0000950109-95-003213.txt : 19950816 0000950109-95-003213.hdr.sgml : 19950816 ACCESSION NUMBER: 0000950109-95-003213 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAFETY FUND CORP CENTRAL INDEX KEY: 0000086134 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 042532311 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 002-50084 FILM NUMBER: 95563977 BUSINESS ADDRESS: STREET 1: 470 MAIN ST CITY: FITCHBURG STATE: MA ZIP: 01420 BUSINESS PHONE: 5083436406 MAIL ADDRESS: STREET 1: 470 MAIN STREET CITY: FITCHBURG STATE: MA ZIP: 01420 10QSB 1 FORM 10-QSB 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. PART I - FINANCIAL INFORMATION ITEM I - FINANCIAL STATEMENTS The financial information required for Part I follows. - 2 - THE SAFETY FUND CORPORATION CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------------- JUNE 30, DECEMBER 31, 1995 1994 ----------------------------- 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 =============================
- 3 - THE SAFETY FUND CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
----------------------------------------------------------------------------------------------- THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, Interest income: 1995 1994 1995 1994 ----------------------------------------------------- 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
- 4 - THE SAFETY FUND CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------------------------- Common Retained Stock Surplus Earnings Other Total ------------- ------------ ----------- ------------- ------------ 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 ============= ============ =========== ============= ============
- 5 - CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------------------------------- Six Months Ended June 30, CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES: 1995 1994 ------------- ------------ 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
- 6 - 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 - 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 - 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 - 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 - 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 - 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:
June 30, December 31, 1995 1994 -------------------------- 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 ==========================
ALLOWANCE FOR POSSIBLE LOSSES Activity in the allowance for possible losses for the first six months of 1995 was as follows:
OTHER REAL LOANS ESTATE OWNED TOTAL ----------------------------------------------- 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 ================================================
Recoveries of $475,048 were primarily from four commercial loan relationships which had been charged-off prior to 1995. - 12 - 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.
COMPANY BANK ------- ---- 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%
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 - 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 - 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 - LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT (CONT'D)
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 ------------ ------- -------- ------- -------- ------- 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 ============ ======= ======== ======= ======== =======
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 - 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 - 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
Page ---- 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...... ***
- 18 - (a) EXHIBITS (Continued)
Page ---- 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
________________________________________________________________________________ * 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 - 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 - 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 - EX-27 2 FINANCIAL DATA SCHEDULE
9 6-MOS 6-MOS DEC-31-1995 DEC-31-1994 JAN-01-1995 JAN-01-1994 JUN-30-1995 JUN-30-1994 13,949,437 15,223,830 188,155,223 169,893,349 7,400,000 3,300,000 0 0 48,525,550 54,537,725 50,438,481 45,598,639 51,426,628 43,213,908 154,167,879 141,458,341 7,370,148 6,417,407 283,554,859 271,060,757 251,534,717 235,474,507 12,161,109 17,979,602 537,389 954,004 0 0 5,523,735 5,523,735 0 0 0 0 13,797,909 11,128,909 283,554,859 271,060,757 7,080,097 5,834,773 3,279,229 2,250,634 84,824 72,332 10,444,150 8,157,739 3,364,712 2,332,058 3,664,663 2,462,360 6,779,487 5,695,379 975,000 1,149,605 781 75,062 6,841,040 6,670,962 922,211 (419,271) 922,211 (419,271) 0 0 0 0 589,611 (315,671) .53 (.29) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0