<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the quarter ended June 30, 1995
----------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period from ____________ to ____________
Commission File Number 0-20493
-------
THE SAFETY FUND CORPORATION
---------------------------
(Exact name of small business issuer as specified in its charter)
MASSACHUSETTS 04-2532311
--------------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization)
470 MAIN STREET, FITCHBURG, MASSACHUSETTS 01420
-----------------------------------------------
(Address of principal executive offices)
Issuer's telephone number (508) 343-6406
--------------
Former name, former address and former fiscal year, if changed since last
report: Not Applicable
-----------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
------- -------
At July 28, 1995, the Registrant had 1,104,747 shares of its common stock
outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
The financial information required for Part I follows.
- 2 -
<PAGE>
THE SAFETY FUND CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
1995 1994
-----------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 13,949,437 $ 15,223,830
Federal funds sold 7,400,000 3,300,000
Investment securities available for sale (amortized cost
of $48,122,585 in 1995 and $56,788,854 in 1994) 48,525,550 54,537,725
Investment securities held to maturity (market value
of $51,426,628 in 1995 and $43,213,908 in 1994) 50,438,481 45,598,639
Loans 154,167,879 141,458,341
Less allowance for possible loan losses (7,370,148) (6,417,407)
-----------------------------
Net loans 146,797,731 135,040,934
-----------------------------
Premises and equipment, net 10,535,107 10,842,035
Accrued interest receivable 2,194,611 2,194,161
Other real estate owned, net 294,929 533,470
Deferred income tax asset, net 1,768,151 2,376,167
Other assets 1,650,862 1,413,796
-----------------------------
Total assets $283,554,859 $271,060,757
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Interest bearing $188,155,223 $169,893,349
Noninterest bearing 63,379,494 65,581,158
-----------------------------
Total deposits 251,534,717 235,474,507
Securities sold under repurchase agreements 8,988,742 15,637,436
Treasury tax and loan notes 3,172,367 2,342,166
Other liabilities 537,389 954,004
-----------------------------
Total liabilities 264,233,215 254,408,113
-----------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $10 par value;
100,000 shares authorized, none issued
Common stock, $5 par value;
3,200,000 shares authorized
1,104,747 issued and outstanding 5,523,735 5,523,735
Surplus 10,326,436 10,326,436
Retained earnings 3,553,615 2,964,004
Net unrealized loss on investment securities
available for sale (82,142) (2,161,531)
-----------------------------
Total stockholders' equity 19,321,644 16,652,644
-----------------------------
Total liabilities and stockholders' equity $283,554,859 $271,060,757
=============================
</TABLE>
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<PAGE>
THE SAFETY FUND CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
Interest income: 1995 1994 1995 1994
-----------------------------------------------------
<S> <C> <C> <C> <C>
Interest on loans $3,612,277 $2,930,394 $ 7,080,097 $5,834,773
Interest and dividends on investment securities:
Available for sale 785,313 1,021,938 1,625,910 2,101,113
Held to maturity 858,445 149,521 1,653,319 149,521
Interest on federal funds sold 64,439 21,442 84,824 72,332
-----------------------------------------------------
Total interest income 5,320,474 4,123,295 10,444,150 8,157,739
-----------------------------------------------------
Interest expense:
Interest on deposits 1,810,376 1,121,757 3,364,712 2,332,058
Interest on borrowed funds 108,859 80,440 299,951 130,302
-----------------------------------------------------
Total interest expense 1,919,235 1,202,197 3,664,663 2,462,360
-----------------------------------------------------
Net interest income 3,401,239 2,921,098 6,779,487 5,695,379
Provision for possible loan losses 450,000 934,599 975,000 1,149,605
-----------------------------------------------------
Net interest income after provision
for possible loan losses 2,951,239 1,986,499 5,804,487 4,545,774
-----------------------------------------------------
Noninterest income:
Trust fees 564,317 601,048 1,083,779 1,122,143
Service fees 294,849 272,198 553,232 517,836
Gains (losses) on loans sold, net - 31,029 709 (297,121)
Gains on sales of investment securities
available for sale, net - 20,262 781 75,062
Other 159,530 151,488 320,263 287,997
-----------------------------------------------------
Total noninterest income 1,018,696 1,076,025 1,958,764 1,705,917
-----------------------------------------------------
Noninterest expense:
Salaries and wages 1,493,361 1,427,155 2,968,227 2,957,712
Employee benefits 344,134 388,540 683,812 745,043
Occupancy, net 221,126 200,077 479,531 429,457
Equipment 303,248 254,326 595,986 499,144
Professional fees 217,036 265,399 415,095 506,470
Marketing 174,343 113,072 336,356 247,275
FDIC assessments 141,753 135,841 283,605 271,935
Other real estate owned, net 24,524 15,401 42,098 179,808
Directors' fees 56,567 63,917 117,867 144,267
Other 420,414 388,259 918,463 689,851
-----------------------------------------------------
Total noninterest expense 3,396,506 3,251,987 6,841,040 6,670,962
-----------------------------------------------------
Income (loss) before income taxes 573,429 (189,463) 922,211 (419,271)
Income tax expense (benefit) 201,800 - 332,600 (103,600)
-----------------------------------------------------
Net income (loss) $ 371,629 $ (189,463) $ 589,611 $ (315,671)
=====================================================
Net income (loss) per common share $.34 $(.18) $.53 $(.29)
Weighted average shares outstanding 1,104,747 1,075,467 1,104,747 1,074,881
</TABLE>
- 4 -
<PAGE>
THE SAFETY FUND CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Common Retained
Stock Surplus Earnings Other Total
------------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1994 $5,523,735 $l0,326,436 $2,964,004 $(2,161,531) $16,652,644
Net income - - 589,611 - 589,611
Reduction in unrealized loss on
investment securities available
for sale, net of income taxes - - - 2,079,389 2,079,389
------------- ------------ ----------- ------------- ------------
Balance, June 30, 1995 $5,523,735 $10,326,436 $3,553,615 $ (82,142) $19,321,644
============= ============ =========== ============= ============
</TABLE>
- 5 -
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Six Months Ended June 30,
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES: 1995 1994
------------- ------------
<S> <C> <C>
Net income (loss) $ 589,611 $ (315,671)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Proceeds from sale of mortgage loans 78,009 11,689,653
Principal reductions on mortgage loans held for sale - 4,538,232
Origination of mortgage loans held for sale (77,300) (5,238,678)
Repurchase of mortgage loans previously sold (222,788) (3,727,041)
(Gains) losses on mortgage loans sold, net (709) 297,121
Depreciation and amortization 597,839 564,792
Gains on sales of investment securities available for sale, net (781) (75,062)
Amortization (accretion) of bond premiums and discounts, net (78,426) 75,526
Provision for possible losses on loans and foreclosed properties 996,008 1,250,000
(Increase) decrease in accrued interest receivable (450) 186,323
(Increase) decrease in other assets, net (19,533) 226,865
Decrease in other liabilities (416,615) (198,705)
------------- ------------
Net cash provided by operating activities 1,444,865 9,273,355
------------- ------------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale 6,632,345 13,108,090
Proceeds from maturities of investment securities available for sale 2,000,000 1,302,410
Proceeds from maturities of investment securities held to maturity 406,600 -
Purchase of investment securities held to maturity (5,100,000) (22,239,473)
(Increase) decrease in federal funds sold (4,100,000) 7,900,000
Increase in loans outstanding (12,509,009) (2,877,598)
Purchases of premises and equipment (290,911) (522,047)
------------- ------------
Net cash used by investing activities (12,960,975) (3,328,618)
------------- ------------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES:
Increase (decrease) in securities sold under repurchase agreements (6,648,694) 2,723,476
Increase (decrease) in treasury tax and loan notes 830,201 (1,556,894)
Increase (decrease) in deposits 16,060,210 (7,545,117)
Proceeds from exercise of stock options - 65,002
------------- ------------
Net cash provided (used) by financing activities 10,241,717 (6,313,533)
------------- ------------
DECREASE IN CASH AND DUE FROM BANKS (1,274,393) (368,796)
CASH AND DUE FROM BANKS, BEGINNING OF YEAR 15,223,830 12,931,329
------------- ------------
CASH AND DUE FROM BANKS, END OF PERIOD $ 13,949,437 $ 12,562,533
============= ============
Supplemental disclosures of cash flow information:
Cash paid during six months for:
Interest $ 3,471,618 $ 2,533,769
Income taxes 657,109 7,846
Non-cash transactions:
Transfers from loans to other real estate owned 154,000 739,620
Transfer of investment securities available for sale
to investment securities held to maturity - 5,357,472
</TABLE>
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<PAGE>
THE SAFETY FUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
1. The financial information furnished herein reflects all adjustments
which, in the opinion of management, are necessary for a fair
presentation of the financial position and results of operations for
interim periods. All such adjustments consist of normal recurring
accruals.
2. Results of operations for the six month period ended June 30, 1995, are
not necessarily indicative of the results to be expected for the entire
year.
3. The accompanying consolidated financial statements should be read in
conjunction with the consolidated financial statements included in the
Form 10-KSB for the year ended December 31, 1994.
4. Financial statements for interim periods, by their very nature, require
estimations which may result in greater imprecision than those associated
with annual audited financial statements.
5. Earnings per share are based upon the weighted average number of shares
outstanding during the period.
6. In accordance with the Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes",
the Company has a net deferred tax asset. Deferred income taxes reflect
the net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. As of June 30, 1995, the Company
had established a valuation allowance of approximately $699,000.
7. The "net unrealized loss on investment securities available for sale"
included in the stockholders' equity section of the Company's balance
sheet as of June 30, 1995, consists of two components:
Net unrealized gain on investment securities
available for sale, net of deferred income
taxes of $137,008 $265,957
Net unrealized loss related to investment
securities transferred from the available for
sale portfolio to the Company's held to maturity
portfolio, net of deferred income taxes of
$179,323 (348,099)
--------
$ (82,142)
========
8. As of June 30, 1995, the Company had commitments to extend credit of
approximately $29,142,000.
- 7 -
<PAGE>
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
For the quarter ended June 30, 1995, the Safety Fund Corporation earned a net
profit of $371,629 or $.34 per share. This represents a 70.5% increase over
the earnings of $217,982 reported during the first quarter. For the six
months of 1995, the Company had a profit of $589,611 or $.53 per share
compared with a net loss of $315,671 or $(.29) per share for the first six
months of 1994.
The Company has now achieved four consecutive profitable quarters and is
continuing its strategy to take actions toward reducing its problem assets.
The primary factor for the year to date increase in earnings over prior year
was an increase in net interest income. Net interest income increased
$1,084,108 as compared to 1994. The Company also saw improvements in gains
(losses) on loans sold, which increased by $297,830, expenses associated with
other real estate owned which declined by $137,710 and a decrease in the
provision for possible loan losses of $174,605. The improvements in those
areas in the first half were partially offset by an increase in occupancy and
equipment expense of $146,916 and by a $100,000 expense reflected in other
expense related to the theft of checks being transported to the Company's main
office in the first quarter of 1995. After giving effect to these and other
factors, pre-tax income increased $905,282 in the first half of 1995 compared
to the first half of 1994.
The Company's capital position remains in full compliance with regulatory
guidelines.
SIX MONTHS OF 1995 (1H'95) OPERATIONS COMPARED TO
SIX MONTHS OF 1994 (1H'94)
The Company had net income of $589,611 ($.53 per share) in 1H'95 compared to a
net loss of $315,671 ($.29 per share) in 1H'94. The following discussion
summarizes the major components of the increase in earnings.
Income from interest on loans was higher during 1H'95 than 1H'94 by $1,245,324
or 21.3%. During the first half of 1995, the Company had higher average loans
outstanding and a lower level of nonaccrual loans as compared to 1994. In
addition, the prime lending rate was higher in 1995 than 1994.
Interest income from investment securities available for sale decreased
$475,203 or 22.6%while interest income from securities held to maturity
increased to $1,653,319 from $149,521 during 1994. The change in the
composition of the Company's security income is the result of the strategic
decision to increase the investment securities held to maturity
- 8 -
<PAGE>
SIX MONTHS OF 1995 (1H'95) OPERATIONS COMPARED TO
SIX MONTHS OF 1994 (1H'94) (CONT'D)
portfolio and not replace investment securities maturing or sold from the
available for sale portfolio. In total, interest income from the investment
securities portfolios increased $1,028,595 or 45.7% during the period due
mainly to higher average outstanding investment levels and also to higher
rates earned.
Interest expense on deposits was also higher during 1H'95 than 1H'94 by
$1,032,654 or 44.3%. The Company's average rate paid on interest bearing
deposits increased from 2.8% in 1H'94 to 3.7% during 1H'95. The increased
interest expense was also due to higher outstanding balances associated with
certificate of deposit products. Interest on borrowed funds also increased by
$169,649 due primarily to higher rates and increased issuance of securities
sold under repurchase agreements during the period.
The provision for possible loan losses decreased during 1H'95 as compared to
1H'94 by $174,605 or 15.2%. The amount provided during the period is the
result of applying the Company's allowance methodology and management's
assessment as to the adequacy of the allowance. That assessment takes into
account specific credit reviews, past loan loss experience, current economic
conditions and trends, the volume, growth, and composition of the loan
portfolio and the Company's nonaccrual loan balances and loans contractually
past due 90 days and still accruing interest.
Gains on loans sold were $709 compared to a net loss of $297,121 during 1H'94.
During 1H'94, the Company sold several under-performing loans, including a
bulk sale at a discount. The 1994 loss included a $300,000 first quarter
write-down relating to certain loans which the Company anticipated selling.
Salaries, wages and employee benefits decreased during 1H'95 as compared to
1H'94 by $50,716 or 1.4%. During 1994, several senior managers left the
Company, resulting in severance related costs totalling $529,949. The 1995
net overall increase, excluding the 1994 severance related expense, of
$479,233 or 15.1% is due to additional staffing related to the Company's
credit administration and loan resolution departments, together with
additional branch personnel.
Occupancy and equipment expenses increased $146,916 or 15.8% during 1H'95 as
compared to 1H'94. The increase was due primarily to the operation of two
additional branches and also the upgrade of certain systems software.
Professional fees decreased during 1H'95 as compared to 1H'94 by $91,375 or
18.0%. The decrease was due primarily to reduced legal, consulting and
appraisal expenses associated with troubled assets.
Marketing expense increased during the period by $89,081 or 36.0%. The
Company initiated several new marketing campaigns during the period.
- 9 -
<PAGE>
SIX MONTHS OF 1995 (1H'95) OPERATIONS COMPARED TO
SIX MONTHS OF 1994 (1H'94) (CONT'D)
Other real estate owned expense decreased $137,710 or 76.6% due primarily to a
decrease in provisions for losses on other real estate owned.
Other expense increased during 1H'95 as compared to 1H'94 by $228,612 or
33.1%. During the first quarter of 1995, the Company sustained a theft of
customer checks being transported from a branch office to the Company's main
office. Although the Company has made progress reducing the financial
exposure to this loss, the Company accrued $100,000, representing the amount
not recoverable through insurance claims. In addition, other expense
increased due to additional training, supplies and postage expense. Also, the
Company incurred increased telephone and automated teller machine charges
associated with additional branches throughout the 1995 period.
The Company recorded tax expense of $332,600 during 1H'95 as compared to a
benefit of $103,600 during 1H'94. The Company's effective tax rate of 36.1%
during 1H'95 was less than the statutory rate of 42.3% due to the Company's
investment in tax-exempt assets and the use of its Massachusetts security
corporation, which is taxed at a preferential state rate. The benefit of
24.7% recorded during 1H'94 was based on an evaluation of the Company's tax
history and status of temporary differences.
SECOND QUARTER, 1995 (2Q'95) OPERATIONS COMPARED TO
SECOND QUARTER, 1994 (2Q'94)
The Company had net income of $371,629 ($.34 per share) in 2Q'95 compared to a
loss of $189,463 ($.18 per share) in 2Q'94. The following discussion
summarizes the major components of the increase in earnings.
Income from interest on loans was higher during 2Q'95 than 2Q'94 by $681,883
or 23.3%. During the second quarter of 1995, the Company had higher average
loans outstanding and a lower level of nonaccrual loans as compared to 1994.
In addition, the prime lending rate was higher in 1995 than 1994.
Interest income from investment securities available for sale decreased
$236,625 or 23.2% while interest income from securities held to maturity
increased to $858,445 from $149,521 during 1994. The change in the
composition of the Company's security income is the result of the strategic
decision to increase the investment securities held to maturity portfolio and
not replace investment securities maturing or sold from the available for sale
portfolio. In total, interest income from the investment securities
portfolios increased $472,299 or 40.3% during the period due mainly to higher
average outstanding investment levels and also to higher rates earned.
- 10 -
<PAGE>
SECOND QUARTER, 1995 (2Q'95) OPERATIONS COMPARED TO
SECOND QUARTER, 1994 (2Q'94) (CON'T)
Interest expense on deposits was higher during 2Q'95 than 2Q'94 by $688,619 or
61.4%. The Company's average rate paid on interest bearing deposits increased
form 3.1% in 2Q'94 to 3.9% during 2Q'95. The increased interest expense was
also due to higher outstanding balances associated with certificate of deposit
products. Interest on borrowed funds also increased by $28,419 or 35.3% due
primarily to higher rates and increased issuance of securities sold under
repurchase agreements and higher rates paid.
The provision for possible loan losses decreased during 2Q'95 as compared to
2Q'94 by $484,599 or 51.9%. The amount provided during the period is the
result of applying the Company's allowance methodology and management's
assessment as to the adequacy of the allowance. That assessment takes into
account specific credit reviews, past loan loss experience, current economic
conditions and trends, the volume, growth, and composition of the loan
portfolio and the Company's nonaccrual loan balances and loans contractually
past due 90 days and still accruing interest.
Occupancy and equipment expenses increased $69,971 or 15.4% during 2Q'95 as
compared to 2Q'94. The increase was due primarily to the operation of an
additional branch and also the upgrade of certain systems software.
Marketing expense increased $61,271 or 54.2% during 2Q'95 as compared to
2Q'94. The Company initiated several new marketing campaigns during the
period.
The Company recorded tax expense of $201,800 during 2Q'95. The Company's
effective tax rate of 35.2% during 2Q'95 was less than the statutory rate of
42.3% due to the Company's investment in tax-exempt assets and the use of its
Massachusetts security corporation, which is taxed a preferential state rate.
Based on an evaluation of the Company's tax history and status of temporary
differences, the Company did not record a benefit on the 2Q'94 loss.
- 11 -
<PAGE>
ASSET QUALITY
Nonaccrual loans, troubled debt restructurings, other real estate owned and
loans contractually past due 90 days and still accruing interest decreased
from $5,225,048 at December 31, 1994 to $4,143,082 at June 30, 1995. The
decrease in nonaccrual loans was due primarily to the return to accrual status
of certain loans and also as the result of chargeoffs or liquidations.
Information with respect to nonaccrual and past due loans, other real estate
owned and troubled debt restructurings at June 30, 1995 and December 31, 1994
follows:
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
--------------------------
<S> <C> <C>
Nonaccrual loans $2,751,663 $3,606,869
Troubled debt restructurings accruing interest 1,058,988 979,687
Loans contractually past due 90 days and still accruing interest 37,502 105,022
Other real estate owned, net 294,929 533,470
--------------------------
$4,143,082 $5,225,048
==========================
</TABLE>
ALLOWANCE FOR POSSIBLE LOSSES
Activity in the allowance for possible losses for the first six months of 1995
was as follows:
<TABLE>
<CAPTION>
OTHER REAL
LOANS ESTATE OWNED TOTAL
-----------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1994 $6,417,407 $42,000 $6,459,407
Provision charged to earnings 975,000 21,008 996,008
Charge-offs (497,307) (63,008) (560,315)
Recoveries 475,048 - 475,048
------------------------------------------------
Balance, June 30, 1995 $7,370,148 $ - $7,370,148
================================================
</TABLE>
Recoveries of $475,048 were primarily from four commercial loan relationships
which had been charged-off prior to 1995.
- 12 -
<PAGE>
REGULATORY MATTERS AND CAPITAL RESOURCES
Following the 1992 examination by the Comptroller of the Currency, the Bank
entered into an informal Memorandum of Understanding. The Memorandum relates
to certain aspects of the Bank's operations, including asset quality
monitoring and other administrative matters. The Bank believes it has fully
complied with eleven of the twelve articles and is actively working toward
complete compliance with the remaining asset quality related article in the
Memorandum.
The Federal Reserve Board has established risk-based standards for measuring
capital adequacy for U.S. banking organizations. In general, the standards
require banks and bank holding companies to maintain capital based on "risk-
adjusted" assets so that categories of assets with potentially higher credit
risk will require more capital backing than assets with lower credit risk. In
addition, banks and bank holding companies are required to maintain capital to
support, on a risk-adjusted basis, certain off-balance sheet activities such
as loan commitments and contingencies.
The Federal Reserve Board standards classify capital into two tiers, referred
to as Tier 1 and Tier 2. Tier 1 capital consists of common stockholders'
equity and preferred stock. Tier 2 capital consists of other types of equity
instruments and the allowance for loan and lease losses. All banks are
required to meet a minimum ratio of 8% of qualifying total capital to risk-
adjusted total assets with at least 4% Tier 1 capital.
For most banks, including the Company's subsidiary bank, the minimum Tier 1
leverage ratio is to be 3% plus an additional cushion of at least 100 to 300
basis points depending upon risk profiles and other factors. The Bank's
informal Memorandum of Understanding requires the Bank to maintain a leverage
ratio of at least 6.00%. As shown below, the regulatory leverage ratios
exceed the minimum required at June 30, 1995.
<TABLE>
<CAPTION>
COMPANY BANK
------- ----
<S> <C> <C>
Tier 1 risk-based capital ratio 12.40% 11.70%
Total risk-based capital ratio 13.69% 12.99%
Leverage ratio 7.00% 6.55%
</TABLE>
The approval of the Comptroller of the Currency is required for a national
bank to pay dividends if the total of all dividends declared in any calendar
year exceeds the Bank's net profit (as defined) for that year combined with
its retained net profits for the preceding two calendar years.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest sensitive
earning assets and interest bearing liabilities. Liquidity management
involves the ability to meet the cash flow requirements of
- 13 -
<PAGE>
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT (CON'T)
customers who may be either depositors wanting to withdraw funds or borrowers
needing assurance that sufficient funds will be available to meet their credit
needs. Interest rate sensitivity management seeks to avoid fluctuating net
interest margins and to enhance consistent growth of net interest income
through periods of changing interest rates.
As a holding company, the Company's primary sources of liquidity are dividends
from the Bank and interest earned on repurchase agreements with the Bank. The
Company uses its liquidity to pay cash dividends to shareholders, fund
operating expenses and pay income taxes.
Marketable investment securities, particularly those of shorter maturities,
are a principal source of liquidity. Available for sale securities maturing
or likely to be called in two years or less amounted to approximately $13.5
million at June 30, 1995, representing 27.8% of the available for sale
portfolio. Held to maturity securities maturing or likely to be called in two
years or less amounted to approximately $8.0 million at June 30, 1995,
representing 15.9% of the held to maturity portfolio. Assets such as federal
funds sold and maturing loans are also sources of liquidity.
During the second quarter of 1994, the Company transferred securities with a
fair value of $5,357,472 from its available for sale portfolio to its held to
maturity portfolio. The transfer was the result of a strategic decision, in
conjunction with the engagement of a new investment advisor, to hold a larger
percentage of the Company's securities to maturity. At the time of transfer,
the securities had an unrealized loss of $599,596. Such amount, after related
tax benefit of $203,863, is reflected as a decrease to stockholders' equity.
This unrealized loss is being amortized over the life of the securities
transferred, which is approximately nine years.
Historically, the overall liquidity of the Company has been enhanced by a high
level of core deposits. Maintaining an ability to acquire large denomination
time deposits, and money fund accounts is a key to assuring liquidity. This
involves maintenance of an appropriate maturity distribution of purchased
funds as well as diversification of sources through various money markets.
During the first six months of 1995, commercial and consumer loans increased
by $12.7 million or 9.0%. while total deposits increased by $16.1 million or
6.8%. The increase in deposits enabled the Bank to reduce securities sold
under repurchase agreements which decreased $6.7 million or 42.5%. Management
believes the liquidity of the Bank is sufficient to meet future needs. The
Bank does not accept brokered deposits.
Interest rate sensitivity varies with different types of interest-earning
assets and interest-bearing liabilities. Overnight federal funds on which
rates change daily and loans which are indexed to the base rate differ
considerably from longer-term investment securities and fixed-rate loans.
Similarly, time deposits are much more interest sensitive than deposits such
as savings accounts. The shorter term interest rate sensitivities are key to
measuring the interest sensitivity gap, which is the difference between the
total of interest sensitive earning
- 14 -
<PAGE>
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT (CON'T)
assets and interest bearing liabilities. Generally, a financial institution
with an excess of interest sensitive assets would have a higher net interest
income in times of increasing market interest rates and lower net interest
income in times of decreasing market interest rates.
The table on the following page shows the interest sensitivity gaps for five
different time intervals as of June 30, 1995 based upon the Company's earliest
repricing opportunity according to contractual terms. Loan balances do not
take into account normal principal amortization or prepayments. During the
first 365 days, there is an excess of interest bearing liabilities over
interest earning assets.
- 15 -
<PAGE>
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT (CONT'D)
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY GAPS AS OF JUNE 30, 1995 (in millions):
2-90 91-365 1-2 Over 2
Immediate Days Days Years Years Total
------------ ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Federal funds sold $ 7.4 $ -- $ -- $ -- $ -- $ 7.4
Investment securities available for sale -- -- 4.1 9.4 35.0 48.5
Investment securities held to maturity -- 3.0 5.0 - 42.4 50.4
Loans 84.6 0.2 1.0 1.7 66.7 154.2
------------ ------- -------- ------- -------- -------
Total interest earning assets 92.0 3.2 10.1 11.1 144.1 260.5
------------ ------- -------- ------- -------- -------
INTEREST BEARING LIABILITIES:
Deposits:
Savings, N.O.W. and money market (101.1) (2.1) -- -- -- (103.2)
Time -- (14.0) (48.5) (16.1) (6.4) (85.0)
Securities sold under repurchase (8.4) (0.6) -- -- -- (9.0)
agreements
Treasury tax and loan notes -- (3.2) -- -- -- (3.2)
------------ ------- -------- ------- -------- -------
Total interest bearing liabilities (109.5) (19.9) (48.5) (16.1) (6.4) (200.4)
------------ ------- -------- ------- -------- -------
Interest sensitivity gap $(17.5) $(16.7) $(38.4) $ (5.0) $137.7 $ 60.1
============ ======= ======== ======= ======== =======
</TABLE>
One of the objectives of the Company's asset-liability management strategy is
to effectively manage the sensitivity gap.
In 1994, the Company entered into an interest rate swap to manage exposure to
interest rate risk. At June 30, 1995, the Company had outstanding a
$5,000,000 interest rate swap agreement whereby, for a three year period
ending December, 1997, the Company receives a fixed payment of 7.95% on the
amount of the agreement in exchange for a variable rate payment indexed to the
three month London Interbank Offered Rate (LIBOR) on the same agreement
amount. The variable rate payment on June 30, 1995 was 6.00%. In the first
six months of 1995, the Company earned $41,277 net, which is included in
interest income.
During the first quarter of 1995, the Company entered into an interest rate
floor agreement to manage exposure to interest rate risk. At June 30, 1995,
the Company had outstanding a $10,000,000 interest rate floor agreement
whereby, for a five year period, ending February, 2000, the Company receives
an interest payment if the three month London Interbank Offered Rate (LIBOR)
declines below 6.25%. This payment would be based upon the rate difference
between current LIBOR and 6.25% accrued on the notional value of $10,000,000.
The transaction fee paid of $88,000 is currently being amortized over the life
of the contract. Interest earned during 1995 has totalled $1,597 on this
agreement.
- 16 -
<PAGE>
PART II - OTHER INFORMATION
ITEMS 1-3 - Not Applicable
ITEM 4 - Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders was held on April 24, 1995. At this
meeting, the following matters were scheduled to be put before the
shareholders for vote: (1) the election of seven directors, (2) a proposal to
amend the Company's charter in certain respects, and (3) the adjournment of
the Annual Meeting, if necessary, to permit further solicitation of proxies
with respect to the proposed charter amendments.
At a special meeting of the Board of Directors held on April 18, 1995,
the Board was advised as to communications received from shareholders opposed
to the proposed amendments to the Company's charter contained in the proxy
materials for the Annual Meeting. Because it was the sense of the meeting
that the proposed amendments would not receive the two-thirds vote required
for adoption, management was authorized to advise shareholders in opposition
to such proposal that the Board did not intend to pursue the proposal.
The following is a record of the votes taken at the meeting held on April
24, 1995:
ELECTION OF DIRECTORS OF THE COMPANY:
-------------------------------------
Number of
Number of Shares Shares for Which
Voted for Authority Withheld
---------------- ------------------
John R. Clementi 770,587 116,047
P. Kevin Condron 770,387 116,247
Donald L. Hall 763,293 123,341
Michael E. Montuori 770,587 116,047
Allen I. Rome 770,587 116,047
J. Robert Seder 763,293 123,341
Richard L. Yates 770,587 116,047
Those Directors whose terms continue after the Annual Meeting are as
follows:
Term Expires
------------
William E. Aubuchon, III 1996
Christopher W. Bramley 1996
Bigelow Crocker, Jr. 1996
David R. Grenon 1997
Edward H. Hall, Jr. 1997
George H. Heywood, Jr. 1996
John E. Howard 1996
- 17 -
<PAGE>
Thomas P. Kelly 1997
Dr. Vincent J. Mara 1997
Henri L. Sans, Jr. 1997
ITEM 5 The Company filed a registration statement on Form 8-A registering
its common stock under section 12(g) of the Securities Exchange Act
of 1934. The registration statement became effective on May 17,
1995.
ITEM 6 Exhibits and reports on Form 8-K:
(a) EXHIBITS
<TABLE>
<CAPTION>
Page
----
<S> <C>
3.1) Articles of Organization
a. Articles of organization amended as of January 13, 1986.. *
b. Amendment dated April 27, 1987........................... *
c. Amendment dated April 25, 1988........................... *
3.2) By-Laws......................................................... ***
10.1) Agreement between The Safety Fund Corporation
and Herbert E. Dunnington dated July 26, 1994................... ***
10.2) The Safety Fund Corporation 1984 Incentive Stock Option Plan
for Key Employees, as amended.................................... **
10.3) The Safety Fund Corporation 1994 Incentive and nonqualified
Stock Option Plan for Key Employees............................. ***
10.4) Memorandum of Understanding by and between Safety Fund
National Bank and the office of the Comptroller of the Currency
dated April 16, 1992.............................................. *
10.5) Severance Agreement between Martin D. McNamara and
Safety Fund National Bank dated February 1, 1994.................. *
10.6) Employment Agreement between The Safety Fund Corporation
and Christopher W. Bramley dated as of February 1, 1994......... ***
10.7) Employment and Change of Control Agreement between The Safety
Fund Corporation and Stephen R. Shirley dated June 1, 1994...... ***
</TABLE>
- 18 -
<PAGE>
(a) EXHIBITS (Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
10.7) Employment and Change of Control Agreement between The Safety
Fund Corporation and James C. Garvey dated August 4, 1994....... ***
10.9) Incentive Plan for Senior Officers.............................. ***
27.1) Financial data schedule.......................................... 21
28) Proxy Statement for the Annual Meeting of Shareholders
of The Safety Fund Corporation dated April 24, 1995.............. 22
</TABLE>
________________________________________________________________________________
* Incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 1993
** Incorporated by reference from the Exhibit 10.4 to Registration
Statement No. 33-19325.
*** Incorporated by reference from the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1994
(b) No Form 8-K was filed during the current quarter ended June 30, 1995.
- 19 -
<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.
THE SAFETY FUND CORPORATION
---------------------------
(Registrant)
Date: August 9, 1995 /S/ CHRISTOPHER W. BRAMLEY
----------------------- ------------------------------------
Christopher W. Bramley
President and Chief Executive Officer
Principal Executive Officer
Date: August 9, 1995 /S/ MARTIN F. CONNORS, JR.
----------------------- ------------------------------------
Martin F. Connors, Jr., Treasurer
Principal Financial and Accounting Officer
(Signature)
- 20 -
<PAGE>
THE SAFETY FUND CORPORATION
INDEX TO EXHIBITS
Description Page
----------------------------------------------------------------------
27.1) Financial data schedule.................................. 21
28) Proxy Statement for the Annual Meeting of Shareholders
of The Safety Fund Corporation dated April 24, 1995...... 22
- 21 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
<PERIOD-START> JAN-01-1995 JAN-01-1994
<PERIOD-END> JUN-30-1995 JUN-30-1994
<CASH> 13,949,437 15,223,830
<INT-BEARING-DEPOSITS> 188,155,223 169,893,349
<FED-FUNDS-SOLD> 7,400,000 3,300,000
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 48,525,550 54,537,725
<INVESTMENTS-CARRYING> 50,438,481 45,598,639
<INVESTMENTS-MARKET> 51,426,628 43,213,908
<LOANS> 154,167,879 141,458,341
<ALLOWANCE> 7,370,148 6,417,407
<TOTAL-ASSETS> 283,554,859 271,060,757
<DEPOSITS> 251,534,717 235,474,507
<SHORT-TERM> 12,161,109 17,979,602
<LIABILITIES-OTHER> 537,389 954,004
<LONG-TERM> 0 0
<COMMON> 5,523,735 5,523,735
0 0
0 0
<OTHER-SE> 13,797,909 11,128,909
<TOTAL-LIABILITIES-AND-EQUITY> 283,554,859 271,060,757
<INTEREST-LOAN> 7,080,097 5,834,773
<INTEREST-INVEST> 3,279,229 2,250,634
<INTEREST-OTHER> 84,824 72,332
<INTEREST-TOTAL> 10,444,150 8,157,739
<INTEREST-DEPOSIT> 3,364,712 2,332,058
<INTEREST-EXPENSE> 3,664,663 2,462,360
<INTEREST-INCOME-NET> 6,779,487 5,695,379
<LOAN-LOSSES> 975,000 1,149,605
<SECURITIES-GAINS> 781 75,062
<EXPENSE-OTHER> 6,841,040 6,670,962
<INCOME-PRETAX> 922,211 (419,271)
<INCOME-PRE-EXTRAORDINARY> 922,211 (419,271)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 589,611 (315,671)
<EPS-PRIMARY> .53 (.29)
<EPS-DILUTED> 0 0
<YIELD-ACTUAL> 0 0
<LOANS-NON> 0 0
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 0 0
<CHARGE-OFFS> 0 0
<RECOVERIES> 0 0
<ALLOWANCE-CLOSE> 0 0
<ALLOWANCE-DOMESTIC> 0 0
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
