<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
--------------
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 0-16193
DS BANCOR, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1162884
(State or other jurisdiction of I.R.S. Employer
Incorporation or organization) Identification No.)
33 ELIZABETH STREET, DERBY, CONNECTICUT
(Address of principal executive offices)
06418
(Zip Code)
(203) 736-9921
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class: Common Stock, par value $1.00 per share
Outstanding at May 12, 1994: 2,657,891 shares
<PAGE>
I N D E X
Page(s)
Part 1 -- Financial Statements
A. Consolidated Statements of Position 1
B. Consolidated Statements of Operations 2
C. Consolidated Statements of Stockholders' Equity 3
D. Consolidated Statements of Cash Flows 4
E. Notes to Consolidated Financial Statements 5 - 25
F. Selected Consolidated Financial and Other Data 26
G. Management's Discussion and Analysis 27 - 38
Part 2 -- Other Information 39
Signatures 40
<PAGE>
DS BANCOR, INC.
CONSOLIDATED STATEMENTS OF POSITION
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
------------- ---------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks (Note 1) $15,076 $12,618
Federal funds sold (Note 1) -- 30,500
Investment securities (Notes 1, 2 & 3)
Trading account securities, at market 304 --
Available-for-sale, at market 221,913 256,346
Held-to-maturity (market value: $126,933 at March 31, 1994
and $66,846 at December 31, 1993) 130,439 66,253
Federal Home Loan Bank of Boston stock, at cost (Note 3) 8,022 8,022
------------- ---------------
Loans (Notes 1, 3, 4 & 5)
Mortgage 691,807 660,605
Consumer 92,787 95,520
Commerical 30,462 30,141
------------- ---------------
815,056 786,266
Less: Allowance for loan losses (6,777) (6,979)
------------- ---------------
Loans, net 808,279 779,287
------------- ---------------
Income receivable (Note 1) 6,566 6,541
Bank premises and equipment, net (Notes 1 & 6) 6,926 7,062
Prepaid and deferred income taxes (Notes 1 & 9) 3,172 2,501
Foreclosed & in-substance foreclosed assets (Notes 1 & 7) 16,707 16,143
Other assets 9,557 8,848
------------- ---------------
TOTAL ASSETS $1,226,961 $1,194,121
------------- ---------------
------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits (Note 8)
Non-interest bearing $29,659 $28,185
Interest bearing 990,141 978,036
------------- ---------------
1,019,800 1,006,221
Mortgagors' escrow 7,035 10,476
Advances from Federal Home Loan Bank of Boston (Notes 3 & 8) 128,332 104,991
Repurchase agreements & other borrowings (Notes 3, 8 & 13) 1,450 1,450
Other liabilities (Note 9) 4,174 4,543
------------- ---------------
Total Liabilities 1,160,791 1,127,681
------------- ---------------
Commitments and contingent Liabilities (Notes 5 & 6)
Stockholders' Equity (Notes 12, 13 & 15)
Preferred stock, no par value; authorized 2,000,000 shares; none issued -- --
Common stock, par value $1.00; authorized 6,000,000 shares;
issued--2,991,116 shares; outstanding--2,651,616 shares 2,991 2,991
Additional paid-in capital 36,007 36,007
Retained earnings 31,685 31,955
Less: Treasury stock, at cost (339,500 shares) (4,513) (4,513)
------------- ---------------
Total Stockholders' Equity 66,170 66,440
------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,226,961 $1,194,121
------------- ---------------
------------- ---------------
</TABLE>
See notes to consolidated financial statements.
- 1 -
<PAGE>
DS BANCOR, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
1994 1993
------------ ------------
(unaudited)
<S> <C> <C>
INTEREST REVENUE (Note 1)
Interest and fees on loans $13,546 $13,481
Taxable interest on investments 4,525 5,294
Dividends on investments 222 212
------------ ------------
Total interest revenue 18,293 18,987
------------ ------------
INTEREST EXPENSE (Note 8)
Deposits 8,300 10,046
Borrowed funds 1,675 1,627
Less: Penalties on premature time deposit withdrawals (13) (22)
------------ ------------
Net interest expense 9,962 11,651
------------ ------------
NET INTEREST REVENUE 8,331 7,336
Provision for loan losses (Notes 1 & 4) 600 450
------------ ------------
Net interest revenue after provision for loan losses 7,731 6,886
------------ ------------
OTHER REVENUE
Service charges and other revenue 583 1,756
Net securities and other gains 280 38
------------ ------------
Total other revenue 863 1,794
------------ ------------
OTHER EXPENSES
Salaries and wages 1,918 1,849
Employee benefits (Note 10) 575 471
Occupancy (Note 6) 645 509
Furniture and equipment (Note 6) 221 185
Foreclosed asset expense (Note 7) 544 1,242
Other 2,188 2,146
------------ ------------
Total other expenses 6,091 6,402
------------ ------------
Income before income taxes and cumulative
effect of a change in accounting principle 2,503 2,278
Provision for income taxes (Note 9) 1,011 988
------------ ------------
Income before cumulative effect of a change in accounting princ 1,492 1,290
Cumulative effect of a change in method of accounting
for income taxes (Notes 1 & 9) -- 1,548
------------ ------------
NET INCOME $1,492 $2,838
------------ ------------
------------ ------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (Note 11)
Primary 2,753,561 2,651,295
Fully diluted 2,762,866 2,651,295
EARNINGS PER SHARE--PRIMARY (Note 11)
Income before cumulative effect of a change in accounting pri $0.54 $0.49
Cumulative effect of a change in account principle -- $0.58
Net income $0.54 $1.07
EARNINGS PER SHARE--FULLY DILUTED (Note 11)
Income before cumulative effect of a change in accounting pri $0.54 $0.49
Cumulative effect of a change in account principle -- $0.58
Net income $0.54 $1.07
</TABLE>
See notes to consolidated financial statements.
- 2 -
<PAGE>
DS BANCOR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
Retained Earnings
--------------------------
Additional Unrealized Total
Common Paid-in Retained Gains & Treasury Stockholders'
Stock Capital Earnings Losses Stock Equity
------------ ------------ ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
(Note 1) (Note 2) (Note 13)
Balance--December 31, 1992 $2,865 $33,971 $26,340 ($78) ($4,513) $58,585
Net income 2,838 2,838
Stock dividend declared on common
stock (5%--February 26, 1992) 126 2,029 (2,155) 0
Shares issued for fractional interest 7 7
Cash in lieu of fractional shares (7) (7)
Adjustment of unrealized losses 78 78
------------ ------------ ------------ ------------ ------------ ---------------
Balance--March 31, 1993 $2,991 $36,007 $27,016 $0 ($4,513) $61,501
------------ ------------ ------------ ------------ ------------ ---------------
------------ ------------ ------------ ------------ ------------ ---------------
Balance--December 31, 1993 $2,991 $36,007 $30,652 $1,303 ($4,513) $66,440
Net income 1,492 1,492
Adjustment for unrealized gains
(losses) of subsidiary (1,762) (1,762)
------------ ------------ ------------ ------------ ------------ ---------------
BALANCE--MARCH 31, 1994 $2,991 $36,007 $32,144 ($459) ($4,513) $66,170
------------ ------------ ------------ ------------ ------------ ---------------
------------ ------------ ------------ ------------ ------------ ---------------
</TABLE>
See notes to consolidated financial statements.
- 3 -
<PAGE>
DS BANCOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
For The Three Months Ended March 31,
------------------------------------
1994 1993
--------- ---------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,492 $2,838
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 600 450
Provision for foreclosed assets 400 975
Depreciation and amortization 220 135
Amortization of intangible assets 250 218
Net amortization of premiums on securities 471 327
Deferral (amortization) of loan fees, net (49) 580
Increase in prepaid income taxes 711 838
Net securities and other gains (290) (38)
Increase in interest receivable (25) (1,395)
Cumulative effect of change in accounting principle --- (1,548)
Benefit for deferred income taxes (128) (201)
Net decrease in other assets 1,491 4,531
Decrease in other liabilities (369) (1,228)
--------- ---------
Net cash provided by operating activities 4,774 6,482
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from matured securities 28,374 18,268
Proceeds from sale of securities 15,733 4,617
Purchase of investment securities (79,897) (122,253)
Purchase of FHLB of Boston stock --- (1,405)
Proceeds from loans sold to others 8,922 769
Purchases of loans from others (1,154) (2,342)
Net increase in loans to customers (38,383) (13,020)
Premises and equipment additions (84) (112)
Proceeds from sale of foreclosed assets 850 1,110
Net (decrease) increase in property taken by foreclosure (656) 264
--------- ---------
Net cash used in investing activities (66,295) (114,104)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits from customers 13,579 4,013
Net decrease in mortgagors' escrow (3,441) (3,129)
Net increase in repurchase agreements & other borrowings --- 252
Net decrease in short term FHLB of Boston advances (11,659) (183)
Proceeds from long term FHLB of Boston advances 35,000 0
Repayment of long term FHLB of Boston advances --- (750)
Proceeds from issuance of common stock --- 7
Dividends paid to stockholders --- (7)
--------- ---------
Net cash provided by financing activities 33,479 203
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (28,042) (107,419)
Cash and cash equivalents at beginning of period 43,118 143,960
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $15,076 $36,541
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements.
- 4 -
<PAGE>
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by DS
Bancor, Inc. (the "Company"), its wholly owned subsidiary Derby Savings Bank
(the "Bank") and Derby Financial Services Corp., the Bank's wholly owned
subsidiary, and reflected in the accompanying consolidated financial statements.
The financial statements of Derby Financial Services Corp. are not significant
to the Bank's or the consolidated financial statements.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of the Company and the Bank and all material intercompany accounts and
transactions have been eliminated.
BASIS OF CONSOLIDATED FINANCIAL STATEMENT PRESENTATION. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and revenue and expenses as of the
date of the consolidated statements of financial position and the consolidated
statements of operations for the period. Actual results may differ from those
estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures and in
satisfaction of loans. In connection with the determination of the allowances
for loan losses and foreclosed assets, management utilizes the services of
professional appraisers for significant properties.
A substantial portion of the Bank's loans are collateralized by real estate in
depressed markets in Connecticut. In addition, all of the foreclosed assets are
located in those same depressed markets. Accordingly, the ultimate
collectibility of a substantial portion of the Bank's loan portfolio and the
recovery of a substantial portion of the carrying amount of foreclosed assets
are particularly susceptible to changes in market conditions in Connecticut.
While management uses available information to recognize possible loan losses,
future additions to the allowance may be necessary based on changes in economic
conditions, particularly in the Bank's service area, Connecticut. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowances for loan and foreclosed asset losses.
Such agencies may require the Bank to recognize additions to the allowances
based on their judgements of information available to them at the time of their
examination.
CASH EQUIVALENTS. Cash equivalents include demand deposits at other financial
institutions and federal funds sold. Generally, federal funds are sold for
one-day periods.
INVESTMENT SECURITIES, effective December 31,1993, at the time of acquisition,
are classified into one of three categories: held-to-maturity, available-for-
sale or trading. The classification is based upon management's intended holding
period and, in the case of the held-to-maturity classification, the ability to
hold the securities to maturity. Investments classified as held-to-maturity are
carried at amortized cost. Investments classified as available-for-sale are
carried at fair value with unrealized gains and losses, net of tax, reported in
a separate component of stockholders' equity. Trading securities are carried at
fair value with unrealized gains and losses included in earnings. Prior to
December 31, 1993, investment securities were stated at cost, adjusted for
amortization of bond premiums and accretion of bond discounts using the interest
method. Marketable equity securities were stated at the lower of aggregate cost
or market value. The specific cost method is used to determine gains or losses
on the sales of securities.
LOANS are stated net of deferred fees.
INTEREST ON LOANS is credited to operations as earned based primarily upon the
principal amount outstanding. In determining income recognition on mortgage,
consumer and commercial loans, it is the general policy that no additional
interest revenue shall be credited to operations with respect to loans on which
a default of interest has existed for a period in excess of 90 days, at which
time previously accrued interest is reversed. On loans secured by real estate,
management may continue to accrue interest if the estimated realizable value
- 5 -
<PAGE>
of the underlying collateral for such loans is sufficient to cover both
principal and accrued interest. All loan origination fees and direct loan
origination costs transacted are being deferred and amortized over the
contractual life of the related loans as an adjustment of yield.
THE ALLOWANCE FOR LOAN LOSSES has been established through provisions for loan
losses and is a valuation allowance which is reflected as a deduction from
loans. The allowance represents amounts which, in management's judgment, will be
adequate to absorb possible losses on loans that may become uncollectible, based
on such factors as changes in the nature and volume of the loan portfolio,
current economic conditions that may affect the borrowers' ability to pay,
overall portfolio quality, the average of the Bank's loan losses less recoveries
for the current and preceding five years, and review of specific problem loans.
BANK PREMISES AND EQUIPMENT are stated at cost, less accumulated depreciation
and amortization. The Bank uses primarily accelerated methods of calculating
depreciation.
Leasehold improvements are amortized over the shorter of the estimated service
lives or the terms of the leases. Bank premises are depreciated over a period of
between 30 and 40 years; furniture and equipment are depreciated over a period
of between 1 and 20 years. For income tax purposes, the Bank uses the
depreciation provisions of the Internal Revenue Code.
FORECLOSED ASSETS acquired through foreclosure action or deed in lieu of
foreclosure are reflected at acquisition cost (loan balance and accrued
interest) plus improvements. The carrying value cannot exceed the estimated net
realizable value and any excess is charged off against the allowance for
foreclosed assets. Operating costs, net of rental income, if any, are charged to
expense in the period incurred.
IN-SUBSTANCE FORECLOSED ASSETS. Collateral generally is considered repossessed
in substance and accounted for at its fair value when the debtor has little or
no equity in the collateral, considering the current net realizable value of the
collateral; proceeds for repayment of the loan can be expected to come only from
the operation or sale of the collateral; and the debtor has either formally or
effectively abandoned control of the collateral to the creditor or retained
control of the collateral but, because of the current financial condition of the
debtor, or the economic prospects for the debtor and/or the collateral in the
foreseeable future, it is doubtful that the debtor will be able to rebuild
equity in the collateral or otherwise repay the loan in the foreseeable future.
To the extent the loan balance exceeds the net realizable value of the
collateral, the excess is charged off against the allowance for loan losses.
Subsequent declines, if any, in the net realizable value of the collateral are
charged off against the allowance for foreclosed assets.
INCOME TAXES. Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109. This Statement requires the use of the
liability method in determining the tax effect of temporary differences in the
recognition of items of income and expense reported in the consolidated
financial statements and those reported for income tax purposes. In prior years
the Company used the deferred method in computing such tax effects. In adopting
this statement, the Company provided for the effect of the change in 1993. As
such, prior period financial statements have not been restated.
The Company and its subsidiaries file consolidated income tax returns. The
subsidiaries pay to or receive from the Company, as appropriate, an allocated
portion of the consolidated income taxes or benefits based upon the effective
income tax rate of the consolidated group.
CONTINGENCY RESERVE FOR QUALIFYING LOAN LOSSES. Deductions from taxable income
in prior years have been claimed as loan loss provisions for qualifying (real
estate) loans in accordance with the Internal Revenue Code. A segregation equal
to the deductions has been made from unappropriated retained earnings to
establish the reserve. If the reserve is used for any purpose other than to
absorb losses on loans, an income tax liability could be incurred. Management
does not anticipate that this reserve will be made available for any other
purposes. In accordance with generally accepted accounting principles, no
deferred taxes have been provided for this temporary difference (Note 9).
CLASSIFICATION OF CERTAIN AMOUNTS. For comparative purposes, certain amounts in
prior period consolidated financial statements have been reclassified to conform
with the current period classifications.
- 6 -
<PAGE>
NOTE 2 - INVESTMENT SECURITIES
The Bank adopted Financial Accounting Standards Board Statement No. 115 as of
December 31, 1993. This statement requires that investment securities, at the
time of acquisition, be classified into one of three categories: held-to-
maturity, available-for-sale or trading.
Debt securities that are purchased with the positive intent and ability to hold
to maturity are classified as held-to-maturity and reported at amortized cost.
Debt and equity securities that are purchased and held for the purpose of sale
in the near term are classified as trading securities and reported at fair
value, with unrealized gains and losses included in earnings.
Debt and equity securities not classified as either held-to-maturity or trading
securities are classified as available-for-sale securities and reported at fair
value, with unrealized gains and losses, net of tax (Note 9), reported in a
separate component of stockholders' equity.
At the time of adoption of this statement, the Bank classified investments in
debt and equity securities based upon the Bank's current intent.
A summary of the Bank's investment securities is as follows:
<TABLE>
<CAPTION>
Available-For-Sale
-----------------------------------------------------
March 31, 1994
-----------------------------------------------------
(Amounts in thousands)
Gross Gross
Amortized unrealized unrealized Market
Cost gains losses value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Mortgage-backed securities $174,740 $ 473 $ 1,339 $173,874
Other bonds and notes 46,550 431 387 46,594
-------- -------- -------- --------
Total bonds 221,290 904 1,726 220,468
Marketable equities 1,408 131 94 1,445
-------- -------- -------- --------
Total investment securities $222,698 $ 1,035 $ 1,820 $221,913
-------- -------- -------- --------
-------- -------- -------- --------
Held-to-Maturity
-----------------------------------------------------
March 31, 1994
-----------------------------------------------------
(Amounts in thousands)
Gross Gross
Amortized unrealized unrealized Market
Cost gains losses value
--------- ---------- ---------- --------
U.S. Government and agency bonds $ 3,000 $ 7 $ 1 $ 3,006
Mortgage-backed securities 116,938 245 3,756 113,427
-------- -------- -------- --------
Total bonds 119,938 252 3,757 116,433
Money market preferred stock 10,500 --- --- 10,500
-------- -------- -------- --------
Total investment securities $130,438 $ 252 $ 3,757 $126,933
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
- 7 -
<PAGE>
<TABLE>
<CAPTION>
Trading Account
-----------------------------------------------------
March 31, 1994
-----------------------------------------------------
(Amounts in thousands)
Gross Gross
Amortized unrealized unrealized Market
Cost gains losses value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Marketable equities $ 314 --- 10 304
-------- -------- -------- --------
Total investment securities $ 314 $ --- $ 10 $ 304
-------- -------- -------- --------
-------- -------- -------- --------
Available-For-Sale
-----------------------------------------------------
December 31, 1993
-----------------------------------------------------
(Amounts in thousands)
Gross Gross
Amortized unrealized unrealized Market
Cost gains losses value
--------- ---------- ---------- --------
Mortgage-backed securities $187,746 $ 1,303 $ 454 $188,595
Other bonds and notes 65,095 1,302 45 66,352
-------- -------- -------- --------
Total bonds 252,841 2,605 499 254,947
Marketable equities 1,274 194 69 1,399
-------- -------- -------- --------
Total investment securities $254,115 $ 2,799 $ 568 $256,346
-------- -------- -------- --------
-------- -------- -------- --------
Held-to-Maturity
-----------------------------------------------------
December 31, 1993
-----------------------------------------------------
(Amounts in thousands)
Gross Gross
Amortized unrealized unrealized Market
Cost gains losses value
--------- ---------- ---------- --------
U.S. Government and agency bonds $ 2,000 $ 21 $ --- $ 2,021
Mortgage-backed securities 55,253 661 89 55,825
-------- -------- -------- --------
Total bonds 57,253 682 89 57,846
Money market preferred stock 9,000 --- --- 9,000
-------- -------- -------- --------
Total investment securities $ 66,253 $ 682 $ 89 $ 66,846
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Prior to December 31, 1993, the aggregate carrying value of the marketable
equity securities portfolio was adjusted to aggregate market, if lower than
cost, by a valuation allowance which was adjusted through corresponding charges
and credits to Retained earnings.
- 8 -
<PAGE>
The amortized cost and market value of debt securities by contractual maturity
is as follows:
<TABLE>
<CAPTION>
March 31, 1994
---------------------------------------------
(Amounts in thousands)
Available-for-Sale Held-to-Maturity
-------------------- --------------------
Amortized Market Amortized Market
Cost value Cost value
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Due in one year or less $ 8,361 $ 8,446 $ --- $ ---
Due after one year through five years 37,806 37,743 3,000 3,006
Due after five years through ten years --- --- --- ---
Due after ten years 383 405 --- ---
-------- -------- -------- --------
46,550 46,594 3,000 3,006
Mortgage-backed securities 174,740 173,874 116,938 113,427
-------- -------- -------- --------
Total $221,290 $220,468 $119,938 $116,433
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Total Portfolio
--------------------------
(Amounts in thousands)
Amortized Market
Cost value
--------- --------
<S> <C> <C>
Due in one year or less $ 8,361 $ 8,446
Due after one year through five years 40,806 40,749
Due after five years through ten years --- ---
Due after ten years 383 405
-------- --------
49,550 49,600
Mortgage-backed securities 291,678 287,301
-------- --------
Total $341,228 $336,901
-------- --------
-------- --------
</TABLE>
Proceeds from the sales of debt securities during the three months ended March
31, 1994 were $15,631,000. Gross gains of $235,000 and gross losses of $1,000
were realized on those sales. Proceeds from the sales of debt securities during
the three months ended March 31, 1993 were $4,104,000. Gross gains of $54,000
were realized on those sales.
NOTE 3 - PLEDGED ASSETS
The aggregate book value and market value of investment securities pledged as
collateral against public funds, treasury tax and loan deposits and repurchase
agreements (Note 8) were approximately as follows:
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
-------------- -----------------
(Amounts in thousands)
<S> <C> <C>
Book value $3,000 $2,000
------- -------
------- -------
Market value $3,006 $2,020
------- -------
------- -------
</TABLE>
Stock of the Federal Home Loan Bank (the "FHLB") of Boston and mortgage loans
and mortgage-backed securities with market values, as determined in accordance
with FHLB of Boston's collateral pledge agreement, at least equal to the
outstanding advances and any unused lines of credit (Note 8) were pledged
against outstanding advances from the FHLB of Boston at March 31, 1994 and
December 31, 1993.
- 9 -
<PAGE>
NOTE 4 - LOANS
Loans are summarized between fixed and adjustable rates as follows:
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
-------------- -----------------
(Amounts in thousands)
<S> <C> <C>
Mortgage
Fixed rate $207,355 $200,406
Adjustable rate 491,529 467,273
-------- --------
698,884 667,679
-------- --------
Consumer
Fixed rate 11,379 12,101
Adjustable rate 80,735 82,795
-------- --------
92,114 94,896
-------- --------
Commercial
Fixed rate 8,888 9,201
Adjustable rate 21,957 21,326
-------- --------
30,845 30,527
-------- --------
Total loans 821,843 793,102
-------- --------
Less: Allowance for loan losses 6,777 6,979
Deferred loan fees and discount 6,787 6,836
-------- --------
13,564 13,815
-------- --------
Loans, net $808,279 $779,287
-------- --------
-------- --------
</TABLE>
Included in loans outstanding at March 31, 1994 and December 31, 1993 were
$8,525,000 and $9,502,000, respectively, in loans on non-accrual status.
Included in these amounts were $6,164,000 in mortgage loans, $1,241,000 in
consumer loans and $1,120,000 in commercial loans at March 31, 1994 and
$6,657,000 in mortgage loans, $1,446,000 in consumer loans and $1,399,000 in
commercial loans at December 31, 1993. At March 31, 1994 and December 31, 1993,
non-accrual interest on these loans totaled approximately $482,100 and $810,400,
respectively.
The Bank also monitors and works closely with certain borrowers that may
experience financial difficulties. These difficulties may result in a
modification of loan terms in order to assist a debtor who has been adversely
affected by the state of the local economy. The modification of terms may be in
the form of the waiver of principal payments, a reduction in the interest rate
or the waiver of interest payments for a specified period of time. At March 31,
1994, the Bank had six loan relationships, all of which were secured, totaling
$8.1 million, which were being monitored. Included in this amount are four loans
totaling $2.3 million, the terms of which have been modified and four loans
totaling $3.6 million, which are non-performing.
In connection with the Burritt transaction (Note 14), the Bank purchased two
loan pools at discounts of $9.0 million and $1.3 million, which had been added
to the Bank's allowance for mortgage and consumer loan losses, respectively, in
1992. During 1993, the Company completed the valuation analysis of the loans
acquired in connection with the Burritt transaction. As a result of this
analysis, the Company allocated $6.0 million of the Burritt acquired allowance
for loan losses as a purchased loan discount. This amount will be accreted to
interest revenue over the remaining terms of the acquired loans. At March 31,
1994, the allowance for loan losses, which totaled $6.8 million, included $2.2
million allocated to the loans acquired in the Burritt transaction.
- 10 -
<PAGE>
Activity in the allowances for loan losses for each of the three years in the
period ended December 31, 1993 were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1994 1993
------ -------
(Amounts in thousands)
<S> <C> <C>
MORTGAGE LOANS
Balance at beginning of period $ 4,605 $11,166
Provision for possible loan losses 350 400
Loan charge-offs (459) (1,552)
Recoveries 1 7
------- -------
Balance at end of period $ 4,497 $10,021
------- -------
------- -------
CONSUMER LOANS
Balance at beginning of period $ 1,193 $ 1,987
Provision for possible loan losses 200 50
Loan charge-offs (349) (603)
Recoveries 3 7
------- -------
Balance at end of period $ 1,047 $ 1,441
------- -------
------- -------
COMMERCIAL LOANS
Balance at beginning of period $ 1,181 $ 784
Provision for possible loan losses 50 ---
Loan charge-offs --- (72)
Recoveries 2 1
------- -------
Balance at end of period $ 1,233 $ 713
------- -------
------- -------
TOTAL ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ 6,979 $13,937
Provision for possible loan losses 600 450
Loan charge-offs (808) (2,227)
Recoveries 6 15
------- -------
Balance at end of period $ 6,777 $12,175
------- -------
------- -------
</TABLE>
The Bank has sold certain mortgage loans and retained the related servicing
rights. The principal balances of loans serviced for others, which are not
included in the accompanying Consolidated Statements of Position, were
approximately $141,300,000 and $149,900,000 at March 31, 1994 and December 31,
1993, respectively.
NOTE 5 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
A. PURCHASE AND SALES COMMITMENTS.
In the normal course of business, there are various commitments and contingent
liabilities outstanding pertaining to the purchase and sale of securities which
are not reflected in the accompanying consolidated financial statements. The
Bank does not anticipate any material losses as a result of these transactions.
There were no outstanding commitments to purchase or sell securities at March
31, 1994.
B. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
instruments expose the Bank to credit risk which is not included in the
accompanying Consolidated Statements of Position.
- 11 -
<PAGE>
The Bank's exposure to credit risk is represented by the contractual amount of
the loan commitments and letters of credit summarized below:
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
-------------- -----------------
(Amounts in thousands)
<S> <C> <C>
Loan Commitments
Commitments to extend credit $18,116 $ 43,832
Unadvanced commercial lines of credit 4,248 6,115
Unadvanced portion of construction loans 1,785 1,881
Unused portion of Home Equity Lines of Credit 57,837 56,331
Other consumer lines of credit 613 635
------- --------
Total $82,599 $108,794
------- --------
------- --------
Letters of credit $ 877 $ 1,643
------- --------
------- --------
</TABLE>
Loan commitments are agreements to lend and are subject to the same credit
policies as loans and generally have fixed expiration dates or other termination
clauses. The Bank also issues traditional letters of credit which commit the
Bank to make payments on behalf of its customers based upon specific future
events. Since many of the letters of credit are expected to expire without being
drawn upon, the total letters of credit do not necessarily represent future cash
requirements. Collateral is obtained based upon management's credit assessment
of the customer.
NOTE 6 - BANK PREMISES AND EQUIPMENT
Bank premises and equipment were comprised of the following:
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
-------------- -----------------
(Amounts in thousands)
<S> <C> <C>
Buildings and land $ 7,215 $ 7,188
Leasehold improvements 825 887
Furniture and equipment 5,459 6,154
------- -------
13,499 14,229
Accumulated depreciation and amortization 6,573 7,167
------- -------
Bank premises and equipment, net $ 6,926 $ 7,062
------- -------
------- -------
</TABLE>
Depreciation and amortization included in Other expenses aggregated
approximately $188,300 and $135,500 for the three months ended March 31, 1994
and 1993, respectively.
- 12 -
<PAGE>
LEASES.
Rent expense for banking premises of $232,100 and $159,400 is included in
Occupancy expense for the three months ended March 31, 1994 and 1993,
respectively.
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with initial or remaining terms of one year or more consist of
the following at March 31, 1994 (amounts in thousands):
<TABLE>
<S> <C>
1994 $ 313
1995 417
1996 382
1997 284
1998 109
Thereafter 187
------
Total future minimum lease payments $1,692
------
------
</TABLE>
These leases include options to renew for periods ranging from 3 to 22 years.
In connection with the Burritt transaction, the Bank acquired an option to lease
ten branches, formerly leased by Burritt. The FDIC disaffirmed all of the
leases, except for one which the Bank has assumed. Two of the offices were
closed by the FDIC and not reopened by the Bank. Through March 31, 1994, the
Bank entered into leases on four of the seven locations formerly leased by
Burritt and is renegotiating the terms of two of the remaining locations. The
Bank closed one of the acquired former branch offices of Burritt in January
1994. (Note 14)
NOTE 7 - FORECLOSED AND IN-SUBSTANCE FORECLOSED ASSETS
Foreclosed and in-substance foreclosed assets consisted of the following:
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
-------------- -----------------
(Amounts in thousands)
<S> <C> <C>
Foreclosed assets $ 9,295 $ 9,379
In-substance foreclosed assets 8,373 7,804
------- -------
Subtotal 17,668 17,183
Valuation allowance (961) (1,040)
------- -------
Net carrying amount $16,707 $16,143
------- -------
------- -------
</TABLE>
At March 31, 1994 and December 31, 1993, there were 45 and 44 properties,
respectively, included in foreclosed assets and 54 and 50 properties,
respectively, in in-substance foreclosed assets. During the quarter ended March
31, 1994, the Bank transferred loans aggregating $1.5 million to in-substance
foreclosed assets.
Activity in the allowance for foreclosed assets is as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1994 1993
------ -------
(Amounts in thousands)
<S> <C> <C>
Balance at beginning of period $1,040 $ 438
Provision 400 975
Write-downs (479) (1,011)
------ ------
Balance at end of period $ 961 $ 402
------ ------
------ ------
</TABLE>
- 13 -
<PAGE>
Expenses related to foreclosed assets are summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1994 1993
------ -------
(Amounts in thousands)
<S> <C> <C>
Provision $ 400 $ 975
(Gain) loss on sale of real estate (1) --
Other expenses, net 145 267
------ ------
Net foreclosed asset expense $ 544 $1,242
------ ------
------ ------
</TABLE>
NOTE 8 - TERM LIABILITIES
Interest bearing deposits were comprised of the following:
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
-------------- -----------------
(Amounts in thousands)
<S> <C> <C>
NOW accounts $ 48,554 $ 47,330
Money market deposit accounts 202,753 205,261
Regular and club savings 229,347 223,255
-------- --------
Time savings
30 - 360 days ($100,000 and over) 2,139 1,881
90 and 91 days 22,367 20,261
6 - 8 months 105,665 102,862
9 - 17 months 129,033 122,955
18 months or more 250,283 254,231
-------- --------
Total time savings 509,487 502,190
-------- --------
Total interest bearing deposits $990,141 $978,036
-------- --------
-------- --------
</TABLE>
Time savings deposits of $100,000 or more approximated $30,314,000 at March 31,
1994 and $30,628,000 at December 31, 1993. There were no brokered deposits at
March 31, 1994 or December 31, 1993.
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
1994 1993
------ -------
(Amounts in thousands)
<S> <C> <C>
NOW $ 224 $ 308
Money market deposits 1,517 1,245
Regular and club savings 1,109 1,773
Time savings 5,412 6,673
Escrow 38 47
------- -------
Total interest expense on deposits $ 8,300 $10,046
------- -------
------- -------
</TABLE>
- 14 -
<PAGE>
Terms of the advances from the FHLB of Boston were as follows:
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
----------------------- ----------------------
(Dollar amounts in thousands)
Weighted Average Weighted Average
Maturity/Reprice Date Balance Interest Rate Balance Interest Rate
- --------------------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C>
1994 $ 4,513 ---% $ 14,802 ---%
1994 37,808 5.19 39,178 5.13
1995 32,051 5.49 27,051 5.78
1996 30,050 5.26 10,050 7.08
1997 19,190 5.55 9,190 6.35
1998 1,600 5.48 1,600 5.48
1999 2,200 8.60 2,200 8.60
2000 920 9.16 920 9.16
-------- --------
Total advances from the FHLB of Boston $128,332 $104,991
-------- --------
-------- --------
</TABLE>
The Bank has a cash management line of credit from the FHLB of Boston of
$10,672,000. At March 31, 1994 and December 31, 1993, the Bank had book
overdrafts of $4,513,000 and $14,802,000, respectively, which are included in
advances from the FHLB of Boston.
At March 31, 1994 and December 31, 1993, the Bank had no retail "sweep"
repurchase agreements.
During 1990, the Company established a $3.0 million line of credit (Note 13), of
which $1.4 million was outstanding at both March 31, 1994 and December 31, 1993.
Interest expense on borrowed funds is summarized as follows:
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
1994 1993
---- ----
(Amounts in thousands)
<S> <C> <C>
FHLB of Boston advances $1,649 $1,591
Line of credit 26 34
Repurchase agreements & other borrowings -- 2
------ ------
Total interest expense on borrowed funds $1,675 $1,627
------ ------
------ ------
</TABLE>
NOTE 9 - INCOME TAXES
In February 1992, the FASB issued Statement of Financial Accounting Standards
No. 109 ("SFAS 109") "Accounting For Income Taxes", which superseded SFAS 96, as
amended, which established financial accounting and reporting standards for the
effects of income taxes. The statement requires the use of the liability method
in determining the tax effect of temporary differences in the recognition of
items of income and expense reported in the consolidated financial statements
and those reported for income tax purposes. Effective January 1, 1993, the
Company adopted SFAS 109. As a result of the adoption of SFAS 109, the Company
recorded the cumulative effect of this change in accounting principle which
amounted to $1,548,000 or $.58 per share.
- 15 -
<PAGE>
The allocation of federal and state income taxes between current and deferred
portions, calculated using the liability method in 1993 and the deferred method
in 1992 is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
1994 1993
---- ----
(Amounts in thousands)
<S> <C> <C>
Current income tax provision
Federal $ 832 $ 867
State 306 322
------ ------
Total current 1,138 1,189
------ ------
Deferred income tax provision
Federal (92) (145)
State (35) (56)
------ ------
Total deferred (127) (201)
------ ------
Total provision for income taxes $1,011 $ 988
------ ------
------ ------
</TABLE>
The Company's effective income tax rate differed from the Federal statutory tax
rate as follows:
<TABLE>
<CAPTION>
For The Three Months Ended March 31,
-------------------------------------
1994 1993
---------------- ----------------
(Dollar amounts in thousands)
Amount % Amount %
------ ---- ------ ----
<S> <C> <C> <C> <C>
Tax at statutory Federal rate $ 851 34.0 $ 775 34.0
State tax* 180 7.2 176 7.7
Dividend income exclusion (20) (0.8) (23) (1.0)
Other -- -- 60 2.7
------- ----- ------ -----
Effective rate on operations $1,011 40.4 $ 988 43.4
------- ----- ------ -----
------- ----- ------ -----
<FN>
* Net of Federal tax benefit
</TABLE>
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
-------------- ------------------
(Amounts in thousands)
<S> <C> <C>
Deferred tax liability:
Federal $ 271 $ 967
State 104 370
------ ------
375 1,337
------ ------
Deferred tax asset:
Federal 2,757 2,454
State 1,054 938
------ ------
3,811 3,392
------ ------
Net deferred tax asset $3,436 $2,055
------ ------
------ ------
</TABLE>
- 16 -
<PAGE>
The tax effects of each item of income and expense that give rise to deferred
taxes are:
<TABLE>
<CAPTION>
March 31, 1994 December 31,
1993
------------------------------
(Amounts in thousands)
<S> <C> <C>
Allowances for losses $2,072 $2,132
Depreciation (137) (171)
Deferred loan fees 130 43
Deferred compensation 197 191
Loan expense 264 249
Employee benefits 387 382
Intangible asset 197 157
------ ------
3,110 2,983
Unrealized gains 326 (928)
------ ------
Net deferred tax asset $3,436 $2,055
------ ------
------ ------
</TABLE>
A summary of the change in the net deferred tax asset for the three months ended
March 31, 1994 and 1993 is as follows (Amounts in thousands):
<TABLE>
<S> <C>
Deferred tax asset at December 31, 1993 $2,055
Cumulative effect of a change in accounting principle ---
Deferred tax provision:
Income and expense 127
Unrealized gains 1,254
------
Net deferred tax asset at March 31, 1994 $3,436
------
------
Deferred tax asset at December 31, 1992 $ 555
Cumulative effect of a change in accounting principle 1,548
Deferred tax provision 201
------
Net deferred tax asset at March 31, 1993 $2,304
------
------
</TABLE>
NOTE 10 - BENEFIT PLANS
A. RETIREMENT PLAN
The Bank has a defined benefit pension plan which is noncontributory and covers
all full-time employees who meet certain age and length of service
requirements. Benefits are based on years of service and the employee's
highest compensation during any consecutive five year period during the last
ten years before normal retirement. The Bank's funding policy is to
contribute annually amounts at least equal to minimum required contributions
under the Employee Retirement Income Security Act of 1974 (ERISA).
Contributions are intended to provide not only for benefits attributed to
service to date, but also for those expected to be earned in the future.
The components of the net pension expense reflected in Employee benefits expense
were as follows:
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
1994 1993
---- ----
(Amounts in thousands)
<S> <C> <C>
Service cost-benefits earned during the period $100 $ 66
Interest cost on projected benefit obligation 76 68
Expected return on plan assets (97) (80)
Net amortization and deferral (2) (1)
----- ------
Net pension expense $ 77 $ 53
----- -----
----- -----
</TABLE>
- 17 -
<PAGE>
Assumptions used in the accounting were:
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
1994 1993
---- ----
<S> <C> <C>
Discount/settlement rates 7.00% 7.00%
Rates of increase in compensation levels 5.00% 5.50%
Expected long-term rate of return on assets 9.50% 9.50%
</TABLE>
The following table sets forth the plan's funded status and amounts
recognized in the Consolidated Statements of Position at December 31, 1993
(Amounts in thousands):
<TABLE>
<S> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation - vested $2,950
Accumulated benefit obligation - nonvested 340
-------
Total accumulated benefit obligation 3,290
Effect of projected future compensation levels 1,000
-------
Projected benefit obligation (PBO) for service
rendered to date 4,290
Plan assets, at fair value * 3,885
-------
"PBO" in excess of plan assets (405)
Unrecognized net asset existing at January 1, 1987
being recognized over approximately 18 years (102)
Unrecognized net loss from past experience different
from that assumed and effects of changes in assumptions 300
-------
Accrued pension cost included in Other liabilities $ (206)
-------
-------
<FN>
* The plan's assets are allocated among equity securities and various
short and intermediate term bond funds.
</TABLE>
B. DEFERRED COMPENSATION PLAN.
The Bank has adopted deferred compensation agreements for its directors
whereby directors can defer earned fees to future years with benefits
commencing at retirement or pre-retirement benefits at death prior to
retirement. The deferred compensation expense for the three months ended
March 31, 1994 and 1993 was approximately $24,000 and $23,200,
respectively. The Bank has purchased life insurance policies which it
intends to use to fund the retirement benefits. For income tax purposes,
no deduction is allowed for the insurance premium expense or deferred
compensation expense, but a deduction will be allowed at the time
compensation is paid to the participant. For the quarters ended March 31,
1994 and 1993, respectively, the Company had no insurance premium expenses
as policy loans were utilized to fund premiums due.
C. THRIFT PLAN.
The Bank has established a defined contribution thrift plan (the "Thrift
Plan") covering eligible employees. Full-time employees are eligible to
participate in the Thrift Plan upon completion of six months of service.
Eligible employees participating in the Thrift Plan may contribute between
one percent and ten percent of their pre-tax annual compensation. If an
employee contributes the maximum ten percent of annual compensation, the
employee may also contribute an additional ten percent of post tax annual
compensation. The Bank contributes $.50 out of net income to the Thrift
Plan for each $1.00 contributed by participants up to three percent of each
participant's compensation. The Bank's expense for the quarters ended
March 31, 1994 and 1993 was $22,800 and $13,900, respectively.
D. POSTRETIREMENT BENEFITS OTHER THAN PENSION
The Bank provides certain health care and life insurance benefits for
retired employees. Substantially all of the Bank's employees become
eligible if they reach normal retirement age while still working for the
Bank. These benefits are provided through an insurance company whose
premiums are based on the benefits paid during the year. The premium is
paid by the Bank is based on the retiree's length of service with the Bank.
The Company adopted the Statement of Financial Accounting Standards No. 106
"Employers' Accounting for Postretirement Benefits Other Than Pensions"
("SFAS No. 106") in 1992. The statement requires that the projected future
costs of providing postretirement benefits be recognized as an expense as
employees render service, instead of when the benefits are paid. Prior to
the adoption of this statement in 1992, the Company recognized
postretirement benefit expense as paid.
- 18 -
<PAGE>
The following table sets forth the accumulated postretirement benefit
obligation (APBO) reconciled to the accrued postretirement benefit expense
included in the Company's Consolidated Statements of Position at the year
ended December 31, 1993.
<TABLE>
<CAPTION>
December 31, 1993
----------------------
(Amounts in thousands)
<S> <C>
Accumulated Postretirement Benefit Obligation
Retirees $ (613)
Fully eligible active plan participants (551)
Other active plan participants (1,566)
-------
Total APBO (2,730)
Unrecognized transition obligation 2,022
Unrecognized net gain from past experience different
from that assumed and effects of changes in assumptions (4)
-------
Accrued postretirement benefit cost $ (712)
-------
-------
</TABLE>
The APBO includes approximately $2,163,000 attributable to the Company's
postretirement health care plan.
Net periodic postretirement benefit cost reflected in Employee benefits
included the following components.
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1994 1993
------ ------
(Amounts in thousands)
<S> <C> <C>
Service cost-benefits attributable to
service during the period $ 70 $ 44
Interest cost on APBO 42 47
Amortization of transition obligation 25 26
---- ----
Net periodic postretirement benefit cost $137 $117
---- ----
---- ----
</TABLE>
For measurement purposes, a 15.0% annual rate of increase in the per capita
cost of covered health care benefits was assumed in 1993. The rate was
assumed to decrease gradually to 4.5% in year 16 and remain at that level
thereafter. The health care cost trend rate assumption has a significant
effect on the amounts reported.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5%.
- 19 -
<PAGE>
NOTE 11 - EARNINGS PER SHARE
Primary and fully diluted earnings per share are based on the weighted
average number of common shares outstanding during the period and
additional common shares assumed to be outstanding to reflect the dilutive
effect of common stock equivalents. Stock options and their equivalents
are included in earnings per share computations using the treasury stock
method, which assumes that the options are exercised at the beginning of
the period. Proceeds from such exercise are assumed to be used to
repurchase common stock. The difference between the number of common
shares assumed to have been issued from the exercise of options and the
number of common shares assumed to have been purchased are added to the
weighted average number of common shares outstanding. Potential dilution
due to exercisable stock options was not material for the three month
period ended March 31, 1993 and is, therefore, not reflected in the
computation of per share amounts for that period (Note 12).
NOTE 12 - STOCK OPTIONS
Under the Company's stock option plan 303,807 shares (adjusted to reflect
stock dividends) of common stock are reserved. At the time options are
granted, no accounting entry is made. The proceeds from the exercise of
options are credited to common stock for the par value of the shares
purchased and the excess of the option price over the par value of the
share issued is credited to additional paid-in capital. The exercise price
of options granted approximated the fair market value of the shares on the
dates granted. Additionally, stock appreciation rights have been granted
in tandem with stock options.
In accordance with generally accepted accounting principles, compensation
accruals are required for SAR when the market value exceeds the option
exercise price. However, compensation expense should be measured according
to the terms the Company's SAR holders are most likely to elect based upon
the facts available each period. Accordingly, no expense accruals have
been made through March 31, 1994 in as much as management does not
anticipate exercise of SAR at this time.
The following table and the data below summarizes the shares subject to
option under the plan which have been adjusted to reflect stock dividends
declared:
<TABLE>
<CAPTION>
For The Three Months Ended March 31, 1994
-----------------------------------------
<S> <C>
Outstanding at beginning of period 233,190
Granted 45,234
Cancelled (2,761)
----------
Outstanding at end of period 275,663
----------
----------
</TABLE>
As of March 31, 1994, 275,663 options were exercisable at prices ranging
from $9.95 to $21.57.
At March 31, 1994, there were 275,663 options in the plan that remained
outstanding. Through March 31, 1994, 26,034 options have been exercised
and 45,590 options, adjusted to reflect subsequent stock dividends, have
been cancelled. 2,110 options are available for grant.
- 20 -
<PAGE>
NOTE 13 - CONDENSED FINANCIAL INFORMATION OF DS BANCOR, INC.
(PARENT COMPANY ONLY)
The condensed statements of position for DS Bancor, Inc. were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
------------- ---------------
(Dollar amounts in thousands)
<S> <C> <C>
ASSETS
Cash in subsidiary bank $ 568 $ 85
Investment in bank subsidiary, at equity 66,774 67,562
Other assets 309 274
---------- ----------
TOTAL ASSETS $67,651 $67,921
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Notes payable--bank (Note A) $ 1,450 $ 1,450
Other liabilities 31 31
---------- ----------
Total Liabilities 1,481 1,481
---------- ----------
STOCKHOLDERS' EQUITY
Common Stock 2,991 2,991
Additional paid-in capital 36,007 36,007
Retained earnings 31,685 31,955
Less: Treasury stock, at cost (339,500 shares) (4,513) (4,513)
---------- ----------
Total Stockholders' Equity 66,170 66,440
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $67,651 $67,921
---------- ----------
---------- ----------
</TABLE>
- 21 -
<PAGE>
The condensed Statements of Earnings were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1994 1993
------- -------
(Dollar amounts in thousands,
except per share date)
<S> <C> <C>
Revenue:
Dividends from subsidiary $ 567 $ 659
------- -------
Total revenue 567 659
------- -------
Expenses:
Interest expense 25 34
Other expenses 59 48
------- -------
Total expenses 84 82
------- -------
Income before income tax and change in equity of subsidiary 483 577
Income tax benefit 35 34
------- -------
Income before change in equity of subsidiary 518 611
Increase in equity of subsidiary 974 679
------- -------
Income before cumulative effect of a change in
accounting principle 1,492 1,290
Cumulative effect of a change in accounting principle --- 1,548
------- -------
Net income $1,492 $2,838
------- -------
------- -------
Weighted average shares outstanding
Primary 2,753,561 2,651,295
Fully Diluted 2,762,866 2,651,295
Earnings per share--Primary (Note 11)
Income before cumulative effect of a change in
accounting principle $ 0.54 $ 0.49
Cumulative effect of a change in accounting principle $ -- $ 0.58
Net Income $ 0.54 $ 1.07
Earnings per share--Fully Diluted (Note 11)
Income before cumulative effect of a change in
accounting principle $ 0.54 $ 0.49
Cumulative effect of a change in accounting principle $ -- $ 0.58
Net Income $ 0.54 $ 1.07
</TABLE>
- 22 -
<PAGE>
The condensed changes in the components of Stockholders' Equity for the
three months ended March 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained Treasury
Stock Capital Earnings Stock
------ --------- -------- --------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Balance - December 31, 1992 $2,865 $33,971 $26,262 $(4,513)
Net income 2,838
Stock dividend declared on common stock 126 2,029 (2,155)
Shares issued for fractional interest 7
Cash in lieu of fractional shares (7)
Adjustment for unrealized losses
on marketable equity securities
of subsidiary 78
------ ------- -------- -------
Balance - March 31, 1993 $2,991 $36,007 $27,016 $(4,513)
------ ------- -------- -------
------ ------- -------- -------
Balance - December 31, 1993 $2,991 $36,007 $31,955 $(4,513)
Net income 1,492
Adjustment for unrealized security
gains (losses) of subsidiary (Note 2) (1,762)
------ ------- -------- -------
Balance - March 31, 1994 $2,991 $36,007 $31,685 $(4,513)
------ ------- -------- -------
------ ------- -------- -------
</TABLE>
The condensed statement of cash flows was as follows:
<TABLE>
<CAPTION>
For The Three Months Ended March 31,
------------------------------------
1994 1993
---- ----
(Amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Dividends received from subsidiary $ 567 $ 659
Interest paid (25) (35)
Cash paid to suppliers (59) (70)
------ ------
Net cash provided from operating activities 483 554
------ ------
Cash flows from financing activities:
Dividends paid to stockholders --- (7)
Issuance of common stock --- 7
Net cash applied to financing activities ------ ------
Net increase in cash 483 554
Cash at beginning of period 85 23
------ ------
Cash at end of period $ 568 $ 577
------ ------
------ ------
</TABLE>
- 23 -
<PAGE>
A reconciliation of net earnings to cash provided by operating activities
was as follows:
<TABLE>
<CAPTION>
For The Three Months Ended March 31,
------------------------------------
1994 1993
---- ----
(Amounts in thousands)
<S> <C> <C>
Net Income $1,492 $2,838
Items not resulting in cash flow:
Equity in undistributed earnings of subsidiary (974) (2,227)
Decrease (increase) in income tax
benefits receivable (35) (34)
Decrease in accrued expenses --- (23)
-------- -------
Net cash flow from operating activities $ 483 $ 554
-------- -------
-------- -------
</TABLE>
Note A: The Board of Directors authorized and the Company established a
$3.0 million line of credit to partially fund the repurchase of
the Company's common stock in 1989 and 1990. At March 31, 1994,
$1.45 million was outstanding. This loan bears an interest rate
of prime plus one percent, which was 7.0% at March 31, 1994, and
will be repaid through six equal annual installments, the first
of which was paid in April, 1991 (Notes 8 and 15).
NOTE 14 - ACQUISITION OF BURRITT INTERFINANCIAL BANCORPORATION
On December 4, 1992, Derby Savings entered into an Insured Deposit Purchase
and Assumption Agreement ("P & A") with the FDIC, pursuant to which Derby
purchased certain assets and assumed the insured deposits and certain other
liabilities of Burritt Interfinancial Bancorporation, New Britain,
Connecticut in an FDIC-assisted transaction. In the transaction, the Bank
assumed approximately $460 million of insured deposits and approximately
$5.5 million of other liabilities of Burritt.
The assets of Burritt acquired included cash, various investment securities
and certain other assets totaling approximately $54.0 million and two loan
pools of one-to-four family mortgage loans and consumer loans, with book
values of approximately $139.7 million and $29.6 million, respectively.
The loan pools, at December 31, 1992, included non-accrual loans totaling
approximately $6.1 million and $221,000, respectively. The loans acquired
in this transaction were purchased at a $10.4 million discount, which had
been added to the Bank's allowance for loan losses. Specific allocations
of the acquired allowance for loan losses, to reflect the fair value of
loans acquired, have been made as management of the Bank identified
probable losses. During 1993, the Bank completed the valuation analysis of
the loans acquired in connection with the Burritt transaction. As a result
of this analysis, the Company allocated $6.0 million of the Burritt
allowance for loan losses as a purchased loan discount (Note 4). This
amount will be accreted to interest revenue over the remaining terms of the
acquired loans.
The FDIC advanced approximately $225 million in cash to Derby in partial
settlement of the difference between the amount of deposits and liabilities
assumed and the assets acquired by Derby, less the $6.2 million premium
paid by Derby in the transaction. Of the premium paid to the FDIC, the
Bank recorded $5.0 million as a core deposit intangible included in Other
assets.
The assets purchased and the liabilities assumed in the Burritt transaction
were subject to adjustment up to the settlement date, December 3, 1993, to
reflect the actual book value of the assets and liabilities acquired.
During 1993, through a series of interim settlements, the FDIC paid Derby
approximately $15.4 million, which reflects the net adjustments of the
assets and liabilities acquired and certain other adjustments (including
any costs, expenses and fees associated with certain determinations of
value) as provided in the P & A.
- 24 -
<PAGE>
As part of the transaction, the Bank acquired the right to service loans
for others which totaled approximately $107.1 million at December 31, 1992.
Approximately $1.1 million of the premium paid to the FDIC has been
allocated to the tangible value of acquired mortgage servicing rights,
included in Other assets. This amount will be amortized over the expected
future life of the serviced loans as a reduction to serviced loan fee
income. Additionally, the Bank entered into an interim management
agreement with the FDIC pursuant to which the Bank would service loans
which at December 31, 1992 totaled $258.9 million. The servicing of these
loans for the FDIC ended September 30, 1993.
In connection with the transaction, Derby acquired an option to acquire or
lease Burritt's 13 banking offices and related equipment. The Bank
exercised its option with respect to 11 of such banking offices. The
offices acquired are located in the towns of New Britain (5 offices),
Newington, East Hartford, Plainville, Rocky Hill, West Hartford and
Glastonbury, Connecticut. Derby did not exercise its option with respect
to the two Burritt banking offices located in Vernon and Southington,
Connecticut. Such offices were closed and not opened by Derby. Three of
Burritt's offices were owned and, in accordance with the P & A, were
appraised in order to establish their fair value. In 1993, the Bank
purchased two of these offices and entered into a short-term rental
agreement with the FDIC on the third. In June 1994, the Bank will be
relocating the operations of the former main office of Burritt, which the
Bank was renting from the FDIC. Of the remaining 8 banking offices which
had been leased by Burritt, one had been assumed by the Bank. Through
March 31, 1994, the Bank entered into leases on four of the seven locations
formerly leased by Burritt and is renegotiating the terms of two of the
remaining locations. The Bank closed one of the acquired former branch
offices of Burritt in January 1994.
NOTE 15 - MEMORANDUM OF UNDERSTANDING
In the second quarter of 1992, the Board of Directors of Derby Savings
entered into a Memorandum of Understanding (the "Memorandum") with the FDIC
and the Connecticut Commissioner of Banks. The Memorandum calls for the
Board of Directors of the Bank to develop a written plan to reduce the
level of assets classified "substandard" and to establish target levels for
the reduction of adversely classified assets to 75% of total equity capital
and reserves by December 31, 1992 and to 50% of total equity capital and
reserves within a reasonable time thereafter. At March 31, 1994, the level
of assets classified "substandard" represented 40% of the Bank's total
equity capital and reserves. The Memorandum also calls for the level of
delinquent loans to be reduced to no more than 7% of gross loans by
December 31, 1992 and to 5% of gross loans by December 31, 1993. At March
31, 1994, delinquent loans totaled $29.4 million or 3.6% of total loans.
Additionally, the Memorandum limits the payment of cash dividends by the
Bank to DS Bancor to the Company's debt service and non-salary expenses.
In connection with the Burritt transaction, the FDIC modified the terms of
the Memorandum which pertained to the maintenance of capital ratios. The
Memorandum initially required that the Bank maintain a ratio of tier 1
capital to total assets of at least 5.5% and if the ratio fell below 7%,
the Bank was required to notify the FDIC and the Connecticut Commissioner.
The modification requires Derby to have tier 1 capital in excess of 5% of
total assets by December 31, 1993 and tier 1 capital at or above 5.75% of
total assets by December 31, 1994. The Bank's tier 1 capital ratio at
March 31, 1994 was 5.2%, which exceeded the FDIC requirement applicable at
that date. The Bank expects to achieve the December 31, 1994 capital
target through maintaining asset size at current levels and earnings
retention.
- 25 -
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL AND OTHER DATA
(Dollar amounts in thousands, except per share data)
For The Quarter
Ended March 31,
---------------------
1994 1993
--------- ---------
(unaudited)
<S> <C> <C>
OPERATING DATA:
Interest revenue $18,293 $18,987
Interest expense 9,962 11,651
--------- ---------
Net interest revenue 8,331 7,336
Provision for loan losses 600 450
--------- ---------
Net interest revenue after provision for loan losses 7,731 6,886
Other revenue, net 863 1,794
Other expenses 6,091 6,402
--------- ---------
Income before income taxes and cumulative effect
of a change in accounting principle 2,503 2,278
Provision for income taxes 1,011 988
--------- ---------
Income before cumulative effect if a change in accounting principle 1,492 1,290
Cumulative effect of a change in method of accounting for income taxes -- 1,548
--------- ---------
Net Income $1,492 $2,838
--------- ---------
--------- ---------
Earnings Per Share--Primary
Income before cumulative effect if a change in accounting principle $0.54 $0.49
Cumulative effect of a change in method of accounting for income taxes -- $0.58
Net Income $0.54 $1.07
Earnings Per Share--Fully Diluted
Income before cumulative effect if a change in accounting principle $0.54 $0.49
Cumulative effect of a change in method of accounting for income taxes -- $0.58
Net Income $0.54 $1.07
STATISTICAL DATA:
Net interest rate spread (a) 2.74% 2.42%
Net yield on average interest-earning assets (a) 2.89% 2.58%
Return on average assets (a) 0.49% 0.96%
Return on average stockholders' equity (a) 8.93% 18.94%
Average stockholders' equity to average assets 5.48% 5.06%
MARKET PRICES OF COMMON STOCK:
High $27.50 $22.25
Low $23.75 $16.50
At March 31 $25.75 $18.00
<CAPTION>
FINANCIAL CONDITION AND OTHER DATA AT: March 31, December 31
1994 1993
---------- ----------
(unaudited)
<S> <C> <C>
Total assets $1,226,961 $1,194,121
Loan portfolio, net 808,279 779,287
Investment portfolio 352,656 322,599
Deposits 1,019,800 1,006,221
Federal Home Loan Bank of Boston advances 128,332 104,991
Other borrowings 1,450 1,450
Stockholders' equity 66,170 66,440
Book value per share 24.95 25.06
Leverage ratio 5.10% 5.11%
Tier 1 capital to risk-weighted assets 9.19% 8.87%
Total capital to risk-weighted assets 10.18% 9.89%
Non-performing loans 11,056 12,068
Foreclosed & in-substance foreclosed assets 16,707 16,143
---------- ----------
Total non-performing assets 27,763 28,211
Restructured loans 2,264 2,273
Allowance for loan losses 6,777 (b) 6,979
Allowance as a percentage of non-performing loans 61.3% 57.8%
<FN>
- --------------------------------------------------
(a) Annualized.
(b) Includes $2.2 million and $2.3 million, allocated to loans acquired as part
of the Burritt transaction, for March 31, 1994 and December 31, 1993,
respectively.
</TABLE>
- 26 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
COMPARISON OF RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
GENERAL. Net income for the first quarter ended March 31, 1994 totaled
$1,492,00 or $.54 per share (fully diluted) compared to $2,838,000 or $1.07 per
share (fully diluted) for the comparable period in 1993. Net income for the
first quarter of 1993 included $1,548,000 or $.58 per share, resulting from the
adoption of Financial Accounting Standards Board Statement No. 109. This amount
represented the cumulative effect of a change in accounting for income taxes
effective January 1, 1993. Net income before the cumulative effect of the
change in accounting principle totaled $1,290,000 or $.49 per share. Net income
for the three months ended March 31, 1994 represented an annualized return on
average assets of .49% compared to .96% for the corresponding period in 1993.
Net income for the current period reflected a $202,000 or 15.7% increase
compared to income before the cumulative effect of the change in accounting
principle for year earlier period. There were several changes in the components
that comprise net income. For the current quarter compared to the year earlier
period, net interest revenue increased $1.0 million and other expense decreased
$311,000, both of which were partially offset by a $931,000 decline in other
revenue.
INTEREST REVENUE. Interest and fee revenue from loans and interest on the
investment portfolio decreased $694,000 or 3.7% during the three months ended
March 31, 1994 compared to the corresponding period in 1993. The decrease in
interest revenue was due to the decline in the yield on average interest-earning
assets, which was partially offset by the interest revenue resulting from an
increase in average interest-earning assets outstanding.
The average yield on interest-earning assets declined 34 basis points (100
basis points equals one percent) from 6.68% during the first quarter of 1993 to
6.34% during the current quarter. The decline in the yield reflects the general
decline in the level of interest rates between the two periods. Average
interest-earning assets increased $16.5 million or 1.5% during the current
quarter compared to the comparable 1993 period. This increase was essentially
due to the growth in total average assets between the two periods. Reflecting
the Company's objective of allocating financial resources from investments to
loans, average loans outstanding increased $66.8 million or 9.3%, while the
average of all other interest-earning assets decreased $50.3 million or 12.0%.
For the quarter ended March 31, 1994, interest on loans includes the
amortization of previously deferred fees of $110,000, which increased the yield
on average interest-earning assets by 4 basis points. For the comparable 1993
period, interest on loans included the amortization of previously deferred fees
which totaled $187,000 and increased the yield on average interest-earning
assets by 7 basis points.
INTEREST EXPENSE. Interest expense decreased $1,689,000 or 14.5% during
the three months ended March 31, 1994 compared to the corresponding period in
1993. This decrease was essentially due to a general decline in the average
cost of funds during the current period which more than offset the effect of the
increase in average interest-bearing liabilities. Average interest-bearing
liabilities increased $12.6 million or 1.2% during the current period compared
to the comparable 1993 period.
NET INTEREST REVENUE. As a result of the changes in interest revenue and
interest expense noted above, net interest revenue increased $1.0 million or
13.6% from $7.3 million for the quarter ended March 31, 1993 to $8.3 million
during the current quarter. The net interest rate spread improved 32 basis
points from 2.42% during the first quarter of 1993 to 2.74% during the first
quarter of 1994.
- 27 -
<PAGE>
The following table summarizes the Bank's net interest revenue (including
dividends) and net yield on average interest-earning assets. Non-accruing
loans, for the purpose of this analysis, are included in average loans
outstanding during the periods indicated. For the purpose of these
computations, daily average amounts were used to compute average balances.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------
1994 1993
------------------------------ -------------------------
(Amounts in thousands)
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ----- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 784,807 $13,546 6.90% $717,991 $13,481 7.51%
Taxable investment securities 355,153 4,567 5.14 327,553 4,765 5.82
Federal funds 6,146 42 2.73 67,300 485 2.88
FHLB of Boston stock 8,022 138 6.88 6,662 116 6.96
Other interest-earning assets -- -- -- 18,124 140 3.09
---------- ------- ----- ----------- -------
Total interest-earning assets $1,154,128 18,293 6.34 $1,137,630 18,987 6.68
---------- ------- ----- ----------- ------- ----
---------- -----------
Interest-bearing liabilities:
Deposits $ 985,942 8,287 3.36 $975,016 10,024 4.11
Borrowed funds 121,748 1,675 5.50 120,055 1,627 5.42
---------- ------- ----------- -------
Total interest-bearing
liabilities $1,107,690 9,962 3.60 $1,095,071 11,651 4.26
---------- ------- ----- ----------- ------- ----
---------- -----------
Net interest revenue $ 8,331 $ 7,336
------- -------
------- -------
Net interest rate spread 2.74% 2.42%
----- ----
----- ----
Net yield on average interest-
earning assets 2.89% 2.58%
----- -----
----- -----
</TABLE>
- 28 -
<PAGE>
RATE/VOLUME ANALYSIS. The following table sets forth the changes in
interest earned and interest paid resulting from changes in volume and
changes in rates. Changes in interest earned or paid due to both rate and
volume have been allocated in proportion to the relationship of the absolute
dollar amounts of the changes in each. There were no material out of period
items or adjustments included in interest revenue or interest expense during
the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1994 Compared to 1993
---------------------
Volume Rate Net
------ -------- -------
(Amounts in thousands)
<S> <C> <C> <C>
Interest earned on:
Loans $1,200 $(1,135) $ 65
Taxable investment securities 382 (580) (198)
Federal funds (419) (24) (443)
FHLB of Boston stock 23 (1) 22
Other interest-earning assets (70) (70) (140)
-------- -------- --------
Interest revenue 1,116 (1,810) 694
-------- -------- --------
Interest paid on:
Deposits 111 (1,848) (1,737)
Borrowed funds 23 25 48
-------- -------- --------
Interest expense 134 (1,823) (1,689)
-------- -------- --------
Net interest revenue $ 982 $ 13 $ 995
-------- -------- --------
-------- -------- --------
</TABLE>
PROVISION FOR LOAN LOSSES. The Bank provided $600,000 for loan
losses during the first quarter of 1994 compared to $450,000 for the
comparable 1993 period. At the end of the first quarter of 1994, the
Company's allowance for loan losses totaled $6.8 million, representing 61.3%
of loans past due 90 days or more and non-accruing loans. The allowance for
loan losses includes $2.2 million allocated to the loans acquired in the
Burritt transaction (see notes to Consolidated financial statements).
OTHER REVENUE. Other revenue decreased $931,000 or 51.9% from
$1,794,000 during the first quarter of 1993 to $863,000 during the first
quarter of 1994. Service charges and other revenue, comprised principally of
loan service and deposit related fees, decreased $1,173,000 from $1,756,000
for the first quarter of 1993 to $583,000 for the current quarter. As part
of the Burritt transaction, the Bank was servicing a pool of loans for the
FDIC on an interim basis (through September, 1993). The fees earned by the
Bank for providing this service amounted to $1,140,000 for the first quarter
of 1993. Net securities and other gains increased from $38,000 in the 1993
period to $280,000 in the 1994 period.
OTHER EXPENSES. Other expenses decreased $311,000 or 4.9% from
$6,402,000 during the first quarter of 1993 to $6,091,000 during the
corresponding period in 1994. Salaries and employee benefits, the largest
component of the Company's cost of operations, increased $173,000 or 7.5%
from $2,320,000 during the quarter ended March 31, 1993 to $2,493,000 during
the current quarter. All other operating expenses, in the aggregate,
decreased $484,000 or 11.9% from $4,082,000 during the first quarter of 1993
to $3,598,000 for the comparable 1994 period. The decline in all other
expenses was attributable to the decline in foreclosed asset expense which
totaled $544,000 in the first quarter of 1994 compared to $1,242,000 for the
comparable 1993 quarter. Included in this expense is the provision for
foreclosed assets which amounted to $400,000 in the current quarter compared
to $975,000 for the year earlier period. The Company expects that until the
level of foreclosed assets declines substantially, foreclosed asset expense
will continue to be significant. The Federal Deposit Insurance Corporation
premium increased from $494,000 for the 1993 period to $726,000 for the
current period. The increased volume of insured deposits assumed in the
Burritt transaction, in large part, accounted for the $232,000 or 47.0%
increase in the premium paid in the current quarter compared to the year
earlier period.
- 29 -
<PAGE>
As required by the Statement of Financial Accounting Standards No.
91, the Bank deferred certain direct costs resulting from the origination of
loans. These deferred costs, which are principally comprised of salaries,
employee benefits and other loan expenses, totaled approximately $445,000 for
the current quarter compared to $355,000 for the year earlier period.
NET NON-INTEREST MARGIN. The net non-interest margin, the difference
between other revenue (non-interest revenue) and other expenses (non-interest
expense) as a percentage of average assets (annualized) outstanding,
decreased by 17 basis points from (1.55%) during the quarter ended March 31,
1993 to (1.72%) during the current 1994 period. Other revenue, as a
percentage of average assets (annualized), decreased from .61% to .28% for
the quarters ended March 31, 1993 and 1994, respectively. Other expenses, as
a percentage of average assets (annualized), decreased 16 basis points from
2.16% during the quarter ended March 31, 1993 to 2.00% during the current
quarter.
NET NON-INTEREST REVENUE/EXPENSE ANALYSIS
AS A PERCENTAGE OF AVERAGE ASSETS
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1994 1993
------ ------
<S> <C> <C>
Non-interest revenue .28 .61
------ ------
Non-interest expense
Foreclosed asset .18 .42
FDIC insurance .24 .17
Other 1.58 1.57
------ ------
Total non-interest expense 2.00 2.16
------ ------
Net non-interest margin (1.72) (1.55)
------ ------
------ ------
</TABLE>
PROVISION FOR INCOME TAXES. The provision for income taxes during
the current quarter totaled $1,011,000, reflecting a 40.4% effective income
tax rate compared to $988,000 or an effective income tax rate of 43.4% for
the comparable 1993 period on income before the cumulative effect of a change
in accounting principle.
CHANGE IN ACCOUNTING PRINCIPLE. In February 1992, the FASB issued
Statement of Financial Accounting Standards No. 109 ("SFAS 109") "Accounting
For Income Taxes", which superseded SFAS 96, as amended, which established
financial accounting and reporting standards for the effects of income taxes.
The Statement requires the use of the liability method in determining the tax
effect of temporary differences in the recognition of items of income and
expense reported in the consolidated financial statements and those reported
for income tax purposes. Effective January 1, 1993, the Company adopted SFAS
109. As a result of the adoption of SFAS 109, the Company recorded the
cumulative effect of this change in accounting principle which amounted to
$1,548,000 or $.58 per share.
FINANCIAL CONDITION
The Company's assets totaled $1.23 billion at March 31, 1994 compared
to $1.19 billion at December 31, 1993. The assets of the Company are
primarily invested in loans to residents and, to a lesser extent, the
businesses located in the Bank's market area. At March 31, 1994,
approximately $815.1 million, representing 66.4% of the Company's assets,
were comprised of loans, compared to $786.3 million or 65.8% of total assets
at December 31, 1993. The predominant thrust of the Bank's lending business
is to provide financing for residential real estate. Essentially as a result
of the relatively low level of interest rates available for residential
mortgage loans during the fourth quarter of 1993, which fostered a rise in
the level of loan applications, the Bank's loan portfolio increased $29.0
million or 3.7% during the first quarter of the year. As in 1993, the large
majority of the residential real estate loans made by the Bank during the
quarter were for the refinance of previously outstanding loans. Nonetheless,
the Bank achieved a net growth in
- 30 -
<PAGE>
outstanding loans. Curtailing the growth in the loan portfolio during the
first quarter 1993 was the sale of approximately $8.8 million in mortgage
loans and the reclassification of $1.5 million of loans to in-substance
foreclosed assets.
The Bank has positioned itself in the market area that it serves
primarily as a provider of consumer financing and, to a lesser extent, as a
provider of commercial and business loans. At March 31, 1994, $658.0 million
or 80.7% of the Bank's loans were for the financing of one-to-four family
residences and $92.8 million or 11.4% of the Bank's loans were allocated to
consumer loans, primarily home equity lines of credit. In the aggregate, at
March 31, 1994, these two segments of the Bank's loan portfolio represented
92.1% of the Bank's total loans.
During the first quarter, the level of non-performing assets, which
include loans past due 90 days or more, non-accrual loans, and foreclosed and
in-substance foreclosed assets (see Note 1 to Consolidated Financial
Statements) continued to trend down. At March 31, 1994, non-performing
assets totaled $27.8 million, representing 2.3% of total assets compared to
$28.2 million or 2.4% of total assets at year end 1993. At March 31, 1994,
foreclosed and in-substance foreclosed assets totaled $16.7 million,
representing 1.4% of total assets, compared to $16.1 million or 1.4% of total
assets at year end 1993.
The following table sets forth non-accrual loans and loans past due
for 90 days or more, including loans in foreclosure, and the allowance for
loan losses at the dates indicated:
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
---------------------------------------------- -----------------------------------------------------
(Dollar amounts in thousands)
Allowance for Allowance for
Loans Past Due Loan Losses Loans Past Due Loan Losses
---------------------- --------------------- ---------------------- -----------------------
% of Loans % of Loans % of Loans % of Loans
Loan Type Balance Outstanding Balance(1) Past due Balance Outstanding Balance(1) Past due
- --------- ------- ----------- -------- ---------- ------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate
1-4 Family $ 5,841 0.9% $ 5,665 0.9%
Commercial 181 0.8 681 2.5
Construction --- -- --- --
Multi-family 2,628 36.1 2,628 30.8
------- -------
Total 8,650 1.3 $ 4,497 52.0% 8,974 1.4 $ 4,605 51.3%
------- -------
Consumer
HELOC 759 1.1 945 1.4
All other 527 2.1 750 2.8
Total 1,286 1.4 1,047 81.4 1,695 1.8 1,193 70.3
------- -------
Commercial
Real estate
development 488 13.5 623 16.3
All other 632 2.4 776 2.9
------- -------
Total 1,120 3.7 1,233 110.0 1,399 4.6 1,181 84.4
------- ------- ------- -------
Total Loans $11,056 1.4 $ 6,777 61.3 $12,068 1.5 $ 6,979 57.8
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
(1) The Bank reallocated $6 million of the allowance allocated to the loans
acquired in the Burritt transaction to a purchased loan discount.
The Company's loan portfolio is segregated into three broad
categories of loans: real estate, consumer and commercial. The Company's
investment in real estate loans totaled $691.8 million, representing 56.4%
of total assets at March 31, 1994 compared to $660.6 million or 55.3% of
total assets at year end 1993. The Bank experienced a significant rise in
the level of mortgage loan applications, predominantly for the refinance of
residential property. As previously noted and reflected in the growth in
the Bank's loan portfolio, the majority of the refinance activity were
loans previously outstanding with other lenders. Mortgage loans closed
during the first quarter of 1994 totaled $83.9 million.
- 31 -
<PAGE>
The Bank continued to supplement local loan originations through
the purchase of single family adjustable rate mortgage loans. The Bank
purchased $1.2 million of these loans during the first quarter of 1994
compared to $2.3 million during comparable 1993 period. The origination
and purchase of adjustable rate loans is an integral part of the Bank's
management of interest rate risk. (See "Asset/Liability Management".)
The Bank's investment in real estate mortgages is primarily
secured by residential properties and, to a lesser extent, multi-family
housing. This portfolio also includes financing for commercial real estate
and real estate development and construction. Loans to finance one-to-four
family residences totaled $658.0 million or 80.7% of the Bank's total loan
portfolio at March 31, 1994 compared to $621.6 million, representing 79.1%
of the total loan portfolio, at year end 1993. The level of loans past due
90 days or more totaled $5.8 million or .9% of this portfolio at March 31,
1994 compared to $5.7 million or .9% of the portfolio at year end 1993.
Multi-family housing loans totaled $7.3 million or .9% of the
total loan portfolio at March 31, 1994 compared to $8.5 million or 1.1% of
the total loan portfolio at year end 1993. At March 31, 1994, loans past
due 90 days or more totaled $2.6 million or 36.1% of this portfolio
compared to $2.6 million or 30.8% at year end 1993. Loans to finance
commercial real estate totaled $24.0 million or 2.9% of the total loan
portfolio at March 31, 1994, of which $.2 million or .8% were past due 90
days or more. At year end 1993, this portfolio totaled $27.7 million,
representing 3.5% of total loans, of which $.7 million or 2.5% were past
due 90 days or more.
The fourth group of loans included in the Bank's real estate
mortgage portfolio were made to finance real estate construction, primarily
residential condominiums and single family residences. This portfolio of
loans totaled $2.5 million or .3% of total loans at March 31, 1994 compared
to $2.8 million or .4% of total loans at year end 1993. At March 31, 1994
and year end 1993, there were no loans in this loan category past due 90
days or more. Unadvanced construction commitments approximated $443,000 at
March 31, 1994 and $533,000 at year end 1993.
The Company's investment in consumer loans totaled $92.8 million,
representing 11.4% of total loans at March 31, 1994, compared to $95.5
million or 12.1% of total loans at year end 1993. The consumer loan
portfolio is primarily comprised of home equity lines of credit, which
complement the Bank's primary business of providing financing for single
family residences. The home equity line of credit, which is collateralized
by the equity in residential real property, has become the Bank's second
largest investment in loans. Home equity lines of credit totaled $125.6
million, with $67.2 million in use at March 31, 1994 compared to $124.8
million, with $68.4 million in use at year end 1993. At March 31, 1994,
consumer loans past due 90 days or more totaled $1.3 million or 1.4% of
this portfolio. Home equity lines of credit included in this amount
totaled $759,000, representing 1.1% of HELOCs outstanding. In comparison,
at year end 1993, consumer loans past due 90 days or more totaled $1.7
million or 1.8% of the consumer loan portfolio, including $945,000,
representing 1.4% of the home equity lines of credit.
The Company also provides credit to the businesses located within
the Bank's market area. The Bank's commercial lending department invests
in loans for the development of real estate and other business needs. The
Bank's investment in commercial loans totaled $30.5 million at March 31,
1994, essentially unchanged from the $30.1 million invested at year end
1993. At March 31, 1994, $3.6 million or 11.9% of this portfolio was
invested in loans for the development of real estate and $26.9 million or
88.1% was invested in loans for various business needs. Unadvanced real
estate development commitments totaled $1.3 million at March 31, 1994,
compared to $1.3 million at year end 1993. At March 31, 1994, loans past
due 90 days or more totaled $1.1 million, representing 3.7% of the
commercial loan portfolio compared to $1.4 million or 4.6% at year end
1993.
- 32 -
<PAGE>
NON-PERFORMING ASSETS. The following table summarizes the Bank's
non-accrual loans, accruing loans past due 90 days or more, and
foreclosed and in-substance foreclosed assets.
<TABLE>
<CAPTION>
At March 31, At December 31,
---------------------- ----------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
-------- ------- -------- -------- -------- -------- --------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
Mortgage............. $ 6,164 $ 5,911 $ 6,657 $ 9,756 $ 7,029 $ 6,524 $ 4,618
Consumer............. 1,241 1,244 1,446 1,197 1,000 1,741 1,008
Commercial........... 1,120 230 1,399 293 3,412 3,437 1,970
------- ------- ------- ------- ------- ------- -------
Total.................. 8,525 7,385 9,502 11,246 11,441 11,702 7,596
------- ------- ------- ------- ------- ------- -------
Accruing loans past due
90 days or more:
Mortgage............. 2,486 1,520 2,317 3,006 4,006 4,730 4,056
Consumer............. 45 96 249 1 151 230 106
Commercial........... --- --- --- --- --- --- 2,000
------- ------- ------- ------- ------- ------- -------
Total.................. 2,531 1,616 2,566 3,007 4,247 4,960 6,162
------- ------- ------- ------- ------- ------- -------
Foreclosed assets...... 9,295 10,769 9,379 10,456 7,305 5,893 3,051
In-substance foreclosed
assets............... 8,373 15,821 7,804 13,124 17,267 11,736 ---
------- ------- ------- ------- ------- ------- -------
Total.................. 17,668 26,590 17,183 23,580 24,572 17,629 3,051
Valuation allowance.... 961 402 1,040 438 412 --- ---
------- ------- ------- ------- ------- ------- -------
Total, net............. 16,707 26,188 16,143 23,142 24,160 17,629 3,051
------- ------- ------- ------- ------- ------- -------
Total non-performing
assets............... $27,763 $35,189 $28,211 $37,395 $39,848 $34,291 $16,809
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Restructured loans $ 2,264 $ 7,316 $ 2,273 $ 8,262 $ 6,985 ---- ----
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
</TABLE>
As detailed in the table above, the level of non-accrual loans and
accruing loans past due 90 days or more declined modestly from $12.1
million at year end 1993 to $11.1 million at March 31, 1994. At March 31,
1994, the Bank had $9.3 million in foreclosed assets, consisting of 45
properties, compared to $9.4 million, consisting of 44 properties at year
end 1993. During the first quarter of 1994, the Bank reclassified $1.5
million in loans to in-substance foreclosed assets. At March 31, 1994, the
Bank had $8.4 million, consisting of 54 properties, classified as
in-substance foreclosed assets compared to $7.8 million, consisting of 50
properties, at year end 1993. In the aggregate, the Bank is carrying 99
properties, totaling $16.7 million, net of a $1.0 million valuation
allowance, in foreclosed and in-substance foreclosed assets. This compares
to 94 properties, totaling $16.1 million, net of a $1.0 million valuation
allowance, at year end 1993.
During the past several years, as the volume of assets acquired by the
Bank through the foreclosure process increased and the value of the
underlying real estate declined, the Bank adopted a policy of reappraising
foreclosed and in-substance foreclosed assets on at least an annual basis.
This policy has assisted the Bank in quantifying the net realizable value
of these assets, and has provided the basis, as necessary, for subsequent
write-downs of the carrying amount of these assets. Additionally, in order
to provide for unidentified and possible future declines in the value of
foreclosed assets, the Bank established an allowance for foreclosed assets
in 1991. This allowance is funded through a provision for foreclosed
assets which is charged to and included in foreclosed asset expense. In
the quarter ended March 31, 1994, the Bank provided $400,000 to this
allowance compared to $975,000 in the comparable 1993 period. During the
current quarter, the Bank charged $480,000 in specific write-downs against
this allowance compared to $1.0 million during the year earlier period. At
March 31, 1994, the allowance for foreclosed assets totaled $961,000
compared to $1.0 million at year end 1993.
- 33 -
<PAGE>
The reduction of non-performing assets has been one of the primary
objectives of the Bank and, as noted, total non-performing assets declined
modestly during the current quarter. A principal focus in 1994 will be a
continuation of the Bank's efforts to reduce the level of non-performing
assets. Continued weakness in the local economy suggests that progress in
this area will be moderate. The amount of loans past due 60 days has
declined to $6.2 million at March 31, 1994, representing .8% of the total
loan portfolio compared to $8.0 million or 1.0% of the total loan portfolio
at year end 1993.
The foundation of the Bank's program to reduce the level of non-
performing assets is the loan collection and workout process. In addition
to the personnel assigned to the collection/workout area, the Bank has two
officers responsible for the management and sale of foreclosed assets.
This increasingly important function of the Bank is supported by a standing
committee of the Board of Directors, comprised of individuals experienced
in the areas of real estate sales and development, which was established to
assist and give advice on the management and disposition of troubled
assets.
To the extent that the Bank ultimately takes title to troubled assets,
the Board of Directors and management of the Bank have established several
programs to facilitate the timely disposition of foreclosed assets. The
foundation of these programs is to establish fair and realistic value for
foreclosed assets, taking into consideration the potential opportunity cost
associated with lengthy marketing time. The Bank augments this pricing
policy through preferred Bank financing, including special first-time
home-buyer programs. To further expand sales efforts and reduce market
time, the Bank also maintains consistent marketing programs and premium
realtor commissions. The employment of these programs has enabled the Bank
to sell and close on 9 properties for an aggregate consideration of
$900,000 in the first quarter of 1994. During the comparable 1993 period,
the Bank sold and closed on 16 properties for an aggregate consideration of
$1.5 million.
At March 31, 1994, one condominium project was included in foreclosed
assets. The Bank's net investment in this project was $2.8 million at
March 31, 1994. Thirty-two units in this project have been completed and
sold. The Bank is currently pursuing the sale of the remaining land
available for future development.
The following table summarizes the Bank's accruing loans past due 60
days:
<TABLE>
<CAPTION>
March 31, At December 31,
----------------------- -----------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- --------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Loans past due 60 days:
Mortgage............. $ 4,870 $ 9,299 $ 7,369 $ 8,829 $ 9,072 $ 5,062 $ 4,534
Consumer............. 1,019 689 651 815 525 753 561
Commercial........... 330 282 --- 95 353 870 295
------- ------- -------- ------- ------- ------- -------
Total.................. $ 6,219 $10,270 $ 8,020 $ 9,739 $ 9,950 $ 6,685 $ 5,390
------- ------- -------- ------- ------- ------- -------
------- ------- -------- ------- ------- ------- -------
</TABLE>
In order to maintain the quality of the loan portfolio, as well as to
provide for potential losses that are inherent in the lending process, the
Bank controls its lending activities through adherence to loan policies
adopted by the Board of Directors and stringent underwriting standards. To
provide for possible losses within the loan portfolio, the Company
maintains an allowance for loan losses. The allowance for loan losses is
maintained through the provision for loan losses which is a charge to
earnings. This provision is determined on a quarterly basis, based upon
management's review of the anticipated uncollectability of loans, current
economic conditions, overall portfolio quality, specific problem loans and
an assessment of the adequacy of the allowance for loan losses. Based on
these factors, the Company provided $600,000 to the allowance for loan
losses during the current quarter compared to $450,000 during the
comparable 1993 period. During the current quarter the Bank wrote off
$802,000 (net of recoveries).
- 34 -
<PAGE>
As part of the Burritt transaction, the Bank purchased approximately
$169.3 million of loans at a $10.4 million discount, which was initially
added to the Bank's allowance for loan losses. This discount was based
upon management's assessment of the potential credit risk inherent in the
portfolios acquired. During 1993, the Bank completed the valuation
analysis of the loans acquired in the Burritt transaction. As a result of
this analysis, the Bank allocated $6.0 million of the Burritt allowance for
loan losses as a purchased loan discount. This amount will be accreted to
interest revenue over the remaining terms of the acquired loans. At March
31, 1994, the allowance for loan losses totaled $6.8 million, which
includes $2.2 million allocated to the loans acquired in the Burritt
transaction. In comparison, the allowance for loan losses totaled $7.0
million at year end 1993, which included $2.3 million allocated to the
loans acquired in the Burritt transaction. The allowance for loan losses
represented 61.3% of non-performing loans at March 31, 1994, compared to
57.8% at year end 1993.
In addition to collection and workout efforts, management also
monitors and works closely with certain borrowers that may experience
financial difficulties. The debtors may be experiencing cash flow problems
which inhibit their ability to service their debt in accordance with its
terms. This situation may be due to, among other things, a decline in
sales, increases in inventories, and vacancies. These conditions may
result in a modification of loan terms in order to assist a debtor who has
been adversely affected by the state of the local economy. The
modification of terms may be in the form of the waiver of principal
payments, a reduction in the interest rate or the waiver of interest
payments for a specified period of time. At March 31, 1994, in addition to
non-performing assets, the Bank had six loan relationships, all of which
are secured, totaling $8.1 million, which are being monitored. Included in
this amount are four loans totaling $2.3 million, the terms of which have
been modified and four loans totaling $3.6 million, which are non-
performing.
During the past several years, the performance of the Company has been
adversely impacted through the loss of interest revenue and increases in
the provisions for loan losses. To moderate this effect upon the Company's
performance, the Bank, prior to the Burritt transaction, had been following
a strategy of increasing the level of interest-earning assets. (See
"Asset/Liability Management"). In addition to assertive marketing programs
directed toward the origination of loans and deposits, the Bank has also
borrowed funds from the FHLB of Boston and allocated these resources to the
investment portfolio. The investments made by the Bank were, for the most
part, in mortgage-backed securities issued by agencies of the U.S.
Government. Additionally, in settlement of the difference between the
amount of deposits and liabilities assumed and the assets purchased in the
Burritt transaction, the FDIC advanced approximately $240 million to the
Bank. These funds have been primarily allocated among various mortgage-
backed security investment alternatives and other investment grade
securities. As a result of these purchases, the investment portfolio
totaled $322.6 million, representing 27.0% of total assets at year end 1993
and $352.7 million or 28.7% of total assets at March 31, 1994. In addition
to mortgage-backed securities, the Company's investment portfolio is
comprised of investment grade corporate bonds, marketable equity securities
and money market preferred stock.
The Bank adopted Financial Accounting Standards Board Statement No.
115 as of December 31, 1993. This statement requires, in part, that
certain investment securities that are classified as available for sale be
recorded at market value, with unrealized gains and losses, net of tax,
reported in a separate component of stockholders' equity. As a result, at
March 31, 1994, the Bank recorded an unrealized loss, net of tax, of
$459,000 which is included in Stockholders' equity. (See "Consolidated
Financial Statements").
FUNDING SOURCES. The investment activities of the Bank are funded
from several sources. The primary source of funds is supplied by local
depositors and is complimented by advances from the FHLB of Boston. In
addition, the Bank is supplied with a steady flow of funds from the
amortization and prepayment of loans as well as the amortization and
maturity of investment securities. The Bank also derives funds, from time
to time, through the sale of loans into the secondary market and allocates
the proceeds in accordance with established asset and liability management
objectives.
During the quarter, deposits increased by $13.6 million or 1.4%, after
interest credited of $8.3 million, from $1.006 billion, funding 84.3% of
total assets at year end 1993, to $1.02 billion, funding 83.1% of total
assets at March 31, 1994.
- 35 -
<PAGE>
Retail deposits are essentially derived from the communities in which
the Bank's offices are located. The Bank offers a wide variety of deposit
accounts which include money market deposit accounts, certificates of
deposit and regular savings.
The Bank also utilizes the FHLB of Boston as an alternative source of
funds. At March 31, 1994, FHLB of Boston advances totaled $128.3 million,
funding 10.5% of total assets, compared to $105.0 million, funding 8.8% of
total assets at year end 1993. The flexibility, pricing and repricing
characteristics of the funding alternatives offered by the FHLB of Boston
have allowed the Bank to match-fund fixed rate commercial mortgage loans,
one year adjustable rate mortgage loans and home equity lines of credit.
The Bank has also employed funds from the FHLB of Boston to fund the
purchase of various mortgage-backed securities.
Amortization, prepayments and the sale of loans into the secondary
market supplied the Bank with an additional $70.1 million in investable
funds during the first quarter of the year. In keeping with the Bank's
asset and liability management objectives, the Bank sold $8.8 million in
fixed rate mortgage loans during the first quarter of 1994. The Bank has
retained servicing on all loans that have been sold and, at March 31, 1994,
was servicing $141.3 million of mortgage loans for others.
ASSET/LIABILITY MANAGEMENT. Derby Savings' asset liability management
program is based upon operating the Bank within a framework of
fundamentally matching interest-sensitive assets and interest-sensitive
liabilities. The purpose of pursuing this policy is to position the Bank
to produce stable net interest revenue through all phases of the business
cycle and resulting interest rate levels.
The table on the following page summarizes the Company's
interest-sensitive assets and interest-sensitive liabilities that mature or
reprice during the various time periods noted. Loans are net of deferred
loan fees and net of non-accruing loans.
- 36 -
<PAGE>
<TABLE>
<CAPTION>
More Than More Than More Than
Six Months One Year Three Years
Six Month To One To Three To Five
or Less Year Years Years
---------- ---------- ----------- -----------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
ASSETS:
Total investments $126,475 $82,941 $76,191 $12,101
---------- ---------- ----------- -----------
Loans:
Fixed-rate mortgages 5,799 5,887 26,126 23,201
Adjustable-rate mortgages 211,335 232,028 32,621 3,515
Consumer loans 76,305 7,025 3,455 2,539
Commercial loans 24,353 80 4,691 154
---------- ---------- ----------- -----------
Total loans 317,792 245,020 66,893 29,409
---------- ---------- ----------- -----------
Total interest-sensitive assets $444,267 $327,961 $143,084 $41,510
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
LIABILITIES:
Regular & club savings $229,347 $ -- $ -- $ --
Certificates of deposit 235,641 100,681 108,042 65,123
Money market accounts 202,804 -- -- --
NOW accounts 48,554 -- -- --
FHLB of Boston advances 32,271 20,050 62,101 10,790
Repurchase agreements & other borrowings 1,450 -- -- --
---------- ---------- ----------- -----------
TOTAL INTEREST-SENSITIVE LIABILITIES $750,067 $120,731 $170,143 $75,913
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
GAP (repricing difference) ($305,800) $207,230 ($27,059) ($34,403)
Cumulative GAP ($305,800) ($98,570) ($125,629) ($160,032)
Cumulative GAP/total assets -24.9% -8.0% -10.2% -13.0%
Ratio of interest-sensitive assets
to interest-sensitive liabilities 59.2% 271.6% 84.1% 54.7%
Cumulative ratio of interest-sensitive
assets to interest-sensitive liabilities 88.7% 87.9% 85.7%
<CAPTION>
More Than More Than
Five Years 10 Years
To Ten To 20 More Than
Years Years 20 Years Total
--------- --------- --------- ----------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
ASSETS:
Total investments $15,904 $38,116 $ -- $351,728
--------- --------- --------- ----------
Loans:
Fixed-rate mortgages 58,031 61,170 23,835 204,049
Adjustable-rate mortgages 1,656 434 -- 481,589
Consumer loans 1,746 476 -- 91,546
Commercial loans 37 27 -- 29,342
--------- --------- --------- ----------
Total loans 61,470 62,107 23,835 806,526
--------- --------- --------- ----------
TOTAL INTEREST-SENSITIVE ASSETS $77,374 $100,223 $23,835 $1,158,254
--------- --------- --------- ----------
--------- --------- --------- ----------
LIABILITIES:
Regular & club savings $ -- $ -- $ -- $229,347
Certificates of deposit -- -- -- 509,487
Money market accounts -- -- -- 202,804
NOW accounts -- -- -- 48,554
FHLB of Boston advances 3,120 -- -- 128,332
Repurchase agreements & other borrowings -- -- -- 1,450
--------- --------- --------- ----------
TOTAL INTEREST-SENSITIVE LIABILITIES $3,120 $ -- $ -- $1,119,974
--------- --------- --------- ----------
--------- --------- --------- ----------
GAP (repricing difference) $74,254 $100,223 $23,835
Cumulative GAP ($85,778) $14,445 $38,280
Cumulative GAP/total assets -7.0% 1.2% 3.1%
Ratio of interest-sensitive assets
to interest-sensitive liabilities 2479.9% 103.4%
Cumulative ratio of interest-sensitive
assets to interest-sensitive liabilities 92.3% 101.3% 103.4%
</TABLE>
- 37 -
<PAGE>
CAPITAL RESOURCES. The Federal Reserve Board (the "FRB") has adopted
risk-based capital standards which require bank holding companies to maintain a
minimum ratio of total capital to risk-weighted assets of 8.0%. Of the required
capital, 4.0% must be tier 1 capital. Tier 1 capital is primarily common
stockholders' equity and certain categories of perpetual preferred stock. As
part of the Burritt transaction, Derby paid the FDIC a premium of $6.2 million.
Of the premium paid, $5.0 million was recorded as a core deposit intangible.
Through March 31, 1994, this amount was reduced to $4.1 million through
amortization expense. This amount, in addition to approximately $158,000 of
other intangible assets resulting from the transaction, are required to be
deducted from the Company's and the Bank's capital prior to determining
regulatory capital requirements. After giving effect to the transaction, the
Company had a ratio of total capital to risk-weighted assets of 10.2% and a
ratio of tier 1 capital to risk-weighted assets of 9.2% at March 31, 1994.
The Board has supplemented the risk-based capital requirements with a
required minimum leverage ratio of 3% of tier 1 capital to total assets. The
Board indicated that all but the most highly-rated holding companies, however,
should maintain a leverage ratio of 4% to 5% of tier 1 capital to total assets.
At March 31, 1994, the Company had a ratio of tier 1 capital to total assets of
5.1%.
Derby Savings Bank is also required by the FDIC to meet risk-based ratios
the same as those adopted by the FRB for the Company. At March 31, 1994, Derby
Savings' ratio of total capital to risk-weighted assets was 10.3% and its ratio
of tier 1 capital to risk-weighted assets was 9.3%.
The FDIC has also adopted a minimum leverage ratio of 3% of tier 1 capital
to total assets. The FDIC has also indicated that all but the most highly rated
banks should maintain a leverage ratio of 4% to 5% of tier 1 capital to total
assets. Derby Savings' ratio of tier 1 capital to total assets at March 31,
1994 was 5.2%.
Derby entered into a Memorandum of Understanding (the "Memorandum") with
the FDIC in April 1992, which required Derby to maintain a minimum tier 1
capital to total asset ratio of 5.5%. In connection with the Burritt
transaction, the FDIC modified the terms of the Memorandum to require that Derby
have tier 1 capital to total assets ratio in excess of 5% by December 31, 1993,
which the Bank has exceeded, and at or above 5.75% by December 31, 1994. Derby
expects to achieve the December 31, 1994 capital target through maintaining
asset size at current levels and earnings retention.
Under the prompt corrective action regulation recently adopted by the FDIC,
which became effective on December 19, 1992, a savings bank will be considered:
(i) "well capitalized" if the savings bank has a risk based capital ratio of 10%
or greater, a tier one or core capital to risk-weighted assets ratio of 6% or
greater, and a leverage ratio to adjusted total assets of 5% or greater
(provided the savings bank is not subject to an order, written agreement,
capital directive or prompt corrective action to meet and maintain a specified
capital level for any capital measure); (ii)"adequately capitalized" if the
institution has a risk-based capital ratio of 8% or greater, a tier 1 or core
capital to risk weighted assets ratio of 4% or greater, and a leverage ratio to
adjusted total assets of 4% or greater (3% or greater if the institution is
rated composite 1 in its most recent report of examination); (iii)
"undercapitalized" if the institution has a risk based capital ratio that is
less than 8%, a tier 1 or core capital to risk weighted assets ratio that is
less than 4% (3% if the institution is rated composite 1 in its most recent
report of examination) and a leverage ratio to adjusted total assets that is
less that 3%; (iv)"significantly undercapitalized" if the institution has a
risk-based capital ratio that is less than 6%, a tier one or core capital to
risk weighted assets ratio that is less than 3%, and a leverage ratio to
adjusted total assets ratio that is less than 3%; and (v) "critically
undercapitalized" if the institution has a ratio of tangible equity to total
assets that is less than 2%. The regulation also permits the FDIC to determine
that a savings bank should be placed in a lower category based on other
information such as a savings institution's examination report, after written
notice. Based on its capital ratios as of March 31, 1994, the Bank believes it
is "adequately capitalized" for purposes of this regulation.
- 38 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Not Applicable
ITEM 2 CHANGES IN SECURITIES
Not Applicable
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5 OTHER INFORMATION
Not Applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Not Applicable
- 39 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
DS Bancor, Inc.
----------------------------------
Registrant
Date: May 12, 1994 By: /S/ Harry P. DiAdamo, Jr.
-------------------- ----------------------------------
Harry P. DiAdamo, Jr.
President & CEO
Date: May 12, 1994 By: /S/ Alfred T. Santoro
-------------------- ----------------------------------
Alfred T. Santoro
Vice President, Treasurer and CFO
- 40 -
