1993. At year end 1994, non-performing consumer loans totaled
$1.1 million or 1.1% of this portfolio. Home equity lines of credit included in
this amount totaled $.6 million, representing .9% of HELOCs outstanding. In
comparison, at year end 1993, non-performing consumer loans more totaled $1.7
million or 1.8% of the consumer loan portfolio, including $.9 million,
representing 1.4% of HELOCs outstanding.
The Company also provides credit to businesses located within the Bank's
market area. The Bank's commercial lending department invests in loans for the
development of real estate and other
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business needs. The Bank's investment in commercial loans totaled $22.7 million
at year end 1994, reflecting a $7.4 million or 24.8% decrease from the $30.1
million invested at year end 1993. At December 31, 1994, $3.3 million or 14.5%
of this portfolio was invested in loans for the development of real estate and
$19.4 million or 85.5% was invested in loans for various business needs.
Unadvanced real estate development commitments totaled $1.1 million at year end
1994, compared to $1.3 million at year end 1993. At December 31, 1994,
non-performing commercial loans totaled $.5 million, representing 2.3% of the
commercial loan portfolio compared to $1.4 million or 4.6% at year end 1993.
NON-PERFORMING ASSETS. The following table summarizes the Bank's
non-performing loans, and foreclosed and in-substance foreclosed assets
("non-performing assets") and restructured loans:
--------------------------------------------------------------------------------
DECEMBER 31,
-----------------------------------------------------
1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
NON-ACCRUAL LOANS:
Mortgage $ 7,675 $ 6,657 $ 9,756 $ 7,029 $ 6,524
Consumer 1,098 1,446 1,197 1,000 1,741
Commercial 527 1,399 293 3,412 3,437
--------- --------- --------- --------- ---------
TOTAL 9,300 9,502 11,246 11,441 11,702
--------- --------- --------- --------- ---------
ACCRUING LOANS PAST DUE 90 DAYS:
Mortgage 1,186 2,317 3,006 4,096 4,730
Consumer -- 249 1 151 230
Commercial -- -- -- -- --
--------- --------- --------- --------- ---------
TOTAL 1,186 2,566 3,007 4,247 4,960
--------- --------- --------- --------- ---------
FORECLOSED ASSETS 6,195 9,379 10,456 7,305 5,893
IN-SUBSTANCE FORECLOSED ASSETS 4,556 7,804 13,124 17,267 11,736
--------- --------- --------- --------- ---------
TOTAL 10,751 17,183 23,580 24,572 17,629
Valuation allowance 439 1,040 438 412 --
--------- --------- --------- --------- ---------
TOTAL, NET 10,312 16,143 23,142 24,160 17,629
--------- --------- --------- --------- ---------
TOTAL NON-PERFORMING ASSETS $ 20,798 $ 28,211 $ 37,395 $ 39,848 $ 34,291
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
RESTRUCTURED LOANS $ 4,213 $ 2,273 $ 8,262 $ 6,985 --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
--------------------------------------------------------------------------------
As detailed in the table above, the level of non-performing loans declined
from $12.1 million at year end 1993 to $10.5 million at year end 1994. During
1994, the Bank made significant progress in reducing the level of foreclosed and
in-substance foreclosed assets. At year end 1994, the Bank had $6.2 million in
foreclosed assets, consisting of 37 properties, compared to $9.4 million,
consisting of 44 properties at year end 1993. During 1994, the Bank reclassified
$3.2 million in loans to in-substance foreclosed assets. At year end 1994, the
Bank had $4.6 million, consisting of 26 properties, classified as in-substance
foreclosed assets compared to $7.8 million, consisting of 50 properties, at year
end 1993. In the aggregate, the Bank is carrying 63 properties, totaling $10.3
million, net of a $.4 million valuation allowance, in foreclosed and
in-substance foreclosed assets. This compares to 94 properties, totaling $16.1
million, net of a $1.0 million valuation allowance, at year end 1993.
During the past several years, as the volume of assets acquired by the Bank
through the foreclosure process increased and the value of the underlying real
estate declined, the Bank adopted a policy of reappraising foreclosed and
in-substance foreclosed assets on at least an annual basis. This policy has
assisted the Bank in quantifying the net realizable value of these assets, and
has provided the basis, as necessary, for subsequent write-downs of the carrying
amount of these assets. Additionally, in order to provide for unidentified and
possible future declines in the value of foreclosed assets, the Bank
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maintains an allowance for estimated losses on foreclosed assets through a
provision which is charged to and included in foreclosed asset expense. In 1994,
the Bank provided $2.2 million to this allowance compared to $4.3 million in
1993. During 1994, the Bank charged $2.8 million in specific write-downs against
this allowance compared to $3.6 million during the prior year. At December 31,
1994, the allowance for estimated losses on foreclosed assets totaled $.4
million compared to $1.0 million at year end 1993.
The reduction of non-performing assets has been one of the primary
objectives of the Bank and, as noted, total non-performing assets declined by
$7.4 million or 26.2% during 1994. A principal focus in 1995 will be a
continuation of the Bank's efforts to reduce the level of non-performing assets.
Continued weakness in the local economy suggests that progress in this area may
be moderate. One of the measures used to identify the trends in non-performing
assets is the level of loans past due 60 days. As noted in the table below, the
amount of loans past due 60 days has declined to $6.1 million at December 31,
1994, representing .7% of the total loan portfolio compared to $8.0 million or
1.0% of the total loan portfolio at year end 1993.
The following table summarizes the Bank's accruing loans past due 60 days:
--------------------------------------------------------------------------------
DECEMBER 31,
-----------------------------------------------------
1994 1993 1992 1991 1990
-------------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
LOANS PAST DUE 60 DAYS:
Mortgage $ 5,014 $ 7,369 $ 8,829 $ 9,072 $ 5,062
Consumer 1,015 651 815 525 753
Commercial 62 -- 95 353 870
--------- --------- --------- --------- ---------
TOTAL $ 6,091 $ 8,020 $ 9,739 $ 9,950 $ 6,685
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
--------------------------------------------------------------------------------
The foundation of the Bank's program to reduce the level of non-performing
assets is the loan collection and workout process. In addition to the personnel
assigned to the collection/workout area, the Bank has two officers responsible
for the management and sale of foreclosed assets. This crucial function of the
Bank is supported by a standing committee of the Board of Directors, comprised
of individuals experienced in the areas of real estate sales and development,
which was established to assist and give advice on the management and
disposition of troubled assets.
To the extent that the Bank ultimately takes title to troubled assets, the
Bank has established several programs to facilitate the timely disposition of
foreclosed assets. The foundation of these programs is to establish fair and
realistic value for foreclosed assets, taking into consideration the potential
opportunity cost associated with lengthy marketing time. The Bank augments this
pricing policy through preferred Bank financing, including special first-time
home-buyer programs. To further expand sales efforts and reduce marketing time,
the Bank also maintains consistent marketing programs and premium realtor
commissions. The employment of these programs has enabled the Bank to sell and
close on 60 properties for an aggregate consideration of $6.2 million in 1994.
During the prior year, the Bank sold and closed on 63 properties for an
aggregate consideration of $6.8 million.
In order to maintain the quality of the loan portfolio, as well as to
provide for potential losses that are inherent in the lending process, the Bank
controls its lending activities through adherence to loan policies adopted by
the Board of Directors and stringent underwriting standards. To provide for
possible losses within the loan portfolio, the Company maintains an allowance
for credit losses. The allowance for credit losses is maintained through
provisions charged to
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income. These provisions are determined on a quarterly basis, based upon
management's review of the anticipated uncollectability of loans, current
economic conditions, historical trend analysis, real estate deflation factors,
overall portfolio quality, specific problem loans and an assessment of the
adequacy of the allowance for credit losses. Based on these factors, the Company
provided $2.3 million to the allowance for credit losses during 1994 compared to
$2.5 million during 1993. During the year, the Bank wrote off $2.5 million (net
of recoveries). At December 31, 1994 the allowance for credit losses totaled
$6.8 million which includes $1.8 million allocated to the loans acquired in the
Burritt transaction. In comparison, the allowance for credit losses totaled $7.0
million at year end 1993 which included $2.3 million allocated to the loans
acquired in the Burritt transaction (see Consolidated Financial Statements--Note
13). The allowance for credit losses represented 64.9% of non-performing loans
at year end 1994, compared to 57.8% at year end 1993.
The following table summarizes the transactions in the allowance for credit
losses for the periods indicated:
--------------------------------------------------------------------------------
AT AND FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
MORTGAGE LOANS
Balance at beginning of period $ 4,605 $ 11,166 $ 2,180
Provision for credit losses 1,675 1,925 825
Acquired allowance -- (5,958) 9,026
Loan charge-offs (1,848) (2,857) (941)
Recoveries 63 329 76
--------- --------- ---------
BALANCE AT END OF PERIOD $ 4,495 $ 4,605 $ 11,166
--------- --------- ---------
--------- --------- ---------
CONSUMER LOANS
Balance at beginning of period $ 1,193 $ 1,987 $ 704
Provision for credit losses 600 50 125
Acquired allowance -- (5) 1,328
Loan charge-offs (573) (860) (211)
Recoveries 46 21 41
--------- --------- ---------
BALANCE AT END OF PERIOD $ 1,266 $ 1,193 $ 1,987
--------- --------- ---------
--------- --------- ---------
COMMERCIAL LOANS
Balance at beginning of period $ 1,181 $ 784 $ 790
Provision for credit losses 50 500 425
Loan charge-offs (195) (114) (660)
Recoveries 6 11 229
--------- --------- ---------
BALANCE AT END OF PERIOD $ 1,042 $ 1,181 $ 784
--------- --------- ---------
--------- --------- ---------
TOTAL ALLOWANCE FOR CREDIT LOSSES
Balance at beginning of period $ 6,979 $ 13,937 $ 3,674
Provision for credit losses 2,325 2,475 1,375
Acquired allowance -- (5,963) 10,354
Loan charge-offs (2,616) (3,831) (1,812)
Recoveries 115 361 346
--------- --------- ---------
BALANCE AT END OF PERIOD $ 6,803 $ 6,979 $ 13,937
--------- --------- ---------
--------- --------- ---------
--------------------------------------------------------------------------------
In addition to collection and workout efforts, management also monitors and
works closely with certain borrowers that may experience financial difficulties.
The debtors may be experiencing cash flow problems which inhibit their ability
to service their debt in accordance with its terms. This may result in a
modification of loan terms in order to assist a debtor who has been adversely
affected by the state of the economy. The modification of terms may be in the
form of the waiver of principal payments, a reduction in the interest rate or
the waiver of interest payments for a specified period of time. At December 31,
1994, in addition to non-performing assets, the Bank had $4.2 million in loans
which have been restructured.
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The Bank's securities portfolio was $322.1 million or 26.4% of total assets
at December 31, 1994, virtually unchanged from $322.6 million or 27.0% of total
assets at December 31, 1993. The securities portfolio serves primarily as a
source of liquidity and as a vehicle to help balance the interest rate
sensitivity of the Bank. Notwithstanding the need for liquidity and interest
rate sensitivity, the portfolio is also structured for yield. The Bank adopted
Statement of Financial Accounting Standards No. 115 ("SFAS 115") as of December
31, 1993. Under the provisions of SFAS 115 the Bank's securities are classified
into one of three categories: held-to-maturity, available-for-sale or trading
(see Consolidated Financial Statements--Notes 1 & 2). At December 31, 1994 the
Bank had securities totaling $104.7 million classified as held-to-maturity,
compared to $66.3 million at December 31, 1993. These investments are primarily
comprised of intermediate and long-term fixed rate mortgage-backed securities
and are carried at amortized cost. Securities classified as available-for-sale
at December 31, 1994 totaled $216.7 million, compared to $256.3 million at
December 31, 1993. The available-for-sale category at year-end 1994 was
principally comprised of mortgage-backed securities with adjustable rate
interest features. SFAS 115 also requires that securities classified as
available-for-sale be carried at fair value, with unrealized gains and losses,
net of tax effect, reported as a separate component of stockholders' equity. At
December 31, 1994, as a result of the sustained increases in interest rates that
occurred throughout most of 1994 and their effect on the market values of the
securities classified as available-for-sale, the Bank recorded an unrealized
loss, net of tax effect, of $5.6 million which is included in stockholders'
equity. At December 31, 1993, the Bank had an unrealized gain, net of tax
effect, of $1.3 million. The trading portfolio, which consists of equity
securities, totaled $.8 million at year-end 1994. This portfolio is carried at
fair value with unrealized gains or losses included in earnings. There were no
securities classified as trading in 1993.
Cash and cash equivalents were $18.6 million at December 31, 1994 versus
$43.1 million at December 31, 1993. The $24.5 million decrease in cash and cash
equivalents during 1994, as mentioned previously, resulted from the redeployment
of federal funds sold into other earning assets, predominantly residential
mortgage loans.
-
-
FUNDING SOURCES. The investment activities of the Bank are funded from
several sources. The primary source of funds is provided by local depositors and
is complemented by advances from the FHLBB. In addition, the Bank is provided
with a steady flow of funds from the amortization and prepayment of loans as
well as the amortization and maturity of securities. The Bank also derives
funds, from time to time, through the sale of loans into the secondary market
and allocates the
[BAR GRAPH]
TOTAL DEPOSITS
(AMOUNTS IN MILLIONS)
at December 31,
1990 1991 1992 1993 1994
$471.7 $522.2 $994.9 $1,006.2 $1,027.7
proceeds in accordance with established asset and liability management
objectives.
In 1994, deposits increased by $21.5 million or 2.1%, after interest
credited of $35.9 million, from $1.01 billion, funding 84.3% of total assets at
year end 1993, to $1.03 billion, funding 84.1% of total assets at year end 1994.
In comparison, deposits increased by $11.3 million or 1.1% after interest
credited of $37.6 million in 1993. Retail deposits are essentially derived from
the communities in which the Bank's offices are located. The Bank offers a wide
variety of deposit accounts which include money market deposit accounts,
certificates of deposit and regular savings.
The Bank also utilizes the FHLBB as an alternative source of funds. At year
end 1994, FHLBB
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advances totaled $111.1 million, funding 9.1% of total assets, compared to
$105.0 million, funding 8.8% of total assets at year end 1993. The flexibility,
pricing and repricing characteristics of the funding alternatives offered by the
FHLBB have allowed the Bank to match-fund fixed rate commercial mortgage loans,
one year adjustable rate mortgage loans and home equity lines of credit. The
Bank has also employed funds from the FHLBB to fund the purchase of various
mortgage-backed securities.
Amortization, prepayments and the sale of loans into the secondary market
supplied the Bank with an additional $123.0 million in investable funds in 1994,
compared to $195.0 million in 1993. In keeping with the Bank's asset and
liability management objectives, the Bank periodically may sell loans. The Bank
sold $12.1 million in loans in 1994 compared to $30.0 million in 1993. The Bank
has retained servicing on all loans that have been sold and, at December 31,
1994, was servicing $129.3 million of mortgage loans for others. Additionally,
at December 31, 1994, the Bank had $55.2 million in loans identified as held-for
sale.
CAPITAL RESOURCES. The Federal Reserve Board (the "FRB") has adopted
risk-based capital standards which require bank holding companies to maintain a
minimum ratio of total capital to risk-weighted assets of 8.0%. Of the required
capital, 4.0% must be tier 1 capital. Tier 1 capital is primarily common
stockholders' equity and certain categories of perpetual preferred stock. As
part of the Burritt transaction (See Consolidated Financial Statements-- Note
13), Derby paid the FDIC a premium of $6.2 million. Of the premium paid, $5.0
million was recorded as a core deposit intangible. The amortized balance of $3.5
million at December 31, 1994, in addition to approximately $149,000 of other
intangible assets resulting from the transaction, are required to be deducted
from the Company's and the Bank's capital prior to determining regulatory
capital requirements. After giving effect to the transaction, the Company had a
ratio of total capital to risk-weighted assets of 11.4% and a ratio of tier 1
capital to risk-weighted assets of 10.4% at December 31, 1994.
The Board has supplemented the risk-based capital requirements with a
required minimum leverage ratio of 3% of tier 1 capital to total assets. The
Board indicated that all but the most highly-rated holding companies, however,
should maintain a leverage ratio of 4% to 5% of tier 1 capital to total assets.
At December 31, 1994, the Company had a ratio of tier 1 capital to total assets
of 5.6%.
Derby Savings Bank is also required by the FDIC to meet risk-based ratios
the same as those adopted by the FRB for the Company. At December 31, 1994,
Derby Savings' ratio of total capital to risk-weighted assets was 11.2% and its
ratio of tier 1 capital to risk-weighted assets was 10.2%.
The FDIC has also adopted a minimum leverage ratio of 3% of tier 1 capital
to total assets. The FDIC has also indicated that all but the most highly rated
banks should maintain a leverage ratio of 4% to 5% of tier 1 capital to total
assets. Derby Savings' ratio of tier 1 capital to total assets at December 31,
1994 was 5.5%.
Derby entered into a Memorandum of Understanding (the "Memorandum") with the
FDIC in April 1992, which required Derby to maintain a minimum tier 1 capital to
total asset ratio of 5.5%. In connection with the Burritt transaction, the FDIC
modified the terms of the Memorandum which pertained to the maintenance of
capital ratios. The Memorandum initially required that the Bank maintain a ratio
of leverage capital to total assets of at least 5.5% and if the ratio fell below
7%, the Bank was required to notify the FDIC and the Connecticut Commissioner of
Banks. The modification required Derby to have leverage capital in excess of 5%
of total assets by December 31, 1993 and leverage capital at or above 5.75% of
total assets by December 31, 1994. However, management of the Bank has requested
and
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the FDIC has approved an extension of the December 31, 1994 target date to June
30, 1995. At December 31, 1994, the Bank's leverage capital to total assets
ratio was 5.5%. The Bank expects to achieve the June 30, 1995 capital target of
5.75% through maintaining asset size at current levels and earnings retention.
Under the prompt corrective action regulation recently adopted by the FDIC,
which became effective on December 19, 1992, a savings bank will be considered:
(i) "well capitalized" if the savings bank has a total risk-based capital ratio
of 10% or greater, a tier 1 risk-based capital ratio of 6% or greater, and a
leverage ratio of 5% or greater (provided the savings bank is not subject to an
order, written agreement, capital directive or prompt corrective action to meet
and maintain a specified capital level for any capital measure); (ii)
"adequately capitalized" if the institution has a total risk-based capital ratio
of 8% or greater, a tier 1 risk-based capital ratio of 4% or greater, and a
leverage ratio of 4% or greater (3% or greater if the institution is rated
composite 1 in its most recent report of examination); (iii) "undercapitalized"
if the institution has a total risk-based capital ratio that is less than 8%, a
tier 1 risk-based capital ratio that is less than 4% (3% if the institution is
rated composite 1 in its most recent report of examination); (iv) "significantly
undercapitalized" if the institution has a total risk-based capital ratio that
is less than 6%, a tier 1 risk-based capital ratio that is less than 3%, or a
leverage ratio that is less than 3%; and (v) "critically undercapitalized" if
the institution has a ratio of tangible equity to total assets that is equal to
or less than 2%. The regulation also permits the FDIC to determine that a
savings bank should be placed in a lower category based on other information
such as a savings institution's examination report, after written notice. At
December 31, 1994, the Bank met the "well capitalized" criteria based on its
capital ratios at that date.
RESULTS OF OPERATIONS
The net income of the Company is principally derived from the banking
operation of its wholly owned subsidiary, Derby Savings Bank. The net income of
Derby Savings is dependent to a substantial extent on the difference between
interest and fee income on its loans plus interest and dividends on its
securities portfolio and its cost of money, consisting principally of the
interest paid on its deposit accounts and, to a lesser extent, interest paid on
its borrowings.
The difference between interest income and interest expense is referred to
as net interest income. The difference between the combined weighted average
yield on loans and securities and the combined weighted average cost of deposits
and borrowings is referred to as the net interest rate spread. Interest income
from interest-earning assets depends primarily on the volume of such assets
outstanding during the period and the interest rates and fees earned thereon.
Derby Savings' interest expense is a function of the average amount of deposits
and borrowed money outstanding during the period and the interest rates paid
thereon.
The following table reflects average yields and costs during the periods
indicated.
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------------------------------
AVERAGE YIELD:
Mortgage loans 6.73% 7.23% 8.47% 9.75% 10.13%
Other loans 8.25 7.61 7.79 9.87 10.98
Securities 5.75 5.17 6.25 7.86 8.29
All interest-earning assets 6.58 6.54 7.87 9.51 10.17
AVERAGE COST:
Deposits 3.61 3.81 4.59 6.71 7.75
Borrowings 5.53 5.48 6.15 7.45 8.62
All interest-bearing liabilities 3.82 3.99 4.83 6.83 7.89
NET INTEREST RATE SPREAD 2.76 2.55 3.04 2.68 2.28
NET YIELD ON AVERAGE INTEREST-EARNING ASSETS (A) 2.94 2.68 3.24 3.02 2.85
(A) NET INTEREST INCOME DIVIDED BY AVERAGE INTEREST-EARNING ASSETS.
--------------------------------------------------------------------------------
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14
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COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1993
GENERAL. Net income for the year ended December 31, 1994 totaled $5,710,000
or $1.95 per share (fully diluted) compared to $6,474,000 or $2.25 per share
(fully diluted) for the prior year. Net income for 1993 includes $1,548,000 or
$.54 per share (fully diluted) attributable to the adoption of Financial
Accounting Standards Board Statement No. 109. This amount represents the
cumulative effect of a change in accounting for income taxes effective January
1, 1993. Net income for 1994 represents a $784,000 or 15.9% increase above 1993
income before the cumulative effect of the change in accounting principle of
$4,926,000 or $1.71 per share (fully diluted). As a result of the 5% stock
dividend declared by the Company on February 15, 1995, the per share amounts for
the current and prior periods have been retroactively adjusted. The improvement
in net income was primarily attributable to $4.0 million or 12.9% increase in
net interest income and a $1.5 million or 5.5% decline in non-interest expense.
These improvements were offset, in part, by a $4.2 million or 57.8% decline in
non-interest income.
For 1994, net income represented a return on average assets and a return on
average stockholders' equity of .47% and 8.34%, respectively, compared to .54%
and 10.30%, excluding the effect of the change in accounting principle,
respectively, for 1993.
INTEREST INCOME. Interest and fee income on loans and interest and
dividends on the securities portfolio increased $3.0 million or 4.0% from $74.3
million during 1993 to $77.3 million during 1994. The increase in interest
income was essentially due to the increased volume of interest-earning assets
resulting from a modest growth in the volume of average assets and a decline in
the volume of average non-interest-earning assets.
[BAR GRAPH]
INTEREST INCOME
(AMOUNTS IN MILLIONS)
Years ended December 31,
1990 1991 1992 1993 1994
$59.7 $57.8 $54.1 $74.3 $77.3
Average interest-earning assets increased $36.5 million or 3.2% during 1994
compared to the prior year. The increase in average interest-earning assets was
concentrated within the loan portfolio which increased $85.1 million or 11.6%,
while the average of all other interest-earning assets declined $48.6 million or
12.0%. These changes highlight the Bank's efforts, during 1994, to place
greater emphasis on loans as opposed to securities. The average yield on
interest-earning assets improved by 4 basis points (100 basis points equals 1%)
from 6.54% during 1993 to 6.58% during 1994.
INTEREST EXPENSE. Interest expense decreased $1.0 million or 2.3% from
$43.8 million during 1993 to $42.8 million during 1994. The decline in interest
expense was due to a decline in the average cost of funds during the current
year which was partially offset by the interest expense resulting from an
increase in average interest-bearing liabilities.
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15
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------------------------------------------------------------------------------
-
-
Average interest-bearing liabilities increased $20.4 million or 1.9% during
1994 compared to the prior year. The growth was essentially evenly divided
between average deposits which increased $10.6 million or 1.1% and average
borrowed funds, consisting of FHLBB advances, which increased $9.8 million or
8.7%. Although the level of interest rates trended upward through most of 1994,
the Bank's average cost of funds lagged behind this trend. In addition to the
lag effect of repricing
[BAR GRAPH]
NET INTEREST INCOME
(AMOUNTS IN MILLIONS)
Year ended December 31,
1990 1991 1992 1993 1994
$16.7 $18.3 $22.3 $30.5 $34.5
certificates of deposit throughout 1994, the interest rates paid by the Bank
were, for the most part, at levels less than the general level of interest
rates. As a result, the Bank's average cost of funds declined 17 basis points
from 3.99% for 1993 to 3.82% for 1994.
NET INTEREST INCOME. Net interest income, the primary component of the
Company's earnings, increased $4.0 million or 12.9% to $34.5 million for 1994
from $30.5 million for 1993. As a result of the 4 basis point improvement
in the average yield on interest-earning assets and the 17 basis point decline
in the average cost of interest-bearing liabilities, the net interest rate
spread increased 21 basis points to 2.76% for 1994 from 2.55% for 1993.
Additionally, the Company's net yield on interest-earning assets averaged 2.94%
for 1994 compared to 2.68% for 1993.
[BAR GRAPH]
NET INTEREST RATE SPREAD
Years ended December 31,
1990 1991 1992 1993 1994
2.28% 2.68% 3.04% 2.55% 2.76%
-
-
The following table summarizes net interest income.
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
INTEREST INCOME:
Loans $ 56,802 $ 53,428 $ 44,568 $ 51,208 $ 56,042
Securities 20,480 20,907 9,576 6,588 3,627
--------- --------- --------- --------- ---------
Total 77,282 74,335 54,144 57,796 59,669
--------- --------- --------- --------- ---------
INTEREST EXPENSE:
Deposits 36,008 37,599 25,493 32,585 35,182
Borrowings 6,810 6,217 6,392 6,884 7,753
--------- --------- --------- --------- ---------
Total 42,818 43,816 31,885 39,469 42,935
--------- --------- --------- --------- ---------
NET INTEREST INCOME $ 34,464 $ 30,519 $ 22,259 $ 18,327 $ 16,734
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
--------------------------------------------------------------------------------
PROVISION FOR CREDIT LOSSES. During 1994, the Bank provided $2.3 million
for credit losses compared to $2.5 million during 1993. In addition to the
provision for credit losses, the Bank also provided $2.2 million for estimated
losses on foreclosed assets during 1994 compared to $4.3 million during 1993.
These provisions are included in foreclosed asset expense (see "Non-interest
expense").
NON-INTEREST INCOME. Non-interest income is derived from fees which the
Bank charges for various loan and deposit account services, fees generated from
other ancillary services provided by the Bank, and net securities and loan
gains. During 1994 the income generated from these sources totaled $3.1 million
compared to $7.3 million for the prior year, reflecting a decrease of $4.2
million or 57.8%.
Service charges and other fee income declined $3.6 million or 59.7% and
totaled $2.5 million for 1994 compared to $6.1 million earned in 1993. During
1993, as part of the Burritt transaction, the Bank was servicing loans for the
FDIC on an interim basis (through September 30, 1993), which resulted in $3.7
million in fee income.
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16
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------------------------------------------------------------------------------
Net securities and loan gains totaled $648,000 in 1994 compared to
$1,256,000 in 1993, reflecting a decline of $608,000 or 48.4%. This decline was
due to a decline in the volume of loans sold at net gains during 1994 compared
to 1993. In keeping with the Bank's asset and liability management objectives
(see "Asset/Liability Management"), the Bank may sell fixed rate mortgage loans
in the secondary markets. In 1994, the Bank sold $12.1 million in fixed rate
mortgage loans, resulting in gains of $102,000 compared to fixed rate mortgage
loan sales of $30.0 million in 1993, resulting in gains of $834,000. The Bank,
during 1994, realized net gains of $546,000 on the sale of various securities
compared to net gains of $422,000 in 1993. The proceeds from these transactions
have been allocated to fund the Bank's loan demand and other securities
purchases.
NON-INTEREST EXPENSE. Non-interest expense totaled $25.6 million or 2.09%
of average assets during 1994 compared to $27.1 million or 2.27% of average
assets in 1993. The $1.5 million or 5.5% decrease in the Company's cost of
operations was due to a decline in foreclosed asset expense which more than
offset increases in several other categories of expense during 1994 compared to
1993.
Salaries and employee benefits, the largest component of the Company's cost
of operations, increased $.5 million or 5.2% from $9.6 million during 1993 to
$10.1 million during 1994. Salaries increased $74,000 or 1.0% during 1994
compared to the prior year. This increase resulted from the exercise of stock
appreciation rights which resulted in compensation expense of $118,000. Employee
benefits increased $.4 million or 21.1% during the year from $1.9 million for
1993 to $2.3 million in 1994. The increased cost of employee benefits was
primarily in pension and postretirement benefit costs, reflecting the increased
number of eligible participants resulting from the Burritt transaction.
During 1994, the Bank continued to incur expenses with the foreclosure
process and the management of foreclosed and in-substance foreclosed assets.
These expenses include all of the direct costs associated with acquiring,
holding, managing, marketing and disposing of these assets. In 1994, the Bank
incurred foreclosed asset expenses of $.8 million compared to $.9 million in
1993 (see Consolidated Financial Statements--Note 4). Subsequent to an initial
estimate of value of the underlying real estate securing loans in the
foreclosure process, the Bank updates appraisals at least on an annual basis. In
order to provide for unidentified and possible future declines in the value of
foreclosed assets the Bank maintains an allowance for estimated losses on
foreclosed assets. For the year ended December 31, 1994, the Bank provided $2.2
million to this allowance compared to $4.3 million for the prior year. The
Company expects that until the level of foreclosed assets declines
substantially, foreclosed asset expense will continue to be significant.
The FDIC insurance premium paid by the Bank in 1994 totaled $2.8 million
compared to $2.4 million in 1993. The increased volume of insured deposits
assumed in connection with the Burritt transaction and the lag in computing the
FDIC insurance premium, in large part, accounted for the increase in the premium
paid in 1994 compared to 1993. In February 1995, the FDIC proposed to reduce the
current deposit insurance assessment rate range of .23% to .31% of insured
deposits to a range of .04% to .31% once the reserve ratio for BIF reaches 1.25%
of total insured deposits. Under the proposal, "well-capitalized" banks, such as
the Bank, would pay insurance premiums within a range of .04% to .21% of insured
deposits, compared to the current assessment rate range for such institutions of
.23% to .29%. The proposal would permit the FDIC to adjust the assessment rate
schedule by up to .05% for all risk classifications.
Data processing expense totaled $1.3 million in 1994, reflecting a decrease
of $.7 million or 35.0% compared to the $2.0 million incurred in 1993. The
decline is largely attributable to the elimination, in the third quarter of
1993, of the former data processing center operated by Burritt. The Bank
continued to operate the center through August 1993 in order to service loans
for the FDIC. (See Consolidated Financial Statements--Note 13).
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17
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Marketing expense increased $.5 million or 62.5% from $.8 million for 1993
to $1.3 million for 1994. The increase reflects the increased promotion of the
Bank's products and services to the markets it serves.
As required by the Statement of Financial Accounting Standards No. 91 ("SFAS
91"), "Accounting for Non-refundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases," the Bank defers certain
direct costs resulting from the origination of loans, which will be amortized as
an adjustment of yield over the contractual term of the related loans. These
deferred costs, which are principally comprised of salaries, employee benefits
and other loan expenses, totaled approximately $1.5 million during 1994 compared
to $1.8 million during 1993.
[BAR GRAPH]
NON-INTEREST EXPENSE
(AMOUNTS IN THOUSANDS)
Years ended December 31,
1990 1991 1992 1993 1994
Foreclosed Asset $ 175 $ 2,547 $ 3,747 $ 4,801 $ 2,904
FDIC Insurance 552 1,016 1,196 2,435 2,770
All Other 9,479 9,603 10,954 19,877 19,936
------- ------- ------- ------- -------
$10,206 $13,166 $15,897 $27,113 $25,610
NET NON-INTEREST MARGIN. The net non-interest margin, the difference
between non-interest income and non-interest expense, as a percentage of average
assets, declined by 18 basis points during 1994 compared to 1993. Non-interest
income decreased 36 basis points from .61% during 1993 to .25% during 1994.
Non-interest expense decreased 18 basis points from 2.27% during 1993 to 2.09%
during 1994.
--------------------------------------------------------------------------------
NET NON-INTEREST INCOME/EXPENSE ANALYSIS
(AS A PERCENT OF AVERAGE ASSETS)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1994 1993 1992 1991 1990
------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME .25 .61 .42 .26 .46
--------- --------- --------- --------- ---------
NON-INTEREST EXPENSE
Foreclosed asset .24 .40 .51 .39 .04
FDIC insurance .23 .20 .16 .16 .09
Other 1.62 1.67 1.49 1.49 1.55
--------- --------- --------- --------- ---------
TOTAL NON-INTEREST EXPENSE 2.09 2.27 2.16 2.04 1.68
--------- --------- --------- --------- ---------
NET NON-INTEREST MARGIN (1.84) (1.66) (1.74) (1.77) (1.22)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
--------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES. The provision for income taxes for 1994 totaled
$3.9 million, reflecting a 40.7% effective income tax rate compared to $3.3
million, representing an effective income tax rate of 40.5% for 1993 (see
Consolidated Financial Statements--Note 9).
COMPARISON OF YEARS ENDED DECEMBER 31, 1993 AND 1992
GENERAL. For the year ended December 31, 1993, net income totaled
$6,474,000 or $2.25 per share (fully diluted) compared to $4,841,000 or $1.74
per share (fully diluted) for the prior year. Net income for 1993 includes
$1,548,000 or $.54 per share (fully diluted) resulting from the adoption of
Financial Accounting Standards Board Statement No. 109. This amount represents
the cumulative effect of a change in accounting for income taxes effective
January 1, 1993. Net income for the year ended December 31, 1993 before the
cumulative effect of the change in accounting principle totaled $4,926,000 or
$1.71 per share (fully diluted).
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18
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--------------------------------------------------------------------------------
Although net income before the cumulative effect of the change in accounting
principle for 1993 approximated net income for the prior year, there were a
number of changes in the components of net income. Net interest income totaled
$30.5 million for 1993, an increase of $8.3 million or 37.1% over the prior
year. Additionally, for 1993 compared to the prior year, non-interest income
increased $4.3 million or 139.1%. However, these increases were substantially
offset by a $1.1 million or 80.0% increase in the provision for credit losses
and a $11.2 million or 70.6% increase in non-interest expense during 1993
compared to 1992.
For 1993, net income represented a return on average assets and a return on
average stockholders' equity of .54% and 10.30%, respectively, compared to .66%
and 8.44%, respectively, for 1992.
INTEREST INCOME. Interest and fee income on loans and interest and
dividends on the securities portfolio increased $20.2 million or 37.3% from
$54.1 million during 1992 to $74.3 million during 1993. The increase in interest
income was essentially due to the increased volume of interest-earning assets
resulting from the Burritt transaction (see Consolidated Financial
Statements--Note 13), the effect of which was partially offset by a decline in
the average effective yield on interest-earning assets.
Average interest-earning assets increased $449.5 million or 65.4% during
1993 compared to the prior year. Reflecting the composition of the assets
acquired in connection with the Burritt transaction, which was completed in
December 1992, average loans outstanding increased $198.0 million or 37.0%, and
the average of all other interest-earning assets increased $251.5 million or
164.1%. In partial settlement of the Burritt transaction, the FDIC advanced
approximately $225 million to the Bank which was primarily invested in
mortgage-backed securities and federal funds sold. The effective rates of return
on these investments were at levels less than the weighted average yield on
previously outstanding assets. This, in addition to the continuing decline in
the level of interest rates during 1993, given the interest rate sensitivity of
the Bank's assets, reduced the Company's effective yield on interest-earning
assets. The average yield on interest-earning assets declined 133 basis points
from 7.87% during 1992 to 6.54% during 1993.
For the year ended December 31, 1993, interest on loans included the
amortization of previously deferred loan origination fees, net of costs,
totaling $570,000, which increased the yield on average interest-earning assets
by 5 basis points. For 1992, interest on loans included the amortization of
previously deferred fees, net of costs, which totaled $636,000 and increased the
yield on average interest-earning assets by 9 basis points.
INTEREST EXPENSE. Interest expense increased $11.9 million or 37.4% from
$31.9 million during 1992 to $43.8 million during 1993. This increase was due to
a $439.5 million or 66.6% increase in average interest-bearing liabilities
outstanding, the effect of which was partially offset by the decline in the
average cost of funds during 1993.
The increase in average interest-bearing liabilities was primarily in
deposits which increased $430.0 million or 77.4% and reflected the deposits
assumed in connection with the Burritt transaction. Average borrowed funds,
primarily FHLBB advances, which serve as the Bank's secondary funding source,
totaled $113.4 million during 1993, reflecting an increase in average
outstanding balances of $9.5 million or 9.1% over 1992. Throughout 1993,
interest rates gradually trended downward, and given the short-term and
interest-rate sensitive structure of the Bank's interest-bearing liabilities,
the average cost of funds declined 84 basis points from 4.83% for 1992 to 3.99%
for 1993. This decline in the average cost of funds partially offset the
interest expense resulting from the increase in the volume of average interest-
bearing liabilities outstanding during 1993 compared to 1992.
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19
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--------------------------------------------------------------------------------
NET INTEREST INCOME. Net interest income, the primary component of the
Company's earnings, increased $8.3 million or 37.1% from $22.3 million for 1992
to $30.5 million for 1993 as a result of the increased volume of
interest-earning assets resulting from the Burritt transaction. As a result of
the 133 basis point decline in the average yield on interest-earning assets and
the 84 basis point decline in the average cost of interest-bearing liabilities,
the net interest rate spread declined 49 basis points from 3.04% for 1992 to
2.55% for 1993. Additionally, the Company's net yield on interest-earning assets
averaged 2.68% for 1993 compared to 3.24% for 1992.
PROVISION FOR CREDIT LOSSES. During 1993, the Bank provided $2.5 million
for credit losses compared to $1.4 million during 1992. During the third quarter
of 1993, the FDIC performed its annual examination of the Bank. The provision
for credit losses made during 1993 reflects the additional provision for credit
losses recommended by the FDIC examiners. In addition to the provision for
credit losses, the Bank also provided $4.3 million for estimated losses on
foreclosed assets during 1993 compared to $3.2 million during 1992. These
provisions are included in foreclosed asset expense (see "Non-interest
expense").
NON-INTEREST INCOME. Non-interest income is derived from fees which the
Bank charges for various loan and deposit account services, fees generated from
other ancillary services provided by the Bank and net securities and loan gains.
During 1993 the income generated from these sources totaled $7.3 million
compared to $3.1 million for the prior year, reflecting an increase of $4.2
million or 139.1%.
Service charges and other fee income totaled $6.1 million for 1993,
reflecting a $4.3 million or 238.9% increase over the $1.8 million earned in
1992. As part of the Burritt transaction, the Bank was servicing loans for the
FDIC on an interim basis through September 30, 1993. The fees earned by the Bank
for providing this service amounted to $3.7 million, which accounted for 86.0%
of the increase in service charges and other fee income in 1993. In addition to
the interim servicing arrangement, the Bank, in connection with the Burritt
transaction, also acquired the right to service approximately $107.1 million in
loans for others, at an estimated value of approximately $1.1 million. Given the
significant volume of residential real estate mortgage loan refinance activity
that occurred in 1993 this portfolio of loans declined accordingly. As a result,
the Bank reduced the value of mortgage servicing rights by $.5 million as a
reduction to service loan fee income. The residual increase in service charges
and other income is essentially due to the increased volume upon which loan and
deposit related charges are assessed.
Net securities and loan gains, which totaled $1.3 million in both 1992 and
1993 were essentially unchanged. From time to time, in keeping with the Bank's
asset and liability management objectives (see "Asset/Liability Management"),
the Bank may sell fixed rate mortgage loans in the secondary markets. In 1993,
the Bank sold $30.0 million in fixed rate mortgage loans, resulting in gains of
$834,000 compared to fixed rate mortgage loan sales of $24.9 million in 1992,
resulting in gains of $785,000.
Additionally, in 1993, the Bank realized net gains of approximately $422,000
on the sale of various investment securities compared to net gains of $486,000
in 1992. The proceeds from these transactions have been allocated to fund the
Bank's loan demand and other investment purchases.
NON-INTEREST EXPENSE. Non-interest expense totaled $27.1 million or 2.27%
of average assets during 1993 compared to $15.9 million or 2.16% of average
assets in 1992. This $11.2 million or 70.6% increase in the Company's cost of
operations was attributable, in large part, to the costs associated with
managing the operations of the former Burritt. In particular, the most
significant of these increased costs were in salaries and employee benefits,
FDIC insurance
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20
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--------------------------------------------------------------------------------
premiums, data processing and occupancy, as well as the costs associated with
foreclosed assets.
Salaries and employee benefits, the largest component of the Company's cost
of operations, increased $3.9 million or 67.9% from $5.7 million during 1992 to
$9.6 million during 1993. The increase in this component of the Company's cost
of operations, in addition to normal salary and employee benefit adjustments
during the year, was substantially due to the increase in staff resulting from
the Burritt transaction.
Effective January 1, 1993, the FDIC adopted a premium schedule for insurance
of deposit accounts for banks and savings institutions, including the Bank,
which is based upon the institution's capital level and supervisory rating. The
deposit insurance assessment rate is subject to adjustment on a semi-annual
basis. The FDIC insurance premium paid by the Bank in 1993 totaled $2.4 million
compared to $1.2 million in 1992. The $1.2 million or 100.0% increase in the
premium was substantially due to the increase in the volume of insured deposits
assumed in the Burritt transaction.
Data processing expense totaled $2.0 million in 1993, reflecting an increase
of $1.2 million or 150.0% over the $.8 million incurred in 1992. The increased
cost is largely attributable to the former data processing center operated by
Burritt. Although the data processing consolidation was completed during the
second quarter of 1993, the Bank continued to operate the center through August
1993 in order to service loans for the FDIC. (See Consolidated Financial
Statements--Note 13).
Reflecting the increase in the number of branches which were acquired in the
Burritt transaction, occupancy expense increased $1.1 million or 110.0% from
$1.0 million in 1992 to $2.1 million in 1993.
The foreclosure process and the management of in-substance foreclosed and
foreclosed assets continued to be a significant expense for the Bank in 1993.
These expenses include all of the direct costs associated with acquiring,
holding, managing, marketing and disposing of these assets. Foreclosed asset
expense for 1993 totaled $900,000 compared to $842,000 in 1992. Subsequent to an
initial estimate of value of the underlying real estate securing loans in the
foreclosure process, the Bank updates appraisals at least on an annual basis.
The Bank maintains an allowance for estimated losses on foreclosed assets in
order to provide for unidentified and possible future declines in the value of
foreclosed assets. For the year ended December 31, 1993, the Bank provided $4.3
million to this allowance compared to $3.2 million for the prior year. The
Company expects that until the level of foreclosed assets declines
substantially, foreclosed asset expense will continue to be significant.
In connection with the Burritt transaction, the Bank recorded $5.0 million
as a core deposit intangible included in other assets, which is being amortized
on a straight line basis over a period of seven years. The amortization expense
in 1993 totaled $.7 million.
As required by SFAS 91, the Bank defers certain direct costs resulting from
the origination of loans, which will be amortized as an adjustment of yield over
the contractual term of the related loans. These deferred costs, which are
principally comprised of salaries, employee benefits and other loan expenses,
totaled approximately $1.8 million during 1993 compared to $1.8 million during
1992.
NET NON-INTEREST MARGIN. The net non-interest margin improved by 8 basis
points during 1993 compared to 1992. Non-interest income, primarily due to the
fees earned by the Bank for servicing loans for the FDIC on an interim basis,
increased 19 basis points from .42% during 1992 to .61% during 1993.
Non-interest expense, primarily due to the increased cost of operations
resulting from the acquisition of Burritt, increased 11 basis points from 2.16%
during 1992 to 2.27% during 1993.
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21
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PROVISION FOR INCOME TAXES. The provision for income taxes for 1993 totaled
$3.3 million, reflecting a 40.5% effective income tax rate compared to $3.2
million, representing an effective income tax rate of 39.9% for 1992 (see
Consolidated Financial Statements--Note 9).
The following table summarizes the Company's net interest income (including
dividends) and net yield on average interest-earning assets. Non-accruing loans,
for the purpose of this analysis, are included in average loans outstanding
during the periods indicated. For the purpose of these computations, daily
average amounts were used to compute average balances.
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1994 1993
--------------------------------- ---------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans $ 817,699 $ 56,802 6.95% $ 732,635 $ 53,428 7.29%
Taxable securities 344,778 19,716 5.72 366,216 19,418 5.30
Federal funds 2,700 90 3.33 25,080 734 2.93
FHLBB stock 8,636 674 7.80 7,682 584 7.60
Other interest-earning assets -- -- -- 5,747 171 2.98
---------- --------- ---------- ---------
TOTAL INTEREST-EARNING ASSETS 1,173,813 77,282 6.58 1,137,360 74,335 6.54
---------- --------- ---- ---------- --------- ----
NON-INTEREST-EARNING ASSETS:
Cash and due from banks 14,382 16,156
Premises and equipment, net 7,028 5,960
Accrued income receivable 6,424 6,700
Other assets 30,979 41,422
Less allowance for credit losses (6,814) (12,701)
---------- ----------
TOTAL NON-INTEREST-EARNING ASSETS 51,999 57,537
---------- ----------
TOTAL ASSETS $1,225,812 $1,194,897
---------- ----------
---------- ----------
INTEREST-BEARING LIABILITIES:
Deposits $ 996,450 36,008 3.61 $ 985,875 37,599 3.81
Borrowed funds 123,190 6,810 5.53 113,376 6,217 5.48
---------- --------- ---------- ---------
TOTAL INTEREST-BEARING LIABILITIES 1,119,640 42,818 3.82 1,099,251 43,816 3.99
---------- --------- ---- ---------- --------- ----
NON-INTEREST-BEARING LIABILITIES:
Demand deposits 30,179 26,409
Other 7,568 6,390
---------- ----------
TOTAL NON-INTEREST-BEARING LIABILITIES 37,747 32,799
---------- ----------
STOCKHOLDERS' EQUITY 68,425 62,847
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,225,812 $1,194,897
---------- ----------
---------- ----------
NET INTEREST INCOME $ 34,464 $ 30,519
--------- ---------
--------- ---------
NET INTEREST RATE SPREAD 2.76% 2.55%
---- ----
---- ----
NET YIELD ON AVERAGE INTEREST-EARNING
ASSETS 2.94% 2.68%
---- ----
---- ----
--------------------------------------------------------------------------------
------
22
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
1992 1991 1990
-------------------------------- -------------------------------- --------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
----------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
$ 534,606 $ 44,568 8.34% $ 523,720 $ 51,208 9.78% $ 542,862 $ 56,042 10.32%
123,562 8,301 6.72 69,183 5,580 8.07 31,965 2,589 8.10
18,235 555 3.04 8,171 469 5.74 6,789 559 8.23
5,601 439 7.84 5,104 458 8.97 4,801 461 9.60
5,865 281 4.79 1,353 81 5.99 200 18 9.00
--------- --------- --------- --------- --------- ---------
687,869 54,144 7.87 607,531 57,796 9.51 586,617 59,669 10.17
--------- ---- --------- --------- ---- --------- --------- -----
6,504 5,227 4,597
5,513 5,911 6,447
5,296 5,682 5,087
34,837 24,099 10,454
(4,491) (3,075) (1,862)
--------- --------- ---------
47,659 37,844 24,723
--------- --------- ---------
$ 735,528 $ 645,375 $ 611,340
--------- --------- ---------
--------- --------- ---------
$ 555,878 25,493 4.59 $ 485,853 32,585 6.71 $ 454,048 35,182 7.75
103,886 6,392 6.15 92,430 6,884 7.45 89,908 7,753 8.62
--------- --------- --------- --------- --------- ---------
659,764 31,885 4.83 578,283 39,469 6.83 543,956 42,935 7.89
--------- ---- --------- --------- ---- --------- --------- -----
12,495 9,667 8,409
5,917 2,303 2,925
--------- --------- ---------
18,412 11,970 11,334
--------- --------- ---------
57,352 55,122 56,050
--------- --------- ---------
$ 735,528 $ 645,375 $ 611,340
--------- --------- ---------
--------- --------- ---------
$ 22,259 $ 18,327 $ 16,734
--------- --------- ---------
--------- --------- ---------
3.04% 2.68% 2.28%
---- ---- -----
---- ---- -----
3.24% 3.02% 2.85%
---- ---- -----
---- ---- -----
--------------------------------------------------------------------------------
------
23
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
RATE/VOLUME ANALYSIS. The following table sets forth the changes in
interest earned and interest paid resulting from changes in volume and changes
in rates. Changes in interest earned or paid due to both rate and volume have
been allocated in proportion to the relationship of the absolute dollar amounts
of the changes in each.
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1994 COMPARED TO 1993 1993 COMPARED TO 1992
--------------------------------- -------------------------------
VOLUME RATE NET VOLUME RATE NET
-------------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
INTEREST EARNED ON:
Loans $ 5,994 $ (2,620) $ 3,374 $ 14,964 $ (6,104) $ 8,860
Taxable securities (1,175) 1,473 298 13,199 (2,082) 11,117
Federal funds (734) 90 (644) 201 (22) 179
FHLBB stock 74 16 90 159 (14) 145
Other interest-earning assets (86) (85) (171) (6) (104) (110)
----------- --------- --------- --------- --------- ---------
INTEREST INCOME 4,073 (1,126) 2,947 28,517 (8,326) 20,191
----------- --------- --------- --------- --------- ---------
INTEREST PAID ON:
Deposits 400 (1,991) (1,591) 16,993 (4,887) 12,106
Borrowed funds 542 51 593 555 (730) (175)
----------- --------- --------- --------- --------- ---------
INTEREST EXPENSE 942 (1,940) (998) 17,548 (5,617) 11,931
----------- --------- --------- --------- --------- ---------
NET INTEREST INCOME $ 3,131 $ 814 $ 3,945 $ 10,969 $ (2,709) $ 8,260
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
--------------------------------------------------------------------------------
ASSET/LIABILITY MANAGEMENT
The primary function of the Company's asset and liability management program
is to identify and manage interest rate risk and allocate the resources of the
Bank to stabilize and increase the level of net interest income through all
phases of the business cycle and resulting interest rate levels. This objective
is administered through the fundamental matching of the interest rate
sensitivity of the Bank's sources and uses of funds. The Bank monitors the
overall interest rate sensitivity of its financial structure through simulation
modeling under various levels of interest rates and attendant volumes.
As noted, the dominant tenet of the Company's asset and liability management
program is to enhance the level of net interest income. Recognizing the adverse
effect that non-performing loans have placed upon net interest income, the
Company continues to focus on returning these assets to performing status. In
1994, the Bank made considerable progress in this area. However, the loss of
interest income on non-performing assets continues to adversely impact earnings
levels (see "Financial Condition").
At December 31, 1994, the Company had approximately $55.2 million in loans
which were identified as held-for-sale. Of this amount, $7.6 million are fixed
rate loans and $47.6 million have adjustable interest rate features. These loans
were acquired in connection with the Burritt transaction. It is expected that
these loans may be sold during the first quarter of 1995.
Although the Company is currently striving to maintain it's current level of
assets, management continues to promote the origination of short term interest
rate sensitive consumer loans (see "Financial Condition"). In 1994, the Bank
originated $40.9 million in consumer loans, including $31.3 million in lines of
credit, compared to $27.9 million, including $22.7 million in lines of credit in
1993. Additionally, in 1994 the Bank originated $164.9 million in mortgage loans
compared to $188.6 million during 1993. Of this amount, $127.2 million or 77% of
the Company's mortgage loan
-------
24
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
originations had adjustable interest rate features compared to $95.9 million or
51% for 1993. Additionally, the Bank has continued to supplement local
adjustable rate mortgage loan originations through the purchase of single family
adjustable rate mortgage loans. These purchases totaled $21.9 million during
1994 and $8.8 million during 1993.
As an integral part of the management of interest rate risk, the Bank
closely monitors the volume of fixed rate mortgage loans in the loan portfolio.
From time to time, in order to achieve the desired balance between
interest-sensitive assets and liabilities and to be able to continue to meet the
credit needs of the local community, the Bank sells fixed rate mortgage loans in
the secondary market. The Company sold $12.1 million in fixed rate mortgage
loans in 1994 and $30.0 million in 1993. The effect of these transactions
enabled the Company to continue to originate fixed rate mortgage loans without
significantly affecting the Bank's interest rate risk. After giving effect to
these transactions, the Bank's relative mix of fixed and adjustable interest
rate mortgage loans, and therefore, interest rate sensitivity, has improved. At
year end 1994, approximately 73% of the mortgage portfolio was invested in
adjustable rate loans compared to approximately 70% at year end 1993. At
December 31, 1994, loans maturing or repricing during the next twelve months
totaled $603.2 million or 74.7% of total interest-sensitive assets maturing or
repricing during the same time period. In comparison, at December 31, 1993,
loans maturing or repricing during 1994 totaled $528.0 million or 66.6% of total
interest-sensitive assets maturing or repricing during the same time period.
As a result of the noted changes, interest-rate sensitive assets that mature
or reprice during the subsequent twelve months totaled $807.1 million at
December 31, 1994 compared to $793.3 million at year end 1993, reflecting an
increase of $13.8 million or 1.7%.
-
-
At December 31, 1994, interest-sensitive liabilities subject to interest
rate adjustments in the next twelve months, primarily comprised of deposits and,
to a lesser extent, advances from the FHLBB, totaled $886.0 million. In
comparison, at year end 1993 this amount totaled $866.0 million. Although the
volume of interest rate sensitive liabilities, as measured over a twelve month
period, remained essentially unchanged, the Bank experienced a modest change in
the mix of deposits in 1994. Term certificate of deposit accounts increased
$26.7 million or 5.3% during 1994
[BAR GRAPH]
MORTGAGE LOAN PORTFOLIO
(AMOUNTS IN MILLIONS)
at December 31,
1990 1991 1992 1993 1994
Fixed Rate $121.0 $107.3 $174.7 $198.3 $192.8
Adjustable Rate 311.8 298.7 418.7 462.3 528.2
-------- ------- ------- ------- -------
$432.8 $406.0 $593.4 $660.6 $721.0
and represented 51.5% of total deposits at year end 1994 compared to 49.9% of
total deposits at year end 1993. Regular savings accounts declined from $223.3
million or 22.2% of total deposits at year end 1993 to $213.6 million or 20.8%
of total deposits at year end 1994.
The Bank recognizes that a static gap, which quantifies the relative volume
of interest rate sensitive assets and liabilities that mature or reprice during
various time frames in the future, fails to accurately reflect the impact of
volumes and timing of interest rate sensitivity. However, the Bank
continues to monitor the ratio of interest-sensitive assets to
interest-sensitive liabilities over various time frames. In general, the Bank
will strive to maintain a ratio of rate sensitive assets to rate sensitive
liabilities, as measured on a static basis over a time horizon of one year,
within a range of 90% to 110%. The ratio of interest-sensitive assets to
interest-sensitive liabilities, as measured over a twelve month time horizon,
remained essentially unchanged at 91.1% at December 31, 1994 compared to 91.6%
at year end 1993.
-------
25
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The following table summarizes the Company's interest-sensitive assets and
interest-sensitive liabilities at December 31, 1994 that mature or reprice
during the various time periods noted. Loans are net of deferred loan fees and
net of non-accruing loans.
--------------------------------------------------------------------------------
MORE THAN MORE THAN
MORE THAN MORE THAN THREE YEARS FIVE YEARS MORE THAN
SIX MONTHS SIX MONTHS ONE YEAR TO TO FIVE TO TEN 10 YEARS TO MORE THAN
OR LESS TO ONE YEAR THREE YEARS YEARS YEARS 20 YEARS 20 YEARS TOTAL
----------------------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
ASSETS:
Investments:
Securities $ 111,388 $ 88,024 $ 61,904 $ 28,199 $ 20,367 $ 9,020 $ 988 $ 319,890
Federal funds sold 4,500 -- -- -- -- -- -- 4,500
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
TOTAL INVESTMENTS 115,888 88,024 61,904 28,199 20,367 9,020 988 324,390
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
LOANS:
Fixed-rate mortgages 5,000 5,279 22,930 24,706 58,395 51,938 23,349 191,597
Adjustable-rate mortgages 265,033 220,571 29,423 5,234 1,437 -- -- 521,698
Consumer loans 77,525 7,851 4,365 3,150 2,774 1,280 -- 96,945
Commercial loans 20,458 1,446 144 33 29 24 -- 22,134
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
TOTAL LOANS 368,016 235,147 56,862 33,123 62,635 53,242 23,349 832,374
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
TOTAL INTEREST-SENSITIVE
ASSETS $ 483,904 $ 323,171 $ 118,766 $ 61,322 $ 83,002 $ 62,262 $ 24,337 $1,156,764
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
LIABILITIES:
Regular & club savings $ 213,574 $ -- $ -- $ -- $ -- $ -- $ -- $ 213,574
Certificates of deposit 223,708 134,205 112,634 58,371 -- -- -- 528,918
Money market accounts 205,239 -- -- -- -- -- -- 205,239
NOW accounts 49,097 -- -- -- -- -- -- 49,097
FHLBB advances 39,634 20,551 46,240 3,800 920 -- -- 111,145
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
TOTAL INTEREST-SENSITIVE
LIABILITIES $ 731,252 $ 154,756 $ 158,874 $ 62,171 $ 920 $ -- $ -- $1,107,973
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
GAP (REPRICING DIFFERENCE) $(247,348) $ 168,415 $ (40,108) $ (849) $ 82,082 $ 62,262 $ 24,337
CUMULATIVE GAP $(247,348) $ (78,933) $(119,041) $(119,890) $ (37,808) $ 24,454 $ 48,791
CUMULATIVE GAP/TOTAL ASSETS -20.2% -6.5% -9.7% -9.8% -3.1% 2.0% 4.0%
RATIO OF INTEREST-SENSITIVE
ASSETS TO
INTEREST-SENSITIVE
LIABILITIES 66.2% 208.8% 74.8% 98.6% N.M. -- -- 104.4%
CUMULATIVE RATIO OF
INTEREST-SENSITIVE ASSETS
TO INTEREST-SENSITIVE
LIABILITIES 91.1% 88.6% 89.2% 96.6% 102.2% 104.4%
--------------------------------------------------------------------------------
-------
26
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
IMPACT OF INFLATION AND CHANGING PRICES
The impact of inflation is reflected in the increased cost of the Company's
operations. Since the primary assets and liabilities of the Bank are monetary in
nature, to the extent that inflation affects interest rates, it will in turn
affect the net income of the Company.
NEWLY ADOPTED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In May 1993, the FASB issued Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). SFAS 114,
which the Bank must adopt for the year ending December 31, 1995, requires
creditors to evaluate the collectibility of both contractual interest and
contractual principal of all loans when assessing the need for a loss accrual.
When a loan is impaired, a creditor shall measure impairment based on the
present value of the expected future cash flows discounted at the loan's
effective interest rate, or the fair value of the collateral, less estimated
selling costs, if the loan is collateral-dependent and foreclosure is probable.
The creditor shall recognize an impairment by creating a valuation allowance.
The Bank has not yet made a determination as to the impact, if any, the
adoption of SFAS 114 will have on its financial condition, but it is expected
that the financial statement presentation of certain non-performing loans as
in-substance foreclosed assets, will be essentially eliminated.
MARKET FOR COMMON STOCK
The Company's common stock trades on The Nasdaq Stock Market National Market
System under the symbol "DSBC".
The following table sets forth, for the periods indicated, market price
information regarding the Company's common stock as reported by NASDAQ.
--------------------------------------------------------------------------------
STOCK PRICE
--------------------
HIGH LOW
--------------------------------------------------------------------------------------------------------------
1993
First Quarter $ 22.25 $ 16.50
Second Quarter 19.00 14.25
Third Quarter 20.75 14.50
Fourth Quarter 22.75 16.75
1994
First Quarter 27.50 21.25
Second Quarter 33.75 25.00
Third Quarter 30.50 25.75
Fourth Quarter 28.50 21.00
1995
First Quarter (through March 12) 27.50 21.75
--------------------------------------------------------------------------------
As of December 31, 1994, the Company had approximately 921 stockholders of
record for the 2,745,071 outstanding shares of its common stock. This does not
reflect the number of persons or entities who hold their stock in nominee or
"street" name through various brokerage firms.
-------
27
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DIVIDENDS
Payment of dividends by the Company on its stock is subject to various
restrictions. Under Delaware law, the Company may pay dividends out of surplus
or, in the event there is no surplus, out of net profits for the fiscal year in
which the dividend is declared and/or the preceding fiscal year. Dividends may
not be paid out of net profits, however, if the capital of the Company has been
diminished to an amount less than the aggregate amount of capital represented by
all classes of preferred stock. Pursuant to Connecticut law, cash dividends may
be paid by the Bank to the Company out of net profits, defined as the remainder
of earnings from current operations plus actual recoveries on loans and
investments and other assets, after deducting all current operating expenses,
actual losses, accrued dividends on preferred stock and all federal and state
taxes. The total dividends declared by the Bank in any calendar year may not
exceed the total of its net profits for that year combined with its net profits
for the preceding two years. Additionally, the Bank may not pay cash dividends
on its stock if its net worth would thereby be reduced below the amount required
for the liquidation account (see Consolidated Financial Statements--Note 12) or
as may in the future be required by the Connecticut Commissioner of Banks or the
FDIC.
In accordance with the Memorandum of Understanding which the Bank entered
into with the FDIC and the Connecticut Commissioner of Banks in April 1992, the
Bank has been limited in its ability to pay cash dividends (see "General").
Since the Bank is the sole source of funds for cash dividend payments by the
Company to its stockholders, the FDIC's restriction has resulted in the Company
being unable to pay cash dividends to stockholders.
The Board of Directors declared 5% stock dividends for each of the four
quarters of 1992 and declared a 5% stock dividend on February 15, 1995.
-------
28
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF POSITION
--------------------------------------------------------------------------------
DS BANCOR, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
DECEMBER 31,
1994 1993
---------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN
THOUSANDS)
ASSETS
Cash and due from banks (Note 1) $ 14,128 $ 12,618
Federal funds sold (Note 1) 4,500 30,500
Securities (Notes 1 & 2)
Trading 770 --
Available-for-sale 216,674 256,346
Held-to-maturity (fair value: $96,928 at December 31, 1994 and $66,846 at December 31,
1993) 104,702 66,253
Loans held-for-sale (Notes 1 & 3) 55,190 --
Loans receivable (net of allowances for credit losses of $6,803 at December 31, 1994
and $6,979 at December 31, 1993) (Notes 1, 3 & 16) 779,681 779,287
Federal Home Loan Bank of Boston stock, at cost (Note 7) 8,899 8,022
Accrued income receivable (Note 1) 7,227 6,541
Bank premises and equipment, net (Notes 1 & 5) 6,975 7,062
Prepaid and deferred income taxes (Notes 1 & 9) 7,247 2,501
Foreclosed & in-substance foreclosed assets (net of allowances of $439 at December 31,
1994 and $1,040 at December 31, 1993) (Notes 1 & 4) 10,312 16,143
Other assets (Note 13) 6,385 8,848
---------- ----------
TOTAL ASSETS $1,222,690 $1,194,121
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 6)
Non-interest bearing $ 30,918 $ 28,185
Interest bearing 996,828 978,036
---------- ----------
Total 1,027,746 1,006,221
Mortgagors' escrow 11,885 10,476
Advances from Federal Home Loan Bank of Boston (Note 7) 111,145 104,991
Other borrowings (Notes 7 & 18) -- 1,450
Other liabilities (Note 8) 4,777 4,543
---------- ----------
TOTAL LIABILITIES 1,155,553 1,127,681
---------- ----------
COMMITMENTS & CONTINGENT LIABILITIES (NOTES 5 & 10)
STOCKHOLDERS' EQUITY (NOTES 1, 11, 12 & 19)
Preferred stock, no par value; authorized 2,000,000 shares; none issued -- --
Common stock, par value $1.00; authorized 6,000,000 shares; issued--December 31,
1994-3,084,571 shares, December 31, 1993-2,991,116 shares; outstanding--December
31, 1994-2,745,071 shares, December 31, 1993-2,651,616 shares 3,085 2,991
Additional paid-in capital 37,780 36,007
Retained earnings 36,362 30,652
Net unrealized gains (losses) on available-for-sale securities, net of tax effect of
$3,970 at December 31, 1994 and ($928) at December 31, 1993 (5,577) 1,303
Less: Treasury stock, at cost (339,500 shares) (4,513) (4,513)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 67,137 66,440
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,222,690 $1,194,121
---------- ----------
---------- ----------
--------------------------------------------------------------------------------
See notes to consolidated financial statements.
------
29
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
--------------------------------------------------------------------------------
DS BANCOR, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER
31,
1994 1993 1992
---------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
INTEREST INCOME (NOTE 1)
Interest and fees on loans $56,802 $53,428 $44,568
Taxable interest on securities 19,528 20,020 8,833
Dividends on securities 952 887 743
--------- --------- ---------
TOTAL INTEREST INCOME 77,282 74,335 54,144
--------- --------- ---------
INTEREST EXPENSE
Deposits (Note 6) 36,102 37,679 25,553
Borrowed funds (Note 7) 6,810 6,217 6,392
Less: Penalties on premature time deposit withdrawals (94) (80) (60)
--------- --------- ---------
NET INTEREST EXPENSE 42,818 43,816 31,885
--------- --------- ---------
NET INTEREST INCOME 34,464 30,519 22,259
Provision for credit losses (Notes 1 & 3) 2,325 2,475 1,375
--------- --------- ---------
Net interest income after provision for credit losses 32,139 28,044 20,884
--------- --------- ---------
NON-INTEREST INCOME
Service charges and other income (Note 14) 2,453 6,087 1,800
Net realized securities gains (Note 2) 546 422 482
Net gain on sale of loans 102 834 789
--------- --------- ---------
TOTAL NON-INTEREST INCOME, NET 3,101 7,343 3,071
--------- --------- ---------
NON-INTEREST EXPENSE
Salaries and wages 7,820 7,746 4,430
Employee benefits (Note 8) 2,312 1,868 1,296
Occupancy (Note 5) 2,094 2,148 987
Furniture and equipment (Note 5) 1,039 907 694
Foreclosed asset expense, net (Notes 1 & 4) 2,904 4,801 3,747
Other (Note 14) 9,441 9,643 4,743
--------- --------- ---------
TOTAL NON-INTEREST EXPENSE 25,610 27,113 15,897
--------- --------- ---------
Income before income taxes and cumulative effect of a change in accounting principle 9,630 8,274 8,058
Provision for income taxes (Note 9) 3,920 3,348 3,217
--------- --------- ---------
Income before cumulative effect of a change in accounting principle 5,710 4,926 4,841
Cumulative effect of a change in method of accounting for income taxes (Notes 1 & 9) -- 1,548 --
--------- --------- ---------
NET INCOME $ 5,710 $ 6,474 $ 4,841
--------- --------- ---------
--------- --------- ---------
---------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (NOTES 1 & 12)
Primary 2,926,825 2,834,337 2,786,199
Fully Diluted 2,929,005 2,875,790 2,786,199
---------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE--PRIMARY (NOTES 1 & 12)
Income before cumulative effect of a change in accounting principle $1.95 $1.74 $1.74
Cumulative effect of a change in method of accounting for income taxes -- $0.55 --
Net Income $1.95 $2.28 $1.74
EARNINGS PER SHARE--FULLY DILUTED (NOTES 1 & 12)
Income before cumulative effect of a change in accounting principle $1.95 $1.71 $1.74
Cumulative effect of a change in method of accounting for income taxes -- $0.54 --
Net Income $1.95 $2.25 $1.74
--------------------------------------------------------------------------------
See notes to consolidated financial statements.
------
30
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
DS BANCOR, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
RETAINED EARNINGS
ADDITIONAL -------------------------- TOTAL
COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS UNREALIZED STOCK EQUITY
GAINS &
LOSSES
(NOTE 1)
------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
BALANCE--JANUARY 1, 1992 $ 2,417 $ 28,034 $ 27,884 $ (718) $ (4,513) $ 53,104
Net income 4,841 4,841
Stock dividend declared on
common stock
(5%--January 31, 1992, 5%--
April 30, 1992,
5%--August 6, 1992 and 5%--
November 6, 1992)(Note 12) 446 5,911 (6,357) --
Shares issued for fractional
interest 2 26 28
Cash in lieu of fractional
shares (28) (28)
Adjustment of unrealized
losses 640 640
----------- ------------- ----------- ------------- ----------- ---------------
BALANCE--DECEMBER 31, 1992 2,865 33,971 26,340 (78) (4,513) 58,585
Net income 6,474 6,474
Stock dividend declared on
common stock
(5%--February 26, 1993)
(Note 12) 126 2,029 (2,155) --
Shares issued for fractional
interest 7 7
Cash in lieu of fractional
shares (7) (7)
Adjustment of unrealized
gains, net 1,381 1,381
----------- ------------- ----------- ------------- ----------- ---------------
BALANCE--DECEMBER 31, 1993 2,991 36,007 30,652 1,303 (4,513) 66,440
Net income 5,710 5,710
Stock options exercised
(93,455 shares) (Notes 11 &
12) 94 1,773 1,867
Adjustment of unrealized
losses, net (6,880) (6,880)
----------- ------------- ----------- ------------- ----------- ---------------
BALANCE--DECEMBER 31, 1994 $ 3,085 $ 37,780 $ 36,362 $ (5,577) $ (4,513) $ 67,137
----------- ------------- ----------- ------------- ----------- -------
----------- ------------- ----------- ------------- ----------- -------
--------------------------------------------------------------------------------
See notes to consolidated financial statements.
------
31
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
DS BANCOR, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER
31,
1994 1993 1992
--------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,710 $ 6,474 $ 4,841
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Provision for credit losses 2,325 2,475 1,375
Provision for estimated losses on foreclosed assets 2,235 4,250 3,150
Depreciation and amortization 807 692 584
Amortization of intangible assets 956 1,255 --
Net amortization of premiums/discounts on securities 1,208 2,077 645
Net accretion of deferred loan fees (506) 170 (29)
Decrease (increase) in prepaid and deferred income taxes 492 112 (279)
Net securities gains (546) (422) (482)
Net gain on sale of loans (102) (834) (789)
Gains on sales of foreclosed assets (93) (349) (245)
Proceeds from sale of trading securities 772 -- --
Purchases of trading securities (1,621) -- --
Increase in accrued income receivable (686) (2,280) (1,202)
Cumulative effect of change in accounting principle -- (1,548) --
Benefit for deferred income taxes (340) (879) --
Net (increase) decrease in other assets 1,507 19,234 (22,407)
Increase (decrease) in other liabilities 234 (1,307) (366)
Other, net 74 -- --
--------- --------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 12,426 29,120 (15,204)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of securities -- 62,175 25,843
Proceeds from matured available-for-sale securities 43,553 -- --
Proceeds from sale of available-for-sale securities 39,020 -- --
Proceeds from matured held-to-maturity securities 34,895 145,708 44,827
Purchase of available-for-sale securities (54,779) -- --
Purchase of held-to-maturity securities (73,827) (261,069) (234,849)
Purchase of FHLBB stock (877) (1,405) (1,535)
Proceeds from loans sold to others 12,245 30,820 25,689
Purchases of loans from others (21,938) (8,813) (172,046)
Net increase in loans to customers (47,291) (96,127) (62,274)
Premises and equipment additions (794) (2,259) (461)
Proceeds from sale of foreclosed assets 3,328 3,590 7,450
Net decrease (increase) in foreclosed assets 44 552 (629)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (66,421) (126,828) (367,985)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits from customers 21,525 11,290 13,201
Assumption of deposits and liabilities -- -- 465,046
Net increase in mortgagors' escrow 1,409 1,997 1,010
Net decrease in repurchase agreements & other borrowings (1,450) (641) (845)
Net increase in short term FHLBB advances 11,754 12,745 3,535
Proceeds from long term FHLBB advances 35,000 13,000 70,200
Repayment of long term FHLBB advances (40,600) (41,525) (36,100)
Proceeds from issuance of common stock 1,867 7 28
Dividends paid to stockholders -- (7) (28)
--------- --------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 29,505 (3,134) 516,047
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (24,490) (100,842) 132,858
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 43,118 143,960 11,102
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 18,628 $ 43,118 $ 143,960
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest $ 42,912 $ 43,838 $ 31,910
Income taxes 3,089 4,208 3,496
Loans transferred to foreclosed assets 3,208 12,081 13,069
Foreclosed assets transferred to loans 1,173 3,499 --
Loans transferred to loans held-for-sale 55,190 -- --
Bank-financed foreclosed asset sales 2,352 2,427 4,361
--------------------------------------------------------------------------------
See notes to consolidated financial statements.
------
32
--------------------------------------------------------------------------------
---------------------
--------------------------------------------------------------------------------
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by DS
Bancor, Inc. (the "Company"), its wholly owned subsidiary Derby Savings Bank
(the "Bank") and Derby Financial Services Corp., the Bank's wholly owned
subsidiary, and reflected in the accompanying consolidated financial statements.
The financial statements of Derby Financial Services Corp. are not significant
to either the Bank's or the consolidated financial statements.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and the Bank. All significant intercompany accounts
and transactions have been eliminated.
BASIS OF CONSOLIDATED FINANCIAL STATEMENT PRESENTATION. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles and general practice within the banking industry. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and income and expenses as of the date of the consolidated
statements of financial position and the consolidated statements of earnings for
the period. Actual results may differ from those estimates.
MATERIAL ESTIMATES that are particularly susceptible to significant change
in the near-term relate to the determination of the Allowance for credit losses
and the valuation of real estate acquired in settlement of loans. In connection
with the determination of the allowances for credit losses and foreclosed
assets, management utilizes the services of professional appraisers for
significant properties.
A substantial portion of the Bank's loans are collateralized by real estate
in markets in Connecticut, which have experienced significant value declines in
recent years. In addition, essentially all of the Bank's foreclosed assets are
located in those same markets. Accordingly, the ultimate collectibility of a
substantial portion of the Bank's loan portfolio and the recovery of a
substantial portion of the carrying amount of foreclosed assets are particularly
susceptible to changes in market conditions in Connecticut. While management
uses available information to recognize possible losses, future additions to the
allowances may be necessary based on changes in economic conditions,
particularly in the Bank's service area, Connecticut. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowances for losses. Such agencies may require
the Bank to recognize additions to the allowances based on their judgements of
information available to them at the time of their examination.
CASH EQUIVALENTS. For the purposes of the Consolidated Statements of Cash
Flows, cash equivalents include demand deposits at other financial institutions
and federal funds sold. Generally, federal funds are sold for one-day periods.
SECURITIES. Effective December 31, 1993, the Bank implemented the
provisions of Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standard ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). Under SFAS 115,
securities are classified upon acquisition as Held-to-maturity,
Available-for-sale or Trading. Securities that are purchased in anticipation of
short-term market gains or for resale are classified as Trading securities and
carried at fair value with unrealized gains and losses included in earnings.
Securities that the Bank has both the positive intent and ability to hold to
maturity are classified as Held-to-maturity and carried at cost adjusted for
premiums and discounts amortized to interest income using the interest method
over the period to the earlier of the maturity or call date, if any. Securities
not designated as either Trading or Held to maturity are classified as
Available-for-sale and carried at fair value, with unrealized gains and losses,
net of related
------
33
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
income taxes, reported as a separate component of Stockholders' Equity until
realized. Declines in the fair value of individual Held-to-maturity and
Available-for-sale securities below their cost that are other than temporary are
recognized as write-downs of the individual securities to their fair value, with
the write-downs included in earnings as realized losses.
Prior to the implementation of SFAS 115, investment securities which were
intended to be held until maturity or as long-term investments were stated at
cost adjusted, where applicable, for amortization of premiums and accretion of
discounts generally computed using the interest method. Marketable equity
securities which were included in investment securities were carried at the
lower of aggregate cost or market value, and a valuation allowance was recorded
as a component of retained earnings, when the aggregate cost of marketable
equity securities temporarily exceeded market value. A loss was recognized in
earnings when the Bank's carrying value in an investment exceeded, other than
temporarily, its market value.
Gain or loss on securities sold is computed by the specific identification
method.
LOANS HELD FOR SALE generally consist of certain first mortgage loans that
management has identified will most likely be sold for reasons of managing rate
risk, liquidity, and/or asset growth, and are reflected at the lower of
aggregate cost or estimated market value. Net unrealized losses resulting from
market value less than cost are recognized through a valuation allowance by
charges against income.
LOANS RECEIVABLE that the Bank has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reflected at amortized cost
(unpaid principal balances reduced by any partial charge-offs or specific
valuation accounts) net of any net deferred fees or costs on originated loans or
any unamortized premiums or discounts on purchased loans, and less an Allowance
for credit losses.
Interest on loans is included in income as earned based on rates applied to
principal amounts outstanding. The accrual of interest income is generally
discontinued when a loan becomes past due 90 days or more as to contractual
payments of principal or interest. Income on purchased loans is adjusted for the
accretion of discounts and the amortization of premiums using the interest
method over the contractual lives of the loans, adjusted for estimated
prepayments.
Loan origination fees, net of certain direct related costs, are deferred and
amortized as an adjustment of loan yield over the life of the related loan.
Allowances for credit losses have been established by provisions charged to
income and decreased by loans charged off (net of recoveries). These Allowances
represent amounts which, in management's judgment, are adequate to absorb
possible losses on loans that may become uncollectible based on such factors as
the Bank's past loan loss experience, changes in the nature and volume of the
loan portfolio, current and prospective economic conditions that may affect the
borrowers' ability to pay, overall portfolio quality, and review of specific
problem loans.
BANK PREMISES AND EQUIPMENT are stated at cost, less accumulated
depreciation and amortization. The Bank uses primarily accelerated methods of
calculating depreciation. Leasehold improvements are amortized over the shorter
of
------
34
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
the estimated service lives or the terms of the leases. Bank premises are
depreciated over a period of between 30 and 40 years; furniture and equipment
are depreciated over a period of between 1 and 20 years. For income tax
purposes, the Bank uses the appropriate depreciation provisions of the Internal
Revenue Code.
FORECLOSED AND IN-SUBSTANCE FORECLOSED ASSETS ("Foreclosed Assets") are
comprised of real estate acquired through foreclosure proceedings or deeds
accepted in lieu of foreclosure, and properties that have been in-substance
repossessed. These properties are initially recorded at the lower of the
carrying value of the related loans or the estimated fair value of the real
estate acquired or in-substance repossessed, with any excess of the loan balance
over the estimated fair value of the property charged to the Allowance for
credit losses. Subsequent changes in the net realizable value of the property
are reflected by charges or credits to the Allowance for estimated losses on
foreclosed assets. Costs relating to the subsequent development or improvement
of a property are capitalized when value is increased. All other holding costs
and expenses, net of rental income, if any, are expensed as incurred.
CORE DEPOSIT INTANGIBLE. In connection with the Burritt transaction (Note
13), the core deposit intangible is being amortized on a straight line basis
over seven years.
INCOME TAXES. Effective January 1, 1993, the Company adopted SFAS No. 109,
"Accounting for Income Taxes". SFAS 109 required a change from the deferred
method of accounting for income taxes of the Accounting Principles Board Opinion
11 ("APB 11") to the asset and liability method of accounting for income taxes.
Under the asset and liability method of SFAS 109, deferred income tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Pursuant to the deferred method under APB 11, which was applied in 1992 and
prior years, deferred income taxes were recognized for income and expense items
that were reported in different years for financial reporting purposes and
income tax purposes using the tax rate applicable for the year of the
calculation. Under the deferred method, deferred taxes were not adjusted for
subsequent changes in tax rates.
Provisions for income taxes are computed based on all taxable revenue and
deductible expense items included in the accompanying Consolidated Statement of
Earnings regardless of the period in which such items are recognized for income
tax filing purposes. The Company and its subsidiary file consolidated Federal
and combined Connecticut income tax returns.
The Company recorded a cumulative one-time benefit in the accompanying
Consolidated Statements of Earnings for the year ended December 31, 1993 for the
change in method of accounting for income taxes upon the adoption of SFAS 109.
PRIMARY AND FULLY DILUTED EARNINGS PER SHARE are based on the weighted
average number of common shares outstanding during the period and additional
common shares assumed to be outstanding to reflect the dilutive effect of common
stock equivalents. Stock options and their equivalents are included in earnings
per share computations using the treasury stock method, which assumes that the
options are exercised at the beginning of the period. Proceeds from such
------
35
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
exercise are assumed to be used to repurchase common stock. The difference
between the number of common shares assumed to have been issued from the
exercise of options and the number of common shares assumed to have been
purchased are added to the weighted average number of common shares outstanding.
Potential dilution due to exercisable stock options was not material for year
ended December 31, 1992 and is, therefore, not reflected in the computation of
per share amounts for that year.
EMPLOYEE RETIREMENT BENEFITS and related deferred assets and liabilities
are accounted for in accordance with SFAS 87, "Employers Accounting for
Pensions" and SFAS 106, "Employers' Accounting for Postretirement Benefits Other
than Pensions". Pension expense and postretirement health care expense are based
on actuarial computations of current and future benefits for employees and
retirees.
CLASSIFICATION OF CERTAIN AMOUNTS. For comparative purposes, certain
amounts in prior period consolidated financial statements have been reclassified
to conform with the current period classifications.
NOTE 2 -- SECURITIES
A summary of the Bank's investment securities is as follows:
--------------------------------------------------------------------------------
DECEMBER 31, 1994
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
TRADING COST GAINS LOSSES VALUE
-----------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Marketable Equities $ 918 $ -- $ 148 $ 770
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DECEMBER 31, 1994
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
-----------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
U.S. Government and agency bonds $ 21,095 $ 1 $ 677 $ 20,419
Mortgage-backed securities 174,667 7 7,832 166,842
Other bonds and notes 28,903 2 978 27,927
----------- ----------- ----------- ---------
Total debt securities 224,665 10 9,487 215,188
Marketable equities 1,556 37 107 1,486
----------- ----------- ----------- ---------
Total $ 226,221 $ 47 $ 9,594 $ 216,674
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
--------------------------------------------------------------------------------
------
36
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 2 -- SECURITIES (CONTINUED)
--------------------------------------------------------------------------------
DECEMBER 31, 1994
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
HELD-TO-MATURITY COST GAINS LOSSES VALUE
-----------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
U.S. Government and agency bonds $ 2,000 $ -- $ 60 $ 1,940
Mortgage-backed securities 102,702 -- 7,714 94,988
----------- ----------- ----------- ---------
Total $ 104,702 $ -- $ 7,774 $ 96,928
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DECEMBER 31, 1993
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
-----------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Mortgage-backed securities $ 187,746 $ 1,303 $ 454 $ 188,595
Other bonds and notes 65,095 1,302 45 66,352
----------- ----------- ----------- ---------
Total debt securities 252,841 2,605 499 254,947
Marketable equities 1,274 194 69 1,399
----------- ----------- ----------- ---------
Total $ 254,115 $ 2,799 $ 568 $ 256,346
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DECEMBER 31, 1993
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
HELD-TO-MATURITY COST GAINS LOSSES VALUE
-----------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
U.S. Government and agency bonds $ 2,000 $ 21 $ -- $ 2,021
Mortgage-backed securities 55,253 661 89 55,825
----------- ----------- ----------- ---------
Total debt securities 57,253 682 89 57,846
Money market preferred stock 9,000 -- -- 9,000
----------- ----------- ----------- ---------
Total $ 66,253 $ 682 $ 89 $ 66,846
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
--------------------------------------------------------------------------------
------
37
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 2 -- SECURITIES (CONTINUED)
The amortized cost and market value of debt securities by contractual
maturity is as follows:
--------------------------------------------------------------------------------
DECEMBER 31, 1994
------------------------------------------------
AVAILABLE-FOR-SALE HELD-TO-MATURITY
------------------------ ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-----------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Due in one year or less $ 12,605 $ 12,391 $ -- $ --
Due after one year through five years 16,298 15,536 2,000 1,940
Due after five years through ten years 16,095 15,600 -- --
Due after ten years 5,000 4,819 -- --
----------- ----------- ----------- ---------
49,998 48,346 2,000 1,940
Mortgage-backed securities 174,667 166,842 102,702 94,988
----------- ----------- ----------- ---------
Total $ 224,665 $ 215,188 $ 104,702 $ 96,928
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
--------------------------------------------------------------------------------
During 1994, proceeds and realized gains (losses) from sales of
Available-for-sale and Trading securities and unrealized gains (losses) on
securities classified as Trading were as follows:
--------------------------------------------------------------------------------
GROSS GROSS
PROCEEDS REALIZED REALIZED NET GAIN
FROM SALES GAINS LOSSES (LOSS)
------------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE (AMOUNTS IN THOUSANDS)
U.S. Government and agency bonds $ 4,020 $ 20 $ -- $ 20
Other bonds and notes 33,929 455 3 452
----------- ----- --- -----------
Total debt securities 37,949 475 3 472
Marketable equities 1,071 208 55 153
----------- ----- --- -----------
Total available-for-sale 39,020 683 58 625
TRADING
Realized gains 772 69 -- 69
----------- ----- --- -----------
Total realized $ 39,792 $ 752 $ 58 694
----------- ----- ---
----------- ----- ---
Net unrealized losses--trading (148)
-----------
Total $ 546
-----------
-----------
--------------------------------------------------------------------------------
Proceeds from the sales of debt securities during 1993 were $59,189,000.
Gross gains of $497,000 and gross losses of $365,000 were realized on those
sales. Proceeds from the sales of investments in debt securities during 1992
were $16,464,000. Gross gains of $494,000 and gross losses of $177,000 were
realized on those sales.
At December 31, 1994, the aggregate amortized cost and fair value of
securities pledged as collateral against public funds and treasury tax and loan
deposits were approximately $7.0 million and $6.8 million, respectively.
The effect of adopting SFAS 115 as of December 31, 1993 in the accompanying
Consolidated Financial Statements was to increase the carrying value of
Available-for-sale securities by approximately $2,231,000, offset by an increase
in Retained earnings of approximately $1,303,000, net of deferred income taxes
of approximately $928,000.
------
38
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 3 -- LOANS RECEIVABLE AND LOANS HELD-FOR-SALE
The components of loans in the accompanying Consolidated Statements of
Position were as follows:
--------------------------------------------------------------------------------
DECEMBER 31,
--------------------
1994 1993
----------------------------------------------------------------------------------------------------------
(AMOUNTS IN
THOUSANDS)
MORTGAGE
Residential real estate $ 686,395 $ 628,208
Commercial real estate 27,268 28,174
Multi-family real estate 8,007 8,544
Residential construction 2,363 2,753
--------- ---------
724,033 667,679
--------- ---------
CONSUMER
Home equity lines of credit 70,177 68,265
Home equity installment 19,267 18,863
Collateral 3,014 3,020
All other 4,783 4,748
--------- ---------
97,241 94,896
--------- ---------
COMMERCIAL
Commercial 19,666 26,694
Real estate development 3,258 3,833
--------- ---------
22,924 30,527
--------- ---------
844,198 793,102
Net deferred loan fees, premiums & discounts (2,524) (6,836)
Allowances for credit losses (6,803) (6,979)
--------- ---------
834,871 779,287
Residential real estate loans held-for-sale (55,190) --
--------- ---------
Loans receivable, net $ 779,681 $ 779,287
--------- ---------
--------- ---------
--------------------------------------------------------------------------------
Loans are summarized between fixed and adjustable rates as follows:
--------------------------------------------------------------------------------
DECEMBER 31,
--------------------
1994 1993
----------------------------------------------------------------------------------------------------------
(AMOUNTS IN
THOUSANDS)
Fixed rate $ 212,820 $ 221,708
Adjustable rate 631,378 571,394
--------- ---------
Total $ 844,198 $ 793,102
--------- ---------
--------- ---------
--------------------------------------------------------------------------------
The Bank has sold certain mortgage loans and retained the related servicing
rights. The principal balances of loans serviced for others, which are not
included in the accompanying Consolidated Statements of Position, were
approximately $129,300,000 and $149,900,000 at December 31, 1994 and 1993,
respectively.
Loans outstanding at December 31, 1994 and 1993 included approximately
$10,486,000 and $12,068,000, respectively, of non-performing loans, which were
comprised of $8,861,000 in mortgage loans, $1,098,000 in consumer loans and
$527,000 in commercial loans at December 31, 1994 and $8,974,000 in mortgage
loans, $1,695,000 in consumer loans and $1,399,000 in commercial loans at
December 31, 1993. At December 31, 1994 and 1993, interest
------
39
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 3 -- LOANS RECEIVABLE AND LOANS HELD-FOR-SALE (CONTINUED)
income not recognized on these loans, in accordance with Bank policy, aggregated
approximately $640,000 and $810,000, respectively.
Activity in the Allowances for credit losses for each of the three years in
the period ended December 31, 1994 was as follows:
--------------------------------------------------------------------------------
MORTGAGE CONSUMER COMMERCIAL TOTAL
--------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Balance--January 1, 1992 $ 2,180 $ 704 $ 790 $ 3,674
Provision for credit losses 825 125 425 1,375
Acquired allowance 9,026 1,328 -- 10,354
Loans charged off (941) (211) (660) (1,812)
Recoveries of loans previously charged off 76 41 229 346
----------- ----------- ------------- ---------
Balance--December 31, 1992 11,166 1,987 784 13,937
Provision for credit losses 1,925 50 500 2,475
Acquired allowance adjustment (5,958) (5) -- (5,963)
Loans charged off (2,857) (860) (114) (3,831)
Recoveries of loans previously charged off 329 21 11 361
----------- ----------- ------------- ---------
Balance--December 31, 1993 4,605 1,193 1,181 6,979
Provision for credit losses 1,675 600 50 2,325
Loans charged off (1,848) (573) (195) (2,616)
Recoveries of loans previously charged off 63 46 6 115
----------- ----------- ------------- ---------
Balance--December 31, 1994 $ 4,495 $ 1,266 $ 1,042 $ 6,803
----------- ----------- ------------- ---------
----------- ----------- ------------- ---------
--------------------------------------------------------------------------------
In connection with the Burritt transaction (Note 13), the Bank purchased two
loan pools at discounts of approximately $9.0 million and $1.3 million, which
were added to the Bank's Allowance for mortgage and consumer credit losses,
respectively, in 1992. During 1993, the Bank completed a valuation analysis of
these loans and allocated approximately $6.0 million from these amounts to a
purchased loan discount, which will be accreted to interest income over the
remaining terms of the acquired loans. At December 31, 1994, the Allowances for
credit losses, which totaled approximately $6.8 million, included approximately
$1.8 million allocated to the loans acquired in the Burritt transaction.
------
40
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 4 -- FORECLOSED AND IN-SUBSTANCE FORECLOSED ASSETS
Foreclosed assets consisted of the following:
--------------------------------------------------------------------------------
DECEMBER 31,
--------------------
1994 1993
-----------------------------------------------------------------------------------------------------------
(AMOUNTS IN
THOUSANDS)
FORECLOSED ASSETS:
One-to-four family residential $ 1,599 $ 2,159
Multi-family 510 546
Commercial real estate 907 1,589
Land 3,179 5,085
--------- ---------
6,195 9,379
--------- ---------
IN-SUBSTANCE FORECLOSED ASSETS:
One-to-four family residential 1,226 2,964
Multi-family 143 371
Commercial real estate 2,295 3,262
Land 892 1,207
--------- ---------
4,556 7,804
--------- ---------
Total 10,751 17,183
Allowance for estimated losses (439) (1,040)
--------- ---------
Foreclosed assets, net $ 10,312 $ 16,143
--------- ---------
--------- ---------
--------------------------------------------------------------------------------
Activity in the Allowance for estimated losses on foreclosed assets for each
of the three years in the period ended December 31, 1994 was as follows:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1993 1992
--------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Balance at January 1 $ 1,040 $ 438 $ 412
Provision charged to expense 2,235 4,250 3,150
Net losses charged to the allowance (2,836) (3,648) (3,124)
--------- --------- ---------
Balance at December 31 $ 439 $ 1,040 $ 438
--------- --------- ---------
--------- --------- ---------
--------------------------------------------------------------------------------
Losses and expenses related to foreclosed assets are summarized as follows:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1993 1992
--------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Provision charged to expense $ 2,235 $ 4,250 $ 3,150
Gain on sales (93) (349) (245)
Holding costs and expenses 1,005 1,057 906
Rental income (243) (157) (64)
--------- --------- ---------
Foreclosed asset expense, net $ 2,904 $ 4,801 $ 3,747
--------- --------- ---------
--------- --------- ---------
--------------------------------------------------------------------------------
------
41
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 5 -- BANK PREMISES AND EQUIPMENT
Bank premises and equipment were comprised of the following:
--------------------------------------------------------------------------------
1994 1993
----------------------------------------------------------------------------------------------------------
(AMOUNTS IN
THOUSANDS)
Buildings and land $ 7,266 $ 7,188
Leasehold improvements 836 887
Furniture and equipment 5,656 6,154
--------- ---------
13,758 14,229
Accumulated depreciation and amortization 6,783 7,167
--------- ---------
Bank premises and equipment, net $ 6,975 $ 7,062
--------- ---------
--------- ---------
--------------------------------------------------------------------------------
Depreciation and amortization included in Non-interest expense aggregated
approximately $806,900, $692,100 and $566,400 for the years ended December 31,
1994, 1993 and 1992, respectively.
LEASES. Rent expense for banking premises of $847,100, $792,500 and
$220,300 is included in Occupancy expense for the years ended December 31, 1994,
1993 and 1992, respectively.
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with initial or remaining terms of one year or more consist of
the following at December 31, 1994 (amounts in thousands):
--------------------------------------------------------------------------------
1995 $ 566
1996 532
1997 436
1998 263
1999 116
Thereafter 145
---------
Total future minimum lease payments $ 2,058
---------
---------
--------------------------------------------------------------------------------
These leases include options to renew for periods ranging from 3 to 22
years.
NOTE 6 -- DEPOSITS
Deposits were comprised of the following:
--------------------------------------------------------------------------------
DECEMBER 31,
--------------------------------------------------------
1994 1993
--------------------------- ---------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
STATED RATE AMOUNT STATED RATE AMOUNT
----------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
Demand $ 30,918 $ 28,185
NOW 1.75-2.00%(a) 49,097 1.75-2.00%(a) 47,330
Regular and club savings 2.00 213,574 2.00 223,255
Money market deposit accounts 5.10 205,239 2.80 205,261
Time accounts 4.72 528,918 4.39 502,190
---------- ----------
Total deposits $1,027,746 $1,006,221
---------- ----------
---------- ----------
(A) RANGES INDICATE TIERS
--------------------------------------------------------------------------------
------
42
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 6 -- DEPOSITS (CONTINUED)
Time accounts at December 31, 1994 mature as follows:
--------------------------------------------------------------------------------
WEIGHTED AVERAGE
YEAR OF MATURITY STATED RATE AMOUNT
--------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN
THOUSANDS)
1995 4.34% $ 357,915
1996 5.36% 68,632
1997 5.72% 43,755
Beyond 5.49% 58,616
---------
Total 4.72% $ 528,918
---------
---------
--------------------------------------------------------------------------------
Time deposit accounts of $100,000 or more approximated $32,169,000 at
December 31, 1994. Of that amount, approximately $11,501,000 mature in six
months or less, $6,923,000 mature after six months to one year, and $13,745,000
mature after one year.
Interest expense on deposits is summarized as follows:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
NOW $ 931 $ 1,108 $ 415
Regular and club savings 4,488 5,928 4,548
Money market deposits 7,979 5,970 4,558
Time accounts 22,530 24,453 15,862
Escrow 174 220 170
--------- --------- ---------
Total interest expense on deposits $ 36,102 $ 37,679 $ 25,553
--------- --------- ---------
--------- --------- ---------
--------------------------------------------------------------------------------
NOTE 7 -- BORROWED FUNDS
Terms of the advances from the Federal Home Loan Bank of Boston ("FHLBB")
were as follows:
--------------------------------------------------------------------------------
DECEMBER 31,
------------------------------------------------------
1994 1993
-------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
MATURITY/REPRICE DATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
1994 $ -- --% $ 14,802 --%
1994 -- -- 39,178 5.13
1995 1,482 -- -- --
1995 58,703 6.02 27,051 5.78
1996 27,050 4.95 10,050 7.08
1997 19,190 5.55 9,190 6.35
1998 1,600 5.48 1,600 5.48
1999 2,200 8.60 2,200 8.60
2000 920 9.16 920 9.16
--------- ---------
Total advances from the FHLBB $ 111,145 $ 104,991
--------- ---------
--------- ---------
--------------------------------------------------------------------------------
------
43
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 7 -- BORROWED FUNDS (CONTINUED)
The Bank has a cash management line of credit from the FHLBB in the amount
of $10,672,000 at December 31, 1994. At December 31, 1994 and 1993, the Bank had
book overdrafts of $1,482,000 and $14,802,000, respectively, which are included
in advances from the FHLBB.
The Company had a $3.0 million line of credit (Note 18), of which
approximately $1.4 million was outstanding at December 31, 1993, and was
subsequently paid off in June 1994.
Interest expense on borrowed funds is summarized as follows:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1993 1992
--------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
FHLBB $ 6,767 $ 6,098 $ 6,229
Line of credit 43 112 152
Repurchase agreements -- 7 11
--------- --------- ---------
Total interest expense on borrowed funds $ 6,810 $ 6,217 $ 6,392
--------- --------- ---------
--------- --------- ---------
--------------------------------------------------------------------------------
Stock of the FHLBB, mortgage loans and mortgage-backed securities with fair
values, as determined in accordance with FHLBB's collateral pledge agreement, at
least equal to the outstanding advances and any unused lines of credit were
pledged against outstanding advances from the FHLBB at December 31, 1994 and
1993.
NOTE 8 -- BENEFIT PLANS
A. RETIREMENT PLAN The Bank sponsors a defined benefit pension plan which
is noncontributory and covers all full-time employees who meet certain age and
length of service requirements. Benefits are based on years of service and the
employee's highest compensation during any consecutive five year period during
the last ten years before normal retirement. The Bank's funding policy is to
contribute annually amounts at least equal to minimum required contributions
under the Employee Retirement Income Security Act of 1974 (ERISA). Contributions
are intended to provide not only for benefits attributed to service to date, but
also for those expected to be earned in the future.
The components of the net pension expense reflected in Employee benefits
expense were as follows:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1993 1992
------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Service cost-benefits earned during the period $ 400 $ 264 $ 249
Interest cost on projected benefit obligation 305 272 240
Actual return on plan assets 67 (400) (133)
Net amortization and deferral (466) 75 (164)
--------- --------- ---------
Net pension expense $ 306 $ 211 $ 192
--------- --------- ---------
--------- --------- ---------
--------------------------------------------------------------------------------
------
44
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 8 -- BENEFIT PLANS (CONTINUED)
Assumptions used in the accounting were:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
------------------------------------------------------------------------------------------------------------------------
Discount/settlement rates 7.00% 7.00% 7.00%
Rates of increase in compensation levels 5.00% 5.50% 5.50%
Long-term rate of return on assets 9.50% 9.50% 9.50%
--------------------------------------------------------------------------------
The following table sets forth the Plan's funded status and amounts
recognized in the Consolidated Statements of Position:
--------------------------------------------------------------------------------
DECEMBER 31,
--------------------
1994 1993
-------------------------------------------------------------------------------------------------------------
(AMOUNTS IN
THOUSANDS)
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS:
Accumulated benefit obligation -- vested $ (3,306) $ (2,950)
Accumulated benefit obligation -- nonvested (72) (340)
--------- ---------
Total accumulated benefit obligation (3,378) (3,290)
Effect of projected future compensation levels (1,174) (1,000)
--------- ---------
Projected benefit obligation ("PBO") for service rendered to date (4,552) (4,290)
Plan assets, at fair value * 4,095 3,885
--------- ---------
PBO in excess of plan assets (457) (405)
Unrecognized net asset existing at January 1, 1987 being recognized over approximately
18 years (93) (102)
Unrecognized prior service cost (72) (77)
Unrecognized net loss from past experience different from that assumed and effects of
changes in assumptions 556 378
--------- ---------
Accrued pension cost included in Other liabilities $ (66) $ (206)
--------- ---------
--------- ---------
* THE PLAN'S ASSETS ARE ALLOCATED AMONG EQUITY SECURITIES AND VARIOUS SHORT
AND INTERMEDIATE TERM BOND FUNDS.
--------------------------------------------------------------------------------
B. DEFERRED COMPENSATION PLAN The Bank has adopted deferred compensation
agreements for its directors whereby directors can defer earned fees to future
years with benefits commencing at retirement or pre-retirement benefits at death
prior to retirement. The deferred compensation expense for the years ended
December 31, 1994, 1993 and 1992 was $96,100, $92,600 and $86,400, respectively.
The Bank has purchased life insurance policies which it intends to use to fund
the retirement benefits. For income tax purposes, no deduction is allowed for
the insurance premium expense or deferred compensation expense, but a deduction
will be allowed at the time compensation is paid to the participant. For the
years ended December 31, 1994, 1993 and 1992, the Bank had no insurance premium
expenses inasmuch as policy loans were utilized to fund premiums due.
C. THRIFT PLAN The Bank has established a defined contribution thrift plan
(the "Thrift Plan") covering eligible employees. Full-time employees are
eligible to participate in the Thrift Plan upon completion of six months of
service. Eligible employees participating in the Thrift Plan may contribute
between one percent and ten percent of their pre-tax annual compensation. If an
employee contributes the maximum ten percent of annual compensation, the
employee may also contribute an additional ten percent of post-tax annual
compensation. The Bank contributes $.50 out of net income
------
45
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 8 -- BENEFIT PLANS (CONTINUED)
to the Thrift Plan for each $1.00 contributed by participants up to three
percent of each participant's compensation. The Bank's expense during the years
ended December 31, 1994, 1993 and 1992 was $85,800, $71,600 and $59,200,
respectively.
D. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Bank provides certain
health care and life insurance benefits for retired employees. Substantially all
of the Bank's employees become eligible if they reach normal retirement age
while still working for the Bank. These benefits are provided through an
insurance company whose premiums are based on the benefits paid during the year.
The premiums paid by the Bank are based on the retiree's length of service with
the Bank. The Company adopted SFAS No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions" in 1992. The statement requires
that the projected future costs of providing postretirement benefits be
recognized as an expense as employees render service, instead of when the
benefits are paid. Prior to the adoption of this statement in 1992, the Company
recognized postretirement benefit expense as paid.
The following table sets forth the accumulated postretirement benefit
obligation ("APBO") reconciled to the accrued postretirement benefit cost
included in the Company's Consolidated Statements of Position:
--------------------------------------------------------------------------------
DECEMBER 31,
--------------------
1994 1993
----------------------------------------------------------------------------------------------------------
(AMOUNTS IN
THOUSANDS)
Accumulated Postretirement Benefit Obligation
Retirees $ (488) $ (613)
Fully eligible active plan participants (180) (551)
Other active plan participants (1,561) (1,566)
--------- ---------
Total APBO (2,229) (2,730)
Unrecognized transition obligation 1,917 2,022
Unrecognized net gains from past experience different from that assumed and effects
of changes in assumptions (920) (4)
--------- ---------
Accrued postretirement benefit cost included in Other liabilities $ (1,232) $ (712)
--------- ---------
--------- ---------
--------------------------------------------------------------------------------
The APBO includes approximately $1,759,000 attributable to the Company's
postretirement health care plan.
Net periodic postretirement benefit cost reflected in Employee benefits
expense included the following components:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1994 1993 1992
---------------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Service cost-benefits attributable to service during the period $ 280 $ 168 $ 74
Interest cost on APBO 168 176 165
Amortization 102 105 105
----- ----- -----
Net periodic postretirement benefit cost $ 550 $ 449 $ 344
----- ----- -----
----- ----- -----
--------------------------------------------------------------------------------
For measurement purposes, a 14.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed in 1994. The rate was assumed
to decrease gradually to 4.0% in year 15 and remain at that level thereafter.
The health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the
------
46
------------------------------------------------------------------------------
------------------------------------------------------------------------------
NOTE 8 -- BENEFIT PLANS (CONTINUED)
assumed health care cost trend rates by 1% in each year would increase the APBO
as of December 31, 1994 by $461,000 and the aggregate of the service and
interest cost components of net periodic postretirement benefit expense for the
year then ended by $86,000.
The weighted-average discount rates used in determining the APBO were 8.5%,
7.0% and 7.5% in 1994, 1993 and 1992, respectively.
NOTE 9 -- INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS 109. As a result, the
Company recorded a cumulative one-time benefit of this change in accounting
principle of approximately $1,548,000 or $.54 per share (fully diluted) in the
accompanying Consolidated Statements of Earnings for the year ended December 31,
1993.
The allocation of federal and state income taxes between current and
deferred portions, calculated using the liability method in 1994 and 1993 and
the deferred method in 1992 is as follows:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1993 1992
---------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
CURRENT INCOME TAX PROVISION
Federal $ 3,102 $ 3,070 $ 2,246
State 1,158 1,157 988
--------- --------- ---------
Total current 4,260 4,227 3,234
--------- --------- ---------
DEFERRED INCOME TAX BENEFIT
Federal (246) (636) (16)
State (94) (243) (1)
--------- --------- ---------
Total deferred (340) (879) (17)
--------- --------- ---------
Total provision for income taxes $ 3,920 $ 3,348 $ 3,217
--------- --------- ---------
--------- --------- ---------
--------------------------------------------------------------------------------
The Company's effective income tax rate differed from the Federal statutory
tax rate as follows:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1994 1993 1992
---------------------- ---------------------- ----------------------
AMOUNT % AMOUNT % AMOUNT %
------------------------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
Tax at statutory Federal rate $ 3,274 34.0 $ 2,814 34.0 $ 2,740 34.0
State tax* 703 7.3 603 7.3 631 7.8
Bad debt deduction -- -- -- -- (81) (1.0)
Dividend income exclusion (67) (0.7) (72) (0.9) (72) (0.9)
Other 10 0.1 3 0.1 (1) --
----------- --------- ----------- --------- ----------- ---------
Effective rate on operations $ 3,920 40.7 $ 3,348 40.5 $ 3,217 39.9
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
* NET OF FEDERAL TAX BENEFIT
--------------------------------------------------------------------------------
------
47
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 9 -- INCOME TAXES
(CONTINUED)
The components of the net deferred income tax asset are as follows:
--------------------------------------------------------------------------------
DECEMBER 31,
--------------------
1994 1993
----------------------------------------------------------------------------------------------------------
(AMOUNTS IN
THOUSANDS)
DEFERRED INCOME TAX LIABILITY:
Federal $ 273 $ 967
State 104 370
--------- ---------
377 1,337
--------- ---------
DEFERRED INCOME TAX ASSET:
Federal 5,549 2,454
State 2,121 938
--------- ---------
7,670 3,392
--------- ---------
Net deferred income tax asset $ 7,293 $ 2,055
--------- ---------
--------- ---------
--------------------------------------------------------------------------------
The tax effects of each item of income and expense and net unrealized gains
(losses) on securities available-for-sale that give rise to deferred income
taxes are as follows:
--------------------------------------------------------------------------------
DECEMBER 31,
--------------------
1994 1993
----------------------------------------------------------------------------------------------------------
(AMOUNTS IN
THOUSANDS)
Allowances for losses $ 2,023 $ 2,132
Depreciation (62) (171)
Deferred loan fees (59) 43
Deferred compensation 215 191
Loan expense 291 249
Employee benefits 539 382
Trading loss 62 --
Intangible asset 314 157
--------- ---------
3,323 2,983
Unrealized losses (gains) 3,970 (928)
--------- ---------
Net deferred income tax asset $ 7,293 $ 2,055
--------- ---------
--------- ---------
--------------------------------------------------------------------------------
A summary of the change in the net deferred income tax asset is as follows:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1994 1993
----------------------------------------------------------------------------------------------------------
(AMOUNTS IN
THOUSANDS)
Net deferred income tax asset--beginning $ 2,055 $ 556
Cumulative effect of a change in accounting principle -- 1,548
Deferred tax provision:
Income and expense 340 879
Unrealized losses (gains) 4,898 (928)
--------- ---------
Net deferred income tax asset--ending $ 7,293 $ 2,055
--------- ---------
--------- ---------
--------------------------------------------------------------------------------
------
48
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 9 -- INCOME TAXES
(CONTINUED)
Deductions from taxable income in prior years have been claimed as loan loss
provisions for qualifying (real estate) loans in accordance with the Internal
Revenue Code. Retained earnings includes a tax reserve for qualifying loans. If
the reserve is used for any purpose other than to absorb losses on loans, an
income tax liability could be incurred. Management does not anticipate that this
reserve will be made available for any other purposes. In accordance with
generally accepted accounting principles, no deferred income taxes have been
provided for this temporary difference.
NOTE 10 -- COMMITMENTS AND CONTINGENT LIABILITIES
The accompanying Consolidated Financial Statements do not reflect various
commitments and contingent liabilities which arise in the normal course of
business and which involve elements of credit risk, interest-rate risk and
liquidity risk. These commitments and contingent liabilities are described in
Note 15.
The Company is party to litigation and claims arising from the normal course
of business. After consultation with legal counsel, management is of the opinion
that the liabilities, if any, arising from such litigation and claims will not
be material to the consolidated financial position.
NOTE 11 -- STOCK OPTIONS
Under the Company's stock option plans 563,797 shares, adjusted to reflect
stock dividends, if any, of common stock are reserved. At the time options are
granted, no accounting entry is made. The proceeds from the exercise of options
are credited to common stock for the par value of the shares purchased and the
excess of the option price over the par value of the shares issued is credited
to additional paid-in capital. The exercise price of options granted
approximated the fair market value of the shares on the dates granted.
Additionally, stock appreciation rights ("SARS") have been granted in tandem
with stock options under the Company's 1985 Stock Option Plan.
In accordance with generally accepted accounting principles, compensation
accruals are required for SARS when the market value exceeds the option exercise
price. However, compensation expense should be measured according to the terms
the Company's SARS holders are most likely to elect based upon the facts
available each period. Accordingly, no expense accruals have been made for the
years ended December 31, 1994, 1993 and 1992 inasmuch as management does not
anticipate exercise of SARS at this time.
The following table and the data below summarizes the shares subject to
option under the Plans, which have been adjusted to reflect stock dividends
declared:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1994 1993
---------------------------------------------------------------------------------------------------------------
Outstanding at beginning of period 275,653 233,180
Granted 43,107 45,234
Exercised (a) (101,884) --
Cancelled -- (2,761)
--------- ---------
Outstanding at end of period 216,876 275,653
--------- ---------
--------- ---------
(A) INCLUDES SARS
--------------------------------------------------------------------------------
------
49
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 11 -- STOCK OPTIONS (CONTINUED)
As of December 31, 1994, 216,876 options were exercisable at prices ranging
from $9.98 to $29.00.
At December 31, 1994, there were 216,876 options in the Plans that remained
outstanding. Through December 31, 1994, 127,918 options have been exercised and
45,590 options, adjusted to reflect subsequent stock dividends, have been
cancelled. 219,003 options are available for grant.
During 1994, 8,429 SARS were exercised which resulted in payments to
employees aggregating $118,000. These amounts are included in Salary and wage
expense for 1994. During 1993 and 1992, there were no SARS exercised.
NOTE 12 -- STOCKHOLDERS' EQUITY
A. LIQUIDATION ACCOUNT. When the Bank converted to stock form, it was
required to establish a liquidation account of approximately $21,600,000 which
was equal to the Bank's net worth as of September 30, 1985. The liquidation
account is established for a period of 10 years subsequent to conversion for the
benefit of eligible depositors who continue to maintain their deposit accounts
in the Bank after conversion, subject to downward adjustment. Eligible
depositors would be entitled, in the unlikely event of complete liquidation of
the Bank, to receive liquidating distributions of any assets remaining after
payment of all creditors' claims (including the claims of all depositors at the
time of liquidation) equal to the withdrawal value of their deposit accounts,
but before any distributions are made to the Bank's stockholders, equal to their
proportionate interest at that time in the liquidation account. Except for the
repurchase of stock and payment of dividends by the Bank, the existence of the
liquidation account will not restrict the use or application of such net worth.
B. DIVIDENDS. Pursuant to Connecticut law, cash dividends may be paid by
the Bank to the Company out of net profits, defined as the remainder of earnings
from current operations plus actual recoveries on loans and investments and
other assets, after deducting all current operating expenses, actual losses,
accrued dividends on preferred stock and all federal and state taxes. The total
dividends declared by the Bank in any calendar year shall not exceed the total
of its net profits for that year combined with its net profits for the preceding
two years. Additionally, the Bank may not pay cash dividends on its stock if its
net worth would thereby be reduced below the amount required for the liquidation
account or as may in the future be required by the Connecticut Commissioner of
Banking or the Federal Deposit Insurance Corporation (the "FDIC").
During the second quarter of 1991, the Bank was informed by the regional
office of the FDIC that it will be permitted to pay dividends to the Company in
an amount limited to the holding company's non-salary expenses and debt service
payments. This restriction was made part of a Memorandum of Understanding which
the Bank entered into with the FDIC and the Connecticut Commissioner of Banks
(Note 19). Since the Bank is the sole source of funds for cash dividend payments
by the Company to its stockholders, the FDIC's restriction has resulted in the
Company being unable to pay cash dividends to stockholders.
The Board of Directors declared 5% stock dividends for each of the four
quarters of 1992 and declared a 5% stock dividend on February 15, 1995.
Fractional shares were not issued to stockholders in connection with these stock
dividends. However, the Company arranged for the sale of the aggregate
fractional interests and distributed the cash proceeds to the stockholders. In
accordance with generally accepted accounting principles, weighted average
shares outstanding, and thus earnings per share, for each of the periods have
been retroactively adjusted.
------
50
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 12 -- STOCKHOLDERS' EQUITY (CONTINUED)
C. STOCK OPTIONS EXERCISED. During 1994, 93,455 stock options were
exercised, resulting in an increase to Additional paid-in capital of
approximately $1.8 million, which includes tax benefits of approximately
$678,000.
NOTE 13 -- ACQUISITION OF BURRITT INTERFINANCIAL BANCORPORATION
On December 4, 1992, Derby Savings entered into an Insured Deposit Purchase
and Assumption Agreement ("P & A") with the FDIC, pursuant to which Derby
purchased certain assets and assumed the insured deposits and certain other
liabilities of Burritt Interfinancial Bancorporation, New Britain, Connecticut
in an FDIC-assisted transaction. In the transaction, the Bank assumed
approximately $460 million of insured deposits and approximately $5.5 million of
other liabilities of Burritt.
The assets of Burritt acquired included cash, various investment securities
and certain other assets totaling approximately $54.0 million and two loan pools
of one-to-four family mortgage loans and consumer loans, with par values of
approximately $139.7 million and $29.6 million, respectively. The loan pools, at
December 31, 1992, included non-accrual loans totaling approximately $6.1
million and $221,000, respectively. The loans acquired in this transaction were
purchased at a $10.4 million discount, which had been added to the Bank's
allowances for credit losses. Specific allocations of the acquired allowance for
credit losses, to reflect the fair value of loans acquired, have been made as
management of the Bank identified probable losses. During 1993, the Bank
completed a valuation analysis of the loans acquired in connection with the
Burritt transaction. As a result of this analysis, the Company allocated $6.0
million of the Burritt allowance for credit losses as a purchased loan discount
(Note 3). This amount will be accreted to interest income over the remaining
terms of the acquired loans.
Of a $6.2 million premium paid by the Bank to the FDIC for the assumption of
deposits and other customer service liabilities, the Bank recorded approximately
$5.0 million as a core deposit intangible which is included in Other assets, net
of amortization approximating $956,000 through December 31, 1994 (Note 1).
As part of the transaction, the Bank acquired the right to service loans for
others which totaled approximately $107.1 million at December 31, 1992.
Approximately $1.1 million of the premium paid to the FDIC has been allocated to
the tangible value of acquired mortgage servicing rights, included in Other
assets. This amount will be amortized over the expected future life of the
serviced loans as a reduction to serviced loan fee income. Additionally, the
Bank entered into an interim management agreement with the FDIC pursuant to
which the Bank would service loans which totaled $258.9 million at December
31,1992. The fees earned by the Bank for providing this service amounted to
approximately $3.7 million in 1993 and $313,000 in 1992. The servicing of these
loans for the FDIC ended September 30, 1993.
In connection with the transaction, Derby acquired an option to acquire or
lease Burritt's thirteen banking offices and related equipment. The Bank
exercised its option with respect to eleven of such banking offices. Derby did
not exercise its option with respect to two Burritt banking offices which were
closed by the FDIC and not opened by Derby. Three of Burritt's offices were
owned and in 1993, the Bank purchased two of these offices and entered into a
short-term rental agreement with the FDIC for the third. In June 1994, the Bank
relocated the operations of the former main office of Burritt, which the Bank
had been renting from the FDIC. Of the remaining eight banking offices which had
been leased by Burritt, one had been assumed by the Bank. Through December 31,
1994, the Bank entered into leases on five of the seven locations formerly
leased by Burritt and is renegotiating the terms of one of the remaining
locations. The Bank closed one of the acquired former branch offices of Burritt
in January 1994.
------
51
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 14 -- NON-INTEREST INCOME AND NON-INTEREST EXPENSE
Included in Service charges and other income were the following:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1993 1992
--------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Fees on loans $ 552 $ 551 $ 608
Fees on loans serviced for the FDIC (a) -- 3,681 313
Deposit service charges 814 867 472
All other, none greater than 1% of income 1,087 988 407
--------- --------- ---------
Total $ 2,453 $ 6,087 $ 1,800
--------- --------- ---------
--------- --------- ---------
(a) In connection with the Burritt transaction (Note 13), the Bank serviced
loans for the FDIC on an interim basis through September 1993.
--------------------------------------------------------------------------------
Included in Other Non-interest expense were the following:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1993 1992
--------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Data processing $ 1,266 $ 2,035 $ 839
FDIC insurance premium 2,770 2,435 1,196
Marketing 1,291 821 508
Amortization of intangible assets (Note 13) 711 712 --
All other, none greater than 1% of income 3,403 3,640 2,200
--------- --------- ---------
Total $ 9,441 $ 9,643 $ 4,743
--------- --------- ---------
--------- --------- ---------
--------------------------------------------------------------------------------
NOTE 15 -- FINANCIAL INSTRUMENTS
A. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Bank is a party to
financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. These instruments expose
the Bank to credit risk which is not included in the accompanying Consolidated
Statements of Position.
------
52
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 15 -- FINANCIAL INSTRUMENTS (CONTINUED)
The Bank's exposure to credit risk is represented by the contractual amount
of those instruments and is summarized below:
--------------------------------------------------------------------------------
DECEMBER 31,
--------------------
1994 1993
-------------------------------------------------------------------------------------------------------
(AMOUNTS IN
THOUSANDS)
LOAN COMMITMENTS
Commitments to extend credit $ 10,783 $ 43,832
Commitments to purchase loans 24,000 --
Unadvanced commercial lines of credit 8,232 6,115
Unadvanced portion of construction loans 2,904 1,881
Unused portion of Home Equity Lines of Credit 59,977 56,331
Other consumer lines of credit 994 635
--------- ---------
Total $ 106,890 $ 108,794
--------- ---------
--------- ---------
Letters of credit $ 1,463 $ 1,643
--------- ---------
--------- ---------
--------------------------------------------------------------------------------
Loan commitments are agreements to lend and are subject to the same credit
policies as loans and generally have fixed expiration dates or other termination
clauses. The Bank also issues traditional letters of credit which commit the
Bank to make payments on behalf of its customers based upon specific future
events. Since many of the letters of credit are expected to expire without being
drawn upon, the total letters of credit do not necessarily represent future cash
requirements. Collateral is obtained based upon management's credit assessment
of the customer.
At December 31, 1994, the Bank had approximately $57.9 million in
commitments to sell mortgage loans. There were no outstanding commitments to
purchase or sell securities at December 31, 1994.
B. FAIR VALUE The estimated fair values of the Bank's financial instruments
are as follows:
--------------------------------------------------------------------------------
DECEMBER 31,
----------------------------------------------
1994 1993
---------------------- ----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
FINANCIAL ASSETS:
Cash and short term investments $ 18,628 $ 18,628 $ 43,118 $ 43,118
Securities 322,146 314,372 322,599 323,192
Loans held-for-sale 55,190 57,951 -- --
Loans receivable, net 779,681 765,395 779,287 781,756
FHLBB stock 8,899 8,899 8,022 8,022
---------- ---------- ---------- ----------
Total financial assets $1,184,544 $1,165,245 $1,153,026 $1,156,088
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
FINANCIAL LIABILITIES:
Deposits $1,027,746 $1,025,671 $1,016,697 $1,022,707
Advances from FHLBB 111,145 111,322 104,991 107,421
Other borrowings -- -- 1,450 1,450
---------- ---------- ---------- ----------
Total financial liabilities $1,138,891 $1,136,993 $1,123,138 $1,131,578
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
--------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments.
CASH AND SHORT-TERM INVESTMENTS. For those short-term instruments, the
carrying amount is a reasonable estimate of fair value.
------
53
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 15 -- FINANCIAL INSTRUMENTS (CONTINUED)
SECURITIES. Fair values for investment securities are based on quoted
market prices.
LOANS HELD-FOR-SALE AND LOANS RECEIVABLE. The fair values for loans are
estimated using discounted cash flow analyses. Discount rates used are comprised
of the risk-free rate associated with the remaining term to maturity, adjusted
for risk and the expenses associated with servicing the loans. Fair values of
purchased mortgages are estimated using the quoted market prices for securities
collateralized by similar loans.
FHLBB STOCK. The carrying amount approximates fair value.
DEPOSITS. The fair values disclosed for interest and non-interest checking,
passbook savings, money market deposit accounts and mortgagors' escrow are equal
to the amount payable on demand at the reporting date. The fair values of
certificates of deposit are estimated using rates currently offered for deposits
of similar remaining maturities.
ADVANCES FROM THE FHLBB. The fair values of advances from the FHLBB are
estimated using rates which approximate the rates currently being offered by the
FHLBB for similar remaining maturities.
OTHER BORROWINGS. The carrying amounts of short-term borrowings approximate
their fair values.
OFF-BALANCE SHEET INSTRUMENTS. In the course of originating loans and
extending credit and standby letters of credit, the Bank will charge fees in
exchange for its lending commitment. While these commitment fees have value, the
Company has not estimated their value due to the short term nature of the
underlying commitments.
NOTE 16 -- CONCENTRATION OF CREDIT RISK
The Bank is primarily engaged in the business of providing credit secured by
residential real estate to the consumer segment of the Bank's market area within
the state of Connecticut. The concentration of the Bank's loan portfolio by type
of loan at December 31, 1994 and 1993, is set forth in Note 3. These loans are
comprised of one-to-four family mortgages, construction loans and home equity
loans aggregating approximately $781.1 million and $721.9 million at December
31, 1994 and 1993, respectively, or approximately 92.5% and 91.0% of total
loans, respectively. Approximately 95.8% and 97.0% of these loans are secured by
residential real estate located within the state of Connecticut at December 31,
1994 and 1993, respectively.
The Bank also has loan commitments, including unused lines of credit and
amounts not yet advanced on construction loans, secured by Connecticut real
estate. In addition, at December 31, 1994 a substantial portion of the Bank's
foreclosed assets (Note 4) is located in those same markets. Accordingly, the
ultimate collectibility of a substantial portion of the Bank's loan portfolio
and the recovery of a substantial portion of the carrying amount of foreclosed
assets are particularly susceptible to changes in real estate market conditions
in Connecticut.
The Bank is required to periodically conduct reviews of the financial
condition of correspondent banks with which it does business in order to
minimize the risks associated with such activities.
NOTE 17 -- RELATED PARTY TRANSACTIONS
At December 31, 1994 and 1993 loans to directors aggregated approximately
$1,191,000 and $1,160,000, respectively. During the year ended December 31,
1994, new loans totaling approximately $135,000 were granted to directors and
repayments totaled approximately $324,000.
------
54
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 17 -- RELATED PARTY TRANSACTIONS (CONTINUED)
During the years ended December 31, 1994, 1993 and 1992, payments
aggregating approximately $364,000, $509,000 and $556,000, respectively, were
made for legal, insurance, maintenance, construction and appraisal services to
companies in which certain directors have an interest.
These loans and payments were made in the ordinary course of business. The
loans were granted on substantially the same terms, including interest rates and
collateral on loans, as those prevailing at the same time for comparable
transactions with others.
NOTE 18 -- CONDENSED FINANCIAL INFORMATION OF DS BANCOR, INC.
(PARENT COMPANY ONLY)
The condensed statements of position for DS Bancor, Inc. were as follows:
--------------------------------------------------------------------------------
DECEMBER 31,
--------------------
1994 1993
---------------------------------------------------------------------------------------------------------
(AMOUNTS IN
THOUSANDS)
ASSETS
Cash in subsidiary bank $ 860 $ 85
Investment in bank subsidiary, at equity 65,985 67,562
Other assets 303 274
--------- ---------
TOTAL ASSETS $ 67,148 $ 67,921
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes payable--bank (Note A) $ -- $ 1,450
Other liabilities 11 31
--------- ---------
Total Liabilities 11 1,481
--------- ---------
Stockholders' Equity
Common stock 3,085 2,991
Additional paid-in capital 37,780 36,007
Retained earnings 30,785 31,955
Less: Treasury stock, at cost (339,500 shares) (4,513) (4,513)
--------- ---------
Total Stockholders' Equity 67,137 66,440
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 67,148 $ 67,921
--------- ---------
--------- ---------
--------------------------------------------------------------------------------
------
55
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 18 -- CONDENSED FINANCIAL INFORMATION OF DS BANCOR, INC.
(PARENT COMPANY ONLY) (CONTINUED)
The condensed statements of earnings were as follows:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1994 1993 1992
---------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Income:
Dividends from subsidiary $ 567 $ 873 $ 742
Other 39 -- --
----------- ----------- -----------
Total income 606 873 742
----------- ----------- -----------
Expense:
Interest expense 43 113 152
Other 265 181 209
----------- ----------- -----------
Total expense 308 294 361
----------- ----------- -----------
Income before income taxes and change in equity of subsidiary 298 579 381
Income tax benefit 109 119 150
----------- ----------- -----------
Income before change in equity of subsidiary 407 698 531
Change in equity of subsidiary 5,303 4,228 4,310
----------- ----------- -----------
Income before cumulative effect of a change in accounting principle 5,710 4,926 4,841
Cumulative effect of change in accounting principle (Note 9) -- 1,548 --
----------- ----------- -----------
Net income $ 5,710 $ 6,474 $ 4,841
----------- ----------- -----------
----------- ----------- -----------
Weighted average shares outstanding (Notes 1 & 12)
Primary 2,926,825 2,834,337 2,786,199
Fully Diluted 2,929,005 2,875,790 2,786,199
Earnings per share--Primary (Notes 1 & 12)
Income before cumulative effect of a change in accounting principle $1.95 $1.74 $1.74
Cumulative effect of a change in accounting principle -- .55 --
Net income $1.95 $2.28 $1.74
Earnings per share--Fully Diluted (Notes 1 & 12)
Income before cumulative effect of a change in accounting principle $1.95 $1.71 $1.74
Cumulative effect of a change in accounting principle -- .54 --
Net income $1.95 $2.25 $1.74
--------------------------------------------------------------------------------
------
56
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 18 -- CONDENSED FINANCIAL INFORMATION OF DS BANCOR, INC.
(PARENT COMPANY ONLY) (CONTINUED)
The condensed changes in the components of Stockholders' Equity for the
years ended December 31, 1994, 1993 and 1992 were as follows:
--------------------------------------------------------------------------------
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK
----------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
Balance--January 1, 1992 $ 2,417 $ 28,034 $ 27,166 $ (4,513)
Net income 4,841
Stock dividend declared on common stock (Note 12) 446 5,911 (6,357)
Shares issued for fractional interest 2 26
Cash in lieu of fractional shares (28)
Adjustment for unrealized losses on marketable equity securities
of subsidiary (Note 2) 640
----------- ----------- ----------- -----------
Balance--December 31, 1992 2,865 33,971 26,262 (4,513)
Net income 6,474
Stock dividend declared on common stock (Note 12) 126 2,029 (2,155)
Shares issued for fractional interest 7
Cash in lieu of fractional shares (7)
Adjustment for unrealized security gains of subsidiary (Note 2) 1,381
----------- ----------- ----------- -----------
Balance--December 31, 1993 2,991 36,007 31,955 (4,513)
Net income 5,710
Stock options exercised (93,455 shares) (Note 11) 94 1,773
Adjustment for unrealized security losses of subsidiary (Note 2) (6,880)
----------- ----------- ----------- -----------
Balance--December 31, 1994 $ 3,085 $ 37,780 $ 30,785 $ (4,513)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
--------------------------------------------------------------------------------
The condensed statements of cash flows were as follows:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1993 1992
---------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Cash flows from operating activities:
Dividends received from subsidiary $ 567 $ 873 $ 742
Non-interest income 39 -- --
Tax benefit received from subsidiary 80 -- --
Interest paid (68) (123) (171)
Cash paid to suppliers (260) (205) (185)
--------- --------- ---------
Net cash provided by operating activities 358 545 386
--------- --------- ---------
Cash flows from financing activities:
Payments on notes payable--bank (1,450) (483) (484)
Dividends paid to stockholders -- (7) (29)
Issuance of common stock 1,867 7 29
--------- --------- ---------
Net cash used by financing activities 417 (483) (484)
--------- --------- ---------
Net increase (decrease) in cash 775 62 (98)
Cash at beginning of year 85 23 121
--------- --------- ---------
Cash at end of year $ 860 $ 85 $ 23
--------- --------- ---------
--------- --------- ---------
--------------------------------------------------------------------------------
------
57
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 18 -- CONDENSED FINANCIAL INFORMATION OF DS BANCOR, INC.
(PARENT COMPANY ONLY) (CONTINUED)
A reconciliation of net income to cash provided by operating activities was
as follows:
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1993 1992
------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Net income $ 5,710 $ 6,474 $ 4,841
Items not resulting in cash flow:
Equity in undistributed earnings of subsidiary (5,303) (5,776) (4,310)
Increase in income tax benefits receivable (29) (119) (150)
Amortization of organization cost -- -- 18
Decrease in accrued expenses (20) (34) (13)
--------- --------- ---------
Net cash flow from operating activities $ 358 $ 545 $ 386
--------- --------- ---------
--------- --------- ---------
------------------------------------------------------------------------------------------------------------------
NOTE A: THE BOARD OF DIRECTORS AUTHORIZED AND THE COMPANY ESTABLISHED A $3.0
MILLION LINE OF CREDIT TO PARTIALLY FUND THE REPURCHASE OF THE
COMPANY'S COMMON STOCK IN 1989 AND 1990. THIS LOAN, WHICH HAD AN
INTEREST RATE OF PRIME PLUS ONE PERCENT, WAS PAID IN FULL IN JUNE,
1994. (NOTES 7, 12 & 19).
--------------------------------------------------------------------------------
NOTE 19 -- REGULATORY MATTERS
DS Bancor and its wholly owned subsidiary Derby Savings Bank, pursuant to
the regulations of the Federal Reserve Board (the "Board") and the FDIC,
respectively, are subject to risk-based capital standards. These risk-based
standards require a minimum ratio of total capital to risk-weighted assets of
8.0%. Of the required capital, 4.0% must be tier 1 capital (primarily
stockholders' equity).
The Board has supplemented these standards with a minimum leverage ratio of
3.0% of tier 1 capital to total assets. The Board has indicated that all but the
most highly rated bank holding companies should maintain a leverage ratio of 4%
to 5% of tier 1 capital to total assets. The FDIC has adopted a similar leverage
requirement.
In the second quarter of 1992, the Board of Directors of Derby Savings
entered into a Memorandum of Understanding (the "Memorandum") with the FDIC and
the Connecticut Commissioner of Banks. The Memorandum calls for the Board of
Directors of the Bank to develop a written plan to reduce the level of assets
classified "substandard" and to establish target levels for the reduction of
adversely classified assets to 75% of total equity capital and reserves by
December 31, 1992 and to 50% of total equity capital and reserves within a
reasonable time thereafter. At December 31, 1994, the level of assets classified
"substandard" represented 31.1% of the Bank's total equity capital and reserves.
The Memorandum also calls for the level of delinquent loans to be reduced to no
more than 7% of gross loans by December 31, 1992 and to 5% of gross loans by
December 31, 1993. At December 31, 1994, delinquent loans totaled $32.0 million
or 3.8% of total loans. Additionally, the Memorandum limits the payment of cash
dividends by the Bank to DS Bancor to the Company's debt service and non-salary
expenses.
In connection with the Burritt transaction, the FDIC modified the terms of
the Memorandum which pertained to the maintenance of capital ratios. The
Memorandum initially required that the Bank maintain a leverage ratio of tier 1
capital to total assets of at least 5.5% and if the ratio fell below 7%, the
Bank was required to notify the FDIC and the Connecticut Commissioner. The
modification required Derby to have a leverage ratio in excess of 5% of total
assets by
------
58
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 19 -- REGULATORY MATTERS (CONTINUED)
December 31, 1993 and a leverage ratio at or above 5.75% of total assets by
December 31, 1994. However, management of the Bank has requested and the FDIC
has approved an extension of the December 31, 1994 target date to June 30, 1995.
At December 31, 1994, the Bank's leverage ratio of tier 1 capital to total
assets ratio was 5.5%. The Bank expects to achieve the 5.75% June 30, 1995
capital target through maintaining asset size at current levels and earnings
retention.
The following table summarizes the capital ratios of DS Bancor and Derby
Savings Bank at December 31, 1994:
--------------------------------------------------------------------------------
RISK-BASED
--------------------
LEVERAGE RATIO TIER 1 TOTAL
--------------------------------------------------------------------------------------------------------------------
DS Bancor 5.6% 10.38% 11.41%
Derby Savings Bank 5.5% 10.21% 11.24%
--------------------------------------------------------------------------------
NOTE 20 -- RECENT ACCOUNTING PRONOUNCEMENTS
In May 1993, the FASB issued Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). SFAS 114,
which the Bank must adopt for the year ending December 31, 1995, requires
creditors to evaluate the collectibility of both contractual interest and
contractual principal of all loans when assessing the need for a loss accrual.
When a loan is impaired, a creditor shall measure impairment based on the
present value of the expected future cash flows discounted at the loan's
effective interest rate, or the fair value of the collateral, less estimated
selling costs, if the loan is collateral-dependent and foreclosure is probable.
The creditor shall recognize an impairment by creating a valuation allowance.
The Bank has not yet made a determination as to the impact, if any, the adoption
of SFAS 114 will have on its financial condition, but it is expected that the
financial statement presentation of certain non-performing loans as In-substance
foreclosed assets will be essentially discontinued.
------
59
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NOTE 21 -- QUARTERLY RESULTS OF EARNINGS (UNAUDITED)
The following is a summary of the quarterly results of earnings for the
years ended December 31, 1994 and 1993:
--------------------------------------------------------------------------------
QUARTERS ENDED
------------------------------------------
12/31/94 9/30/94 6/30/94 3/31/94
--------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Interest income $ 20,414 $ 19,794 $ 18,781 $ 18,293
Interest expense 11,427 10,985 10,444 9,962
--------- --------- --------- ---------
Net interest income 8,987 8,809 8,337 8,331
Provision for credit losses 700 625 400 600
--------- --------- --------- ---------
Net interest income after provision for credit losses 8,287 8,184 7,937 7,731
Non-interest income, net 545 683 1,010 863
Non-interest expense 6,507 6,480 6,532 6,091
--------- --------- --------- ---------
Income before income taxes 2,325 2,387 2,415 2,503
Income tax 977 966 966 1,011
--------- --------- --------- ---------
Net income $ 1,348 $ 1,421 $ 1,449 $ 1,492
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per share--Primary (a) $ 0.46 $ 0.48 $ 0.49 $ 0.52
Earnings per share--Fully Diluted (a) $ 0.46 $ 0.48 $ 0.49 $ 0.51
--------------------------------------------------------------------------------------------------------------
12/31/93 9/30/93 6/30/93 3/31/93
--------------------------------------------------------------------------------------------------------------
Interest income $ 18,083 $ 18,137 $ 19,128 $ 18,987
Interest expense 10,095 10,736 11,334 11,651
--------- --------- --------- ---------
Net interest income 7,988 7,401 7,794 7,336
Provision for credit losses 425 1,325 275 450
--------- --------- --------- ---------
Net interest income after provision for credit losses 7,563 6,076 7,519 6,886
Non-interest income, net 932 1,862 2,755 1,794
Non-interest expense 6,203 6,736 7,772 6,402
--------- --------- --------- ---------
Income before income taxes and cumulative effect of a change in
accounting principle 2,292 1,202 2,502 2,278
Income tax 957 323 1,080 988
--------- --------- --------- ---------
Income before cumulative effect of a change in accounting
principle 1,335 879 1,422 1,290
Cumulative effect of a change in accounting principle -- -- -- 1,548
--------- --------- --------- ---------
Net income $ 1,335 $ 879 $ 1,422 $ 2,838
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per share--Primary (a)
Income before cumulative effect of a change in accounting
principle $ 0.47 $ 0.32 $ 0.51 $ 0.46
Cumulative effect of a change in accounting principle -- -- -- $ 0.56
Net income $ 0.47 $ 0.32 $ 0.51 $ 1.02
Earnings per share--Fully Diluted (a)
Income before cumulative effect of a change in accounting
principle $ 0.46 $ 0.32 $ 0.51 $ 0.46
Cumulative effect of a change in accounting principle -- -- -- $ 0.56
Net income $ 0.46 $ 0.32 $ 0.51 $ 1.02
(a) Adjusted retroactively to reflect stock dividend declared (Note 12).
--------------------------------------------------------------------------------
------
60
--------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
---------------------
--------------------------------------------------------------------------------
The Board of Directors and Stockholders
DS Bancor, Inc.
Derby, Connecticut
WE HAVE AUDITED THE ACCOMPANYING CONSOLIDATED STATEMENTS OF POSITION OF
DS BANCOR, INC. AND SUBSIDIARY AS OF DECEMBER 31, 1994 AND 1993, AND THE
RELATED CONSOLIDATED STATEMENTS OF EARNINGS, STOCKHOLDERS' EQUITY AND
CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31,
1994. THESE CONSOLIDATED FINANCIAL STATEMENTS ARE THE RESPONSIBILITY OF THE
COMPANY'S MANAGEMENT. OUR RESPONSIBILITY IS TO EXPRESS AN OPINION ON THESE
CONSOLIDATED FINANCIAL STATEMENTS BASED ON OUR AUDITS.
WE CONDUCTED OUR AUDITS IN ACCORDANCE WITH GENERALLY ACCEPTED AUDITING
STANDARDS. THOSE STANDARDS REQUIRE THAT WE PLAN AND PERFORM THE AUDITS TO OBTAIN
REASONABLE ASSURANCE ABOUT WHETHER THE CONSOLIDATED FINANCIAL STATEMENTS ARE
FREE OF MATERIAL MISSTATEMENT. AN AUDIT INCLUDES EXAMINING, ON A TEST BASIS,
EVIDENCE SUPPORTING THE AMOUNTS AND DISCLOSURES IN THE CONSOLIDATED FINANCIAL
STATEMENTS. AN AUDIT ALSO INCLUDES ASSESSING THE ACCOUNTING PRINCIPLES USED AND
SIGNIFICANT ESTIMATES MADE BY MANAGEMENT, AS WELL AS EVALUATING THE OVERALL
CONSOLIDATED FINANCIAL STATEMENT PRESENTATION. WE BELIEVE THAT OUR AUDITS
PROVIDE A REASONABLE BASIS FOR OUR OPINION.
IN OUR OPINION, THE CONSOLIDATED FINANCIAL STATEMENTS REFERRED TO ABOVE PRESENT
FAIRLY, IN ALL MATERIAL RESPECTS, THE CONSOLIDATED FINANCIAL POSITION OF DS
BANCOR, INC. AND SUBSIDIARY AS OF DECEMBER 31, 1994 AND 1993, AND THE RESULTS OF
THEIR OPERATIONS, CHANGES IN THEIR STOCKHOLDERS' EQUITY, AND THEIR CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1994, IN CONFORMITY
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
BRIDGEPORT, CONNECTICUT
FEBRUARY 10, 1995
------
61
--------------------------------------------------------------------------------
---------------------
--------------------------------------------------------------------------------
DIRECTORS
DS BANCOR, INC. & DERBY SAVINGS BANK
MICHAEL F. DADDONA JR.
Chairman of the Board;
Owner/General Manager
Automated Services
ACHILLE A. APICELLA, CPA
President.
Apicella, Testa & Co.
WALTER R. ARCHER JR.
President
Burtville Associates & Archer Landfill Service Co.
JOHN J. BRENNAN
President
J.J. Brennan Construction Company
JOHN F. COSTIGAN
Executive Vice President & Secretary
Derby Savings Bank
HARRY P. DIADAMO JR.
President, Treasurer & CEO
Derby Savings Bank
ANGELO E. DIRIENZO
Retired Superintendent of Schools
Sherman Board of Education
LAURA J. DONAHUE, ESQ.
Attorney
Donahue & Donahue
CHRISTOPHER H.B. MILLS (1)
Chief Executive
North Atlantic Small Companies Trust PLC
JOHN M. RAK
Owner
John M. Rak Real Estate
JOHN P. SPONHEIMER, ESQ.
Partner
Hoyle & Sponheimer
BRONISLAW WINNICK, ESQ. (HONORARY)
Partner
Winnick, Vine, Welch, Donnelly & Teodosio
(1) Director, DS Bancor, Inc., only
--------------------------------------------------------------------------------
ADVISORY BOARD--NEW BRITAIN/HARTFORD REGION
MARYANN E. CICHOWSKI
SAL N. GIONFRIDDO
NANCY B. HEISER
WILLIAM R. HOFFMAN
DANIEL J. O'CONNELL
ANNELISA SANTORO
--------------------------------------------------------------------------------
BANK COUNSEL
Winnick, Vine, Welch, Donnelly & Teodosio
SPECIAL COUNSEL
Hogan & Hartson L.L.P.
INDEPENDENT PUBLIC ACCOUNTANTS
Friedberg, Smith & Co., P.C.
REGISTRAR AND TRANSFER AGENT
American Stock Transfer & Trust Co.
40 Wall Street, 46th Floor
New York, NY 10005
1-800-937-5449
INVESTOR RELATIONS
Katherine Costigan Partesano
Assistant Vice President
Telephone (203) 736-1000 X605
COMMON STOCK INFORMATION
Listing: NASDAQ
NMS Symbol: DSBC
ANNUAL MEETING OF STOCKHOLDERS
April 26, 1995, 10:00 a.m.
Trumbull Marriott
180 Hawley Lane
Trumbull, CT 06611
------
62
------------------------------------------------------------------------------
------------------------------------------------------------------------------
DS BANCOR, INC.
OFFICERS:
HARRY P. DIADAMO JR.
President & CEO
JOHN F. COSTIGAN
Executive Vice President & Secretary
ALFRED T. SANTORO
Vice President,
Treasurer & CFO
--------------------------------------------------------------------------------
DERBY SAVINGS BANK
OFFICERS:
HARRY P. DIADAMO JR.
President,
Treasurer & CEO
JOHN F. COSTIGAN
Executive Vice President,
Secretary & COO
ALFRED T. SANTORO
Executive Vice President
Finance & CFO
THOMAS H. WELLS
Senior Vice President &
Chief Lending Officer
LYNN A. MILLER
Senior Vice President
Branch Administration
NINA M. ALLEN
Vice President
Retail Loan Servicing
WILLIAM W. COTE
Vice President
Legal Services
JOHN DADA
Vice President
Marketing
DAVID A. DEDMAN
Vice President
Commercial Real Estate Lending
KENNETH J. DOUGHTY
Vice President
Retail Lending
THOMAS J. LASKOWSKI
Vice President
Deposit Servicing
ROBERT V. OUELLETTE
Vice President
Commercial Lending
JANICE A. SHEEHY
Vice President
Commercial Lending
BONITA L. SMITH
Vice President
Human Resources
FREDERICK I. WILSON
Vice President
Real Estate Management
DONALD E. KEAGAN
Controller
RITA L. FINNEGAN
Auditor
CALVIN K. PRICE
Director of Community Affairs
--------------------------------------------------------------------------------
SUBSIDIARY:
DERBY FINANCIAL SERVICES
------
63
------------------------------------------------------------------------------
------------------------------------------------------------------------------
OFFICES
CORPORATE HEADQUARTERS
33 Elizabeth Street
Derby, CT 06418
AVON
Tri-Town Plaza
320 West Main Street
Avon, CT 06001
DERBY
One Elizabeth Street
Derby, CT 06418
Orange-Derby Shopping Center
Derby, CT 06418
EAST HARTFORD
471 Main Street
East Hartford, CT 06118
FAIRFIELD
1919 Black Rock Turnpike
Fairfield, CT 06430
GLASTONBURY
119 Hebron Avenue
Glastonbury, CT 06033
NEW BRITAIN
185 Main Street
New Britain, CT 06050
435 South Main Street
New Britain, CT 06051
275 Newington Avenue
New Britain, CT 06053
681 West Main Street
New Britain, CT 06050
NEWINGTON
260 Hartford Avenue
Newington, CT 06111
ORANGE
35 Old Tavern Road
Orange, CT 06477
PLAINVILLE
54 East Street
Plainville, CT 06062
ROCKY HILL
2049 Silas Dean Highway
Rocky Hill, CT 06067
SEYMOUR
15 New Haven Road
Seymour, CT 06483
SHELTON
502 Howe Avenue
Shelton, CT 06484
506 Shelton Avenue
Shelton, CT 06484
SOUTHBURY
325 Main Street South
Southbury, CT 06488
STRATFORD
2505 Main Street
Stratford, CT 06497
TRUMBULL
952 White Plains Road
Trumbull, CT 06611
WEST HARTFORD
1253 New Britain Avenue
West Hartford, CT 06110
970 Farmington Avenue
West Hartford, CT 06107
Member FDIC
Equal Housing Lender
Equal Opportunity Employer
------
64
EX-23.(A)
4
EXHIBIT 23(A)
EXHIBIT 23(a)
FRIEDBERG, SMITH & CO., P.C.
CERTIFIED PUBLIC ACCOUNTANTS
855 MAIN STREET
BRIDGEPORT, CT 06604
PHONE (203) 366-5876
FAX (203) 366-1924
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
DS Bancor, Inc.
We consent to incorporation by reference in the Post-Effective Amendment No. 1
on Form S-8 to the Registration Statement on Form S-4 (No. 33-3699) of DS
Bancor, Inc. of our report dated February 10, 1995 relating to the consolidated
statements of condition of DS Bancor, Inc. and Subsidiary as of December 31,
1994 and 1993, and the related consolidated statements of earnings, stock-
holders' equity and cash flows for each of the years in the three-year period
ended December 31, 1994, which report appears in the December 31, 1994 annual
report to shareholders of DS Bancor, Inc. which is incorporated by reference in
the annual report on Form 10-K of DS Bancor, Inc. for the year ended
December 31, 1994.
Friedberg, Smith & Co., P.C.
Bridgeport, Connecticut
March 22, 1995
51.
EX-23.(B)
5
EXHIBIT 23(B)
EXHIBIT 23(b)
FRIEDBERG, SMITH & CO., P.C.
CERTIFIED PUBLIC ACCOUNTANTS
855 MAIN STREET
BRIDGEPORT, CT 06604
PHONE (203) 366-5876
FAX (203) 366-1924
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
DS Bancor, Inc.
We consent to incorporation by reference in the Post-Effective Amendment No. 1
on Form S-8 to the Registration Statement on Form S-4 (No. 33-71206) of DS
Bancor, Inc. of our report dated February 10, 1995 relating to the consolidated
statements of condition of DS Bancor, Inc. and Subsidiary as of December 31,
1994 and 1993, and the related consolidated statements of earnings,
stock-holders' equity and cash flows for each of the years in the three-year
period ended December 31, 1994, which report appears in the December 31, 1994
annual report to shareholders of DS Bancor, Inc. which is incorporated by
reference in the annual report on Form 10-K of DS Bancor, Inc. for the year
ended December 31, 1994.
Friedberg, Smith & Co., P.C.
Bridgeport, Connecticut
March 22, 1995
52.
EX-23.(C)
6
EXHIBIT 23(C)
EXHIBIT 23(c)
FRIEDBERG, SMITH & CO., P.C.
CERTIFIED PUBLIC ACCOUNTANTS
855 MAIN STREET
BRIDGEPORT, CT 06604
PHONE (203) 366-5876
FAX (203) 366-1924
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
DS Bancor, Inc.
Derby, Connecticut
We consent to the incorporation by reference in the registration statement on
Form S-8 (No. 33-53803) of the DS Bancor, Inc. 1994 Stock Option Plan of our
report dated February 10, 1995 relating to the consolidated statements of
position of DS Bancor, Inc. and Subsidiary as of December 31, 1994 and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1994, which report
appears in the December 31, 1994 annual report on Form 10-K of DS Bancor, Inc.
and Subsidiary.
Friedberg, Smith & Co., P.C.
Bridgeport, Connecticut
March 22, 1995
53.
EX-27
7
EXHIBIT 27
9
1,000
12-MOS
DEC-31-1994
JAN-01-1994
DEC-31-1994
14,128
0
4,500
770
216,674
104,702
96,928
841,674
(6,803)
1,222,690
1,027,746
0
4,777
111,145
0
0
3,085
64,052
1,222,690
56,802
20,480
0
77,282
36,008
42,818
34,464
2,325
546
25,610
9,630
5,710
0
0
5,710
1.95
1.95
2.94
9,300
1,186
4,213
0
6,979
(2,616)
115
6,803
6,803
0
0