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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the fiscal year ended September 30, 1995
Or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the transition period from to
Commission File Number 1-8408
THE ADVEST GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-0950444
(State or other jurisdiction of (I.R.S.
Employer
incorporation or organization) Identification
Number)
90 State House Square, - Hartford, Connecticut 06103
(Address of principal executive offices) (Zip
Code)
Registrant's telephone number, including area code: (860) 509-1000
Securities registered pursuant to Section 12(b) of the Act: Yes
Name of each exchange on
Title of each class which registered
Common Stock, $.01 Par Value New York Stock Exchange, Inc.
9% Convertible Subordinated Debentures New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by an (X) whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X
No
Indicate by an (X) if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the Registrant was $72,899,351 as of December 1, 1995.
On December 1, 1995 the Registrant has outstanding 8,391,371 shares of
common stock of $.01 par value, which is the Registrant's only class
of common stock.
Parts I, II and IV incorporate information by reference from the
Registrant's 1995 Annual Report to Shareholders. Part III
incorporates information by reference from the Registrant's definitive
proxy statement for the annual meeting to be held on January 25, 1996.
Total of sequentially numbered pages 64 .
exhibit index equential page number page 27 .
>
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Part I
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Item 1. Business
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General Development of Business
(1) The Advest Group, Inc. ("AGI"), a Delaware corporation, is a
financial services holding company engaged, with its operating
subsidiaries (collectively the "Company"), in securities
brokerage, trading, investment banking, consumer lending, asset
management, trust and related financial services. It is organized
under the laws of Delaware and commenced operations on January 1,
1977. AGI is successor to a partnership which resulted from
mergers of five New York Stock Exchange, Inc. ("NYSE") member
firms organized between 1898 and 1919. The Company's
broker-dealer subsidiary, Advest, Inc. ("Advest"), was organized
to succeed the business of the partnership, effective January 1,
1977. Since that date, a number of other operating subsidiaries
in the brokerage and financial services industries have been
established or acquired.
In addition to Advest, operating subsidiaries include Advest
Bank (the "Bank"), a Connecticut-chartered capital stock savings
bank; Boston Security Counsellors, Inc. ("BSC"), an investment
management company; and Billings & Company, Inc. ("Billings"), a
real estate services company. Material acquisitions and
dispositions of the Company during the past five years follow.
In November 1992, the Company sold substantially all the
assets, the business and name of Shore & Reich, Ltd. ("S&R"), its
subsidiary specializing in pension plan administration, to an
unrelated third party. Consideration included an initial cash
payment of $600,000 and future payments over a five year period
based on revenues of the business sold. The Company realized a
pre-tax loss of $170,000 related to the disposition in its 1993
fiscal year.
In January 1994, Lyons, Zomback & Ostrowski, Inc., a
financial consulting company specializing in the banking industry
and a subsidiary of AGI, was merged into the corporate finance
division of Advest as the Financial Institutions Group (the
"FIG"). The FIG unit will focus its efforts on serving as an
advisor to small and medium-sized community banks.
During 1995, the Company sold the investment advisory
business related to its proprietary mutual funds in three separate
transactions. In the first quarter, a pre-tax gain of $.8 million
was realized from the sale of the business related to the Scottish
Widows International Fund to an unrelated third party. During the
third quarter, the businesses related to the six taxable and three
non-taxable funds, respectively, in the Advantage Family of Funds
("Funds") were sold to two other unrelated third parties for total
consideration of $11.2 million. Net of expenses, the Company
realized a pre-tax gain of $9.3 million from the two transactions.
The total gain from all sales was $10.1 million and is reported
separately on the 1995 Consolidated Statement of Earnings.
(2) Advest is engaged in a broad range of activities in the
securities brokerage, investment banking and asset management
businesses. Specific services include retail brokerage,
institutional sales, origination of and participation in
underwritings and distribution of corporate and municipal
securities', market making and trading activities in corporate
securities and municipal bonds, research, custody and money
management.
Advest has been classified by the Securities and Exchange
Commission ("SEC") and the Securities Industry Association as a
"large regional" brokerage firm. "Regional" is a term commonly
used in the securities industry to indicate that a firm's
headquarters are located outside New York City. Advest has retail
clients in all fifty states with the largest concentration in the
Northeast and Midwest regions and also services institutional
accounts throughout the country. During fiscal 1995, Advest
opened 1 new sales office and closed 2. At September 30, 1995,
Advest had sales offices and account executives in 16 states and
the District of Columbia as
2
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follows:
Number of
Number of Account
State Offices Executives
----- ------- ---------
Connecticut 7 70
District of Columbia 1 11
Florida 6 48
Illinois 2 9
Kentucky 3 15
Maine 3 23
Maryland 1 4
Massachusetts 5 52
Missouri 2 15
New Hampshire 2 7
New Jersey 4 25
New York 16 127
Ohio 12 53
Pennsylvania 10 59
Rhode Island 1 8
Vermont 1 3
Virginia 3 12
--- ---
79 541
== ===
Advest is a member of all major securities exchanges in the
United States, the National Association of Securities Dealers
("NASD") and the Securities Investor Protection Corporation
("SIPC"). In addition, Advest is registered with the Commodity
Futures Trading Commission as a commodity trading advisor and a
futures commission merchant.
The Bank is a Connecticut-chartered capital stock savings
bank which opened for business in 1984. The Bank's offices and
single retail branch are located at 280 Trumbull Street, Hartford,
Connecticut 06103. (In December 1995, the Bank has relocated its
corporate office and branch office to 90 State House Square,
Hartford, CT 06103.) The Bank's principal business has consisted
of attracting deposits and investing such deposits, together with
funds from capital and other borrowings, in various types of
loans, primarily residential, and investments. The Bank's loan
portfolio includes single and multi-family residential mortgages,
consumer, commercial mortgages and commercial and construction
loans. Investments include government and agency obligations,
mortgage-backed securities and money market instruments. In
addition to providing deposit, lending and trust services within
the Bank's primary market area, a significant portion of the
Bank's activities have been directed toward providing such
products and services to clients of AGI's brokerage and other
subsidiaries. The Bank does not currently have a material source
of deposits other than those obtained through Advest. Deposits in
the Bank are insured by the Bank Insurance Fund of the FDIC,
subject to applicable limits.
In fiscal 1991, the Office of Thrift Supervision ("OTS")
approved requests by AGI and the Bank for the Bank to be deemed a
"savings association" by virtue of its meeting the test for a
qualified thrift lender and for AGI, as the sole shareholder of a
"savings association", to be treated as a unitary thrift holding
company. In order to retain its status as a "savings association"
the Bank must continue to satisfy the "qualified thrift lender"
test. This test generally requires that an institution maintain a
minimum of 65% of its assets in residential real estate and
related investments. At September 30, 1995, 97.0% of the Bank's
portfolio consisted of such assets.
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(3) The Company's principal executive offices are located at One
Commercial Plaza, 280 Trumbull Street, Hartford, Connecticut,
06103 (telephone number (203) 525-1421). As of January 1996, the
Company will relocate its executive offices to 90 State House
Square, Hartford, CT 06103, telephone number (860) 509-1000.) At
September 30, 1995, the Company employed 1,539 persons.
Financial Information about Industry Segments
The information required by this item is disclosed on page 37 of
the 1995 Annual Report to Shareholders in Note 18 of Notes to
Consolidated Financial Statements. Such information is hereby
incorporated by reference.
Narrative Description of Business
(1) Revenues
The principal sources of revenue for the last five years are
disclosed on page 9 of the 1995 Annual Report to Shareholders
under the caption "Five Year Financial Summary". A discussion of
the components of services provided and related compensation
follows.
Commissions
Listed Advest acts as an agent for its customers in the
purchase and sale of securities on the major securities exchanges.
Commissions generated by these customers represent a large portion
of the Company's revenue.
Mutual Funds Advest executes purchases and redemptions of
shares for its clients in many diverse mutual funds. Prior to the
sale of the investment advisory business related to its
proprietary mutual funds Advest served as sole distributor for The
Advantage Family of Mutual Funds and the Advantage Municipal Bond
Fund and acted as a distributor of the Scottish Widows
International Fund.
Over-the-Counter In executing customers' orders in the
over-the-counter market, Advest generally acts as agent with
another firm which is a market maker in the securities being
purchased or sold. The market price executed represents the best
inter-dealer market price available.
Insurance Advest acts as agent for several life insurance
companies and sells life insurance and tax-advantaged annuities to
its brokerage clients. A principal objective of Advest's
insurance department is to assist account executives in protecting
the assets of high net worth individuals and businesses. The
department provides customized advice and recommends appropriate
products to meet unique individual, professional or business
needs.
Options Advest also effects for its customers the purchase
and sale of put and call options traded on all major stock
exchanges.
Other Other commissions include commissions from commodity
trading, international stocks and bonds, certificates of deposit
and income from correspondent brokers. In addition, Advest
markets private placement and registered offerings of limited
partnerships investing in various ventures, primarily real estate.
Certain of these limited partnerships are originated by Advest or
Billings who, consequently, receive management and other fees.
Principal Transactions
Revenue from principal transactions includes realized and
unrealized gains and losses on securities held for resale by
Advest and the Bank and related sales credits of Advest. The
Company does not actively participate in the high yield securities
market. Advest also hedges its municipal bond inventory by
entering into derivative transactions, primarily futures when
certain inventory levels
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are reached. Derivative positions are not material and are marked-
to-market daily.
Advest actively engages in trading as principal in various
phases of the over-the-counter securities business and acts as
principal to facilitate the execution of customers' orders.
Advest buys, sells and maintains an inventory of a security in
order to "make a market" in that security. As of September 30,
1995, Advest made dealer markets in the common stock or other
equity securities of approximately 184 corporations. Advest also
actively engages in trading municipal bonds and unit trust
instruments.
Investment Banking
Advest manages and participates as an underwriter of corporate and
government securities, mutual funds and private placement
offerings. The Syndicate Department is responsible for Advest's
participation in underwritings managed by Advest and other firms.
The Corporate Finance and Public Finance Departments are
responsible for offerings managed or co-managed by Advest.
Underwriting involves both economic and regulatory risks. An
underwriter may incur losses if it is unable to resell the
securities it is committed to purchase or if it is forced to
liquidate its commitments at less than the agreed purchase price.
In addition, under the Securities Act of 1933, other laws and
court decisions with respect to underwriters' liability and
limitation on indemnification of underwriters by issuers, an
underwriter is subject to substantial potential liability for
material misstatements or omissions in prospectuses and other
communications with respect to underwritten offerings. Further,
underwriting commitments constitute a charge against net capital
and Advest's underwriting commitments may be limited by the
requirement that it must at all times be in compliance with the
net capital Rule 15c3-1 of the SEC.
Advest also provides merger and acquisition advisory
services, appraisals and related services. Billings develops
private placement offerings of limited partnerships in real estate
and other industries. As a general rule, the Company does not
engage in bridge financing activities.
Asset Management and Administration
BSC provides advisory services to a diverse clientele and, until
the sale of the investment advisory business related to the
Advantage Family of Mutual Funds and the Scottish Widows
International Fund in fiscal 1995, acted as their investment
advisor. As of September 30, 1995, BSC had approximately $358
million of private account assets under management.
Advest provides money management services to its brokerage
customers through its Investment Management Group ("IM"). IM
provides various services to brokerage clients including client
profiling, asset allocation, manager selection, due diligence and
performance measurement. Recommended portfolio managers include
managers in the proprietary Advest Managed Portfolio Services as
well as managers not affiliated with the Company. Revenue is
generated from fees and/or commissions. At September 30, 1995, IM
had approximately $1.6 billion of assets under management.
Advest Transfer Services, Inc., a subsidiary of AGI, provides
transfer agency services to the formerly proprietary mutual funds
of the Company. Advest provides dividend reinvestment for more
than 1,200 equities and closed-end funds as well as 31 families of
mutual funds representing over 1,100 individual funds.
The Advest Reserve Cash Account "ARCA" enables brokerage
clients to participate in an integrated financial services
program. ARCA clients have access to their assets through
unlimited checkwriting and a VISA debit card issued by a major
third party bank as well as on-request loans collateralized by
margined securities. Direct deposit is available to ARCA accounts
who can select among several automatic investment options for idle
cash balances, including an FDIC-insured money market account with
the Bank and five money market mutual funds. Other services
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offered to all clients include retirement plan servicing,
securities custody and asset safekeeping.
Advest Bank Net Interest Income
Net interest income is the excess of the interest income and loan
fee income over interest expense. The Bank derives interest income
from loans extended for the purposes of residential, commercial
and consumer credit. Funds not used in lending are invested
primarily in money market instruments and short and adjustable
rate mortgage-backed securities. The Bank's loans and investments
are funded by interest bearing deposits, by debt (primarily
advances from the Federal Home Loan Bank of Boston), and by the
Bank's equity capital. The Bank's interest and loan fee income
has historically exceeded the interest expense of funding and has
produced positive net interest income.
The Bank is subject to interest rate risk to the degree that
the Bank's interest-bearing liabilities reprice or mature more
rapidly, and in greater volume, as is the case currently, than its
interest-earning assets (see Distribution of assets, liabilities
and shareholder's equity, interest rates and interest
differentials as disclosed in Item 1(c) 4 of this filing and in
Note 17 of Notes to Consolidated Financial Statements on pages 35
through 37 in the 1995 Annual Report to Shareholders. Such
information is hereby incorporated by reference).
Interest Income and Customer Financing
Customers' transactions in securities are effected on either a
cash or margin basis. In a margin account, the customer pays less
than the full cost of a security purchased and the broker-dealer
makes a loan for the balance of the purchase price which is
secured by the securities purchased, or other securities owned by
the investor. The amount of the loan is subject to the margin
regulations (Regulation T) of the Board of Governors of the
Federal Reserve System, NYSE margin requirements, and the firm's
internal policies which in some instances are more stringent than
Regulation T or NYSE requirements. Currently, in most
transactions, Regulation T requires that the amount loaned to a
customer for a particular purchase not exceed 50% of the purchase
price of a security, so that initially the customer's equity in
the purchase exceeds the NYSE's rules. A member firm is required
to have the customer deposit cash or additional securities so that
the loan to the customer for which marginable equity securities
are pledged as collateral is no greater than 75% of the value of
the securities in the account.
Interest is charged on the amount borrowed to finance
customers' margin transactions. The rate of interest charged
customers is based primarily on the brokers' call rate (the charge
on bank loans to brokers secured by firm and customers'
securities), to which an additional amount is added up to 2.75%.
The amount of this interest surcharge is dependent on the average
net margin balance and the dollar amount of commissions charged on
account transactions during the month.
Customer credit balances, retained earnings, cash received
from stock loan activities, and as needed short-term borrowings,
are the primary source for financing customer margin accounts.
Other Income
Other income includes execution fees, exchange and other marketing
credits, transfer and service fees as well as investment gains and
losses.
Research
Through the combined resources of its in-house research staff and
correspondent research provided by three leading outside research
firms, Advest provides its brokerage clients with a full range of
research services. These include corporate data, financial
analysis, identification of emerging trends and objective
recommendations. In-house analysts specialize in health care,
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regional banking, insurance and technology. Correspondent
research provides information and recommendations on approximately
3,000 domestic and international equities in over 60 industries in
30 countries.
(2) Competition
All aspects of the business of the Company are highly competitive.
Advest competes with numerous regional and national broker-dealers
and other entities, many of which have greater financial resources
than the Company. Because of the variety of financial services
offered by the Company and the various types of entities that
provide such services (including other brokers, banks, insurance
companies and retail merchandise outlets), it is not possible to
estimate the number of companies that compete with the Company for
investor assets. Advest competes with other firms on the basis of
transaction prices, quality of service, product availability and
locations. With respect to price, service and product, the Company
believes it is competitively well-positioned; it is impossible to
predict, however, the effect of the broader distribution locales
offered by competing entities or the lower costs which may be
offered by certain discount brokers. In addition, there is
competition for investment professionals among the large number of
companies now in the financial services field.
In attracting deposits, the Bank faces strong competition
from numerous savings banks, savings and loan associations,
commercial banks, broker-dealers, credit unions, insurance
companies, investment firms and mutual funds with offices located
primarily in its primary market area. The Bank also faces
significant competition for investors' funds from short-term money
market funds and other corporate and government securities.
The Bank's deposit base is substantially derived from
Advest's brokerage clients. A portion of these deposits,
primarily certificates of deposits, are acquired on a fee basis
and are considered "brokered" under FDIC rules. The Bank does not
possess branch operations with which it may attract significant
additional retail deposits other than those obtained through
Advest. Pursuant to the terms of federal banking regulations,
concerning brokered deposits, the Bank is deemed to be an
"adequately capitalized bank", and as such is limited in the
maximum interest rates it may offer on its brokered deposit
products to rates which do not exceed (1) the rate paid on
deposits of similar maturity in the Bank's normal market area for
deposits accepted or (2) the "national rate" paid on deposits of
comparable maturity for deposits accepted outside the Bank's
normal market area. The Bank, as of September 30, 1995, had $69.6
million of brokered deposits.
The Bank also competes with other financial institutions for
retail loans such as one to four family residential mortgages.
These other competitors include banks, savings and loans,
insurance companies, credit unions and mortgage banking companies.
This market is also highly sensitive to the level and volatility
of interest rates, which affects the volume of business being
conducted.
(3) Regulation
The securities industry in the United States is subject to
extensive regulation under both Federal and state laws. The SEC
is the Federal agency charged with administration of the Federal
securities laws. Much of the regulation of broker-dealers has
been delegated to self-regulatory authorities, principally the
NASD and the securities exchanges. These self-regulatory
organizations conduct periodic examinations of member broker-
dealers in accordance with the rules they have adopted and amended
from time to time, subject to approval by the SEC. Securities
firms are also subject to regulation by state securities
commissions in those states in which they do business.
Broker-dealers are subject to regulations which cover all
aspects of the securities business, including sales methods,
trading practices among broker-dealers, uses and safekeeping of
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customers' funds and securities, capital structure of securities
firms, recordkeeping and the conduct of directors, officers and
employees. Additional legislation, changes in rules promulgated
by the SEC and self-regulatory authorities, or changes in the
interpretation or enforcement of existing laws and rules, may
directly affect the mode of operation and profitability of broker-
dealers. The SEC, self-regulatory authorities and state
securities commissions may conduct administrative proceedings
which can result in censure, fine, suspension or expulsion of a
broker-dealer, its officers or employees. Such administrative
proceedings, whether or not resulting in adverse findings, can
require substantial expenditures. The principal purpose of
regulation and discipline of broker-dealers is the protection of
customers and the securities markets, rather than protection of
creditors and stockholders of broker-dealers.
The Company's investment advisory subsidiary is also subject
to extensive Federal and state regulations by the SEC and state
securities commissions.
Advest is required by Federal law to belong to the Securities
Investor Protection Corporation ("SIPC"). The SIPC fund provides
protection for securities held in customer accounts up to $500,000
per customer, with a limitation of $100,000 on claims for cash
balances. The Company purchases coverage which provides an
additional $24.5 million of coverage per customer for securities
held in customers' accounts.
As a Connecticut-chartered capital stock savings bank whose
deposits are insured by the FDIC, subject to applicable limits,
the Bank is subject to extensive regulation and supervision by
both the Commissioner of the Department of Banking of the State of
Connecticut and the Regional Director of the FDIC. The Bank is
also subject to various regulatory requirements of the Board of
Governors of the Federal Reserve System (the "Federal Reserve
Board") applicable to FDIC insured financial institutions. This
governmental regulation is primarily intended to protect
depositors, rather than shareholders, and concerns, among other
matters, capital requirements, safety and soundness, permissible
investments, community reinvestment and credit discrimination.
AGI, for the purpose of ownership of the Bank, is a Unitary
Savings and Loan holding company, and is subject to limited
regulation of and certain reporting requirements to the Office of
Thrift Supervision.
The Bank has posted losses in each of the last six fiscal
years, resulting primarily from the significant deterioration in
the Bank's loan portfolio. In July 1991, the Bank entered into a
Memorandum of Understanding ("MOU") with its regulators to address
certain concerns arising out of an examination of the Bank. In
February 1993, the Bank entered into a new MOU with its regulators
with terms similar to the original MOU. The Bank has also
requested and received a waiver from the FDIC permitting it to
continue to accept brokered deposits through September 30, 1996.
If the Bank's condition were to deteriorate significantly, the
Bank could be subject to regulatory sanctions, which potentially
could include additional restrictions on the Bank's operations
(including its ability to accept brokered deposits), or under
extreme conditions, revocation of the Bank's deposit insurance and
the appointment of a conservator or receiver or the closing of the
Bank.
The Bank recorded a significant loss in fiscal 1995 due to
its implementation of the accelerated asset disposition plan for
NPAs (Refer to Note 2 of Notes to Consolidated Financial
Statements on page 27 of the 1995 Annual Report to Shareholders).
Consequently, the Bank's leverage capital ratio as of September
30, 1995 was below that required under the terms of the MOU. The
1995 operating loss was anticipated and the accelerated asset
disposition plan was discussed with the Bank's state and federal
banking regulators prior to implementation. The regulators have
required that the Bank submit a capital plan detailing the Bank's
estimate of when it will comply with the leverage capital ratio
requirement, its risk management program, and contingency plans.
Bank management expects to submit its plans to the regulators by
the end of
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the first quarter of fiscal 1996. Management believes that the
Bank's non-compliance with the required leverage capital ratio
requirement is unlikely to result in adverse action by its
regulators.
Refer to pages 10 through 18 of the 1995 Annual Report to
Shareholders under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and on
page 30 in Note 7 and on pages 33 and 34 in Note 14 of the Notes
to Consolidated Financial Statements for a further description of
capital and regulatory considerations concerning the Bank. Such
information is hereby incorporated by reference.
Certain legislative and regulatory proposals that could
affect the Bank and the banking business in general are pending,
or may be introduced, before the United States Congress, the
Connecticut General Assembly and various governmental agencies.
These proposals include measures that may further alter the
structure, regulation and competitive relationship of financial
institutions and that may subject financial institutions to
increased regulation, disclosure and reporting requirements. The
Bank in its present status is restricted by state bank regulations
from the declaration of dividends. (For further discussion
concerning dividend restriction applicable to the Bank refer to
pages 33 and 34 of the 1995 Annual Report to Shareholders in Note
14 of Notes to Consolidated Financial Statements. Such
information is hereby incorporated by reference.) It cannot be
predicted whether or in what form any future legislation or
regulations will be enacted or to what extent the business of the
Bank may be affected.
Federal banking regulations define five categories of capital
adequacy for all insured depository institutions, including
categories that would prompt supervisory actions. These
categories include "Well Capitalized" (with total risk based
capital of greater than 10% of risk adjusted assets, Tier One Risk
Based Capital of greater than 6% of risk adjusted assets and
Leverage Capital of greater than 5% of assets), "Adequately
Capitalized" (greater than 8%, 5% and 4% respectively),
"Undercapitalized" (less than 8%, less than 4% and less than 4%,
respectively), "Significantly Undercapitalized" (less than 6%, 3%
and 3%, respectively) and "Critically Undercapitalized" (Tangible
Capital of less than 2% of total assets.) In addition, an
institution may not be categorized as "Well Capitalized" if it is
subject to a regulatory order. Financial institutions classified
as one of the three undercapitalized categories are subject to
progressively more restrictive limitations on activities and may
be subject to orders to increase capital and to cease certain
activities and practices. A "Critically Undercapitalized"
institution, among other additional restrictions, may, under
certain conditions, be placed in a receivership or a
conservatorship. Holding Company guarantees apply if an insured
institution is classified "Undercapitalized". Such holding
company guarantees include guarantee of compliance with banking
rules, regulations and laws and the improvement of the Bank,
including limited capital support. As previously disclosed, Advest
Bank, which is classified as an "Adequately Capitalized" bank, has
been subject to successive Memoranda of Understanding since July
1991.
(4) Disclosure Requirements for Nonbank Holding Companies
Article 9 of Regulation S-X and Industry Guide 3 specify financial
statement and certain disclosure requirements for bank holding
companies. SEC Staff Accounting Bulletin #69 ("SAB 69") details
the view of the SEC staff concerning the applicability of Article
9 and Industry Guide 3 to registrants which are not bank holding
companies. The bulletin concludes that a nonbank holding company
registrant engaged in similar lending and deposit activities
should provide certain disclosures relevant to an understanding of
the Registrant's operations. In accordance with SAB 69, the
Company, a nonbank holding company, makes the following
disclosures regarding the Bank.
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Distribution of assets, liabilities and shareholder's
equity; interest rates and interest differentials
The following table presents for the periods indicated (I) average assets,
liabilities and shareholder's equity, (II) interest income and expense,
(III) average yields on interest-earning assets and average rates incurred
on interest-bearing liabilities, (IV) the net interest spread and (V) net
interest margin on interest- earning assets. Yields and rates are computed
on a tax equivalent basis at tax rates of 34% for each of the three years
ended September 30, 1995.
<TABLE>
<CAPTION>
1995 1994 1993
----------------------------- -------------------------- --------------------------
Interest Average Interest Average Interest Average
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
(In thousands) Balance Expense Rates Balance Expense Rates Balance Expense Rates
- ------------------------- ----------------------------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets
CD's, time deposits, federal funds
and other short-term investments $ 6,294 $ 366 5.82% $ 23,861 $ 785 3.29% $ 57,206 $ 1,807 3.16%
Investment securities: <F1>
U.S. government and agency obligations 2,107 151 7.17% 2,163 160 7.40% 513 21 4.09%
Other 703 47 6.69% 827 41 4.96% 823 47 5.71%
Mortgage-backed securities 35,321 2,044 5.79% 66,312 2,574 3.88% 66,635 2,118 3.18%
FHLB stock 2,129 157 7.37% 2,127 162 7.62% 2,590 197 7.61%
Loans (net of unearned income)<F2> 258,011 19,975 7.74% 247,075 18,987 7.68% 233,708 19,594 8.38%
----------------------------- -------------------------- ----------
Total interest-earning assets 304,565 22,740 7.47% 342,365 22,709 6.63% 361,475 23,784 6.58%
----------------------------- -------------------------- ----------
Non-interest earning assets
Cash and equivalents 960 1,472 1,361
Property and equipment 692 663 695
Interest receivable 2,339 1,818 1,930
OREO and other assets 16,421 26,209 32,980
Due from affiliates 255 115 11
Prepaid commissions 163 178 253
----------- ---------- ----------
Total non-interest earning assets 20,830 30,455 37,230
----------- ---------- ----------
$325,395 $372,820 $398,705
=========== ========== ==========
Liabilities and shareholder's equity
Interest-bearing liabilities
Total deposits <F3> $275,962 $11,370 4.12% $325,993 $11,045 3.39% $355,442 $12,981 3.65%
FHLB advances 23,965 1,605 6.70% 15,991 1,033 6.46% 12,896 978 7.58%
----------- ---------- ----------
Total interest-bearing liabilities 299,927 12,975 4.33% 341,984 12,078 3.53% 368,338 13,959 3.79%
----------- ---------- ----------
Non-interest bearing liabilities
Accrued interest payable 1,251 1,201 1,305
Other liabilities 5,067 5,506 4,029
Accrued expenses 232 969 849
Due to affiliates 71 58 32
----------- ---------- ----------
Total non-interest-bearing liabilities 6,621 7,734 6,215
----------- ---------- ----------
Shareholder's equity 18,847 23,102 24,152
----------- ---------- ----------
$325,395 $372,820 $398,705
=========== ========== ==========
Net interest income (tax equivalent basis) $ 9,765 $10,631 $ 9,825
=========== ========= =========
Net interest spread (tax equivalent basis) 3.14% 3.10% 2.79%
======= ======= =======
Net interest income as a percentage of
interest-earning assets (tax equivalent basis) 3.21% 3.11% 2.72%
======= ======= =======
<FN>
<F1>(1) Securities available for sale and trading
securities are included in investment securities.
<F2>(2) Nonaccrual loans at year end are included in the total
loan portfolio.
<F3>(3) Includes net cost of interest rate swaps and caps.
</TABLE>
10
<PAGE>
Analysis of changes in interest income and interest expense
The following table presents an analysis of increases and decreases in
interest income and expense in terms of changes in volume and interest rates
for the periods indicated. Changes not due solely to either a change in
volume or a change in rate have been allocated based on the respective
percentage changes in average balances and average rates. The table is
presented on a tax equivalent basis at tax rates of 34% for fiscal years
1995 and 1994.
<TABLE>
<CAPTION>
1995 vs. 1994 1994 vs. 1993
-------------- --------------
Increase (decrease) due to cIncrease (decrease) due to change in
(In thousands) Volume Rate Total Volume Rate Total
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income
CD's, time deposits, federal funds
and other short-term investments $ (918$ 499 $(419) $(1,247$ 225 $(1,022)
Investment securities: <F1>
US government and agency obligation (4) (5) (9) 17 122 139
Other (19) 25 6 - (6) (6)
Mortgage-backed securities (2,270)1,740 (530) (23) 479 456
FHLB stock 0 (5) (5) (35) - (35)
Loans (net of unearned income) <F2> 695 293 988 28 (635) (607)
-------------- --------------
Total interest income (2,516)2,547 31 (1,260) 185 (1,075)
-------------- --------------
Interest expense
Total deposits <F3> (2,004)2,329 325 (1,131) (805) (1,936)
FHLB advances 519 53 572 200 (145) 55
-------------- --------------
Total interest expense (1,485)2,382 897 (931) (950) (1,881)
-------------- --------------
Change in net interest income $(1,031$ 165 $(866) $ (329$1,135 $ 806
============== ==============
<FN>
<F1> (1) Securities available for sale and trading securities are included in investment securities.
<F2> (2) Nonaccrual loans at year end are included in the total loan portfolio.
<F3> (3) Includes net cost of interest rate swaps and caps.
</TABLE>
Investment activities
The following table summarizes the composition of the securities portfolio
(book values) for the three years ended September 30, 1995:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
(In thousands) Amount % Amount % Amount %
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
US government and agency obligations $ 49 2% $ 4,888 9% $ 49 1%
Mortgage-backed securities 21,965 83% 48,003 79% 39,374 48%
Other 596 2% 818 1% 817 1%
FHLB stock 2,233 9% 2,045 3% 2,590 3%
Securities available for sale <F4> 1,127 4% 4,902 8% 38,662 47%
-----------------------------------------
Total $26,411 100% $60,656 100% $81,937 100%
=========================================
</TABLE>
The following table sets forth the maturities of investment securities at
September 30, 1995 and the weighted average (tax equivalent) yields on such
securities.
<TABLE>
<CAPTION>
Within After one Five After ten
one year within fiv y Total
------------ ------------- ------------- ------------- -------
(In thousands) AmountYield Amount Yield Amount Yield Amount Yield Amount Yield
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
US government and agency o$ 490 6.45% - - - - - - $ 49 6.45%
Mortgage-backed securities - - - - - - $21,965 6.25% 21,965 6.25%
Other 96 0.00% - - $500 8.50% - - 596 7.13%
FHLB stock 2,233 6.80% - - - - - - 2,233 6.80%
Securities available for s - - - - - - 1,127 5.71% 1,127 5.71%
------------------------------------------------------
Total $2,819 6.51% - - $500 8.50% $23,092 6.22% $26,411 6.30%
======================================================
<FN>
<F4>(4) Securities available for sale are detailed in Note 6 of Notes to
Consolidated Financial Statements in the 1995 Annual Report to Shareholders.
As of September 30, 1995, the Bank held no investments in floating rate
collateralized mortgage obligation (CMO) securities, which exceeded 10% of
shareholder's equity.
</TABLE>
11
<PAGE>
Lending activities
The following table summarizes the composition of loan
portfolio for the three years ended September 30, 1995:
<TABLE>
<CAPTION>
1995 1994 1993
---------------- ---------------- ----------------
(In thousands) Amount % Amount % Amount %
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial and financi$ 3,85 2% $ 7,02 3% $ 6,48 3%
Real estate constructi 5,597 2% 2,819 1% 9,783 4%
Real estate mortgage 220,613 95% 262,797 95% 222,450 92%
Installment 922 - 913 - 375 -
Lease financing 1,811 1% 2,199 1% 2,835 1%
---------------- ---------------- ----------------
Gross total loans $232,799 100% $275,749 100% $241,926 100%
======== ======== ========
Less: Allowance for l 2,213 4,645 5,433
-------- -------- --------
Net total loans $230,586 $271,104 $236,493
======== ======== ========
</TABLE>
Commercial loans, primarily to individuals and small to medium
sized firms, were made at a variety of repayment terms and are
primarily collateralized by equipment, marketable securities or
inventory primarly located in Connectitcut. Real estate
mortgage and construction balances as of September 30, 1995 are
comprised of residential, commercial and multifamily mortgages
of approximately $170.0 million, $43.9 million and $12.3
million, respectively. Commercial real estate loans are
primarily located in the Northeast and include as collateral
multifamily, health care, office and industrial property. The
Bank is no longer an active loan originator in the commercial
real estate
market. The Bank's residential loan portfolio is primarily
collateralized by mortgages on 1-4 family residential
properties located throughout the Eastern United States with
concentrations in CT, MA, NY and PA. Installment loans are
made to individuals. The Bank also occasionally purchases
residential mortgage loans for its portfolio from other
financial institutions and mortgage bankers for its portfolio.
Such purchases are primarily loans collateralized by property
located in Connecticut. There were no such purchases during
fiscal 1995.
The following tables show the interest rate sensitivities of
loans outstanding as of September 30, 1995 which are due in the
periods indicated. Loans due within one year include demand
loans.
<TABLE>
<CAPTION>
After one
Within but within After five
(In thousands) one year five years years Total
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and financial $ 3,556 $ 300 $ - $ 3,85
Real estate construction 3,566 1,443 588 5,597
Real estate mortgage 114,654 41,318 64,641 220,613
Installment 317 267 338 922
Lease financing - 79 1,732 1,811
--------------------------------------------------------
Total $122,093 $43,407 $67,299 $232,799
--------------------------------------------------------
Fixed interest rate $ 7,368 $66,987
Variable interest rate 36,039 312
------------------------
Total $43,407 $67,299
========================
</TABLE>
Nonperforming assets
A summary of nonperforming assets by type follows for the three
years ended September 30, 1995:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $ 290 $ 6,730 $ 4,474
Accruing loans contractually past due 90 days - 960 19
Restructured loans - 638 665
Other real estate owned, net 2,849 13,414 22,683
----------------------------------------
Total nonperforming assets $3,139 $21,742 $27,841
========================================
Nonperforming assets as a percentage of loans
and other real estate owned 1.3% 7.5% 10.4%
========================================
</TABLE>
OREO is shown net of the reserve for OREO losses. The 1995
activity in the reserve account reflects a beginning balance of
$1,201,000, provisions for possible OREO losses of $4,491,000,
total OREO reserve chargeoffs of $5,186,000, total recoveries
of $212,000 and an ending balance in the reserve for OREO
losses of $718,000.
12
<PAGE>
Generally loans are placed in nonaccrual status when interest or
principal is past due for ninety days or earlier if circumstances
indicate collection is doubtful. The Bank resumes the accrual of
interest on such loans if, in the opinion of management, the
borrower has demonstrated adequate financial resources and intent
to meet the terms and conditions of the loan, and all payments are
again current. Interest income forgone on nonperforming loans in
fiscal years 1995, 1994, and 1993 amounted to $508,000, $754,000
and $700,000, respectively.
Summary of loan loss experience
The following table summarizes the Bank's loan loss experience for
each of the three years ended September 30, 1995:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $4,645 $5,433 $5,925
----------------------------
Chargeoffs:
Real estate mortgage 7,831 2,640 1,051
Installment - 27 -
Commercial 483 52 70
Lease financing 14 97 -
----------------------------
8,328 2,816 1,121
----------------------------
Recoveries:
Real estate mortgage 239 136 50
Commercial 1 16 19
Lease financing 19 22 -
----------------------------
259 174 69
----------------------------
Net charge-offs 8,069 2,642 1,052
Additions charged to operations 5,637 1,854 560
----------------------------
Balance at end of period $2,213 $4,645 $5,433
============================
Ratio of net charge-offs to average loans
outstanding during the period 3.13% 1.07% 0.45%
============================
</TABLE>
The Bank maintains general reserves for potential losses from its
loan portfolio in an Allowance for Losses from Loans (the "ALL").
The ALL is maintained at a level considered by management to be
adequate. The adequacy of the ALL is reviewed quarterly by the
Bank's management and its Board of Directors, and is determined
primarily by management's informed judgment concerning the amount
of risk inherent in the portfolio at a point in time. Management's
judgment is based on a number of factors including: 1) a detailed
risk rating system for commercial loans in which loans are
individually reviewed with respect to such criteria as the
estimated value of underlying loan collateral and the financial
condition of borrowers, 2) recent historical loan loss experience,
3) industry and geographic concentrations, 4) the results of the
most recent regulatory examination available, 5) current national
and local economic conditions, and 6) other relevant information
as may be available. The balance of each risk rating category has
a reserve percentage applied for the purpose of estimating each
component of the ALL. A substantial portion of outstanding
commercial loan portfolio balances on an annualized basis are
reviewed periodically by a third party that is independent from the
Bank and the results of such review are factored into the risk
rating system.
Management also reviews monthly, certain monitored performing and
all nonperforming loans individually and makes further reserve
allocation adjustments. The Bank's one to four family residential
mortgage portfolio reserves are evaluated primarily upon the basis
of portfolio historical performance. The Bank also maintains an
unallocated and supplemental reserve that reflects management's
assessment of local and national economic, business and real estate
market trends, and the Bank's procedures, controls and personnel.
Loans are charged off against the ALL when management believes that
collection is unlikely. Loan charge-offs are identified during the
loan review process. The charge-offs recorded prior to 1995 were
primarily associated with the real estate mortgage portfolio and
resulted from the decline in the value of the properties serving as
collateral for the loans. The charge-offs recorded during 1995
were primarily associated with the discounts neccessary to attract
buyers of those distressed commercial OREO assets included in the
Bank's accelerated asset disposition plan and other bulk sales.
(See Note 2 of Notes to Consolidated Financial Statements in the
1995 Annual Report to Shareholders. )
13
<PAGE>
The following table presents the allocation of the reserve for loan
and lease losses by loan categories for the three years ended
September 30, 1995:
<TABLE>
<CAPTION>
1995 1994 1993
---------------- ------------------ ----------------
Loans in Loans in Loans in
Amount category Amount category Amount category
of as a % of of as a % of of as a % of
(In thousands) reserve total loanreserve total loans reserve total loans
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial and financ$ 29 2% $ 86 3% $1,033 3%
Real estate construct 38 2% 37 1% 291 4%
Real estate mortgage 1,752 95% 4,198 95% 3,144 92%
Installment 18 - 18 - 17 -
Lease financing 66 1% 105 1% 381 1%
Unallocated 310 - 201 - 567 -
---------------- ------------------ ----------------
Total $2,213 100% $4,645 100% $5,433 99%
================ ================== ================
</TABLE>
Deposits
The Bank offers a variety of deposit accounts designed to attract
both short and long term funds. The Bank provides a money market
deposit account to Advest's customers as a component of various
cash management products available to those customers. The Bank
primarily markets brokered Certificates of Deposit (CD's) through
Advest. The Bank also markets retail deposit accounts, such as
money market accounts, primarily through Advest. At September 30,
1995, deposits obtained through Advest constituted 89% of all
deposits at the Bank. Additional deposit information is disclosed
in Note 9 of Notes to Consolidated Financial Statements in the 1995
Annual Report to Shareholders.
The following table presents the average balances of and average
rates paid on deposits for the three years ended September 30,
1995:
<TABLE>
<CAPTION>
1995 1994 1993
---------------- ------------------ ----------------
Average Average Average Average Average Average
(Dollars in thousandsbalance rate balance rate balance rate
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Savings-non interest $ 66 $ 58 $ 63
Savings 33 1.99% 243 2.00% 354 2.51%
Money market 209,407 3.22% 274,715 2.76% 306,722 2.96%
Time certificates 66,456 6.41% 50,977 6.17% 48,303 8.00%
---------------------------------------------------------
Total deposits $275,962 4.12% $325,993 3.39% $355,442 3.65%
=========================================================
</TABLE>
The following table sets forth the maturity distribution of time
deposits of $100,000 or more as of September 30, 1995:
<TABLE>
<CAPTION>
(Dollars in thousands) Amount
-----------------------------------------
<S> <C>
Three months or less $ 4,150
Over three months to six months 7,108
Over six months to twelve month 6,441
Over twelve months 9,056
----------
$26,755
==========
</TABLE>
Return on equity and assets
<TABLE>
<CAPTION> Years ended September 30,
---------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on assets (net income/average to * * *
Return on equity (net income/average eq * * *
Net interest margin 3.00% 2.85% 2.46%
Equity to assets (average equity/averag 5.79% 6.20% 6.06%
<FN>
* As a result of net losses in 1995, 1994, and 1993, this
information is not meaningful.
</TABLE>
14
<PAGE>
Item 2. Properties
The Company conducts all of its operations from leased premises,
generally under non-cancelable leases with terms up to 15 years.
Item 3. Legal Proceedings
The Company has been named as defendant in various legal actions some
of which claim substantial damages. The actions have arisen
principally from the securities and investment banking business. In
the opinion of management, based on discussions with counsel, the
outcome of these matters will not result in a material adverse effect
on the results of operations and financial condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The information required by this item is disclosed on pages 31 and 32
of the 1995 Annual Report to Shareholders in Note 11 of the Notes to
Consolidated Financial Statements and on page 39 under the captions
"Quarterly Financial Information" and "Shareholder Information". Such
information is hereby incorporated by reference.
Item 6. Selected Financial Data
The information required by this item is disclosed on page 9 of the
1995 Annual Report to Shareholders under the caption "Five Year
Financial Summary". Such information is hereby incorporated by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The information required by this item is disclosed on pages 10 through
18 of the 1995 Annual Report to Shareholders under the caption
"Management's Discussion and Analysis of Financial Condition and
Results of Operations". Such information is hereby incorporated by
reference.
Item 8. Financial Statements and Supplementary Data
The information required by this item is disclosed in the Consolidated
Financial Statements and Notes on pages 20 through 38 and under the
caption "Quarterly Financial Information" on page 39 of the 1995
Annual Report to Shareholders. Such information is hereby incorporated
by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
There were no disagreements with the Company's independent accountants
on any accounting or financial disclosure matters.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information required for "Directors" by this item is included
under the caption "Election of Directors" in the Company's Proxy
Statement to be filed with the Securities and Exchange Commission in
connection with the Company's annual meeting to be held January 25,
1996. Such information is hereby incorporated by reference.
15
<PAGE>
The following table sets forth the executive officers of the
Company at December 1, 1995. Executive officers of the Company are
appointed annually by the Board of Directors to hold office until
their successors are appointed and qualify.
Officer
Name Age Office Since
- ---------------------------------------------------------------------------
Allen Weintraub 60 Chief Executive Officer and
Chairman of the Board 1977
Grant W. Kurtz 53 President of the Company and Advest, Inc. 1985
Allen G. Botwinick 52 Executive Vice President - Administration
and Operations 1980
George A. Boujoukos 61 Executive Vice President - Capital
Markets of Advest, Inc. 1977
Lee G. Kuckro 54 Senior Vice President, Secretary
and General Counsel 1978
Martin M.
Lilienthal 53 Senior Vice President, Treasurer and
Chief Financial Officer 1977
Harry H. Branning 44 Executive Vice President of
Advest, Inc 1994
Item 11. Executive Compensation
The information required by this item is included under the caption
"Remuneration of Directors and Officers" and "Certain Transactions" of
the Company's Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the Company's annual meeting to
be held January 25, 1996. Such information is hereby incorporated by
reference.
Item 12. Security Ownership Of Certain Beneficial Owners And
Management
The information required by this item is contained under the caption
"Election of Directors" in the Company's Proxy Statement to be filed
with the Securities and Exchange Commission in connection with the
Company's annual meeting to be held January 25, 1996. Such
information is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is included under the caption
"Certain Transactions" of the Company's Proxy Statement to be filed
with the Securities and Exchange Commission in connection with the
Company's annual meeting to be held January 25, 1996. Such
information is hereby incorporated by reference.
16
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
Page Reference
-----------------------
Annual Report 10-K
----------------------
(a) 1. Financial Statements
--------------------
The Consolidated Financial Statements and The Report of
Independent Accountants contained in the 1995 Annual
Report to Shareholders are incorporated herein by reference:
Report of Independent Accountants 19
Consolidated Balance Sheets 21
Consolidated Statements of Earnings 20
Consolidated Statements of Cash Flows 22
Consolidated Statement of Changes
in Shareholders' Equity 23
Notes to Consolidated Financial Statements 24-38
2. Financial Statement Schedules
-----------------------------
Report of Independent Accountants on all schedules 22
Schedule I - Condensed Financial Information
of Registrant 23-25
Schedule II - Valuation and Qualifying Accounts 26
3. Exhibits
--------
The following is a list of exhibits to this report on Form 10-K
filed herewith or incorporated by reference herein.
Prior Filing(s) to which Reference
---------------------------------
Exhibit Description is made, if applicable
- -------- ----------- --------------------
3(a) Restated Certificate of Exhibit 3(a) of Incorporation
Incorporation of Registration Registrant's Report on Form 10-q
for the quarter ended March 31, 1989
3(b) By-laws of Registrant, as restated Exhibit 3(b) of Registrant's
Report on Form 10-Qfor the
quarter ended March 31, 1989
and Exhibit 3(a) to Registrant's
Report on Form 10-Q for the
quarter ended June 30, 1990
3(c) First Amendment to By-laws Filed Herewith
of Registrant
4(a) Shareholder Rights Agreement Exhibit to Registrant's Report on
dated as of October 31, 1988 Form 8-k datedNovember 1, 1988
between Registrant and The
Connecticut Bank and Trust
Company, N.A., as Rights Agent
4(b) Indenture pertaining to Registrants Exhibit 4(e) to Registrant's
9% Convertible Subordinated Registration Statement on Form
Debentures S-1, File NO. 2-81977
17
<PAGE>
Prior Filing(s) to which Reference
---------------------------------
Exhibit Description is made, if applicable
- -------- ----------- --------------------
10(a) Registrant's 1994 Non-Employee Exhibit A to Registrant's Proxy
Director Stock Option Plan Statement dated December 20, 1994
10(b) Registrant's 1986 Stock Exhibit 10 to Registrant's Report
Option Plan, as amended on Form 10-q the quarter ended
March 31, 1987; Exhibit 10(a) to
Registrant's Report on Form 10-Q
for the quarter ended March
31, 1988
10(c) Registrant's 1993 Stock Option Exhibit A to Registrant's Proxy
Plan Statement dated December 21, 1993
10(d) Registrant's 1981 and 1983 Exhibit A to Registrant's Proxy
Incentive Stock Option Plans, Statements dated December 15,
as amended 1981 and December 21, 1983;
Exhibit 10(a) to Registrant's
Report on Form 10-Qfor the
quarter ended March 31, 1988
10(e) Registrant's Deferred Exhibit 10(f) to Registrant's
Compensation Savings and Report on Form 10-k for the
Investment Plan, Amended and fiscal year ended September
Restated as of November 17, 1989 30, 1989
10(f) First Amendment to Registrant's Exhibit 10(j) to Registrant's
Deferred Compensation Savings Report on Form 10-k for its
and Investment Plan fiscal year ended September
30, 19900
10(g) Amendments Nos. 2 and 3 to Exhibit 10(b) of Registrant's
Registrant's Deferred for the quarter ended December
Compensation Savings and 30, 1992
Investment Plan
10(h) Form of Executive Officer Exhibit 10 to Registrant's Report
Restricted Stock and Stock on Form 10-Q for the quarter
Option Agreement ended December 31, 1994
10(I) The Advest Thrift Plan of Exhibit 10(a) of Registrant's
Registrant,effective as of Report on Form 10-Q for the
December 31, 1992 quarter ended December 31, 1992
10(j) Registrant's 1990 Top AE Stock Exhibit 10(i) to Registrant's
Option Plan, effective as of Report on Form 10-k for its
October 26, 1990 fiscal year ended September
30, 1990
10(k) Registrant's 1991 Top AE Exhibit 10(k) to Registrant's
Stock Option Plan, effective Report Form 10-k for its fiscal
as of November 22, 1991. year ended September 30, 1991
18
<PAGE>
Prior Filing(s) to which Reference
---------------------------------
Exhibit Description is made, if applicable
- -------- ----------- --------------------
10(l) Registrant's 1992 Top AE Exhibit 10(c) of Registrant's
Stock Option Plan Report on Form 10-q for the
quarter ended December 31, 1992
10(m) Registrant's Account Executive Exhibit 10(m) of Registrant's
Nonqualified Define Benefit Plan Report on Form 10-k for its
fiscal year ended September 30,
1993
10(n) Registrant's Nonqualified Exhibit 10(n) of Registrant's
Executive Post-employment Report on Form 10-k for its
Income Plan fiscal year ended September
30, 1994
10(o) Registrant's 1995 Equity Plan, Exhibit 4.1 to Registrant's
effective as of December 1, 1994 Regulation Statement on Form
S-8, File NO. 33-56275
10(p) First Amendment to Registrant's Filed Herewith
Nonqualified Executive Post-
employment Income Plan
11 Statement Regarding Computation Filed Herewith
of Net Earnings per Common Share
13 Annual Report to Shareholders Filed Herewith *
for fiscal year ended
September 30, 1995
21 Subsidiaries Filed Herewith
23 Consent of Independent Filed Herewith
Accountants
* Pursuant to Item 601(b) (13) of Regulation S-K, except for those portions
of the Annual Report expressly incorporated by reference and included in
Exhibit 13, the Annual Report is not to be deemed filed as part of this filing
on Form 10-K.
- -------------------
(b) Reports on Form 8-K
--------------------
No reports on Form 8-K were filed during the fourth quarter of the year
ended September 30, 1995.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE ADVEST GROUP, INC.
By /s/Martin M. Lilienthal November 30, 1995
--------------------------
Martin M. Lilienthal
Senior Vice President and Treasurer
(Chief Financial and Principal Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Chief Executive Officer,
Chairman of the Board
and Director (Principal
/s/Allen Weintraub Executive Officer) November 30, 1995
- --------------------------
Allen Weintraub
Senior Vice President and
Treasurer (Chief Financial
and Principal Accounting
/s/Martin M. Lilienthal Officer) November 30, 1995
- ----------------------------
Martin M. Lilienthal
/s/George A. Boujoukos Director November 30, 1995
- ----------------------------
George A. Boujoukos
/s/Sanford Cloud, Jr. Director November 30, 1995
- ----------------------------
Sanford Cloud, Jr.
/s/Richard G. Dooley Director November 30, 1995
- ----------------------------
Richard G. Dooley
/s/Robert W. Fiondella Director November 30, 1995
- ----------------------------
Robert W. Fiondella
20
<PAGE>
SIGNATURES
/s/Grant W. Kurtz President and Director November 30, 1995
- ----------------------------
Grant W. Kurtz
Vice Chairman of the
/s/Anthony A. LaCroix Board and Director November 30, 1995
- ----------------------------
Anthony A. LaCroix
/s/Corine T. Norgaard Director November 30, 1995
- -----------------------------
Corine T. Norgaard
/s/John A. Powers Director November 30, 1995
- -----------------------------
John A. Powers
21
<PAGE>
Report of Independent Accountants
---------------------------------
The Board of Directors and Shareholders
of The Advest Group, Inc.:
Our report on the consolidated financial statements of The Advest
Group, Inc. and Subsidiaries has been incorporated by reference in
this Form 10-K from page 19 of the 1995 Annual Report to Shareholders
of The Advest Group, Inc. In connection with our audits of such
financial statements, we have also audited the related financial
statement schedules listed in the index on page 17 of this Form 10-K.
In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as
a whole, present fairly, in all material respects, the information
required to be included therein.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
October 26, 1995
22
<PAGE>
Schedule I
Condensed Financial Information of Registrant
The Advest Group, Inc.
---------------------
(Parent Company)
Condensed Balance Sheets
September 30,
---------------
- ------------------------------------------------------------------
(In thousands) 1995 1994
- ------------------------------------------------------------------
Assets
Cash $ 670 $ 352
Short-term investment - 3,000
Investment in subsidiaries, equity
method(a) 88,766 92,955
Receivables from subsidiaries(a) 3,038 2,788
Loans 10,922 8,371
Investment securities 8,313 2,344
Other assets 9,047 8,609
----------------------
Total assets $120,756 $118,419
=======================
Liabilities
Accounts payable and accrued expenses$ 9,657 $ 11,708
Payable to subsidiaries(a) 6,375 6,696
Borrowings 5,240 5,038
Subordinated liabilities 20,552 20,997
----------------------
Total liabilities 41,824 44,439
Shareholders' Equity(b) 78,932 73,980
----------------------
Total liabilities and shareholders'
equity $120,756 $118,419
===================
(a) Eliminated in consolidation.
(b) For an analysis of Shareholders' Equity and its components, see
Registrant's Consolidated Balance Sheets and Statements of Changes in
Shareholders' Equity on pages 21and 23 of the 1995 Annual Report to
Shareholders.
23
<PAGE>
Schedule I
(Continued)
The Advest Group, Inc.
----------------------
(Parent Company)
Condensed Statements of Earnings
For the years ended September 30,
------------------------
(In thousands) 1995 1994 1993
- ----------------------------------------------------------------
Gain on sale of investment
advisory business, net $10,092 $ -- $ --
Interest and other income 428 284 293
--------------------------------
Total revenues $10,520 $ 284 $ 293
Interest and other expenses 3,259 5,149 3,586
-------------------------------
Income (loss) before income tax benefit,
extraordinary credit and
equity in earnings of
subsidiaries 7,261 (4,865) (3,293)
Income tax benefit 542 2,787 2,711
-------------------------------
Income (loss) before extraordinary credit
and equity in earnings of
subsidiaries 7,803 (2,078) (582)
Extraordinary credit -- -- 2,103
----------------------------------
Income (loss) before equity in
income of subsidiaries 7,803 (2,078) 1,521
Equity in (loss) income of
subsidiaries (1,452) 5,131 5,750
-----------------------------
Net income $ 6,351 $3,053 $7,271
=============================
24
<PAGE>
Schedule I
(Continued)
The Advest Group, Inc.
----------------------
(Parent Company)
Condensed Statements of Cash Flows
For the years ended September 30,
- --------------------------------------------------------------------
(In thousands) 1995 1994 1993
- --------------------------------------------------------------------
Operating Activities:
Net income $ 6,351 $ 3,053 $ 7,271
Equity in income (loss) of
subsidiaries 1,452 (5,131) (5,750)
Adjustments to reconcile net income to net cash
provide by (used for) operating
activities 1,580 3,391 189
Gain on sale of investment
advisory business, net (10,092) -- --
Deferred ESOP contribution -- -- 1,000
Net decrease (increase)in
operating assets (20) 24 (111)
Net decrease in operating liabilities (2,103) (1,365) (450)
----------------------------
Net cash (used for) provided by
operating activities (2,832) (28) 2,149
----------------------------
Financing Activities:
Proceeds from long term borrowing 1,000 -- --
Repayment of long term borrowings -- -- (67)
Repayment of short term borrowings (798) (650) (1,050)
Employee stock transaction 62 27 84
Repurchase of subordinated debentures (410) (365) (281)
Net (decrease) increase in payables
to subsidiaries 3,018 (748) 6,358
Repurchase of common stock (2,309) (3,090) (2,022)
Proceeds from sale of treasury stock 846 -- --
------------------------------
Net cash provied by (used for)
financing activities 1,409 (4,826) 3,022
-----------------------------
Investing Activities:
Acquisition of subsidiaries assets (4,585) -- --
Increase in investments in
subsidiaries (152) (548) (1,050)
Proceeds from sales of investment
securities -- 8,975 --
Proceeds from maturities of held
to maturity securities 12,500 39,000 30,000
Proceeds from investment
advisory business, net 10,141 -- --
Purchases of investment securities (15,309) (44,114) (37,108)
Loans originated (1,761) (56) --
Principal collections on loans 746 10 19
Recovery on write-offs 161 -- 291
------------------------------
Net cash provided by (used for)
investing activities 1,741 3,267 7,848)
-----------------------------
Increase (decrease) in cash 318 (1,587) (2,677)
Cash at beginning of period 352 1,939 4,616
------------------------------
Cash at period end $ 670 $ 352 $ 1,939
=============================
Supplemental Information:
Interest paid $ 2,452 $ 2,426 $ 2,792
Income taxes paid $ 2,273 $ 1,058 $ 2,406
Non-cash transfers (reduction of payable to
subsidiaries effected in the form
of dividends) $ 3,007 $ -- $ 7,000
25
<PAGE>
Schedule II
The Advest Group, Inc. and Subsidiaries
---------------------------------------
Valuation and Qualifying Accounts
Additions
Balance charged Charge Balance
at to -offs at
beginning cost and and end
(In thousands) of period expenses recoveries of period
- -------------------------------------------------------------------
For the years ended
September 30,
- ------------------
1995
Credit losses:
Brokerage customers $ 869 $ 473$ (599) $ 743
Loans 4,900 5,637 (8,203) 2,334
Asset devaluation:
Other real estate owned 1,201 4,491 (4,974) 718
Other investments/assets 2,218 (263) (705) 1,250
---------------------------------------
$ 9,188 $10,338 $(14,481) $ 5,045
======================================
1994
Credit losses:
Brokerage customers $ 1,305 $ 265$ (701) $ 869
Loans 5,782 2,499 (3,381) 4,900
Other -- 6 (6) --
Asset devaluation:
Other real estate owned 2,201 772 (1,772) 1,201
Other investments/assets 1,383 1,869 (1,034) 2,218
---------------------------------------
$10,671 $ 5,411 $ (6,894) $ 9,188
======================================
1993
Credit losses:
Brokerage customers $ 1,674 $ 364 $ (733) $ 1,305
Loans 5,986 1,690 (1,894) 5,782
Other -- 5 (5) --
Asset devaluation:
Other real estate owned 2,830 2,190 (2,819) 2,201
Other investments/assets 1,626 43 (286) 1,383
---------------------------------------
$12,116 $ 4,292 $ (5,737) $10,671
======================================
26
<PAGE>
Form 10-K
Exhibit Index
Exhibit Description
- -------------------
3(c) First Amendment to By-laws of Registrant
10(p) First amendment to registran's Nonqualified Executive
Postemployment Income Plan
10(n) Registrant's Nonqualified Executive Post-employment Income
Plan
11 Statement Regarding Computation of Net Earnings per Common
Share
13 Selected Excerpts from the Annual Report to Shareholders for
fiscal year ended September 30, 1995
21 Subsidiaries
23 Consent of Coopers & Lybrand L.L.P.
27
<PAGE>
Exhibit 3(c)
FIRST AMENDMENT TO
RESTATED BY-LAWS OF
THE ADVEST GROUP, INC.
(Adopted by action of the Board of Directors
of The Advest Group, Inc. on September 28, 1995)
RESOLVED, that Article III, Section 4 of the Bylaws of the
Corporation be, and it hereby is, amended in its entirety to read
as follows:
SECTION 4. Qualification. Directors shall be
stockholders. Any person elected as a Director who is not at
the time of election a stockholder, shall have a period of
six months from the date of election to satisfy the
requirement of stock ownership. If, at the end of said six
month period, the Director has not become an owner of the
common stock of the Corporation, he shall cease to be a
Director. No person shall be eligible for election or
reelection as a Director after such person has reached his or
her 71st birthday. Nor shall any person be appointed as a
Director to fill any vacancy after such person has reached
his or her 71st birthday.
28
<PAGE>
Exhibit 10(p)
FIRST AMENDMENT TO
THE ADVEST, INC.
ACCOUNT EXECUTIVE NONQUALIFIED DEFINED BENEFIT PLAN
This Amendment to The Advest, Inc. Account Executive
Nonqualified Defined Benefit Plan (the "Plan") is made effective
as of October 1, 1992.
W I T N E S S E T H
WHEREAS, the Plan was adopted by Advest, Inc. (the "Company")
effective October 1, 1992 and provides for the provision of
specified benefits to certain account executives meeting certain
performance targets;
WHEREAS, the term "account executive" is generally reserved
for brokers servicing retail accounts and it was the intent of the
Company in adopting the Plan that institutional brokers servicing
institutional accounts not be deemed to be account executives
eligible to receive benefits under the Plan; and
WHEREAS, the Company believes it is appropriate to amend the
plan to clarify this matter and eliminate any possible ambiguity
as to whether institutional brokers may be deemed to be account
executives for purposes of participation in the Plan;
NOW, THEREFORE, Section 1.17 of Plan is hereby amended,
effective October 1, 1992, by adding the following sentence to the
end thereof:
"For purposes of the Plan, an institutional broker whose
primary responsibility is the servicing of institutional
accounts shall not be deemed to be an 'account executive' and
shall not be eligible to participate in the Plan."
29
<PAGE>
Exhibit 11
The Advest Group, Inc. and Subsidiaries
Computation of Net Income (Loss) Per Common Share
For the years ended September 30,
- -------------------------------------------------------------------
Assuming
(Primary) Full dilution*
------------------- --------------
(In thousands, except per share amounts)
1995 1994 1993 1995 1993
- --------------------------------------------------------------------
Income before
extraordinary credit $6,351 $3,053 $5,168 $6,351 $5,168
Interest on convertible debentures
outstanding during the period, net
of tax and other
related expenses -- -- -- 1,001 1,105
--------------------------------------------
6,351 3,053 5,168 7,352 6,273
Extraordinary credit -- -- 2,103 -- 2,103
------------------------------------------
Net income applicable to common
stock and other dilutive
securities $6,351 $3,053 $7,271 $7,352 $8,376
Average number of common shares
outstanding during the
period 8,501 8,776 9,248 8,501 9,248
Additional shares assuming:
Exercise of stock options 234 221 -- 270 258
Conversion of debentures -- -- -- 1,527 1,591
---------------------------------------
Average number of common and
common equivalent shares used
to calculate net income per
common share 8,735 8,997 9,248 10,298 11,097
=======================================
Income per common and
common equivalent share:
Income before extraordinary
credit $ 0.73 $ 0.34 $ 0.56 $ 0.71$ 0.56
Extraordinary credit -- -- 0.23 -- 0.19
-------------------------------------------
Net income $ 0.73 $ 0.34 $ 0.79 $ 0.71$ 0.75
==========================================
* For the year ended September 30, 1994, net income per share
assuming full dilution is the
same as primary net income per share.
30
Exhibit 13
<PAGE>
[page 9 of Annual Report]
<TABLE>
<CAPTION>
Five Year Financial Summary
For the years ended September 30,
- -------------------------------------------------------------------------------------------------------------
In thousands, except per share amounts
1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
Revenues
Commissions:
Listed $ 39,773 $ 36,284 $ 39,199 $ 40,208 $ 37,306
Mutual Funds 22,693 22,337 21,448 18,472 12,439
Over-the-counter 12,554 10,374 9,527 9,699 6,961
Insurance 4,487 5,164 3,634 3,260 2,629
Options 3,071 2,570 2,407 3,237 3,904
Other 1,686 2,761 1,620 1,626 2,683
---------------------------------------------------------------------------
84,264 79,490 77,835 76,502 65,922
---------------------------------------------------------------------------
Interest:
Loans 20,005 19,016 19,615 23,094 29,704
Margin accounts 23,761 17,868 14,158 17,990 18,227
Investments 6,132 6,793 6,227 8,738 18,330
Securities inventory 1,470 1,016 1,015 970 1,053
Other 4,714 1,391 1,428 1,985 2,689
---------------------------------------------------------------------------
56,082 46,084 42,443 52,777 70,003
Principal transactions 41,424 32,297 33,662 40,364 38,102
Investment banking 17,470 25,743 31,102 30,675 22,787
Asset management and administrat 16,810 16,399 14,111 15,669 12,818
Gain on sale of investment advisory
business, net 10,092 -- -- -- --
Other 6,491 5,216 2,878 3,894 2,614
---------------------------------------------------------------------------
Total revenues 232,633 205,229 202,031 219,881 212,246
---------------------------------------------------------------------------
Expenses
Compensation and benefits 121,611 114,800 111,615 110,474 98,534
---------------------------------------------------------------------------
Interest:
Deposits 11,002 9,613 11,290 18,018 30,538
Brokerage customers 9,928 6,342 5,383 6,690 9,511
Borrowings 4,704 5,064 5,120 5,110 4,942
Other 4,932 1,565 1,229 1,618 2,170
---------------------------------------------------------------------------
30,566 22,584 23,022 31,436 47,161
Occupancy and equipment 17,123 15,508 15,516 17,663 19,035
Communications 18,418 18,662 16,627 14,771 14,202
Provision for credit losses and
asset devaluation 10,338 5,411 4,292 26,444 16,857
Professional 5,468 6,231 5,248 5,160 6,350
Business development 4,204 4,532 4,033 3,908 2,866
Brokerage, clearing and exchange 3,922 3,693 3,579 3,654 4,082
Provision for restructuring -- -- -- 1,020 --
Other 9,222 8,453 10,028 9,773 11,783
---------------------------------------------------------------------------
Total expenses 220,872 199,874 193,960 224,303 220,870
---------------------------------------------------------------------------
Income (loss) before income taxes
and extraordinary credit 11,761 5,355 8,071 (4,422) (8,624)
Provision (benefit) for income tax 5,410 2,302 2,903 175 (1,740)
---------------------------------------------------------------------------
Income (loss) before
extraordinary credit 6,351 3,053 5,168 (4,597) (6,884)
Extraordinary credit - utilization
of operating loss carryforward -- -- 2,103 -- --
---------------------------------------------------------------------------
Net income (loss) $ 6,351 $ 3,053 $ 7,271 $ (4,597) $ (6,884)
===========================================================================
Per share data
Primary net income (loss) $ 0.73 $ 0.34 $ 0.79 $ (0.48) $ (0.70)
Net income (loss) assuming full di $ 0.71 $ 0.34 $ 0.75 $ (0.48) $ (0.70)
Book value $ 9.42 $ 8.62 $ 8.16 $ 7.22 $ 7.52
Other data
Total assets $ 830,815 $ 884,855 $ 885,182 $ 796,102 $ 904,899
Shareholders' equity $ 78,932 $ 73,980 $ 73,989 $ 67,656 $ 73,178
Subordinated borrowings $ 20,552 $ 20,997 $ 21,375 $ 21,671 $ 21,835
Long-term borrowings $ 17,240 $ 30,388 $ 15,038 $ 11,688 $ 17,300
Return on average equity 8.40% 4.10% 10.20% * *
Average common and common equivalent
shares outstanding 8,735 8,997 9,248 9,598 9,832
<FN>
* As a result of net losses in 1992 and 1991, this item is not meaningful.
</TABLE>
31
<PAGE>
[page 10 of annual report]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Business Environment
The Advest Group, Inc. ("AGI"), together with its subsidiaries
(the "Company"), provides diversified financial services including
securities brokerage, trading, investment banking, consumer
lending and asset management. Advest, Inc. ("Advest"), a regional
broker/dealer and the Company's principal subsidiary, provides
brokerage, investment banking and asset management services to
retail and institutional investors through some 85 sales offices
in 16 states and Washington, DC. Advest Bank (the "Bank"), an
FDIC-insured, Connecticut chartered savings bank, offers
residential mortgage lending and trust services primarily in the
northeast and through Advest's branch network. Other subsidiaries
include Boston Security Counsellors ("BSC"), an investment
management company serving private clients and, until their sale
in the current year, the Company's proprietary mutual funds and
Billings & Co., Inc. ("Billings"), a company specializing in
private placement offerings primarily in real estate.
All aspects of the Company's business are highly competitive
and impacted by regulatory and other factors outside of its
control, including general economic and financial conditions,
particularly in the northeastern United States, the volume and
price levels of securities markets, the demand for investment
banking services and interest rate volatility. The Company
closely monitors its operating environment to enable it to respond
promptly to market cycles. In addition, the Company seeks to
lessen earnings volatility by controlling expenses, increasing fee-
based business and developing new revenue sources. Nonetheless,
operating results of any individual period should not be
considered representative of future performance.
For the year ended September 30, 1995, the Company reported
net income of $6.4 million ($.73 per share) compared with net
income of $3.1 million ($.34 per share) in 1994 and income before
extraordinary credit of $5.2 million ($.56 per share) in 1993.
Fiscal 1993 benefited from a $2.1 million extraordinary credit
from the utilization of net operating loss carryforwards resulting
in net income of $7.3 million ($.79 per share).
Advest, Inc.
The securities markets rebounded during the first three calendar
quarters of 1995 after a dismal 1994. Corporate restructurings,
together with lower interest rates, contributed to strong earnings
of corporate issuers, and led the DOW and other major stock
indices to record highs. Despite continued concerns of an
expected correction, the DOW closed at 4789 on September 30, 1995,
a 25% increase from the prior year. The S&P 500, at 584, and the
NASDAQ Composite, at 1044, gained 26% and 37%, respectively,
during the past twelve months. For the securities industry
generally, a 43% year to year increase in the fourth quarter
lifted an otherwise mediocre underwriting year. The level of new
stock issues surged in the September 1995 quarter as corporate
issuers took advantage of higher stock prices to raise capital and
most issues sold at levels above their filing range. Related
underwriting fees rose significantly in the same quarter due to
higher fees from stock issues compared with debt issues. For the
first three calendar quarters of 1995, bond underwritings were
down 9% from the year earlier period. Driven by industry
consolidations, merger and acquisition activities achieved record
levels during the first three quarters of calendar 1995.
Advest reported pre-tax income for fiscal 1995 of $12.9
million, an increase of 13% from $11.4 million in the prior year.
Net revenues, total revenues less interest expense, increased 7%
to $179.2 million. Year to year revenue gains were posted for
principal transactions, up 27%, net interest, up 20%, asset
management activities, up 11%, commissions, up 6%, and other
revenues, up 28%. Current year investment banking revenues
declined 31%, despite a 17% year to year fourth quarter increase
reflective of the industry trend. Net expenses (total expenses
excluding interest), increased 6% to $166.3 million, primarily due
to increased compensation and computer equipment costs.
Advest Bank
During the current year, the Bank took action to enhance future
operating results by evaluating alternatives to expedite the
disposition of its nonperforming assets ("NPAs"). Through
December 1994, the Bank managed its NPAs primarily by acquiring
title to the properties through foreclosure and marketing the
foreclosed properties at fair value. This process has been
prolonged due to the sluggish economic conditions prevalent in the
Northeast, and in particular Connecticut, where the Bank's
commercial lending is concentrated. During the first half of
fiscal 1995, the Bank sold $14.5 million of NPAs and commercial
real estate loans in bulk sale transactions at discounts to
carrying value and recorded charges of $2.8 million. During the
third quarter, the Bank's Board of Directors approved and adopted
an accelerated asset disposition plan with the objectives of
allowing Bank management to focus on its residential mortgage
banking and trust businesses and expediting conditions under which
a Memorandum of Understanding ("MOU") the Bank is subject to would
be lifted or modified (See Note 2). In accordance with the
accelerated asset disposition plan, the Bank recorded loss
provisions of $6.0 million in the third quarter to write down
assets targeted for accelerated disposition. Under the plan, $.5
million of supplementary provisions were booked in the fourth
quarter to adjust third quarter estimates as additional
information became available. Substantial discounts to carrying
value were required for assets targeted for accelerated
disposition in order to attract buyers of distressed assets.
A further objective of the accelerated asset disposition plan
was to substantially improve the risk profile of the Bank's
32
<PAGE>
[page 11 of Annual Report]
balance sheet by reducing its commercial loan portfolio. During
fiscal 1995, the Bank's commercial real estate mortgage portfolio
decreased by $50 million (47%) to $56 million at September 30,
1995 (24% of total Bank loans). In addition, under the plan, the
Bank transferred $4.6 million of NPAs to AGI on September 30,
1995. The transferred assets, which include $1.3 million under
sales contracts, are expected to be sold during fiscal 1996. To
preserve compliance with regulatory capital requirements, an
additional component of the accelerated asset disposition plan was
to reduce the Bank's asset base. Accordingly, total Bank assets
declined $84.2 million in fiscal 1995.
The Bank posted a $9.3 million pre-tax loss for the year
compared with a loss of $1.5 million in fiscal 1994. The Bank
recorded total loss provisions of $10.1 million for fiscal 1995,
including those required by the implementation of the accelerated
asset disposition plan as well as the bulk sales consummated in
the first half of the year. At September 30, 1995, the Bank's NPAs
were $3.1 million (1% of total bank assets) compared with $21.7
million (6% of total bank assets) a year earlier.
As a result of the current year's operating loss, the Bank's
leverage capital ratio was 5.03% which exceeded the 4% regulatory
requirement but was below the 6% required by the MOU. See further
discussion under the caption Liquidity and Capital Resources -
Advest Bank. At September 30, 1995, the Bank's risk-based and
Tier 1 capital ratios were 8.61% and 7.40%, respectively, which
met both the regulatory and MOU requirements.
The following table summarizes 1995 activity for NPAs and
commercial loans of the Bank, including the impact of the
accelerated asset disposition plan.
- -----------------------------------------------------------------
Commercial
Nonperforming performings
- ------------------------------------------------------------------
In thousands OREO Loans loans
- ------------------------------------------------------------------
Balance at September 30, 1994 $13,414 $8,328 $107,212
New NPAs 80 4,469 (4,469)
Transferred to performing -- (1,063) 1,063
Sales proceeds through March 31, 1995 (1,643) (733) (9,144)
Related OREO provisions and loan
charge-offs (461) (430) (676)
Transfers from Loans to OREO 2,830 (2,830) --
Sales proceeds (under accelerated
asset disposition plan) (2,764) (724) (19,004)
Related OREO provisions and loan
charge-offs (3,346) (2,569) (400)
Assets transferred to AGI (2,950) (1,635) --
Loan amortization and payoff, less
advances on loans -- -- (14,795)
Other payments and charge-offs, net (2,311) (2,523) --
- ------------------------------------------------------------------
Balance at September 30, 1995 $ 2,849 $ 290 $ 59,787
==============================
- ------------------------------------------------------------------
Other
During 1995, the Company sold the investment advisory business
related to its proprietary mutual funds in three separate
transactions. In the first quarter, a pre-tax gain of $.8 million
was realized from the sale of the business related to the Scottish
Widows International Fund to an unrelated third party. During the
third quarter, the businesses related to the six taxable and three
non-taxable funds, respectively, in the Advantage Family of Funds
("Funds") were sold to two other unrelated third parties for total
consideration of $11.2 million. Net of expenses, the Company
realized a pre-tax gain of $9.3 million from the two transactions.
The total gain from all sales was $10.1 million and is reported as
a separate line item on the 1995 Consolidated Statements of
Earnings. As a result of the sales, Advest's operating results
are expected to benefit because it will no longer pay up front
commissions to its brokers on Advantage fund sales. This
anticipated benefit should substantially negate the decline in
BSC's results (discussed below), consequently,the impact of the
sales on future consolidated results of operations is not expected
to be material, although there can be no assurance of this.
BSC reported pre-tax earnings of $1.1 million for the current
year compared with a record $1.6 million in 1994. Prior to the
sale of the Company's investment advisory business related to its
proprietary mutual funds, management fees related to the Funds
accounted for more than 70% of BSC's revenue. Although, BSC's
costs have significantly declined, primarily as a result of staff
reductions related to the Funds sales, its operating results will
be materially impacted by the sale of the advisory business.
Billings Management Company ("BIM"), a subsidiary of
Billings, has served as managing general partner of a real estate
limited partnership since 1990 when the original general partner
filed for bankruptcy protection. As a result, Billings has made
advances through charges to income to the partnership to cover
cash flow deficiencies. Over the past two years, the deficiencies
have declined substantially resulting in a favorable impact on
Billings' pre-tax results. Currently, the partnership property is
fully occupied, with a waiting list, and generates sufficient cash
flow from operations to meet its needs. In January 1993, a class
action lawsuit on behalf of the limited partners was certified.
On December 24, 1994, the US District Court for the District of
Connecticut signed an order approving a stipulation of settlement
whereby the plaintiffs retained their equity interests in the
partnership in exchange for annual cash distributions through 2004
and a substantial reduction in partnership debt. The settlement
was finalized on January 27, 1995. Management expects that the
partnership will generate sufficient cash flow to meet the cash
distributions through 2004. However, should funds not be
sufficient the Company will be required to make supplementary cash
payments to the partnership. The settlement did not have a
material impact on the Company's financial condition or 1995
results of operations. Billings pre-tax operating results
improved $.8 million and $.5 million, respectively, in fiscal 1995
and 1994.
33
<PAGE>
[page 12 of Annual Report]
Results of Operations
Net income for the years ended September 30, 1995, 1994 and 1993
was $6.4 million, $3.1 million and $7.3 million, respectively.
The following table summarizes percentage changes for revenues,
expenses and pre-tax income for the three years in the period
ended September 30, 1995.
- ---------------------------------------------------------------
% %
Increase Increase
In thousands 1995 (Decrease) 1994 (Decrease) 1993
- ---------------------------------------------------------------
Revenues
Commissions $ 84,264 6.01% $ 79,490 2.13% $ 77,835
Interest 56,082 21.70 46,084 8.58 42,443
Principal
transactions 41,424 28.26 32,297 (4.06) 33,662
Investment
banking 17,470 (32.14) 25,743 (17.23) 31,102
Asset
management and
administration 16,810 2.51 16,399 16.21 14,111
Gain on sale of investment
advisory
business, net 10,092 -- -- -- --
Other 6,491 24.44 5,216 81.24 2,878
---------------------------------------------
232,633 3.35 205,229 1.58 202,031
Interest
expense 30,566 35.34 22,584 (1.90) 23,022
--------------------------------------------
Net revenues 202,067 10.63 182,645 2.03 179,009
--------------------------------------------
Non-interest
expenses 190,306 7.34 177,290 3.72 170,938
--------------------------------------------
Pre-tax income $ 11,761 119.63% $ 5,355 (33.65%)$ 8,071
============================================
- ----------------------------------------------------------------
Net revenues were $202.1 million in the current year compared
with $182.6 million in 1994, an increase of 11%. Increases were
posted in all revenue categories, except investment banking, with
significant gains in revenue from principal transactions and net
interest. Non-interest expenses increased 7% primarily due to
higher sales-driven compensation, incentives and employee
insurance, increased equipment costs associated with technology
upgrades and loss provisions at the Bank related to the
accelerated asset disposition plan.
In fiscal 1994, net revenues were $182.6 million, a $3.6
million (2%) increase over 1993. Increases were posted in most
revenue categories, with significant gains in net interest, asset
management and other revenues. However, a $5.4 million (17%)
decline in investment banking revenue offset these gains to a
large extent. Total expenses, excluding interest, increased 4%
with employee compensation costs, communications expenses and loss
provisions at AGI level accounting for most of the increase.
Commissions
Commission revenue rose $4.8 million (6%) to $84.3 million in the
current year, the highest level since fiscal 1987. Significant
revenue gains in the second half of the fiscal year, including a
45% increase in the fourth quarter, offset a 17% decline through
the first six months. Commissions on over-the-counter issues
increased $2.2 million (21%) and listed securities increased $4.0
million (10%). Mutual fund sales, including distribution and
deferred sales charges, increased $.4 million (2%) in 1995 as a
result of a $2.0 million (42%) fourth quarter gain. Sales of
commodities and insurance products declined $.9 million (54%) and
$.7 million (13%), respectively.
In 1994, commissions rose $1.7 million (2%) to $79.5 million.
Through the first half of the fiscal year, commission revenue
increased $6.9 million, an 18% pace, however, various factors,
most notably higher interest rates, negatively impacted stock
volume and prices during the remainder of the year. Sales of
insurance products, primarily tax deferred annuities, increased
$1.5 million (42%). Revenue from mutual funds increased $.9
million (4%) and commissions from commodity trading more than
doubled to $1.6 million. Commissions on over-the-counter stocks
increased $.8 million (9%) from 1993 while sales of listed issues
declined $2.7 million.
Principal Transactions
Revenue from principal transactions includes realized and
unrealized gains and losses on Advest's securities inventory and
related sales credits. Advest enters into derivative transactions
to hedge certain trading positions, primarily municipal bonds.
Derivatives are marked to market daily with unrealized gains and
losses reflected in revenue from principal transactions. (Further
discussion of derivatives is under the caption "Derivative
Financial Instruments" and in Notes 1 and 17.) Advest holds only
nominal inventory positions of high yield securities. Gains and
losses on the Bank's trading and available for sale securities are
reflected in revenue from principal transactions.
Current year revenues were $41.4 million, a $9.1 million
(28%) increase over 1994 and a record high for the Company.
Revenue gains were posted across the board. Commissions on
equities gained $2.9 million (29%) and related trading profits
rose $.9 million (155%), reflecting the market rally in the second
half of the year. Sales credits on debt securities increased $2.0
million (9%), led by commissions on municipal bonds which
increased $3.0 million, due to strong sales in the first half of
the year. In the second half, municipal sales slowed
significantly due to investor concerns about tax changes,
specifically the possibility of a flat tax.
34
<PAGE>
[page 13 of Annual Report]
During 1995, sales credits increased $1.1 million for government
zero coupon securities. Commissions on mortgage-backed
obligations declined $2.0 million. Trading profits on municipal,
government and corporate bonds increased $2.0 million, $.5 million
and $.4 million, respectively. Advest posted a $.1 million loss
from derivative transactions in the current year compared with a
negligible loss in 1994. The Bank posted a small loss from
principal trading in the current year.
Revenue declined $1.4 million (4%) to $32.3 million in fiscal
1994, as first quarter gains were more than offset by subsequent
declines, primarily in the fourth quarter. Equity commission
gains of $1.1 million (12%) during fiscal 1994, were negated by a
$1.1 million (5%) decline in sales credits from debt securities,
primarily government and mortgage-backed obligations. Trading
profits were lower on most firm inventories, particularly
municipal and corporate bonds which collectively declined $.8
million. The Bank posted a $.3 million loss on its portfolio
compared with a small profit in fiscal 1993.
Investment Banking
To generate investment banking revenue, Advest manages and
participates in underwritings of corporate and municipal
securities and closed-end funds. Advest also provides merger and
acquisition services and other consulting and valuation
activities. In general, the Company does not participate in
bridge financing activities, however, during 1995, Advest provided
such financing in one underwriting deal as discussed below.
Advest's Corporate Finance Department concentrates its efforts on
raising capital for mid-size companies, primarily in the banking,
insurance, high tech and health care industries. Public Finance
Divisions services healthcare and educational institutions as well
as state and local issuers. Lyons, Zomback & Ostrowski, Inc.
("LZO"), a financial consulting subsidiary of the Company
specializing in the banking and thrift industry, was merged into
Advest's Corporate Finance Department in January 1994. Renamed
the Financial Institutions Group ("FIG"), the unit chiefly serves
as an advisor to small- and medium-sized community banks.
Current year investment banking revenues declined $8.3
million (32%) to $17.5 million, the lowest level since fiscal
1990. Revenue from merger and acquisition services increased $3.1
million (437%) but was more than offset by declines in most other
categories. Underwriting commissions declined $4.2 million (39%),
reflecting a substantial decline in the number of new equity and
mutual and closed-end fund offerings. Syndicate trading profits
declined $1.2 million each for funds and equities. Corporate
finance underwriting fees declined $1.5 million (73%) and public
finance and syndicate underwriting fees declined $.5 million (54%)
and $.4 million (85%), respectively, reflecting both the lower
volume of new issues and lower fees. Revenue from consulting and
valuation services declined $1.1 million (36%) in 1995. Revenue
from the exercise of stock warrants was $1.0 million higher in
fiscal 1994. On August 3, 1995, Advest provided bridge financing
in the amount of $.5 million to a company for which Advest was
underwriting a secondary stock offering. The loan was repaid on
August 31, 1995.
Investment banking revenues were $25.7 million in 1994, a
decline of $5.4 million (17%) from 1993. Advest, excluding the
FIG, posted a $4.4 million (15%) revenue decline, reflecting the
negative impact of higher interest rates in the stock and bond
markets. Both the volume and size of new issues declined as well
as the underwriting fees earned. Syndicate participations in new
debt and equity issues were down $2.8 million (21%) and mutual
fund offerings declined $.5 million (14%). Corporate finance
underwriting fees increased $1.1 million (101%) primarily due to
two deals that closed in the first fiscal quarter, before the
underwriting slowdown commenced. In addition, a $1.3 million gain
was recognized on the exercise of warrants related to a prior
underwriting. These gains were more than offset by declines in
merger and acquisition fees, down $2.0 million (74%) and
consulting and valuation service fees, down $.6 million (34%).
FIG accounted for the balance of the 1994 decline.
Asset Management and Administration
Advest's investment management department provides various
services for its managed account base including client profiling,
asset allocation, manager selection and performance measurement.
BSC provides advisory services to a diverse clientele and, until
their sale in the current year, was investment advisor for the
Company's proprietary mutual funds. The Company acts as transfer
agent and provides dividend disbursing and reinvestment for its
formerly proprietary mutual funds as well as dividend reinvestment
for more than 1,200 equities and 1,100 mutual and closed-end
funds. Other services include retirement plan administration,
securities custody and safekeeping.
Current year revenues were $16.8 million, a $.4 million (3%)
increase over 1994 and a record high level for the Company.
Advest's revenues increased $1.3 million (11%) to $13.3 million.
Advest's managed account base increased 49% to $1.6 billion during
fiscal 1995 accounting for a $1.1 million increase in money
management fees. Increased money market service fees accounted
for the balance of the 1995 gain. BSC's revenue was $3.2 million,
a $1.0 million (24%) decrease from 1994. Fourth quarter revenue
declined $.8 million (73%), reflecting the third quarter sales of
the Company's proprietary mutual funds. At September 30, 1995,
private accounts under BSC's management were $358 million, a 222%
increase from the prior year.
Asset management and administration revenues were $16.4
million in 1994, a $2.3 million (16%) increase over 1993. BSC
posted revenues of $4.3 million, up 24% from fiscal 1993. Assets
under management increased 10% to $731 million, led by the
proprietary mutual funds which gained 12% to $580 million. In
July 1994, the Advantage Strategic Income Fund, which invests in
three diverse fixed income sectors, was introduced, bringing to 10
the number of proprietary funds offered by the Company. Advest's
1994 revenues were $12.0 million, a 19% increase, and managed
account assets surpassed the $1 billion mark.
35
<PAGE>
[page 14 of Annual Report]
Other Income
Other income increased $1.3 million (24%) to $6.5 million in the
current year. Advest revenues increased $1.2 million (25%),
primarily due to a $.5 million gain on the sale of an exchange
seat and higher execution and service fee income. In 1994, other
income increased $2.3 million (81%) to $5.2 million as a result of
higher fee income, particularly compensation paid to Advest to
help defray various costs associated with marketing non-
proprietary products.
Net Interest Income
Net interest income is the excess of interest income and loan fee
income over interest expense and is derived primarily by the Bank
and Advest. The Bank derives most of its interest income from
residential and commercial loans and from investments. The Bank's
loans and investments are primarily funded by interest-bearing
deposits, advances from the Federal Home Loan Bank of Boston
("FHLBB") and by the Bank's equity capital. The Bank also enters
into derivative transactions, including interest rate swap and
interest rate cap contracts, as part of its interest rate risk
management. The net costs of these contracts are accounted for as
an adjustment to interest expense. (Further discussion of
derivatives appears under the caption "Derivative Financial
Instruments.") Advest derives interest income from financing
brokerage customers margin transactions, entering into reverse
repurchase agreements and stock borrowing transactions as well as
from its securities inventory. Advest pays interest primarily on
brokerage customer credits held for re-investment, on its stock
lending activities and short and long-term borrowings.
Current year net interest income was $25.5 million, a $2.0
million (9%) increase from 1994 and a record high level for the
Company. Advest's net interest was $18.0 million, a 20% increase,
primarily due to higher income from margin accounts. Higher
average interest rates during the current year resulted in
increased spreads between interest charged on margin accounts and
the cost of funds, primarily interest paid on credit balances.
Gains from higher rates were partly offset by a decline in average
margin debit balances during fiscal 1995. Net revenue also
increased from short-term investments and stock lending
activities, as well as trading accounts, principally municipal
bonds.
The Bank's net interest income declined $.9 million (8%)
during 1995. The decline is attributable to an $84.2 million
(24%) decline in assets under management, partly offset by
improved interest margin on average assets. The Bank's earning
asset base improved to 97.2% in the current year from 93.1% in
1994, largely as a consequence of the accelerated asset
disposition plan which reduced NPAs substantially. (See Note 2 and
prior discussion under the caption "Advest Bank".)
Net interest income was $23.5 million in 1994, a 21% increase
over 1993 and the highest level achieved since fiscal 1990.
Advest's net interest income increased $3.1 million (27%)
primarily due to higher average margin debit balances throughout
the year. In addition, higher interest rates resulted in greater
spreads on all interest-earning assets.
The Bank's net interest income increased $.8 million (8%) to
$10.6 million in 1994 primarily due to growth of the loan
portfolio and increased interest spreads as interest rates on
earning assets increased more than the cost of funds. The ratio
of earning assets to total assets improved to 93.1% at September
30, 1994 compared with 92.9% at the previous fiscal year end.
Non-Interest Expenses
Current year compensation costs increased $6.8 million (6%) with
all of the increase coming in the fourth quarter. Advest's
compensation increased $7.3 million (7%) primarily due to
increased sales-driven salesmen's compensation and related
incentives. BSC's compensation costs declined $.4 million (22%)
due to staff reductions related to the third quarter sale of the
Company's mutual fund advisory business. The Bank's compensation
costs increased $.3 million primarily due to personnel additions
in its mortgage lending and trust departments. Occupancy and
equipment costs increased $1.6 million (10%). During the latter
part of fiscal 1994 and throughout the current year, Advest
upgraded the data processing network throughout its branch office
network and most operations departments. New workstations and
software enhancements were installed and connected to a firm-wide
local area network. Increased depreciation and maintenance costs
associated with the upgrade account for most of the increase in
occupancy and equipment costs with the balance primarily due to
higher office rent expense. The provision for credit losses and
asset devaluation increased $4.9 million (91%) to $10.3 million.
The Bank's loss provisions were $10.1 million, a $7.5 million
(286%) increase, and primarily related to writedowns associated
with the accelerated asset disposition plan and bulk sales. (See
discussions under the caption "Business Environment - Advest Bank"
and Note 2.) Provisions at AGI and Billings declined $2.0 million
and $.7 million, respectively, primarily related to reserves
recorded during fiscal 1994 to settle a limited partnership class
action suit. (See discussion under the caption "Business
Environment - Other".) Other expenses increased $.8 million (9%)
to $9.2 million primarily due to increased settlement, syndicate,
computer software and transfer fee expenses at Advest.
Professional fees declined $.8 million (12%) primarily due to
lower legal and/or consulting expenses at most subsidiaries and
AGI.
In 1994, compensation and benefits expenses were $114.8
million, an increase of 3% over 1993. The increase was primarily
due to general salary increases, the first full year of the
Company's matching contribution to employee 401(k) accounts and
higher salesmen's compensation. In addition, compensation at the
Bank increased 9% primarily as a result
36
<PAGE>
[page 15 of Annual Report]
of efforts to expand its mortgage lending and trust businesses.
Communication costs increased $2.0 million (12%) to $18.7 million.
Most of the increase is attributable to the ADP conversion being
effective for all of fiscal 1994 (versus 9 months in 1993) as well
as certain non-recurring credits available in the prior year. In
1994, professional fees increased $1.0 million (19%) to $6.2
million. Advest's professional fees increased $.4 million (11%)
due equally to higher legal fees and personnel agency costs. The
Bank's professional fees were up $.4 million (31%) in great part
due to legal fees associated with the introduction of a new home
equity product. The provision for credit losses and asset
devaluation was $5.4 million, a 26% increase reflecting additional
reserves booked by AGI related to the potential settlement of
limited partnership activity discussed previously under the
caption "Business Environment - Other". Other expenses declined
$1.6 million (16%) to $8.5 million due primarily to lower OREO and
related expenses of the Bank and a decline in settlement costs at
Advest.
Income Taxes
The effective income tax rates were 46.0%, 43.0% and 9.9%,
respectively, for 1995, 1994 and 1993. The 1995 rate primarily
reflects the impact of higher levels of income apportioned to
states with higher average tax rates. The 1994 rate was higher
than the federal statutory rate due to the impact of minimum state
taxes imposed, most notably in Connecticut, where no benefit could
be realized from 1994 state net operating losses. The 1993 rate
benefited from significant federal net operating loss
carryforwards which were partially offset by state tax minimums.
As of October 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting For Income
Taxes" ("SFAS 109"). At September 30, 1995, the Company had net
deferred tax assets, net of a $1.5 million valuation allowance, of
$2.1 million. The company expects to realize all deferred tax
assets, except for certain state net operating loss carryforwards
for which it has established the above valuation allowance. For
further information on the Company's income taxes refer to Notes 1
and 15 to the Consolidated Financial Statements.
Derivative Financial Instruments
Advest Bank
The Bank enters into transactions involving derivative securities,
including interest rate swap and interest rate cap contracts as
part of the Bank's management of interest rate risk. (See Note
17.) Swap and cap contracts are used to hedge the cost of funds
so that a more stable net interest income will be earned by the
Bank. The net costs of these contracts are accounted for as an
adjustment to interest expense. The amounts exchanged are
determined by reference to the notional amounts and the other
terms of the derivative contracts. The Bank is exposed to credit-
related losses in the event of non-performance by counterparties
but does not expect any parties to fail to meet their obligations.
The Bank only enters into transactions with highly rated
counterparties and the FHLBB, which is the counterparty in $22.5
million and $5 million of the Bank's swap and cap contract
holdings, respectively. The following table identifies the
notional amounts of contracts entered into by the Bank and their
potential credit exposure:
- ------------------------------------------------------------------
1995 1994
-------------------- -----------------------
Notional Credit Notional Credit
amount exposure amount exposure
In thousands
- ------------------------------------------------------------------
Interest rate
swaps $27,500 $-- $52,500 $271
Interest rate
caps 5,000 61 $20,000 --
Unamortized cap
premiums 110 -- $ 234 --
- ------------------------------------------------------------------
The notional amounts of derivatives do not represent amounts
exchanged by the parties and thus are not a measure of the Bank's
exposure through the use of swap and cap contracts.Therefore, they
are not recognized as assets or liabilities on the balance sheet.
The current credit exposure of derivatives is represented by
contracts with a favorable fair value.
Advest, Inc.
Advest periodically hedges a portion of its trading inventory,
primarily municipal bonds, when the market risk based on inventory
levels, exceeds an acceptable limit, as defined in its hedging
policy. Hedge instruments used to date are short-duration
exchange-traded futures and options. Hedging is limited to the
underlying trading portfolio's interest rate risk, based on pre-
determined inventory levels, and is not speculative in and of
itself. Hedge positions are marked-to-market daily. Positions
are reviewed daily and, at each month end, the hedging strategy is
re-evaluated based on anticipated inventory levels and composition
and necessary transactions are executed to achieve the target
hedged position.
The fair value of a derivative contract is the amount Advest
would have to pay a third party to assume its obligation under the
contract or the amount Advest would receive for its benefits under
the contract in the reverse situation. At September 30, 1995,
Advest had no open hedge positions. At September 30, 1994, the
fair value of open hedge positions was $2.5 million. During 1995
and 1994, respectively, the average fair value of outstanding
hedge positions was $.7 million and $.1 million, respectively. A
net trading loss of $.1 million and a small gain were realized in
fiscal 1995 and 1994, respectively.
Asset Quality
Advest Bank
The Bank is primarily a secured lender, with real estate being the
predominant form of collateral. Lending activity during 1994
primarily concentrated on enlarging the Bank's single family
residential mortgage portfolio and shrinking its commercial real
estate portfolio, with the intention of shifting the Bank's loan
portfolio risk characteristics. During the current
37
<PAGE>
[page 16 of Annual Report]
year, the Bank focused on expanding sales of its single family
residential mortgages in the secondary market and continuing to
reduce its commercial real estate exposure. Secondary market
sales of residential loans were $33.4 million in 1995. The
residential and commercial portfolios increased $11.2 million and
decreased $53.8 million, respectively, in 1995, and increased
$46.9 million and decreased $13.1 million, respectively, in 1994.
At September 30, 1995, the Bank's loan portfolio was comprised of
$170 million of single family residential mortgages and $63
million of commercial and other loans, representing 73% and 27% of
total loans, respectively.
At September 30, 1995 and 1994, respectively, earning assets
were 97.2% and 93.1% of total bank assets. Loss reserves were
80.8% and 24.7% of NPAs at September 30, 1995 and 1994,
respectively. Loan delinquency was .87% of total loans at
September 30, 1995 compared with 3.84% and 5.32% at September 30,
1994 and 1993, respectively. Had interest been accrued at
contractual rates on non-accrual and re-negotiated loans, interest
income would have increased by approximately $.5 million, $.8
million and $.8 million in 1995, 1994 and 1993, respectively.
The Bank has identified approximately $7.4 million of
performing commercial loans that are rated as "watch" due
primarily to certain perceived weaknesses in debt service capacity
and/or collateral values. Watch assets are closely monitored for
any deterioration which could result in future losses, and have
declined from $16.0 million at September 30, 1994.
Advest Group, Inc.
At September 30, 1995, the Bank transferred $4.6 million of NPAs
to AGI, as previously discussed. These assets are comprised of
$2.0 million of subdivision assets generally under contract to
sell as construction of single family residences is completed,
$1.5 million of delinquent residential mortgage loans in various
stages of foreclosure and liquidation and $1.1 million of
nonperforming commercial loans and OREO that are either under
contract to sell, under repayment plans or are being marketed for
sale. Substantially all of these assets are expected to be sold
or repaid during fiscal 1996. The assets were transferred at
their expected sales prices which reflect discounts from fair
value.
AGI also holds a $9.0 million first mortgage on a property
owned by a real estate limited partnership for which BIM serves as
general partner. The loan was restructured during 1995 as part of
a class action settlement on behalf of the limited partners.
(Refer to previous discussion under the caption "Business
Environment - Other".) The first payment under the mortgage is
not due until January 2000 therefore, the loan is technically
performing. The property has been at full occupancy with a
waiting list for nearly two years, however, given its significant
future financial commitments, management has decided to treat the
mortgage as a nonperforming loan and, accordingly, no interest
income is being accrued.
Liquidity and Capital Resources
The Company's total assets were $830.8 million at September 30,
1995, reflecting a 6% decline from both 1994 and 1993 levels which
were substantially equivalent. The decline in total assets
primarily reflects the Company's efforts to dispose of the Bank's
nonperforming assets and shrink the Bank's balance sheet to better
enable it to meet capital and other regulatory requirements. The
Bank's assets have declined $118.6 million (30%) during the past
two fiscal years. Conversely, Advest's assets have increased
$80.9 million (17%) to $550.9 million since fiscal 1993. Advest's
assets have increased during the past two years primarily due to
higher receivables related to stock loan/borrow activities,
increased trading account balances, primarily municipal bonds, and
higher margin debits.
Liquid assets which include cash and cash equivalents,
receivables from brokerage customers, interest-earning deposits,
securities purchased under agreements to resell, securities
borrowed, receivables from brokers and dealers, available for sale
and trading securities comprised 61% of total assets at September
30, 1995 compared with 55% for the prior year. The improved
liquidity is primarily a result of a planned decline in the Bank's
loan and OREO portfolios as well as changes in the Company's
securities holdings, with declines in held to maturity securities
and increases in available for sale and trading securities.
Long-term borrowings decreased $13.1 million (43%) primarily
due to current year dispositions of performing and nonperforming
assets, as discussed under the caption "Business Environment -
Advest Bank" and Note 2. Sales proceeds enabled the Bank to
substantially reduce borrowings $19.5 million (75%) during the
current year. Advest's long-term borrowing increased $6.25 million
during 1995, as discussed below and in Note 9.
Shareholders' equity increased $5.0 million (7%) to $78.9
million, as a result of a $6.4 million increase in retained
earnings from current year operating results. Treasury stock
increased $1.5 million (14%), due to repurchases of the Company's
common stock partly offset by sales of treasury shares under the
1995 Equity Plan (See Note 13). At September 30, 1995, 2,114,177
shares of the Company's common stock had been purchased since the
inception of the stock buyback program in August 1990, at an
average price of $5.21 per share. SFAS 115, which was adopted in
the current year (See Note 1), had an immaterial impact on
shareholders' equity during the year ended September 30, 1995.
AGI's principal source of funding is the earnings
distributions from its subsidiaries which, except as discussed
below, is unrestricted. During the current year, AGI netted $10.1
from the sale of the Company's proprietary mutual fund business.
$4.6 million of the proceeds were applied to acquire certain
nonperforming assets of the Bank in accordance with the
accelerated asset disposition plan previously discussed. The
balance of the proceeds were primarily invested in Treasury bills
by AGI.
38
<PAGE>
[page 17 of Annual Report]
Advest, Inc.
Sources used by Advest to finance assets include credit balances
in brokerage accounts which decreased $10.5 million (3%), short-
term borrowings which decreased $22.5 million (100%), long-term
borrowings which increased $6.25 million (Advest had no long-term
debt at September 30, 1994) and operating cash flows. In
addition, Advest has arrangements with certain financial
institutions whereby it can borrow amounts on a collateralized
basis, principally to support securities settlements and
underwriting activities. Advest has substantial levels of
customer and firm securities which can be used for such purposes.
Management believes that operating cash flow together with
available credit lines will provide sufficient resources to meet
all present and reasonably foreseeable capital needs.
The Securities and Exchange Commission ("SEC") requires
Advest to maintain liquid net capital to meet its obligations to
customers. During the current year, Advest borrowed $6.25 million
under a non-recourse note with the purpose of increasing its net
capital. Although its net capital was in excess of that required,
the supplemental net capital generated by the non-recourse note
provides Advest additional flexibility in its business activities.
At September 30, 1995, Advest had excess net capital of
approximately $35.1 million, a 46% increase from the prior year
(See also Notes 9 and 14).
Advest Bank
The Bank's total assets declined $84.2 million (24%) to $270.5
million, with loans and cash and investments declining $42.9
million (16%) and $33.2 million (52%), respectively. Assets
declined $84.2 million (24%) in the current year primarily as a
result of three factors: (1) the disposition of $46.7 million of
performing commercial loans and nonperforming assets primarily in
accordance with the accelerated asset disposition plan and other
bulk sales and dispositions, (2) the sales of $33.4 million of
residential loans through the secondary market and (3) the sales
of $8.9 million of trading and available for sale securities,
offset by $4.8 million net increase in other assets. At September
30, 1995, the Bank's liquid assets included cash, federal funds
and available for sale securities of $8.0 million. In addition,
the Bank is a member of the FHLBB and, accordingly, has access to
advances from the FHLBB to the extent the Bank possesses eligible
collateral. At September 30, 1995, the Bank had uncommitted,
eligible collateral of $115 million. Without giving effect to any
operating results from subsequent periods, management believes
that the Bank has sufficient capital to comply with the regulatory
requirements. Under state bank regulatory restrictions, the Bank
is currently prohibited from declaring dividends.
The Federal Deposit Insurance Corporation ("FDIC") requires
banks to maintain a minimum leverage capital ratio of between 4%
and 5%. Under the MOU, discussed previously, the Bank had
maintained the required leverage capital ratio of at least 6%
until the current year. Primarily as a result of the
implementation of the accelerated asset disposition plan
previously discussed, the Bank posted a $9.3 million pre-tax loss
in 1995. Consequently, the Bank's leverage capital ratio was 5.03
% which met the regulatory requirement but fell below the MOU
requirement (See Notes 2 and 14). The Bank does not expect
adverse action by its regulators who were aware of the probable
impact of the accelerated asset disposition plan and did not
object to its implementation. The Bank's regulators have
requested that the Bank submit a capital plan detailing estimates
of when the Bank will attain compliance with the 6% ratio
requirement, the Bank's risk management program and contingency
plans. Bank management expects to submit such plans to its
regulators by the second quarter of fiscal 1996.
The Bank is also subject to the FDIC's risk-based capital
regulations which require the Bank to maintain a total risk-based
capital ratio of 8%, including at least 4% Tier 1 capital. At
September 30, 1995, the Bank's total risk-based and Tier 1 capital
ratios were 8.61% (with capital of $15.8 million) and 7.40% (with
capital of $13.6 million), respectively, which met both the
regulatory and MOU requirements.
Pursuant to the FDIC Improvement Act ("FDICIA"), the Bank is
subject to rules limiting brokered deposits and interest rates.
Under FDICIA, the Bank meets the conditions to be deemed an
"adequately capitalized" bank which means it may accept brokered
deposits with a waiver from the FDIC. Under the terms of a
brokered deposit prohibition waiver received by the Bank in
September 1995, the Bank may accept brokered deposits without
limitation other than observing restrictions on the rate of
interest paid on such deposits and limiting the total outstanding
balances of brokered deposits of the Bank to $95.0 million, until
September 30, 1996. At September 30, 1995, the Bank had $69.6
million of brokered deposits. Prior to September 30, 1996, the
Bank must, under the provisions of the new rules, apply for a new
waiver if it wishes to continue to accept brokered deposits after
that date.
Cash Flows
Cash and cash equivalents increased $16,000 in the current year
compared with declines of $12.0 million and $11.9 million in 1994
and 1993, respectively. The break even results for 1995 resulted
from $1.0 million and $.3 million increases at the Bank and AGI,
respectively, which were offset by a $1.3 million decline at
Advest. The Bank's increase was primarily attributed to net funds
generated by the accelerated asset disposition plan and improved
cash flow from operations. Advest generated strong cashflow
primarily from operations and a $6.25 million borrowing in 1995.
However, the broker/dealer made significant current year capital
investments in computer hardware and software to support its sales
force. In addition, Advest incurred high costs associated with
the recruitment of investment professionals. The 1994 decline was
primarily due to a net $40.1 million increase in loan originations
(new loans less principal collections), a $52.4 million increase
in margin debits, a $54.8 million decline in bank deposits and a
$17.6 million decline in payables to brokerage customers. These
uses of cash were partly offset by
39
<PAGE>
[page 18 of Annual Report]
increased short and long-term borrowings and proceeds from sales
and maturities of investments not reinvested. The 1993 decline
was primarily due to a $20.2 million decline in bank deposits
partly offset by a $9.4 million decrease in margin debits.
The Company generated $28.9 million of operating cash
primarily from $6.4 million of net income adjusted for non-cash
revenue and expense items. Margin debits declined $13.1 million
and 15c3-3 requirements for segregated customer funds declined
$18.0 million generating cash. Brokerage customer credits
declined $10.5 million and Advest increased its trading positions
$11.1 million decreasing operating cash. Financing activities
used $93.6 million primarily due to a $56.2 million decline in
customer deposits at the Bank. Advest's short-term borrowings
declined $22.5 million and its long-term debt increased $6.25
million. The Bank paid down its short-term and long-term
borrowings by $9.5 million and $10.0 million, respectively.
Investing activities produced positive cash flow of $64.7 million
primarily as a result of $49.5 million in proceeds from the sales
of performing and NPAs of the Bank and $29.6 million from
securities sales by the Bank. The Company generated $10.1 million
of cash from the sales of its proprietary mutual fund investment
advisory business. Uses of investing cash included $4.2 million
for Advest's capital expenditures and for the Bank a net $4.4
million increase in loans originated compared with principal
collections on loans.
In 1994, the Company used $16.0 million of operating cash
primarily due to the increased margin debits and decreased
brokerage customer payables noted above which were partly offset
by a $56.9 million decrease in segregated cash and securities
required under SEC Rule 15c3-3. Financing activities used net
cash of $11.9 million as the previously noted significant decline
in bank deposits was partly offset by a net $25.9 million increase
in short-term borrowings and a $20.5 million increase in long-term
borrowings. Investing activities generated $16.0 million in net
cash due to net proceeds from the sale and maturity of investments
exceeding net new loans originated.
The Company generated $26.2 million in operating cash during
the year ended September 30, 1993, including $18.2 million from
net income and addbacks for noncash operating expenses. Net cash
used for financing activities declined $25.5 million primarily due
to a $20.2 million decline in bank deposits and net $3.2 million
in repayments of borrowings. A net $12.6 million was used for
investing activities primarily due to net increases in investment
securities.
Recently Issued Accounting Pronouncements
In May 1993, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") 114
"Accounting by Creditors for Impairment of a Loan." SFAS 114
addresses those circumstances where a creditor should measure
impairment of a loan based on the discounted present value of
expected future cash flows or fair value, if collateral dependent.
In October 1994, the FASB issued SFAS 118 "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures," an
amendment of SFAS 114. SFAS 114 and SFAS 118 are required to be
adopted for fiscal years beginning after December 15, 1994,
although earlier implementation is encouraged. The Company will
adopt SFAS 114 and SFAS 118 in its 1996 fiscal year as required,
but does not expect its implementation to have a material impact
on the Company's financial condition or results of operations.
In March 1995, the FASB issued SFAS 121, "Accounting for the
Impairment Of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." SFAS 121 establishes accounting standards for the
impairment of long-lived assets and certain identifiable
intangibles to be held and used by an entity or disposed of. SFAS
121 is effective for fiscal years beginning after December 15,
1995, although earlier implementation is encouraged. The Company
has not determined when it will adopt SFAS 121 but does not expect
its implementation to have a material effect on results of
operations or financial condition.
In May 1995, the FASB issued SFAS 122 "Accounting for
Mortgage Servicing Rights." SFAS 122 amends SFAS 65 "Accounting
for Certain Mortgage Banking Activities" to require that a
mortgage banking entity recognize as separate assets rights to
service mortgage loans for others, however those servicing rights
are acquired. SFAS 65 required separate capitalization of the
cost of rights which were acquired through a purchase transaction
but prohibited separate capitalization when the rights were
acquired through loan origination activities. SFAS 122 also
requires that a mortgage banking entity assess capitalized rights
for impairment and establish valuation allowances based on the
fair value of those rights, including rights acquired prior to
adoption of SFAS 122. Prospective adoption of SFAS 122 is
required for fiscal years beginning after December 15, 1995. The
Company has not decided when it will adopt SFAS 122 and has not
yet assessed its impact on financial condition or results of
operations.
In October 1995, the FASB issued SFAS 123 "Accounting For
Stock-based Compensation." SFAS 123 encourages, but does not
require, companies to recognize compensation expense for grants of
stock, stock options and other equity instruments to employees
based on fair value accounting rules. Companies may opt to
continue accounting for stock-based compensation under Accounting
Principles Board Opinion No. 25 ("APB 25"). However, SFAS 123
requires these companies to disclose pro forma net income and
earnings per share using the fair value based method. SFAS 123 is
required for fiscal years beginning after December 15, 1995,
although earlier implementation is encouraged. The Company is
required to adopt SFAS 123 in fiscal 1997 and has not yet made a
determination as to whether it will adopt the new fair value
accounting rules of expense recognition or continue to follow APB
25.
40
<PAGE>
[page 19 of Annual Report]
Report of Independent Accountants
We have audited the accompanying consolidated balance sheets
of The Advest Group, Inc. and Subsidiaries as of September
30, 1995 and 1994, and the related consolidated statements
of earnings, changes in shareholders' equity and cash flows
for each of the three years in the period ended September
30, 1995. 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 audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the consolidated financial position of The Advest Group,
Inc. and Subsidiaries as of September 30, 1995 and 1994, and
the consolidated results of their operations and their cash
flows for each of the three years in the period ended
September 30, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial
statements, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", as of
October 1, 1994.
As discussed in Notes 1 and 15 to the consolidated financial
statements, the Company adopted the provisions of Statements
of Financial Accounting Standards No. 109, "Accounting for
Income Taxes", as of October 1, 1993.
Coopers & Lybrand L.L.P.
Hartford, Connecticut
October 26, 1995
41
<PAGE>
[page 20 of Annual Report]
The Advest Group, Inc.
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
Fiscal year ended September 30,
- ----------------------------------------------------------------------------------------------------
In thousands, except per share amounts 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Commissions $ 84,264 $ 79,490 $ 77,835
Interest 56,082 46,084 42,443
Principal transactions 41,424 32,297 33,662
Investment banking 17,470 25,743 31,102
Asset management and administration 16,810 16,399 14,111
Gain on sale of investment advisory business, net 10,092 - -
Other 6,491 5,216 2,878
---------------------------------------------
Total revenues 232,633 205,229 202,031
---------------------------------------------
Expenses
Compensation 121,611 114,800 111,615
Interest 30,566 22,584 23,022
Communications 18,418 18,662 16,627
Occupancy and equipment 17,123 15,508 15,516
Provision for credit losses and asset devaluation 10,338 5,411 4,292
Professional 5,468 6,231 5,248
Business development 4,204 4,532 4,033
Brokerage, clearing and exchange 3,922 3,693 3,579
Other 9,222 8,453 10,028
---------------------------------------------
Total expenses 220,872 199,874 193,960
---------------------------------------------
Income before taxes and extraordinary credit 11,761 5,355 8,071
Provision for income taxes 5,410 2,302 2,903
---------------------------------------------
Income before extraordinary credit 6,351 3,053 5,168
Extraordinary credit - utilization of
operating loss carryforwards -- -- 2,103
---------------------------------------------
Net income $ 6,351 $ 3,053 $ 7,271
=============================================
Net income per common and common equivalent shares:
Primary:
Income before extraordinary credit $ 0.73 $ 0.34 $ 0.56
Extraordinary credit -- -- $ 0.23
Net income $ 0.73 $ 0.34 $ 0.79
Assuming full dilution:
Income before extraordinary credit $ 0.71 $ 0.34 $ 0.56
Extraordinary credit -- -- --
Net income $ 0.71 $ 0.34 $ 0.75
Average common and common equivalent shares outstanding:
Primary 8,735 8,997 9,248
Assuming full dilution 10,298 8,997 11,097
- ----------------------------------------------------------------------------------------------------
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
42
<PAGE>
[page 21 of Annual Report]
<TABLE>
<CAPTION>
The Advest Group, Inc.
Consolidated Balance Sheets
September 30,
- --------------------------------------------------------------------------------------------------------
In thousands, except share and per share amounts 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and short-term investments
Cash and cash equivalents $ 7,294 $ 7,278
Cash and securities segregated under federal and other regulations 31,259 49,305
Interest-earning deposits and investments - 3,000
--------------- ---------------
38,553 59,583
--------------- ---------------
Receivables
Brokerage customers, net 308,714 321,776
Loans, net 242,575 280,480
Securities borrowed 110,681 65,751
Brokers and dealers 2,391 3,539
Other 11,179 10,810
--------------- ---------------
675,540 682,356
--------------- ---------------
Securities
Trading, at market value 41,500 34,810
Held to maturity (market values of $31,473 and $53,102) 31,469 53,850
Available for sale, at market value 3,360 4,902
--------------- ---------------
76,329 93,562
--------------- ---------------
Other assets
Other real estate owned, net 5,799 13,414
Equipment and leasehold improvements, net 12,115 11,537
Other 22,479 24,403
40,393 49,354
--------------- ---------------
Total assets $830,815 $884,855
=============== ===============
Liabilities & shareholders' equity
Liabilities
Brokerage customers $300,011 $310,537
Deposits 235,656 291,885
Securities loaned 113,632 79,459
Compensation and benefits 16,529 14,053
Short-term borrowings 10,251 32,652
Brokers and dealers 9,744 6,023
Checks payable 6,751 6,800
Securities sold, not yet purchased, at market value 4,847 2,187
Other 16,670 15,894
--------------- ---------------
714,091 759,490
--------------- ---------------
Long-term borrowings 17,240 30,388
Subordinated borrowings 20,552 20,997
--------------- ---------------
751,883 810,875
--------------- ---------------
Commitments and contingent liabilities (see Notes 1, 14 and 16)
Shareholders' equity
Common stock, par value $.01, authorized 25,000,000 shares,
issued 10,584,488 and 10,570,222 shares 106 106
Paid-in capital 67,467 67,405
Retained earnings 22,956 16,605
Treasury stock, at cost, 2,202,519 and 1,987,357 shares (11,599) (10,136)
Net unrealized gain on securities available for sale, net of taxes 2 -
--------------- ---------------
78,932 73,980
--------------- ---------------
Total liabilities and shareholders' equity $830,815 $884,855
=============== ===============
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
43
<PAGE>
[page 22 of Annual Report]
<TABLE>
<CAPTION>
The Advest Group, Inc.
Consolidated Statements of Cash Flows
Fiscal year ended September 30,
- -------------------------------------------------------------------------------------------------------
In thousands 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,351 $ 3,053 $ 7,271
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 8,905 7,067 6,613
Provision for credit losses and asset devaluation 10,338 5,411 4,292
Gain on investment advisory business, net (10,092) 0 0
Other 1,512 2,156 50
Deferred ESOP contribution 0 0 1,000
(Increase) decrease in operating assets:
Receivables from brokerage customers 13,079 (52,432) 9,389
Securities borrowed (44,930) (36,623) (9,878)
Receivables from brokers and dealers 1,148 (406) 9,385
Trading securities (6,633) (9,094) (963)
Cash and securities segregated under federal
other regulations 18,046 56,868 (104,911)
Other 104 3,000 (803)
Increase (decrease) in operating liabilities:
Brokerage customers (10,526) (17,613) 86,726
Securities loaned 34,173 40,458 14,535
Brokers and dealers 3,721 (3,573) 417
Checks payable (49) (8,207) 3,337
Other 3,723 (6,089) (236)
------------------------------------------
Net cash provided by (used for) operating activities 28,870 (16,024) 26,224
------------------------------------------
FINANCING ACTIVITIES
Net decrease in deposits (56,229) (54,827) (20,178)
Proceeds from short-term borrowings 0 10,000 0
Repayment of short-term borrowings (10,298) (6,650) (6,650)
Short-term brokerage borrowings, net (22,501) 22,500 (1,500)
Proceeds from long-term borrowings 7,250 20,500 5,000
Repayment of long-term borrowings (10,000) 0 0
Other (1,811) (3,428) (2,219)
------------------------------------------
Net cash used for financing activities (93,589) (11,905) (25,547)
------------------------------------------
INVESTING ACTIVITIES
Proceeds from (payments for):
Sales of available for sale securities 23,075 0 0
Maturities of available for sale securities 2,544 0 0
Maturities of held to maturity securities 18,466 0 0
Purchase of available for sale securities (1,215) 0 0
Purchase of held to maturity securities (16,439) 0 0
Purchase of investment securities and
short-term investments 0 (95,847) (274,243)
Maturities of investments 0 131,734 242,256
Sales of investments 0 23,028 20,653
Sale of investment advisory business, net 10,141 0 0
Loans sold 36,129 0 0
Sales of OREO, net 6,021 11,379 11,278
Principal collections on loans 60,432 53,704 48,264
Loans originated (67,674) (93,774) (52,822)
Other (6,745) (14,249) (7,949)
------------------------------------------
Net cash provided by (used for) investing activities 64,735 15,975 (12,563)
------------------------------------------
Increase (decrease) in cash and cash equivalents 16 (11,954) (11,886)
Cash and cash equivalents at beginning of period 7,278 19,232 31,118
------------------------------------------
Cash and cash equivalents at period end $ 7,294 $ 7,278 $ 19,232
==========================================
Interest paid $ 30,560 $ 22,853 $ 23,183
Income taxes paid $ 2,273 $ 1,058 $ 2,406
Non-cash activities:
Loans to OREO $ 2,830 $ 3,028 $ 2,210
Securities available for sale (from) to
investment securities $ (20,891) $ 27,910 $ 0
Change in SFAS 115 valuation reserve $ 2 $ 0 $ 0
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
44
<PAGE>
[page 23 of Annual Report]
<TABLE>
<CAPTION>
The Advest Group, Inc.
Consolidated Statements of Changes in Shareholders' Equity
Net
unreal-
lized
gain
In thousands, (loss)
on
except securities
share and $.01 par value Deferred Treasury available,
Common stock Paid ESOP stock for Share-
per share -----------------------------in Retained contr- ---------------------------- sale holders'
amounts Shares Amount capital earnings butions Shares Amount net equity
of taxes
- ------------------------------------------------------------------------------------------------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
September
30 992 10,544,322 $ 105 $ 67,312 $ 6,281 $ (1,000) (1,172,701) $ (5,042) $ 0 $ 67,656
Net Income 7,271 7,271
Exercise of
stock optio 19,100 66 4,267 18 84
Deferred ESOP
contr-
butions, net 1,000 1,000
Repurchase of
common
stock (330,371) (2,022) (2,022)
- ------------------------------------------------------------------------------------------------------------- -------------------
Balance as of
September
30, 1993 10,563,422 105 67,378 13,552 0 (1,498,805) (7,046) 0 73,989
Net Income 3,053 3,053
Exercise of
stock optio 6,800 1 27 28
Repuchase of
common
stock (488,552) (3,090) (3,090)
- ------------------------------------------------------------------------------------------------------------- -------------------
Balance as of
September
30, 1994 10,570,222 106 67,405 16,605 0 (1,987,357) (10,136) 0 73,980
Adjustment
to beginning
balance for
adoption
SFAS 115 (57) (57)
Net income 6,351 6,351
Exercise of
stock optio 14,266 62 62
Repurchase of
common stock (344,554) (2,309) (2,309)
Sale of
treasury
stock to 1995
equity plan 129,392 846 846
Change in
unrealized
gain(loss)
net of taxes 59 59
- ------------------------------------------------------------------------------------------------------------- -------------------
Balance as of
September
30, 1995 10,584,488 $ 106 $ 67,467 $ 22,956 $ 0 (2,202,519) $ (11,599) $ 2 $ 78,932
============================================================================================================= ===================
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
45
<PAGE>
[page 24 of Annual Report]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of The
Advest Group, Inc. ("AGI") and all subsidiaries collectively (the
"Company"), including Advest, Inc. ("Advest"), a broker-dealer;
Advest Bank (the "Bank"), a state-chartered savings bank; Boston
Security Counsellors, Inc. ("BSC"), an investment management
company; and Billings & Company, Inc. ("Billings"), a real estate
services company. All material intercompany accounts and
transactions are eliminated. Certain 1994 and 1993 amounts have
been reclassified in the accompanying consolidated financial
statements to provide comparability with the current year
presentation.
Cash equivalents are defined as short-term, highly liquid
investments with an original maturity of three months or less
including amounts due from banks, federal funds sold and overnight
time deposits. Federal funds sold were $3,660,000 and $1,980,000
at September 30, 1995 and 1994, respectively.
Cash and securities segregated under federal and other regulations
Pursuant to SEC Rule 15c3-3, Advest is required to segregate funds
and qualified securities for the exclusive benefit of customers.
Investments held in special reserve accounts for the exclusive
benefit of customers are primarily securities purchased under
agreements to resell which are financing transactions
collateralized by US Government and Agency obligations. It is the
policy of Advest to obtain collateral with a market value in
excess of the principal amount loaned plus accrued interest. The
collateral, which is held by a third party custodian bank, is
valued daily and additional collateral is obtained when
appropriate. Securities purchased under agreements to resell are
carried at the amounts at which the securities will be
subsequently resold. As of September 30, 1995 and 1994, securities
purchased under agreements to resell were $31,000,000 and
$49,050,000, respectively.
In addition, certain interest-bearing cash deposits are held
in special reserve accounts for the exclusive benefit of
customers.
Loans
Loans are carried at their unpaid principal balances, and related
interest is recognized as income when earned but only to the
extent considered collectible. Generally loans are placed on a
nonaccrual status when interest or principal is unpaid for ninety
days or earlier if circumstances indicate collection is doubtful.
The Company resumes the accrual of interest on a delinquent loan
if, in the opinion of management, the borrower has demonstrated
adequate financial resources and intent to meet the terms and
conditions of the loan, and all payments are current. If a loan
has been restructured during a period in which it was delinquent,
or had sufficiently met the definition of a restructured troubled
loan in any other regard, a loan would not be restored to accruing
status until 1) adequate collateral coverage had been provided and
2) an appropriate period (minimum six months) has elapsed during
which the restructured loan has performed according to the terms
and conditions of the restructuring.
Loan origination fees and direct costs related to origination
are deferred and amortized into interest income over the
contractual life of the loan, using the level yield method. When a
loan is prepaid or sold, any remaining unamortized fees and costs
are credited or charged to income at that time.
In May 1993, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") 114 "Accounting by Creditors for Impairment of a Loan."
SFAS 114 addresses those circumstances where a creditor should
measure impairment of a loan based on the discounted present value
of expected future cash flows or fair value, if collateral
dependent. In October 1994, the FASB issued SFAS 118 "Accounting
by Creditors for Impairment of a Loan - Income Recognition and
Disclosures," an amendment of SFAS 114. SFAS 114 and SFAS 118 are
required to be adopted for fiscal years beginning after December
15, 1994, although earlier implementation is encouraged. The
Company will adopt SFAS 114 and SFAS 118 in its 1996 fiscal year
as required, but does not expect its implementation to have a
material impact on the Company's financial condition or results of
operations.
In May 1995, the FASB issued SFAS 122 "Accounting for
Mortgage Servicing Rights." SFAS 122 amends SFAS 65 "Accounting
for Certain Mortgage Banking Activities" to require that a
mortgage banking entity recognize as separate assets rights to
service mortgage loans for others, however those servicing rights
are acquired. SFAS 65 required separate capitalization of the
cost of rights which were acquired through a purchase transaction
but prohibited separate capitalization when the rights were
acquired through loan origination activities. SFAS 122 also
requires that a mortgage banking entity assess capitalized rights
for impairment and establish valuation allowances based on the
fair value of those rights, including rights acquired prior to
adoption of SFAS 122. Prospective adoption of SFAS 122 is
required for fiscal years beginning after December 15, 1995. The
Company has not decided when it will adopt SFAS 122 and has not
yet assessed its impact on financial condition or results of
operations.
Allowance for loan losses
In management's opinion, the allowance, established through
charges against income, is adequate to absorb potential losses on
loans, commitments and other extensions of credit.
46
<PAGE>
[page 25 of Annual Report]
Management's determination of the adequacy of the allowance is
based upon continuing evaluation of the risk characteristics of
the loan portfolio, current economic and real estate market
conditions, reviews of specific loans, estimates of current value
of underlying collateral, changes in loan portfolio composition,
the results of the most recent regulatory examination and other
relevant factors. Loans are charged against the allowance when
management believes that collection is unlikely. Any subsequent
recoveries are credited to the allowance when received.
The Company's reserves are general reserves and are available
to absorb losses to the total loan portfolio as well as off-
balance sheet commitments, such as commitments to extend credit,
guarantee and standby letters of credit. At September 30, 1995 and
1994, the allowances for loan losses were $2,334,000 and
$4,900,000, respectively.
Receivables from and payables to brokerage customers
Receivables from and payables to brokerage customers arise from
cash and margin transactions executed by Advest on their behalf.
In virtually all instances, receivables are collateralized by
securities with market values in excess of the amounts due. It is
the policy of Advest to monitor the market value of the collateral
and request additional collateral when required. The collateral is
not reflected in the accompanying financial statements. A reserve
for doubtful accounts is maintained at a level that in
management's judgment is adequate to absorb potential credit
losses. The reserve is based upon reviews of individual credit
risks, as well as prevailing and anticipated economic conditions
and is increased by provisions charged to income as well as
recoveries and is reduced by chargeoffs. At September 30, 1995 and
1994, the reserves were $743,000 and $869,000, respectively.
Included in payables to brokerage customers are free credit
balances of $278,450,000 and $297,416,000 at September 30, 1995
and 1994, respectively. Advest pays interest on credit balances
when the customer has indicated that the funds are for
reinvestment purposes.
Securities loaned and securities borrowed
Advest loans, to other brokers and dealers, securities owned by
its customers and others for which it receives cash deposits or
other securities as collateral. Advest also acts in an agency
capacity whereby it borrows securities from one broker-dealer and
lends to another. Securities borrowed and securities loaned are
recorded at the amount of cash collateral advanced or received,
respectively. The initial collateral advanced or received has a
market value equal to the market value of the underlying
securities. Advest monitors the market value of securities
borrowed and loaned on a daily basis and requests additional
collateral or returns excess collateral, when appropriate. The
values of such securities at September 30, 1995 and 1994
approximate amounts owed.
Trading positions
Advest's trading securities and securities sold, not yet purchased
are valued at market with unrealized gains and losses reflected in
current period revenues from principal transactions and investment
banking. Trading securities are generally held for resale within a
relatively short time period. Securities sold, not yet purchased
represent an obligation of Advest to deliver specific equity and
debt securities at predetermined prices. Advest is obligated to
acquire the securities at prevailing market prices in the future
to satisfy this obligation. At September 30, 1994, the Bank's
trading securities consisted entirely of government securities and
were carried at market value with unrealized gains and losses
reflected in revenue from principal transactions. The Bank held
no trading securities at September 30, 1995.
Investment securities
Effective October 1, 1994, the Company prospectively adopted SFAS
115, "Accounting for Certain Investments in Debt and Equity
Securities" and revised its securities accounting policy. SFAS
115 requires the Company to classify investments in debt and
certain equity securities into three categories: "trading",
"available for sale" or "held to maturity". The Bank holds
substantially all of the Company's non-trading securities which
consist primarily of bonds, notes and mortgage-backed securities.
Securities available for sale are carried at fair value with
unrealized holding gains or losses credited or charged directly to
shareholders' equity. Realized gains and losses are recorded on
trade date by the specific identification method and are included
in revenue from principal transactions. Securities, which the
Company has the positive intent and ability to hold until
maturity, are carried at amortized cost and classified as held to
maturity investments. Available for sale and held to maturity
securities are reduced to fair value, through charges to income,
for declines in value that are considered to be other than
temporary. The accounting treatment for securities classified as
"trading" did not change with the adoption of SFAS 115. The
adoption did not have a material effect on the Company's results
of operations or financial condition.
In previous fiscal years, certain securities were classified
as available for sale or held for investment using definitions
that differed from those specified in SFAS 115. Consequently,
upon adoption of SFAS 115, available for sale securities as of
October 1, 1994 increased by $20,891,000.
Prior to the adoption of SFAS 115, investment securities were
classified as such when purchased with the intent they would be
held to maturity. Securities available for sale were
identified as assets which were held for indefinite time periods
but were likely to be sold prior to maturity. Investment
securities were carried at amortized cost and available for sale
47
<PAGE>
[page 26 of Annual Report]
securities were carried at the lower of aggregate cost or market.
When, in the opinion of management, the value of an investment
securities had experienced an other than temporary impairment in
value, the carrying value of the security was written down to its
estimated market value by a charge to other income. Gains and
losses on the sale of investment securities were recorded on trade
date by the specific identification method and were included in
other revenues. Realized and unrealized gains and losses on
securities available for sale were included in revenue from
principal transactions.
Equipment and leasehold improvements
Depreciation of equipment for financial accounting purposes, is
calculated primarily using the straight-line method and is based
upon the estimated useful lives of the assets ranging from three
to ten years. Leasehold improvements are amortized over the
shorter of the terms of the respective leases or the estimated
useful lives of the improvements. At September 30, 1995 and 1994,
accumulated depreciation and amortization were $31,942,000 and
$28,367,000, respectively.
Other real estate owned
Other real estate owned ("OREO") of the Company is comprised of
real estate and other assets acquired through foreclosure,
acceptance of a deed in lieu of foreclosure or loans which are in-
substance foreclosed. These assets are generally carried at the
lower of cost or fair value, inclusive of selling expenses. Any
excess of cost over the estimated fair value at the time of
acquisition is charged to the allowance for loan losses.
Writedowns subsequent to acquisition are charged against the
reserve for OREO losses, which is established through charges
against income and maintained at a level management considers
adequate to absorb potential losses on OREO. OREO is reported net
of related reserves on the consolidated balance sheets.
Intangible assets
The excess cost over the fair value of net assets of acquired
companies is recorded as goodwill and is amortized on a straight-
line basis over periods between 15 and 40 years. At September 30,
1995 and 1994, the amount of goodwill reported in other assets is
$6,374,000 and $6,624,000, respectively.
Revenues from securities transactions and investment banking
Advest records securities transactions on a settlement date basis,
which does not materially differ from a trade date basis. Revenues
and related expenses for transactions executed but not settled are
accrued on a trade date basis. Securities transactions of the
Bank are recorded on a trade date basis.
Investment banking revenues are recorded, net of expenses, on
the settlement date for management fees and sales concessions, and
on the dates the underwriting syndications are closed for
underwriting fees.
Provision for credit losses and asset devaluation
The provision for credit losses and asset devaluation reflects
reserve accruals and writedowns for loans, OREO and certain other
investments and receivables.
Income taxes
Effective October 1, 1993, the Company adopted, on a prospective
basis, SFAS 109, "Accounting for Income Taxes," which requires the
use of the asset/liability method of accounting for income
taxes. Deferred income taxes are recognized for the future tax
consequences of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year end
based on enacted tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax
assets to an amount which is more likely than not realizable.
Income tax expense is the sum of the taxes currently payable and
the change during the period in deferred tax assets and
liabilities.
Prior to the adoption of SFAS 109, the Company accounted for
income taxes using the deferred method under Accounting Principles
Board Opinion No. 11. Deferred income taxes were provided on items
of income and expense which were recognized in different periods
for financial reporting and tax purposes.
Net income per common and common equivalent share
Primary income per share is calculated by dividing net income by
the average shares of common stock and common stock equivalents
outstanding during the period. Common stock equivalents are
dilutive stock options which are assumed exercised for calculation
purposes. Fully diluted calculations assume full conversion of the
Company's outstanding subordinated debentures into common stock
and elimination of the related interest expense, net of taxes.
Derivative financial instruments
Advest enters into derivative transactions to hedge certain
trading positions, primarily municipal bonds. Derivatives to
hedge trading inventory positions are marked to market daily with
unrealized gains and losses reflected in revenue from principal
transactions. Market values for exchange-traded derivatives,
principally futures, are based on quoted market prices. At
September 30, 1995 there were no hedge positions.
Amounts receivable or payable under derivative financial
instruments used to manage interest rate risks arising from the
Bank's financial assets and financial liabilities are recognized
as interest income or expense. Gains and losses on early
terminations of derivatives are included in the carrying amount of
the related loans or debt and amortized as yield adjustments over
the remaining terms of the loans or debt.
48
<PAGE>
[page 27 of Annual Report]
Other accounting pronouncements
In March 1995, the FASB issued SFAS 121, "Accounting for the
Impairment Of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." SFAS 121 establishes accounting standards for the
impairment of long-lived assets and certain identifiable
intangibles to be held and used by an entity or disposed of. SFAS
121 is effective for fiscal years beginning after December 15,
1995, although earlier implementation is encouraged. The Company
has not determined when it will adopt SFAS 121 but does not expect
its implementation to have a material effect on results of
operations or financial condition.
In October 1995, the FASB issued SFAS 123 "Accounting For
Stock-based Compensation." SFAS 123 encourages, but does not
require, companies to recognize compensation expense for grants of
stock, stock options and other equity instruments to employees
based on fair value accounting rules. Companies may opt to
continue accounting for stock-based compensation under Accounting
Principles Board Opinion No. 25 ("APB 25"). However, SFAS 123
requires these companies to disclose pro forma net income and
earnings per share using the fair value based method. SFAS 123 is
required for fiscal years beginning after December 15, 1995,
although earlier implementation is encouraged. The Company is
required to adopt SFAS 123 in fiscal 1997 and has not yet made a
determination as to whether it will adopt the new fair value
accounting rules of expense recognition or continue to follow APB
25.
Note 2: Accelerated Asset Disposition Plan
During the third quarter, the Company completed a previously
announced evaluation of alternatives for the disposition of the
Bank's non-performing assets ("NPAs"). As a result, the Bank's
board of directors approved a plan for the accelerated disposition
of NPAs and certain commercial real estate loans primarily through
bulk and other institutional sales. In accordance with the plan,
the Bank recorded a $6.0 million provision for loss in the third
quarter to reflect the discounts required by the accelerated
disposition.
Through September 30, 1995, the Bank has completed sales of
NPAs and commercial real estate loans selected for this program
with carrying amounts of $9.4 million and $19.4 million ,
respectively. Additionally, the accelerated disposition plan
provided for the transfer of certain of the Bank's unsold NPAs at
September 30, 1995 to AGI. Accordingly, $4.6 million of such
assets were transferred to AGI. The transferred NPAs included
$1.3 million of assets under contract for sale, and the total
amount is expected to be disposed in fiscal 1996. Refer to
discussion in Management's Discussion and Analysis under the
caption "Business Environment - Advest Bank."
The Bank recorded a significant operating loss for the 1995
fiscal year due to its implementation of the accelerated
disposition plan. Consequently, the Bank's leverage capital ratio
as of September 30, 1995 was 5.03%, which exceeded the 4%
statutory requirements, but was below the 6% requirement of the
MOU (see Note 14). The 1995 operating loss was expected as a
result of the accelerated disposition plan and was, therefore,
discussed with the Bank's regulators prior to the implementation
of the plan. The regulators have required the Bank to submit a
capital plan detailing the Bank's estimate of when it will attain
the 6% capital ratio requirement, its risk management program and
contingency plans. Bank management expects to submit such plans
to its regulators before the second quarter of fiscal 1996.
Management believes that the Bank's non-compliance with the
required leverage capital ratio is unlikely to result in adverse
action by its regulators.
Note 3: Loans
The Bank originates one to four family residential mortgage loans
for resale to the secondary market or for portfolio. Residential
mortgages are primarily marketed to clients of Advest, who are
largely located in the eastern and central United States and to
the general public in Connecticut. Additionally, the Bank
originates a small volume of secured consumer loans for portfolio
drawn substantially from the same client base. The Bank maintains
a commercial mortgage portfolio but is no longer an active lender
in the commercial market. Although the Bank has a diversified and
substantially collateralized commercial loan portfolio, the
ability of many debtors to meet their commitments is largely
dependent on the real estate sector of the economy. At
September 30, 1995 and 1994, loans consisted of:
-----------------------------------------------
In thousands 1995 1994
-------------------------------------------------
Advest Bank:
Mortgages
Commercial $ 43,908 $ 75,276
Multi-family
residential 12,256 31,538
1 - 4 family
residential 170,046 158,801
Commercial 3,856 7,021
Consumer 922 913
Installment note and lease
loan financing 1,811 2,200
Advest Group, Inc.:
Mortgages
Commercial 9,031 8,000
1 - 4 family
residential 1,460 --
Other 431 371
Other: 1,188 1,260
----------------------
$244,909 $285,380
======================
- ---------------------------------------------------------
The Company maintains an allowance for possible future loan
losses. For the three years in the period ended September 30,
1995, activity in the allowance for loan losses was as follows:
--------------------------------------------------
In thousands 1995 1994 1993
--------------------------------------------------
Balance at
September 30, $4,900 $5,782 $5,986
Provisions 5,637 2,499 1,690
Charge-offs (8,462) (3,555) (1,963)
Recoveries 259 174 69
--------------------------------
Balance at
September 30, $2,334 $4,900 $5,782
==============================
----------------------------------------------------
49
<PAGE>
[page 28 of Annual Report]
Note 4: Nonperforming Assets
Nonperforming assets include nonaccruing loans, loans ninety days
past due and accruing interest, loans renegotiated on other than
prevailing market terms and OREO. OREO is reported separately on
the accompanying consolidated balance sheets. All other
nonperforming assets are classified as loans.
The following table details the composition of nonperforming
assets at September 30, 1995 and 1994:
- -----------------------------------------------------------------
Accuring
loans
Non- past due Total non-
accrual 90 or Renegotiated performing
In thousands loans more days loans OREO assets
- ------------------------------------------------------------------
1995
Real estate:
Residential $ 1,401 $116 $ -- $ 40 $ 1,557
Commercial 9,264 -- -- 2,853 12,117
Land and land development-- -- -- 3,624 3,624
Other 925 -- -- -- 925
Valuation
reserve (718) (718)
---------------------------------------------
$11,590 $116 $ -- $ 5,799 $17,505
=============================================
1994
Real estate:
Residential $ 1,202 $229 $264 $ 356 $ 2,051
Commercial 12,638 731 374 8,043 21,786
Land and land
development -- -- -- 6,216 6,216
Other 1,640 -- -- -- 1,640
Valuation
reserve (1,201)(1,201)
---------------------------------------------
$15,480 $ 960 $638 $13,414 $30,492
=============================================
- -----------------------------------------------------------------
Residential real estate is comprised of one to four family
properties. Multi-family properties are included in commercial
real estate. Renegotiated loans are troubled debt restructurings.
The OREO valuation reserve is a general valuation reserve. At
September 30, 1995 and 1994, respectively, the gross balance of
OREO includes approximately $6,081,000 and $10,836,000 of real
estate to which the Company has title and approximately $435,000
and $3,779,000 representing in-substance foreclosures.
The following table summarizes changes in nonperforming
assets for the two years ended September 30, 1995:
- ------------------------------------------------------------------
Non- Accruing loans Total non-
accrual past due 90 Renegotiated performing
In thousands loans or more days loans OREO assets
- ------------------------------------------------------------------
Balance at September
30, 1993 $13,404 $ 19 $665 $22,683 $36,771
Increases, net 8,587 1,636 28 -- 10,251
Transfers, net (2,340) (688) -- 3,028 --
Net loan charge-offs and
provisions to
OREO reserve (2,683) -- -- (772)(3,455)
Amounts capitalized
on OREO -- -- -- 6,234 6,234
Collections and proceeds
from sales (1,488) (7) (55)(17,951)(19,501)
Recoveries from sales of
OREO, net -- -- -- 192 192
-------------------------------------------
Balance at September
30, 1994 15,480 960 638 13,414 30,492
Increases, net 5,248 825 -- 3,016 9,089
Transfers, net (1,367) (1,463) -- 2,830 --
Net loan charge-offs and
provisions to
OREO reserve (3,094) -- (71)(4,491) (7,656)
Amounts capitalized
on OREO -- -- -- 4,569 4,569
Collections and proceeds
from sales (3,592) (206) (502)(13,327)(17,627)
Recoveries from sales of
OREO, net (1,085) -- (65) (212) (1,362)
--------------------------------------------
Balance at September
30, 1995 $11,590 $ 116 $ -- $ 5,799 $17,505
=============================================
50
<PAGE>
[page 29 of Annual Report]
At September 30, 1995 and 1994, nonperforming assets were
comprised of:
- ----------------------------------------------------
In thousands 1995 1994
- ----------------------------------------------------
Advest Group, Inc.:
- Loans $10,666 $ 8,000
- OREO 2,950 --
Advest Bank:
- Loans 290 8,328
- OREO, net 2,849 13,414
Other 750 750
-------------------
$17,505 $30,492
==================
Nonperforming assets as a percentage
of loans and OREO 7.0% 10.2%
======== ======
Nonperforming assets as a percentage
of total assets 2.1% 3.4%
======== ======
- ---------------------------------------------------
During 1995 and 1994, respectively, approximately $184,000
and $291,000 of income was recognized on non-accrual loans. This
income was recognized while the loans were performing and was
realized by cash payments. It is management's policy to reverse
all uncollected interest at the time a loan is placed on non-
accrual. Interest forgone on nonaccrual and restructured loans of
the Bank were $509,000, $754,000 and $700,000 for the years ended
September 30, 1995, 1994 and 1993, respectively. As of September
30, 1995, no additional funds were committed to clients whose
loans have been restructured or were non-performing.
As of September 30, 1995 and 1994, OREO balances included
approximately $816,000 and $2,448,000, respectively, of
construction costs associated with the sellout activities of
certain land development projects.
The Bank evaluates the real property collateral supporting
defaulted income property and other loans for potential
environmental risks prior to completing foreclosure. If the Bank
elects to complete a foreclosure on a property that is
contaminated, the costs to remediate identified environmental
conditions are recognized as an adjustment to the carrying value
of the asset through a charge to the OREO reserve.
For the three years in the period ended September 30, 1995,
activity in the reserve for OREO losses was as follows:
--------------------------------------------
In thousands 1995 1994 1993
--------------------------------------------
Balance at September
30,1995 $1,201 $2,201 $2,830
Provision 4,491 772 2,190
Charge-offs (5,186) (1,922) (3,028)
Recoveries 212 150 209
---------------------------
Balance at September
30,1995 $ 718 $1,201 $2,201
==========================
--------------------------------------------
Note 5: Trading Securities
At September 30, 1995 and 1994, the Company's trading securities
consisted of:
--------------------------------------------------
In thousands 1995 1994
--------------------------------------------------
State and municipal
obligations $26,052 $19,749
US government and agency
obligations 6,252 10,301
Stocks and warrants 5,722 3,564
Corporate obligations 3,474 1,196
--------- ---------
$41,500 $34,810
======= ======
--------------------------------------------------
The 1994 balances include $4,395,000 of the Bank's government
securities; all other inventory represents holdings of Advest.
Note 6: Investment Securities
The amortized cost and fair values of the Bank's available for
sale securities at September 30, 1995 and 1994 were:
- ------------------------------------------------------------------
Amortized Gross unrealized Fair
----------------
In thousands cost gains losses value
- ------------------------------------------------------------------
1995
FHLB stock $2,233 $-- $ -- $2,233
Mortgage-backed securities
of federal agencies 861 2 -- 863
Other mortgage-backed
securities 264 -- -- 264
-------- ---- ------ --------
$3,358 $ 2 $ -- $3,360
====== === ===== ======
1994
Mortgage-backed securities
of federal agencies $ 691 $ -- $ (3) $ 688
Other mortgage-backed
securities 4,236 1 (23) 4,214
-------- ----- ------ -------
$ 4,927 $ 1 $(26) $4,902
======= ==== ==== ======
For the three years ended September 30, 1995, 1994 and 1993,
respectively, proceeds from the sale of securities available for
sale were $23,075,000, $14,003,000 and $20,429,000. Gross gains
reported were $152,000, $60,000 and $76,000 and gross losses were
$255,000, $59,000 and $29,000 for 1995, 1994 and 1993,
respectively.
51
<PAGE>
[page 30 of Annual Report]
The amortized cost and fair values of the Company's held to
maturity securities at September 30, 1995 and 1994 were:
- ------------------------------------------------------------------
Amortized Gross unrealized Fair
----------------
In thousands cost gains losses value
- ------------------------------------------------------------------
1995
Mortgage-backed
securities $21,965 $107 $(105) $21,967
US government and agency
obligations 6,854 2 -- 6,856
Limited partnership 1,718 -- -- 1,718
Other 932 -- -- 932
--------------------------------------
$31,469 $109 $(105) $31,473
=====================================
1994
Mortgage-backed
securities $48,003 $ 34 $(784) $47,253
FHLB stock 2,045 -- -- 2,045
Limited partnerships 1,760 -- -- 1,760
US government and agency
obligations 493 2 -- 495
Other 1,549 -- -- 1,549
-------------------------------------
$53,850 $ 36 $(784) $53,102
====================================
- ------------------------------------------------------------------
There were no sales of held to maturity securities during the
three years in the period ended September 30, 1995.
As of September 30, 1995, the amortized cost and fair values
of investment securities, by contractual maturity, were:
- -----------------------------------------------------------------
Available for Sale Held to
Maturity
Amortized Fair Amortized Fair
In thousands cost value cost value
- -----------------------------------------------------------------
Due in one year or less $ --$ --$ 6,854$ 6,856
Due after five years
through ten years -- -- 500 500
Due after ten years 1,125 1,127 21,965 21,967
-------------------------------------
$1,125 $1,127 $29,319 $29,323
====================================
- -----------------------------------------------------------------
Note 7: Deposits
Pursuant to the FDIC Improvement Act ("FDICIA"), the Bank is
subject to rules limiting brokered deposits and related interest
rates. Under these rules, banks that are deemed "well capitalized"
may accept brokered deposits without restriction, and banks deemed
"adequately capitalized" may do so with a waiver from the FDIC. An
"undercapitalized" bank is not eligible for a waiver and may not
accept brokered deposits. The Bank meets the conditions of such
rules to be deemed an "adequately capitalized" bank. Under the
terms of a brokered deposit prohibition waiver granted to the Bank
by the FDIC in September 1995, the Bank may accept brokered
deposits without limitation other than observing restrictions on
the rate of interest paid on such deposits and limiting the total
outstanding balances of brokered deposits of the Bank to
$95,000,000. Prior to September 30, 1996, the Bank, under FDICIA
rules, must apply for a new waiver if it wishes to continue to
accept brokered deposits.
At September 30, 1995 and 1994, client deposits at the Bank
consisted of:
- ------------------------------------------------------------------
In thousands 1995 1994
- ------------------------------------------------------------------
Money market $167,778 $230,931
Certificates of deposit 67,790 60,862
Savings 88 92
------------------------
$235,656 $291,885
========================
- ------------------------------------------------------------------
Note 8: Short-term Borrowings
In the ordinary course of business, Advest obtains bank loans
which are collateralized by its own securities inventory and
customers' margin securities. The loans are payable on demand and
bear interest based on the federal funds rate. At September 30,
1994, Advest had $14,901,000 in firm loans and $7,601,000 in
customer loans outstanding. There were no outstanding loans at
September 30, 1995. The weighted average interest rate on bank
loans outstanding at September 30, 1994 was 5.27% and the weighted
average interest rates during fiscal 1995 and 1994 were 6.14% and
4.29%, respectively.
Short-term borrowings of the Bank consisted primarily of the
current portion of advances from the Federal Home Loan Bank
("FHLB"). At September 30, 1995, borrowings totaled $9,500,000 at
rates from 5.24% to 9.11%. At September 30, 1994, borrowings
totaled $9,500,000 at rates from 4.80% to 8.74%. The Bank has
unused short term credit lines of approximately $8,000,000 with
the FHLB at September 30, 1995. The Bank's borrowings with the
FHLB are collateralized by its holdings of FHLB stock as well as
otherwise unencumbered mortgage loans and investment securities.
Based on available qualified collateral balances of approximately
$182.5 million at September 30, 1995, the Bank had additional
borrowing capacity with the FHLB of approximately $140.0 million
at September 30, 1995.
Included in the 1996 total is an advance maturing February
1996 in the amount of $2,500,000 which is putable to the FHLB at
par on specified dates with 36 days prior written notice. The
remaining advances are subject to prepayment penalties.
AGI's short-term borrowings at September 30, 1995 and 1994
were $750,000 and $650,000, respectively. The borrowings
represent the current portion of a promissory note due a third
party lender. Refer to Note 9 for additional information.
52
<PAGE>
[page 31 of Annual Report]
Note 9: Long-term Borrowings
Long-term borrowings of the Bank were $6,500,000 and $26,000,000
as of September 30, 1995 and 1994, respectively, and represent the
non-current portion of FHLB advances. The borrowings are
collateralized in the same manner as short-term borrowings. As of
September 30, 1995, the interest rates and maturities of
outstanding borrowings were:
- ------------------------------------------------------------------
In thousands Interest rates Amount
- ------------------------------------------------------------------
Year Ending
September 30, 1997 6.30% - 8.60% $4,750
Year Ending
September 30, 1998 7.17% 1,750
-------
$6,500
======
- ------------------------------------------------------------------
During the current year, Advest borrowed $6.25 million under
a non-recourse note, collateralized exclusively by furniture and
computer equipment. Under the terms of the note, the principal is
due October 1, 1998, unless extended at Advest's option, with
interest payments due monthly beginning April 1, 1995. The note
bears interest at the variable rate of the LIBOR rate plus 2.5%
per annum. The interest rate on the long-term note outstanding at
September 30, 1995 was 8.37%. The purpose of the loan was to
increase Advest's regulatory net capital. As required by the non-
recourse note, AGI signed a letter of credit with a third party
bank guaranteeing 20% of Advest's debt. The letter of credit is
fully collateralized by government securities.
At September 30, 1995 and 1994, long-term borrowings of AGI
were $4,490,000 and $4,388,000, respectively and represent a loan
from a third party lender on a first mortgage acquired by AGI in
July 1992. The debt bears interest at 1.25% over prime with
interest and principal payments due monthly, and is due July 1,
1997 unless extended at AGI's discretion to July 1, 1999. AGI
borrowed an additional $1,000,000 under the same terms during the
current year. The debt is collateralized by the first mortgage on
real estate managed by a subsidiary. The mortgage is currently
classified as a nonperforming asset and is due December 31, 2005.
Note 10: Subordinated Borrowings
At September 30, 1995 and 1994, the Company had $20,552,000 and
$20,997,000, respectively, of 9% convertible subordinated
debentures outstanding with interest payable semiannually. The
debentures are convertible at any time prior to maturity into
common stock of The Advest Group, Inc. at $13.57 per share. The
debentures are redeemable currently at 101.8% of the principal
amount plus accrued interest and at declining prices hereafter.
The debentures are subordinated to the claims of general
creditors.
The debentures are due on March 15, 2008. Commencing March
15, 1995, annual sinking fund requirements of 5% of the aggregate
principal amount of the debentures or at least 70% of the
debentures prior to maturity are due. At its option, the Company
may make sinking fund payments in cash or in debentures or by a
credit for debentures previously converted or redeemed. The 1995
sinking fund requirement was satisfied by the Company's election
to use previously redeemed securities. The Company has purchased
and retired $6,948,000 of the initial offering amount and,
consequently, has currently satisfied the entire sinking fund
requirement through fiscal 1998.
During the two years ended September 30, 1995 and 1994,
respectively, the Company purchased and retired debentures with a
total par value of $445,000 and $378,000.
Note 11: Common Stock
In August 1990, the Company announced its intention to repurchase
up to 2,000,000 shares, approximately 20%, of its common stock. In
August 1995, the Board of Directors voted to increase the number
of shares authorized for repurchase to 2,500,000 shares. During
the years ended September 30, 1995 and 1994, 344,554 and 488,552
shares, respectively, were acquired under the repurchase program
for a total of 2,114,177 shares repurchased since the start of the
program.
The payment of dividends on the Company's common stock is
subject to (1) the availability of funds from Advest, which may be
restricted under the net capital rule of the SEC and the New York
Stock Exchange ("NYSE"), and from the Bank, which is subject to
minimum bank regulatory requirements, and (2) the restriction of
the Company's Indenture with respect to its 9% Convertible
Subordinated Debentures due 2008 and (3) the restriction of the
Company's Loan and Security Agreement dated as of July 2, 1992
with Fleet Bank, N.A. Such restrictions have never curtailed the
Company's dividend payments, however, the Company has not declared
a dividend since December 1990 primarily as a result of weak
economic conditions in New England and their impact on the Bank.
In 1988, the Board of Directors of the Company adopted a
shareholder rights plan. The plan provides for the distribution of
one common stock purchase right for each outstanding share of
common stock of the Company. Each right entitles the holder,
following the occurrence of certain events, to purchase one share
of common stock at a purchase price of $30 per share subject to
adjustment. The rights will not be exercisable or transferable
apart from the common stock except under certain circumstances in
which either a person or group of affiliated persons acquires, or
commences a tender offer to acquire, 20% or more of the Company's
common stock or a person or group of affiliated persons acquires
15% of the Company's common stock and is determined by the Board
of Directors to be an "Adverse Person." Rights held by such an
acquiring person or persons may thereafter become void. Under
certain circumstances, a right may become a right to purchase
common stock or assets of the Company or common stock of an
acquiring company at a substantial discount. Under certain
circumstances, the Company may redeem the rights at $.01 per
right. The rights will expire in October 1998 unless earlier
redeemed or exchanged by the Company.
53
<PAGE>
[page 32 of Annual Report]
The Company has 2,000,000 shares, $.01 par value, preferred
stock which was authorized by shareholders in 1988. The board of
directors has full discretion with respect to designating and
establishing the terms of each class or series of preferred stock
prior to its issuance. No preferred stock has been issued to date.
Note 12: Stock Option Plans
During fiscal 1994, the Company established the 1993 Stock Option
Plan (the "1993 Plan") providing for grants of incentive stock
options or nonqualified stock options for up to 500,000 shares of
the Company's common stock. At September 30, 1995, options for
177,500 shares had been granted under the 1993 Plan, of which
175,500 options were outstanding. Option grants under the 1993
Plan are made at the discretion of the Stock Option and
Compensation Committee of the Board of Directors and become
exercisable at such times (but not within six months of grant) and
expire at such time (but not later than 10 years after grant), as
that committee determines.
During fiscal 1995, the Company established the 1994 Non-
Employee Director Stock Option Plan (the "1994 Plan"), providing
for annual grants of 1,500 incentive stock options to each
director not employed by the Company up to an aggregate of 60,000
options for all directors. At September 30, 1995, options for
9,000 shares had been granted and were outstanding under the 1994
Plan. Options granted under the 1994 Plan become exercisable in
equal thirds 30, 42 and 54 months after grant and expire 60 months
after the grant.
At September 30, 1995, the Company had outstanding an
aggregate of 614,143 options issued to employees under stock
option plans maintained by the Company prior to the 1993 Plan and
the 1994 Plan and under which no further grants are authorized.
These include 204,407, 125,638 and 36,597 nonqualified stock
options granted to top account executives under performance-based
plans offered in calendar 1990, 1991 and 1992, respectively.
These account executive options become exercisable five years
after grant and expire one year thereafter. The remainder of the
614,143 options consist of five-year options granted to executive
officers and key employees other than account executives on five
occasions between April 1991 and February 1993.
During calendar 1995 the Company is offering the Advest
Equity Plan (the "Equity Plan") to certain eligible employees.
The Equity Plan is a salary deferral investment program and is
described in more detail in Note 13. Participants in the Equity
Plan will receive nonqualified stock options on January 1, 1996
which will become exercisable on January 1, 2001 and expire
December 31, 2002. Based upon participation in the Equity Plan
through September 30, 1995 (without giving effect to additional
participation for the period through December 31, 1995),
participants will be granted options for 134,084 shares.
All options granted by the Company to date, or which may be
granted under the 1993 Plan, the 1994 Plan and the Equity Plan for
calendar 1995, have or will have exercise prices not less than
100% of the fair market value of the Company's common stock on the
date of grant.
Transactions under the Company's stock option plans are
summarized below:
- -----------------------------------------------------------------
Number of Option Price
Shares Per Share
- -----------------------------------------------------------------
Options outstanding at September
30, 1992
(384,805 exercisable) 877,275 $2.00- $9.09
Granted 191,481 5.75- 6.63
Forfeited (282,993) 2.00- 9.09
Exercised (23,367) 2.00- 4.00
----------
Options outstanding at September
30, 1993
(223,768 exercisable) 762,396 2.00- 8.13
Granted 30,000 5.13
Forfeited (79,829) 2.00- 8.13
Exercised (6,800) 4.00
----------
Options outstanding at September
30, 1994
(179,301 exercisable) 705,767 2.00- 7.00
Granted 156,500 5.63- 6.00
Forfeited (50,358) 2.00- 7.00
Exercised (13,266) 4.00- 6.25
---------
Options outstanding at September
30, 1995
(190,501 exercisable) 798,643 $2.00- $6.25
=========
- -----------------------------------------------------------------
Note 13: Employee Compensation and Benefits Plan
Advest Thrift Plan
The Company maintains the Advest Thrift Plan (the "Thrift Plan")
which is a qualified employee stock ownership plan ("ESOP") and
401(k) plan covering all employees who have completed one year of
service. The Thrift Plan is the successor to the December 31,
1992, merger of the Employee Stock Ownership Plan, Incentive
Savings Plan and Employees' Retirement Plan. The Company matches
100% of participants' contributions to their Thrift Plan accounts
up to 2% of compensation. In addition, since January 1993 the
Company has made discretionary contributions to participants'
Thrift Plan accounts equal to 1.5% of their compensation, and as
of December 31, 1995, the Company will make an additional
contribution of 0.5% of calendar 1995 compensation. Contribution
expense for fiscal 1995, 1994 and 1993 was $2,624,281, $2,552,180
and $2,041,082, respectively. No ESOP contributions have been
made by the Company since 1993.
Defined Benefit Plans
The Company's Account Executive Nonqualified Defined Benefit Plan
(the "AE Defined Benefit Plan"), effective October 1, 1992, offers
certain high-performing account executives retirement benefits
based upon a formula reflecting their years of service, the gross
commissions they generate and Company contributions to their
Thrift Plan 401(k) accounts.
The Company's Executive Nonqualified Post-Employment Income
Plan (the "Executive Defined Benefit Plan"), effective
54
<PAGE>
[page 33 of Annual Report]
October 1, 1993, provides certain senior executives with income
for 10 years after retirement equal to a percentage of their final
average earnings based upon a formula reflecting years of service,
assumed social security benefits and Company contributions to
certain other benefit plans on the executive's behalf.
Although the AE Defined Benefit Plan and the Executive
Defined Benefit Plan are considered to be "unfunded," assets have
been set aside in revocable trusts for each to fund future
payments. These trusts are available to general creditors of the
Company in the event of liquidation. The fair value of these
trusts, which are included in trading securities, at September 30,
1995 was $3,826,000, which was less than the projected benefit
obligation by $26,000.
The following table sets forth the status of the AE Defined
Benefit Plan and Executive Defined Benefit Plan as well as amounts
recognized in the Company's consolidated financial statements at
September 30, 1995 and 1994:
- ------------------------------------------------------------------
In thousands 1995 1994
- ------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested $ -- $ --
Non-vested 2,673 911
----------------
Accumulated benefit obligation 2,673 911
Effect of projected future
compensation levels 1,179 1,308
----------------
Projected benefit obligation 3,852 2,219
Unrecognized net (loss) gain (369) 239
Unrecognized prior service cost (341) (375)
-----------------
Accrued pension liability $3,142 $2,083
==================
- -----------------------------------------------------------------
Pension expense for the plans for the three years ended
September 30, 1995 included in the following components:
- ------------------------------------------------------------------
In thousands 1995 1994 1993
- ------------------------------------------------------------------
Service cost $ 878 $1,042 $ 915
Interest cost 175 92 --
Net amortization and deferral 6 34 --
------------------------------
Net benefit costs $1,059 $1,168 $ 915
==============================
- ------------------------------------------------------------------
The following table provides the assumptions used in
determining the projected benefit obligation for the plans for the
three years ended September 30, 1995:
- -----------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------
Weighted-average discount rate 7.0% 8.5% 7.0%
Rate of increase in future
compensation levels 5.0 5.0 5.0
Expected long-term rate of
return on plan assets 6.5 7.5 6.0
- -----------------------------------------------------------------
Equity Plans
During calendar 1995, the Company is offering the Advest Equity
Plan (the "Equity Plan") to certain top performing account
executives and designated key employees. The Equity Plan allows
those employees to invest a portion of their 1995 compensation on
a pretax basis in units consisting of one share of the Company's
common stock and one option to purchase an additional share of
common stock. The share portion of the unit is issued monthly
from treasury stock and will be restricted until January 1, 1999.
The option portion will be granted on January 1, 1996 and is
described under Note 12. Both the restricted stock and options
will be subject to forfeiture under certain circumstances. The
Company is offering a substantially similar plan to executive
officers, although their restricted stock will be purchased on the
open market and their options will be granted under the 1993 Stock
Option Plan.
Management Incentive Plan
The Company has a Management Incentive Plan (the "MIP") which
provides for incentive compensation to salaried employees.
Compensation presently is based on the Company's pre-tax income.
During fiscal 1995 and 1993, MIP compensation was $1,330,000, and
$778,000, respectively. There was no MIP compensation in fiscal
1994.
Note 14: Capital and Regulatory Requirements
Advest is subject to the net capital rule adopted and administered
by the NYSE and the SEC. Advest has elected to compute its net
capital under the alternative method of the rule which requires
the maintenance of minimum net capital equal to 2% of aggregate
debit balances arising from customer transactions, as defined. The
NYSE also may require a member firm to reduce its business if net
capital is less than 4% of aggregate debit balances and may
prohibit a member firm from expanding its business and declaring
cash dividends if net capital is less than 5% of aggregate debit
balances. As of September 30, 1995, Advest's regulatory net
capital of $41,644,000 was 13% of aggregate debit balances and
exceeds required net capital by $35,064,000.
Under state bank regulatory restrictions, the Bank is
required to maintain a minimum level of capital and to limit
annual dividends to the total of the current and prior two years
retained net income. As a result of these restrictions, the Bank
with an accumulated deficit at September 30, 1995 is prohibited
from declaring dividends.
The FDIC requires most banks to establish and maintain a
leverage capital ratio of 4% to 5%. Pursuant to a Memorandum of
Understanding (the "MOU") with the Regional Director of the FDIC
and the Banking Commissioner of the State of Connecticut, the Bank
is required to exercise all reasonable good faith efforts to
achieve (generally within unspecified time periods) certain goals,
including among others: to achieve and maintain a leverage capital
ratio of at least 6% and a risk-based capital ratio of 8%, to
ensure that there are adequate loan loss reserves and quarterly
evaluations of such reserves, to reduce the level of adversely
classified assets to not more than 40% of total capital and
reserves, and to provide periodic progress reports to regulatory
agencies.
The Bank recorded a significant operating loss for the 1995
fiscal year due to its implementation of the accelerated
disposition plan for NPAs (Refer to Note 2). Consequently, the
Bank's leverage capital ratio as of September 30, 1995
55
<PAGE>
[page 34 of Annual Report]
was 5.03%, which exceeded the regulatory requirements, but was
below the requirement of the MOU. The Bank's leverage capital
ratio as of September 30, 1994 was 6.32%, which exceeded both the
regulatory and MOU requirements. At September 30, 1995, the
Bank's total risk-based capital ratio was 8.61%, and the Tier 1
ratio was 7.40%, which exceeded both the regulatory and MOU
requirements. At September 30, 1994, risk-based capital and Tier
1 capital were 10.44% and 9.18%, respectively.
Note 15: Income Taxes
As discussed in Note 1, the Company adopted SFAS 109 as of October
1, 1993. The cumulative effect of adopting SFAS 109 did not have a
material impact on the Company's financial condition or results of
operations.
The provision for income taxes for the three years ended
September 30, 1995 consisted of the following:
- ------------------------------------------------------------------
Liability method Deferred method
- ------------------- ----------------
- ------------------------------------------------------------------
In thousands 1995 1994 1993
- ------------------------------------------------------------------
Current:
Federal $1,695 $ -- $ --
State and local 1,985 1,015 800
-------- ----- ----
3,680 1,015 800
-------- ----- ----
Deferred:
Federal 1,747 1,280 --
State and local (17) 7 --
----------------- --------
1,730 1,287 --
-------- ------ --------
Provision for income taxes,
net of extraordinary
credit $5,410 $2,302 $800
======== ===== =====
- -----------------------------------------------------------------
At September 30, 1995 and 1994, deferred tax assets and
liabilities were comprised of:
- ------------------------------------------------------------------
In thousands 1995 1994
- ------------------------------------------------------------------
Deferred tax assets:
Provision for credit losses and
asset devaluation $3,853 $4,338
Employee benefits 3,810 3,759
Net operating loss
carryforwards -- 830
General business tax credits -- 633
Other 4 303
--------- --------
Total deferred tax assets $7,667 $9,863
--------- ------
Deferred tax liabilities:
Tax loan loss reserve in
excess of base year $ 433 $ 764
Depreciation 620 162
Investment income 1,002 1,899
Partnership basis difference3,082 2,919
Other 400 259
------------------
Total deferred tax liabilities $5,537 $6,003
------------------
Net deferred tax asset $2,130 $3,860
=================
- ------------------------------------------------------------------
The Company will only recognize a deferred tax asset when,
based on available evidence, realization is more likely than not.
Accordingly, at September 30, 1995 and 1994, the Company has
recorded no valuation allowance against federal deferred tax
assets based on reversals of existing taxable amounts and
anticipated future earnings. On the date SFAS 109 was adopted, a
valuation reserve of $575,000 was established to cover state net
operating loss carryforwards which were not expected to be
realized due to short carryforward time periods. At September 30,
1995 and 1994, the valuation reserve was $1,510,000 and
$1,360,000, respectively, reflecting increasing state net
operating loss carryforwards. At September 30, 1995, state net
operating loss carryforwards were approximately $13.4 million
which expire in various years between 1998 and 2000.
For the year ended September 30, 1993, the principal
components of deferred tax expense (benefit) were:
- ------------------------------------------------------------------
In thousands 1993
- ------------------------------------------------------------------
Provision for losses $1,674
Employee benefits 1,185
Investment income 632
Impact of operating losses (3,350)
Depreciation (136)
Other (5)
-----------
$ --
===========
A reconciliation of the difference between the statutory
federal income tax rate and the effective income tax rate follows
for the three years ended September 30, 1995:
- ------------------------------------------------------------------
Percent of pre-tax income 1995 1994 1993
- ------------------------------------------------------------------
Statutory income tax rate 34.0% 34.0% 34.0%
State and local income taxes,
net of federal tax effect 11.1 12.6 6.5
Rate differential due to carryforward
of net operating losses -- -- (26.1)
Tax-exempt interest income (1.9) (4.6) (2.7)
Intangible assets .7 1.6 (2.2)
Dividend income -- (0.3) (0.1)
Effect of limitation on operating
loss carrybacks -- -- --
Other 2.1 (0.3) 0.5
--------------------------
Effective income tax rate 46.0% 43.0% 9.9%
==========================
- ------------------------------------------------------------------
As of September 30, 1995, the Bank's allowance for possible
loan losses for federal income tax purposes was approximately
$4,447,000 of which $3,369,000 represents reserves that arose in
tax years beginning before December 31, 1987 (base year amount). A
deferred tax liability has not been recognized for possible loan
losses to the extent of the base year amount. If the reserve were
to be used for any purpose other than to absorb loan losses or if
the Bank's
56
<PAGE>
[page 35 of Annual Report]
qualifying assets as defined by the Internal Revenue Code are less
than 60% of total assets, a federal income tax liability could be
incurred. It is not anticipated that the reserve will be made
available for other purposes or that qualifying assets will be
less than 60%.
Note 16: Commitments and Contingent Liabilities
Leases
The Company conducts all of its operations from leased premises,
and leases data processing and communications equipment under
noncancelable operating leases primarily varying from one to ten
years, with certain renewal options for similar terms. Minimum
rentals based upon the original terms (excluding taxes, insurance
and maintenance expenses which also are obligations) are (in
thousands):
- ------------------------------------------------------------------
Data processing
Fiscal year ended Office & communications
September 30, facilities equipment Total
- ------------------------------------------------------------------
1996 $ 6,091 $1,233 $ 7,324
1997 5,560 1,138 6,698
1998 5,160 761 5,921
1999 4,363 222 4,585
2000 3,927 -- 3,927
2001 and thereafter 14,231 -- 14,231
--------------------------------------
$39,332 $3,354 $42,686
====================================
Rental expense under these leases was $9,458,000, $9,938,000,
and $10,079,000 for the years ended September 30, 1995, 1994 and
1993, respectively.
Loan guarantees and letters of credit
The Company has guaranteed loans to certain of its employees from
a third party lender. At September 30, 1995 and 1994, the total
principal outstanding on these loans was $2,000 and $75,000,
respectively.
Billings Management Company ("BIM"), a subsidiary of
Billings, acts as general partner in various real estate limited
partnerships. Under the terms of one of the partnership
agreements, the Company has guaranteed half of an institutional
loan to the partnership for which the partnership has pledged
individual investor notes as collateral. At September 30, 1994,
AGI's guarantee covered borrowings in the amount of $915,000. The
loans were paid off during fiscal 1995. In September 1995, AGI
guaranteed additional partnership borrowings of $750,000 from a
third party lender. The 1995 borrowings are uncollateralized.
At September 30, 1995, AGI was contingently liable under a
bank letter of credit in the amount of $1.25 million. The letter
of credit was required under the terms of a non-recourse note
entered into between Advest and a third party lender and covers
20% of the note amount. It is fully collateralized by government
securities. Refer to Note 9.
At September 30, 1995 and 1994, respectively, Advest was
contingently liable under bank letter of credit agreements in the
amounts of $1,255,000 and $1,232,000, which are collateralized by
securities held in customer accounts.
At September 30, 1995 and 1994, the Bank was contingently
liable under standby letters of credit and commitments to extend
credit to its customers in the amount of $45,177,000 and
$30,006,000, respectively. The value of collateral held for letter
of credit commitments as of September 30, 1995 varies from 0% to
466% of individual commitments with a weighted average of 22%.
At September 30, 1995, the Bank was contingently liable under
letters of credit of $200,000 from the FHLB of Boston pledged as
security for $5,000,000 of interest rate swaps. No amounts have
been drawn against these letters of credit. (See Note 17.)
Litigation
The Company has been named as defendant in various legal actions
some of which claim substantial damages. The actions have arisen
principally from the securities and investment banking business.
In the opinion of management, based on discussions with counsel,
the outcome of these matters will not result in a material adverse
effect on the results of operations and financial condition of the
Company.
Note 17: Financial Instruments With Off-Balance-Sheet and
Concentrations of Credit Risk
In the normal course of business, Advest's securities activities
involve execution, settlement and financing of various securities
transactions for customers. These activities may expose Advest to
risk in the event customers, other brokers and dealers, banks,
depositories or clearing organizations are unable to fulfill
contractual obligations.
In accordance with industry practice, Advest records
securities transactions executed on behalf of its customers on
settlement date which is generally three business days after trade
date. Through May 31, 1995 the settlement cycle was five business
days. The shortened settlement cycle is intended to reduce the
market risk of trades. The risk of loss on these transactions is
identical to settled transactions and relates to the customer or
brokers and dealers inability to meet the terms of their
contracts. Advest generally conducts business with brokers and
dealers located in the New York metropolitan area that are members
of the major securities exchanges. Advest's clients are
predominantly retail investors located throughout the United
States but primarily in the Northeast.
For transactions in which Advest extends credit to customers,
it seeks to control the risk associated with these activities by
requiring customers to maintain margin collateral in compliance
with various regulatory and internal guidelines. Advest monitors
required margin levels daily and, pursuant to such guidelines,
requests customers to deposit additional collateral, or liquidate
securities positions when necessary.
Advest's collateralized financing activities require it to
pledge customer securities as collateral for various secured
financing sources such as bank loans and securities loaned. In the
event the counterparty is unable to meet its contractual
obligations, Advest may be exposed to off-balance-sheet risk of
acquiring securities at prevailing market prices. The Company
monitors the credit standing of counterparties with
57
<PAGE>
[page 36 of Annual Report]
whom it conducts business. Risk is further controlled by
monitoring the market value of securities pledged on a daily basis
and by requiring adjustment of collateral levels as needed.
Advest has sold securities that it does not currently own and
will therefore be obligated to purchase such securities at a
future date. These obligations are recorded in the financial
statements at the September 30, 1995 and 1994 market values of the
related securities. Advest will incur a loss if the market value
of the securities increases subsequent to September 30, 1995.
Advest seeks to control interest rate risk associated with
its trading positions, primarily its municipal bond inventory, by
entering into derivative transactions, principally short-term
futures contracts. The average fair value of futures contracts
during the year ended September 30, 1995 was $675,380. Net
trading losses were $103,000 for fiscal 1995 and a negligible
trading profit in 1994. Advest held no open positions at
September 30, 1995.
The Bank is a party to financial instruments with off-balance-
sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments involve, to
varying degrees, elements of credit and interest rate risk. The
Bank's exposure to credit loss in the event of non-performance by
the other party to the financial instrument is represented by the
contractual amount of these instruments. The Bank uses the same
credit policies in making commitments as it does for existing
loans and management believes that the Bank controls the risk of
these financial instruments through credit approvals, limits and
monitoring procedures. Commitments to extend credit are agreements
to lend to a customer as long as there is no violation of any
condition established in the contract. Since many of the
commitments could expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The amount of collateral obtained, if deemed
necessary by the Bank, upon extension of credit is based on credit
evaluation of its customer. Collateral held varies but may include
income-producing commercial properties, accounts receivable,
inventory and property, plant and equipment.
Standby letters of credit are conditional commitments issued
by the Bank to guarantee the performance of customers to a third
party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in standing loan facilities
to customers. The Bank holds real estate and marketable securities
as collateral supporting those commitments for which collateral is
deemed necessary.
. The Bank enters into interest rate swap and cap contracts as
part of its interest rate risk management strategy. Such
instruments are held for purposes other than trading. These swaps
and caps are intended to maintain a targeted level of net interest
margin between the return on the Bank's interest earning assets
and the cost of funds. Interest rate swaps involve the exchange of
fixed and floating rate interest payments based on an underlying
notional amount. The notional values do not represent direct
credit exposures. The Bank's credit exposure is limited to the net
difference between the calculated pay and receive amounts on each
transaction which is generally netted and paid quarterly. Interest
rate cap contracts provide that in exchange for the payment of an
initial premium, the Bank will receive payments from the
counterparty in the event that interest rates rise above a
predetermined level (the "strike rate").
Entering into interest rate swap agreements involves the risk
of dealing with counterparties and their ability to meet the terms
of the contracts. The Bank enters into swap and cap contracts
with counterparties that are either highly rated by recognized
rating agencies or are federal agencies. The Bank minimizes the
credit risk by performing credit reviews on the swap
counterparties and minimizes the interest rate risk by its asset
and liability management policies
The following table illustrates the Bank's outstanding swap
and cap contracts at September 30, 1995:
- ------------------------------------------------------------------
Maturities Balance Balance
-----------------------
In thousands
1996 1997 1998 1999 9/30/95 9/30/94
- ------------------------------------------------------------------
Fixed pay interest rate swaps:
Notional value $7,500 $10,000 $5,000 $5,000 $27,500 $52,500
Weighted average
received rate 5.757% 6.063% 5.875% 5.875% 6.009% 4.932%
Weighted average
pay rate 9.352% 6.350% 8.790% 7.090% 7.747% 6.676%
Interest rate caps:
Notional value $ -- $ 5,000 $ -- $ -- $5,000 $20,000
Strike rate -- 5.500% -- -- -- --
Unamortized premium $ -- $ 110 $ -- $ -- $ 110 $ 234
Total notional
value $7,500$15,000 $5,000 $5,000 $32,500 $72,500
- ------------------------------------------------------------------
58
<PAGE>
[page 37 of Annual Report]
In the absence of these interest rate swaps, net interest
income would have been higher by approximately $472,000 in 1995,
$1,361,000 in 1994 and $1,619,000 in 1993. In the absence of these
cap contracts, net interest income would have been lower by
approximately $128,000 in 1995, and higher by approximately
$64,000 in 1994 and $22,000 in 1993.
Note 18: Segment Reporting
The Company operates principally in the financial services and
banking industries. Operations in the financial services industry
include agency transactions, principal transactions, investment
banking, asset management and consulting. The banking operations
include mortgage, leasing and other lending and investment of
funds generated from borrowings and customer deposits. Financial
information by industry segments for the three years ended
September 30, 1995 are summarized as follows:
- ------------------------------------------------------------------
Financial
In thousands services Banking Other Consolidated
- ------------------------------------------------------------------
1995
Total revenues $207,573$ 23,464 $ 1,596 $232,633
Operating
income (loss) 23,175 (9,301) (2,113) 11,761
Identifiable
assets 530,997 269,500 30,318 830,815
Capital
expenditures 4,182 193 2 4,377
Depreciation 2,806 184 2 2,992
Amortization 5,585 129 199 5,913
1994
Total revenues $181,389$ 23,185 $ 655 $205,229
Operating
income (loss) 12,874 (1,480) (6,039) 5,355
Identifiable
assets 508,001 353,150 23,704 884,855
Capital
expenditures 7,001 313 -- 7,314
Depreciation 2,075 141 3 2,219
Amortization 4 ,507 149 192 4,848
1993
Total revenues $177,232$ 24,379 $ 420 $202,031
Operating
income (loss) 15,045 (2,102) (4,872) 8,071
Identifiable
assets 464,922 388,996 31,264 885,182
Capital
expenditures 2,750 110 -- 2,860
Depreciation 1,778 114 2 1,894
Amortization 3,483 1,043 193 4,719
Note 19: Related Parties
As of September 30, 1995 and 1994, loans to related parties made
by the Bank totaled approximately $5,578,000 and $4,271,000,
respectively. There were approximately $2,124,000 of new loans and
$1,573,000 of repayments during 1995. Related parties include
directors and executive officers of the Company, and their
respective affiliates in which they have a 10% or more interest.
Such loans were made in the ordinary course of business and at
terms substantially comparable to loan transactions with others.
As of September 30, 1995, all loans to related parties were
performing.
Note 20: Fair Value of Financial Instruments
Fair values generally represent estimates of amounts at which a
financial instrument could be exchanged between willing parties in
a current transaction other than in forced liquidation. Where
current exchange prices are not available, other valuation
techniques are used. Fair value estimates are subjective and
depend on a number of significant assumptions based on
management's judgment regarding future expected loss experience,
current economic conditions, risk characteristics of various
financial instruments, and other factors. In addition, a wide
range of valuation techniques are permitted, making comparisons
difficult, even between similar entities.
The methods and assumptions used to estimate fair value
follow. Financial instruments not specifically addressed are
reported in the financial statements at fair value or amounts that
approximate fair value where other estimation methods are used.
Securities
Fair value is based upon quoted market prices, where available. If
a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities and adjusted for
differences between the quoted instrument and the instrument being
valued.
Loans
For commercial real estate loans, multi-family mortgage loans,
lease loan financings and commercial and consumer loans, fair
value is estimated by discounting the expected future cash flows
using the current rates at which similar loans would be originated
to borrowers with similar credit ratings for comparable remaining
maturities. For residential one to four family real estate
mortgages, fair value is estimated using quoted market prices for
similar loans, adjusted for differences in loan characteristics.
The fair value of nonperforming loans is based on recent
appraisals or estimated cash flows discounted at a rate
commensurate with the risk associated with such cash flows.
Assumptions regarding credit risk, cash flows and discount rates
are judgmentally determined using available market and borrower
information.
Deposits
Fair values for regular savings and money market accounts are
equal to the amount payable on demand at the reporting date. Fair
values for fixed-rate certificates of deposit are estimated by
discounting future cash flows using interest rates currently
offered on time deposits with similar remaining maturities.
Borrowings
The fair value of advances from the Federal Home Loan Bank,
including the current portion, are estimated using rates which
approximate those currently being offered by the
59
<PAGE>
[page 38 of Annual Report]
FHLB for advances with similar remaining maturities. The fair
values of subordinated debentures and other long-term borrowings
are based on quoted market prices or rates available to the
Company for similar debt.
Derivative financial instruments
The fair value of interest rate swap and cap agreements are
obtained from dealer quotes. These values represent the estimated
amount that the Company would receive or pay to terminate the
agreements at the reporting date, taking into account current
interest rates and the current credit-worthiness of the
counterparties. The fair values of derivatives entered into by
Advest are based on quoted market prices.
Commitments to extend credit, standby letters of credit and
financial guarantees written
The fair value of commitments is estimated using the fees
currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
credit worthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair
values of guarantees and letters of credit generally are based on
fees currently charged for similar agreements or on the estimated
cost to terminate or otherwise settle the obligations with the
counterparties at the reporting date. The fair value of certain
loan guarantees made by the Company is not practicable to estimate
as there is no market for the loans.
The fair values of the Company's financial instruments at
September 30, 1995 and 1994 are:
- -----------------------------------------------------------------
1995 1994
---------------- -----------------
Carrying Fair Carrying Fair
In thousands amount value amount value
- -----------------------------------------------------------------
Financial assets:
Loans, net $242,575 $243,319 $280,480 $272,390
Investment
securities 34,829 34,833 58,752 58,004
Financial liabilities:
Deposits 235,656 236,461 291,885 292,417
Short-term
borrowings 10,251 10,313 32,652 32,666
Long-term
borrowings 17,240 17,387 30,388 29,967
Subordinated
debentures 20,552 20,655 20,997 19,527
Unrecognized financial instruments:
Fixed pay interest
rate swaps 27,500 (759) 52,500 (271)
Interest rate caps 5,000 61 20,000 379
Commitments to
extend credit (42,763) 32 (28,013) (84)
Standby letters
of credit (4,919) (9) (3,225) (46)
- ------------------------------------------------------------------
60
<PAGE>
[page 39 of Annual Report]
Quarterly Financial Information (unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
In millions, except 1995 by fiscal quarters 1994 by fiscal quarters
--------------------------------------------------------
per share data 1st 2nd 3rd 4th 1st 2nd 3rd 4th
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash dividends per common share $- $- $- $- $- $- $- $-
Stock price range: High $5-1/2 $6-3/8 $8 $9-3/8 $8-1/8 $6-7/8 $6-1/4 $5-1/2
Low $5 $5 $5-1/2 $7-3/8 $6-3/8 $6 $5 $5
Clos$5-1/8 $5-3/4 $7-7/8 $9-1/8 $6-5/8 $6-1/4 $5-3/8 $5-1/8
Revenues $51.0 $53.6 $66.9 $61.2 $56.3 $52.0 $47.8 $49.1
Income before income taxes $1.5 $0.3 $6.2 $3.7 $3.8 $0.5 $0.4 $0.7
Net income $0.9 $0.2 $3.3 $2.0 $2.2 $0.3 $0.2 $0.4
Net income per common share $.10 $.02 $.38 $.23 $.24 $.03 $.02 $.05
</TABLE>
Annual Meeting
The annual meeting of stockholders will be held
at the Sheraton Hotel, Hartford, CT on January
25, 1996 at 10:30 AM. Proxy statements an proxies
are mailed to stockholders of record as of
December 11, 1995. As of September 30, 1995
there were 971 common stockholders of record.
Additional Information-Form 10k
One copy of the Company's annual report on Form
10k to the Securities and Exchange Commission
will be provided at no charge upon written
request to Coporate Marketing, The Advest Group,
Inc.
The Advest Group, Inc. is listed on the New York
Stock Exchange under the symbol ADV.
Registrar and Transfer Agent
Fleet Bank N.A. Stock Transfer Department P.O.
Box 366 Providence, RI 02901
61
<PAGE>
Exhibit 21
The Advest Group, Inc.
List of Subsidiaries
Jurisdiction Present
Name Where Incorporated
Ownership
Advest, Inc.
Delaware
100%
Advest Insurance
Agency, Inc. Massachusetts 100%
Balanced Capital
Services, Inc. Connecticut 100%
Advest Bank Connecticut 100%
Admass Corp. Massachusetts 100%
Admyst Corp. Connecticut 100%
Advantage Service Corp.
Advest Mortgage Corp (formerly
Advantage Service Corp.)Connecticut 100%
Advest Credit Corporation Connecticut 100%
A.B. Realty Corp. Connecticut 100%
Laurel Woods Development
Corp. Connecticut 100%
Salem Corp. of CT Connecticut 100%
Advest Capital, Inc. Connecticut 100%
Advest Transfer Services, Inc.Delaware 100%
Bank Street Management CompanyConnecticut 100%
Billings & Company, Inc. Connecticut 100%
Billings Management Co. Connecticut 100%
Boston Security
Counsellors, Inc. Massachusetts 100%
Central Row Corp. Connecticut 100%
NERI, Inc. Connecticut 100%
SRNY, Ltd. (formerly Shore &
Reich, Ltd.) Connecticut 100%
Coordinated Planning, Ltd. New York 100%
Verco Insurance Agency, Inc Ohio 100%
62
<PAGE>
Exhibit 23
Consent of Independent Accountants
The Board of Directors and Shareholders
of The Advest Group, Inc.:
We consent to the incorporation by reference in the registration
statements of The Advest Group, Inc. and Subsidiaries on Form S-8
(File No. 2-92868) concerning its 1983 Incentive Stock Option
Plan, Form S-8 (File No. 33-17674) concerning its 1986 Incentive
Stock Option Plan, Form S-8 (File No. 33-72042) concerning its
Advest Thrift Plan and Form S-8 (File No. 33-56275) concerning its
1995 Equity Plan, of our reports dated October 26, 1995, on our
audits of the consolidated financial statements and financial
statement schedules of The Advest Group, Inc. and Subsidiaries as
of September 30, 1995 and 1994 and for the years ended September
30, 1995, 1994 and 1993, which reports are incorporated by
reference and included, respectively, in this Annual Report on
Form 10-K.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
December 19, 1995
63
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